US – Page 3 – Chris Mallin Macro Perspectives

“Global debt dynamics – I”

Why does the changing nature of global debt matter?

The key chart

**Changes in breakdown of global debt (% total) since the GFC** (Source: BIS; CMMP)

The key message

“Private debt causes crises – public debt (to some extent) ends them.”
Professor Steve Keen, June 2021

While a great deal of attention is focused on the fact that global debt levels hit new highs during 2021, too little attention is given to the important changes that have taken place in the structure of global debt since the GFC.

This matters because conventional macro theory struggles to deal with the implications here, since it typically ignores private debt while seeing government debt as a problem rather than as a solution.

There has been an important shift away from household (HH) debt towards government debt at the aggregate, global level since the Global Financial Crisis (GFC). Debt dynamics in advanced economies have driven this shift, most notably in the US and the UK. In contrast, the structure of emerging economies’ (EMs) debt remains broadly unchanged, with a structural bias towards private sector debt. These trends matter for a number of reasons:

First, and in contrast conventional theory, we know that government deficits increase the supply of money (not the demand for money), crowd-in investment private spending (as opposed to crowding it out) and depress interest rates (rather than driving them up).
Second, and from this, we also know that while private sector debt typically causes crises, public sector debt typically limits their damage/ends them.
Third, the structure of US and UK debt is now the mirror image of the pre-GFC period, which reduces associated risks since governments face different financial constraints to HHs and NFCs and cannot, as currency issuers, become insolvent. Risks associated with excess credit growth exist more obviously in other advanced economies.
Fourth, EMs face very different risks to advanced economies. These are associated largely with the level of NFC debt, the growth rate in HH debt and the increasing dominance of China in EM debt.

Global debt dynamics – I

Debt dynamics since the GFC

In the “Seven lessons from the money sector in 2021”, I noted that our understanding of global debt dynamics is improved significantly by extending analysis beyond the level of debt to include its structure, growth and affordability.

In this first post of 2022, and the first in a series of five posts reviewing current global debt dynamics, I focus on the implications of the changes that have taken place in the structure of global debt since the Global Financial Crisis (GFC).

**Global debt levels ($tr) and debt ratios (% GDP) as at end 2Q21** (Source: BIS; CMMP)

A great deal of attention has focused on the fact that global debt levels hit new, record highs in 2021 (see chart above). According to BIS statistics released on 6 December 2021, total debt (to the non-financial sector) reached $225tr at the end of 2Q21. NFC debt reached $86tr (38% total), government debt reached $83tr (37% total) and HH debt reached $55tr (25% total).

Note that while it is common to aggregate these three categories of debt together, it is also important to recognise that NFC and HH debt sit on the liabilities side of private sector balance sheets, while government debt sits on the assets side of private sector (and RoW) balance sheets.

Note also, that while debt levels are at record highs, debt ratios (ie, debt as a percentage of GDP) are below their 4Q20 peaks in each category.

Too little attention has focused, however, on the important changes that have taken place to the structure of global debt since the GFC (see chart above). While NFC debt’s share of total debt has remained relatively stable at just under 40%, there has been an important shift away from HH debt to government debt over the period. HH debt’s share of total debt has fallen from 32% to 25% (see chart below). In contrast, government debt’s share of total debt has risen from 29% to 37%.

**Trends in shares of HH and government debt (% total debt) since GFC** (Source: BIS; CMMP)

Debt dynamics in advanced economies have driven this shift, most notably in the US and the UK (see chart below). In advanced economies, the US and the UK the share of HH debt has fallen from 34% to 26%, from 42% to 28% and from 43% to 30% respectively. In contrast, the respective shares of government debt to total debt have risen from 29% to 42%, from 26% to 44% and from 20% to 45% respectively. Similar shifts have also taken place in the EA, albeit in a much more muted fashion. This reflects a much lower (27%) share of HH debt at the time of the GFC in the EA.

**Changes in structure of global debt by region** (Source: BIS; CMMP)

The structure of EM debt remains broadly unchanged, however, with a bias towards private sector debt. At the end of 2Q21, the shares of HH, NFC and government debt to total debt in EM were 22%, 50% and 28% respectively.

**Trends in structure (% total) of EM debt since GFC** (Source: BIS; CMMP)

Note that China’s share of total EM debt has risen from 31% to 64% over the period. In other words, the EM debt story is increasingly a “China debt” story. For reference, China’s share of total global debt has also increased from 5% to 21% over the same period (see chart below). In contrast, EM excluding China’s share of total global debt has remain unchanged.

**Trends in EM share of global debt since GFC** (Source: BIS; CMMP)

Why does this matter?

This matters for a number of reasons. First, and in contrast conventional theory, we know that government deficits increase the supply of money (not the demand for money), crowd-in investment private spending (as opposed to crowding it out) and depress interest rates (rather than driving them up).

Professor Steve Keen has written extensively on this subject. He notes that, “rather than deficits meaning that the government has to take money away from the private sector – which is what the mainstream thinks the government does when it sells bonds to cover the deficit – the deficit creates money by increasing the bank deposits of the private sector”. In simple terms, by not studying the accounting involved in government deficits, Keen argues that they (mainstream economists) have wrongly classified them as increasing the demand for money, when in fact they increase the supply of money. I agree.

The implication here is that many arguments regarding global debt are in fact, back-to-front. Government deficits crowd in private spending and investment by increasing the supply of money. They also typically drive down interest rates rather than driving them up.

Second, and from this, we also know that while private sector debt typically causes crises, public sector debt typically limits their damage/ends them. Consider the EA’s fiscal rules that put limits on government debt and deficits but completely ignored private debt and credit and the history of Spanish debt dynamics after the introduction of the euro (see chart below).

**Ignore excess private sector debt growth at your peril I – Spain** (Source: BIS; CMMP)

After the introduction of the euro, government debt in Spain fell from 70% to 36% in March 2008. In contrast, private sector debt rose from 80% of GDP to 208% of GDP over the same period before peaking at 227% in 2Q10 at the height of the Spanish banking crisis (see chart above). Similar trends were also seen in other advanced economies. The chart below illustrates trends in private sector credit and government debt in the US.

Ignore excess private sector growth at your peril II – the US (Source: BIS; CMMP)

Excess growth in private sector debt up to a crisis point is followed by increases in government debt post-crisis in response to the collapse in demand as credit growth turns negative and the private sector reduces leverage. In short, recent history supports Professor Keen’s hypothesis that private debt causes crisis, while public debt ends them (or limits their damage). This topic and these case studies are developed in more detail in other posts/CMMP research.

**Shift from US and UK HH debt to government debt (% total debt) since GFC** (Source: BIS; CMMP)

Third, the structure of US and UK debt is now the mirror image of the pre-GFC period (see chart above). This reduces associated risks since governments face different financial constraints to HHs and NFCs and cannot, as currency issuers, become insolvent.

**Rates of excess credit growth in EM** (Source: CMMP)

Fourth, EMs face very different risks to advanced economies. These are associated largely with the level of NFC debt, the growth rate in HH debt (see chart above) and the increasing dominance of China in EM debt – subjects that I will address in the final post in this series.

Conclusion

Global debt dynamics are a core element of CMMP analysis. While it is natural to focus initially on the new highs in global debt levels, it is also important not to miss the important messages associated with changes in the structure, growth and affordability of global debt.

The shift in the structure of global debt from HH debt to government debt has important implications for the severity of recessions, monetary dynamics, inflation, rates and investment risks. The nature of these implications also vary depending on whether governments are currency issuers (eg, US and UK) or currency users (eg, EA governments). The risks of a return to pre-pandemic policy mixes remain in all areas, however.

In the next post, I will examine dynamics in global private sector debt.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Seven key lessons from the money sector in 2021”

What have the “messages from the money sector” taught us?

**Visual summary of the CMMP framework linking all economic sectors together** (Source: CMMP)

The key message

Over the past twelve months, the “messages from the money sectors” have taught us more about:

The true value in analysing global banks
How to improve our understanding of global debt dynamics
What does (and does not) constitute a pragmatic and responsible fiscal outcome
Why official forecasts for UK government spending remain flawed
How QE fuelled the “wrong type of lending” and what the ECB thinks should be done about it
How to avoid misinterpreting trends in monetary aggregates
How the behaviour of UK and euro area households reached an important inflexion point at the start of 4Q21

Unfortunately, there is a risk that the renewed rise in COVID-19 cases and emergence of the omicron variant may have masked the final lesson over the Christmas period.

Nonetheless, a final positive message from 2021 is that firmer economic foundations (and higher levels of vaccinations) suggest that both the UK and euro area regions are in a stronger position to face renewed COVID-related challenges now than they were at the start of the year.

Seven key lessons from 2021

Lesson #1: where is the true value in analysing banks?

The true value in analysing global banks comes from understanding the implications of the relationship between the money sector and the wider economy for macro policy, corporate strategy, investment decisions and asset allocations.

Based on this core foundation, CMMP analysis incorporates:

A quantifiable and objective framework linking all domestic economic sectors with each other and the rest of the world (see key chart above)
A deep understanding of global debt dynamics (see lesson #2 below)
Unique insights into the impact of global money, credit and business cycles on corporate strategy and asset allocation

Lesson #2: how can we improve our understanding of global debt dynamics?

**Household and government debt as a share (% total) of global debt** (Source: BIS; CMMP)

Our understanding of global debt dynamics is improved significantly, at the macro level, by extending analysis beyond the level of debt to include its structure, growth and affordability and, at the micro level, by distinguishing between productive (COCO-based) and non-productive sources of debt (FIRE-based), at the micro level (see lesson #5 below).

A great deal of attention focused on the fact that global debt levels hit new highs during 2021. Much less attention focused on the key structural changes that have taken place in the structure of global debt since the GFC:

There has been an important shift away from household (HH) debt towards government debt at the aggregate, global level (see chart above)
Advanced economy dynamics have driven this structural shift, especially in the US and UK
In contrast, the structure of EM debt remains broadly unchanged, with a bias towards private sector debt

I will explore the implications of these (and other structural changes) in my first post in 2022.

Lesson #3: what constitutes a pragmatic and responsible fiscal outcome?

**UK financial sector balances (4Q rolling averages, £bn)** (Source: ONS; CMMP)

“Pragmatic” and “responsible” fiscal outcomes are those that deliver a balanced economy not a balanced budget.

The three key sectors in any modern economy – the domestic private sector, the domestic government and the RoW – each generate income and savings flows over a given period. If a sector spends less than it earns it creates a surplus. Conversely, if it spends more than it earns it creates a deficit.

Extending fundamental accounting principles, we know that any deficit run by one or more economic sectors must equal surpluses run by other sector(s). This leads to the key identity pioneered by the late Wynne Godley:

Domestic private balance + domestic government balance + foreign balance (must) = zero

**UK private and public sector net savings/borrowings as %age of GDP** (Source: OBR; CMMP)

Contrary to popular political rhetoric, budget outcomes are inappropriate goals in themselves. Worse still, fiscal surpluses reduce the wealth and financial savings of the non-government sectors.

The good news during the pandemic was that the unprecedented shifts in net savings of the private sector were matched by equally unprecedented shifts in the net deficits of the public sector (see chart above for the UK experience). In other words, policy responses were both timely and appropriate. The risk looking forward is that policy makers ignore these lessons and repeat the mistakes of the post-GFC period (see also lesson #4).

Lesson #4: where are the flaws in offical UK forecasts

**Historic and forecast UK sectoral net lending – % GDP, rolling annual average** (Source: OBR; CMMP)

Forecast improvements in UK government finances from the OBR rely on dynamic adjustments by other economic sectors and unusual patterns of behaviour beyond that. The assumed end-result is one where sustained, twin domestic deficits are counterbalanced by significant and persistent current account deficits (see chart above).

The OBR described this as a “return to more normal levels.” CMMP analysis suggest it is anything but. Viewed from a sector balances perspective, the risks appear tilted to the downside ie, government finances may not recover as quickly as forecast.

Lesson #5: has QE fuelled the wrong type of lending?

**Contribution (ppt) of COCO-based and FIRE-based lending to growth (% YoY) in total lending in the euro area** (Source: ECB; CMMP)

Unorthodox monetary policy has fuelled growth in the wrong type of lending. There has been a shift away from productive COCO-based lending towards less-productive FIRE-based lending. The stock of productive lending in the euro area, for example, only returned to its previous January 2009 peak last month (November 2021).

**Outstanding stock (EUR bn) of productive COCO-based lending in the euro area** (Source: ECB; CMMP)

In other words, the aggregate growth in lending since then has come exclusively from non-productive FIRE-based lending. According to the latest ECB data, for example, FIRE-based lending accounted for 2.7ppt of the total 3.7% YoY growth in private sector lending in November 2021 (see chart below).

**What’s driving private sector lending in the euro area?** (Source: ECB; CMMP)

In its latest, “Financial Stability Review” (November 2021), the ECB calls for a policy shift away from short-term measures towards “mitigating risks from higher medium-term financial stability vulnerabilities, in particular emerging cyclical and real estate risks”.

This is a welcome development given the negative implications that the rise in FIRE-based lending has for future growth, leverage, financial stability and income inequality. Within the EA, Germany stands out given current house price and lending dynamics, the extent of RRE overvaluation and the absence of targeted macroprudential measures.

Lesson #6: how can we avoid misinterpreting monetary aggregates?

**Growth in euro area M3 (% YoY) and contribution (ppt) from M1 and private sector lending** (Source: ECB; CMMP)

Trends in monetary aggregates provide important insights into the interaction between the money sector and the wider economy but headline YoY growth figures can be easily misinterpreted, leading to false narratives regarding their implications.

The message from rapid broad money growth in the pre-GFC period, for example, was one of (over-) confidence and excess credit demand. In contrast, the message from rapid broad money growth during the COVID-19 pandemic was one of elevated uncertainty and subdued credit demand (see chart above). Very different drivers with very different implications…

CMMP analysis has focused on three key signals throughout 2021 to help to interpret recent trends more effectively: monthly household deposit flows (behaviour); trends in consumer credit demand (growth outlook) and the synchronisation of money and credit cycles (policy context).

Lesson #7: has HH behaviour in the UK and EA reached an inflexion point?

**Monthly HH money flows as a multiple of pre-pandemic levels** (Source: BoE; ECB; CMMP)

The behaviour of UK and euro area households reached a potentially important inflexion point at the start of 4Q21. Monthly money flows moderated sharply (see chart above) while monthly consumer credit flows hit new YTD highs ie, positive developments in two of the three key signals.

The recent rise in COVID-19 cases, the emergence of the omicron variant and renewed restrictions imposed by governments may result in these points being missed or, worse, still, reversed.

That said, and to finish on a positive note, firmer economic foundations (and higher levels of vaccinations) suggest that both the UK and euro area regions are in a stronger position to face renewed COVID challenges than they were at the start of the year.

Thank you for reading and very best wishes for a very happy and healthy new year.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Structure matters too”

How the structure of global debt is changing and why this matters

The key chart

**Share of government and household debt in global debt since December 2008** (Source: BIS; CMMP)

The key message

With attention focusing mainly on post-pandemic highs in the level of global debt/debt ratios, it is very easy to ignore key changes in the structure of global debt, and why these changes matter.

There has been a marked shift away from household (HH) debt to government debt, at the global level. While HH (and other types of private debt) typically cause crises, government debt typically ends them/reduces their severity. Government deficits also increase the supply of money and depress rates (contrary to popular opinion)
The structure of US and UK debt is now the mirror image of the pre-GFC period. This reduces associated risks since governments face different financial constraints to the HH and NFC sectors and cannot, as currency issuers, become insolvent
A similar but more muted shift has occurred in the euro area (EA) where the structure of debt also differs significantly across the EA’s largest economies
As currency users, EA governments also face different constraints to governments that remain issuers of their own currency. Flaws in the EU’s fiscal architecture were apparent before the pandemic. With budget hawks already calling for a return to EU fiscal rules, policy risks remain elevated
These trends are advanced economy trends not EM ones. With private sector credit accounting for 72% of EM debt, EMs face very different challenges associated mainly with the level of NFC debt and the rate of growth in HH debt (note also that EM debt is increasingly a “China-debt” story)

Global debt dynamics are a key element of CMMP analysis. It is natural to focus initially on the impact of responses to the pandemic on the level of debt. However, a failure to incorporate analysis of the structure, growth and affordability of debt at the same time can lead to false conclusions regarding investment implications. The post-COVID world is very different from the post-GFC world.

Structure matters too

**Trends in global debt and the global debt ratio since 2005** (Source: BIS; CMMP)

Much attention has focused on the impact of the public and private sector responses to the COVID-19 pandemic on the level of global debt and global debt ratios across all sectors (see chart above). All recorded new highs at the end of 4Q20. Less attention has focused, however, on the changing structure of global debt particularly in relation to the pre-GFC period. This posts sets out to correct this by highlighting five key structural changes in global debt and explaining their significance.

Five key changes

**Share of government anf household debt in global debt since December 2008** (Source: BIS; CMMP)

First, at the global level, there has been a shift away from HH debt to government debt (see chart above). This matters because (1) while private sector debt typically causes crises, public sector debt typically ends them/reduces their severity and (2) contrary to mainstream teaching, government deficits increase rather than decrease the supply of money and drive rates down.

**Trends in the share of US and UK government and household debt since 2008** (Source: BIS; CMMP)

Second, following this shift, the structure of US and UK debt is the mirror image of the pre-GFC structure (see chart above). This reduces associated risks since governments face different financial constraints to the HH and NFC sectors and cannot, if currency issuers, become insolvent.

**Trends in shares of EA government, HH and NFC debt since 2008** (Source: BIS; CMMP)

Third, more muted shifts have occurred in the euro area (EA) where the structure of debt still differs significantly across the EA’s largest economies. HH debt accounted for 27% of total EA debt in 1Q08 versus 42% in the US and the UK (see chart above). This share fell to 21% in 4Q20 versus 27% in the US and 30% in the UK respectively. Government debt has increases from 31% to 39% of EA debt versus 45% in the US and 44% in the UK respectively. At the country level, however, the share of government debt in total debt ranges from 60% in Italy to only 20% in the Netherlands (see chart below).

**Changes in structure of debt across EA’s largest economies (Source: BIS; CMMP)**

Fourth, as currency users, EA governments also face different constraints to governments that remain issuers of their own currency. Flaws in the EU’s fiscal architecture were apparent before the pandemic. With budget hawks already calling for a return to EU fiscal rules, policy risks remain elevated.

**Trends in shares of EM government, HH and NFC debt since 2008** (Source: BIS; CMMP)

Fifth, these trends are advanced economy trends not EM ones. With private sector credit accounting for 72% of EM debt, EMs face very different challenges associated mainly with the level of NFC debt and the rate of growth in HH debt (see chart above). Note also that EM debt is also increasingly a “China-debt” story. At the end of 4Q20, China accounted for 67% and 70% of total EM and EM NFC debt respectively (see chart below).

**China’s share of EM total and NFC debt since 2008** (Source: BIS; CMMP)

Conclusion

Global debt dynamics are a core element of CMMP analysis. While it is natural to focus initially on the new highs in the global debt levels and debt ratios across all sectors, it is also important not to miss the important messages associated with changes in the structure, growth and affordability of global debt.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Herd immunity?”

Resilience and risks in global housing

The key chart

**Trends in global house prices since the GFC** (Source: BIS; CMMP)

The key message

Anyone looking for evidence of COVID-19 “herd immunity” need look no further than global housing markets!

House prices rose 4% globally in 2020 in real terms, the fastest rate of growth since the GFC. Prices rose 7% in advanced economies, compared with a more modest 2% in emerging economies. House price resilience during the pandemic reflects many factors: a recovery in HH incomes thanks to continued policy support; lower borrowing costs; reduced supply as construction activity slowed; temporary tax breaks; and perceptions that housing was/is a relatively safe investment.

The combination of rising prices and an uncertain macro backdrop has kept measures of overvaluation elevated. In the euro area, for example, above average increases in house prices occurred in Luxembourg, Slovakia, Estonia, Portugal, Denmark, Austria, the Netherlands and France. With the exception of Estonia, estimates suggested overvaluation in each of these countries before the start of 2020, notably in Luxembourg, Denmark and Austria. Similarly, the Bank of England indicated unease about the UK housing market recently (1 June 2021) after the Nationwide Building Society said that prices were growing at their fastest pace since 2014.

Current EA housing and lending dynamics reflect Minsky’s hypothesis that, over the course of a long financial cycle, there will be a shift towards riskier and more speculative sectors. The flow of funds towards property and financial asset markets (FIRE-based lending) is increasing at the expense of more productive flows to the real economy (COCO-based lending). FIRE-based lending in the EA hit a new high of €5,905bn in April 2021 and accounts for 52% of total lending with negative implications for leverage, growth, stability and income inequality.

Resilience and risks in global housing

Anyone looking for evidence of COVID-19 “herd immunity” need look no further than global housing markets! House prices rose 4% globally in 2020 (in real terms) according to latest BIS data release, the fastest rate of growth since the GFC. Prices are now 21% higher than their average after the GFC (see chart below).

**Real price change in 2020 plotted against real price change since the GFC** (Source: BIS; CMMP)

Prices rose 7% in “advanced economies” (especially New Zealand, Canada, Denmark, Portugal, Austria, Germany, US) compared with a more modest 2% in “emerging economies.” The resilience of housing markets reflects many factors: a recovery in HH incomes thanks to continued policy support; lower borrowing costs; reduce supply as construction activity slowed; temporary tax breaks; and the perceptions that housing was/is a relatively safe investment.

**EA trends – 2020 price change ploted against valuation at end-2019** (Source: ECB; CMMP)

The key risk here is that the combination of rising prices and an uncertain macro backdrop have kept measures of overvaluation elevated.

In their latest Financial Stability Review, for example, the ECB notes that “house price growth during the pandemic has generally been higher for those countries that were already experiencing pronounced overvaluation prior to the pandemic (see chart above).”

The largest/above average increases in house prices during 2020 in the EA occurred in Luxembourg (17%), Slovakia (16%), Estonia (9%), Portugal (9%), Denmark (9%), Austria (7%), the Netherlands (7%) and France (6%). With the exception of Estonia, ECB estimates suggest that house prices were overvalued in each of these countries before the start of 2020, notably in Luxembourg (39% overvalued, not shown in graph above), Denmark (16% overvalued) and Austria (15% overvalued).

On the 7 June 2021, the BIS will release 4Q20 credit and affordability data which will provide further insights into the risks associated with housing trends in the EA and the rest-of-the-world.

**The rise in FIRE-based lending in the euro area** (Source: ECB; CMMP)

In recent posts, I have noted an adaptation of Hyman Minsky’s hypothesis that states that over the course of a long financial cycle, there will be a shift towards riskier and more speculative sectors.

Minsky’s theory can be applied to the house price trends described above and to HH lending trends described in previous posts. Minsky’s “shift” is reflected in the decline in bank credit to the real sector (COCO-based credit) and an increase in funds flowing towards property and financial asset markets (FIRE-based credit).

FIRE-based lending in the EA hit a new high of €5,905bn in April 2021 and accounts for 52% of total lending with negative implications for leverage, growth, stability and income inequality.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Houston, do we have a problem?”

Seven key perspectives on US debt

The key chart

**Total debt levels and cumulative market share as at the end of 3Q20** (Source: BIS; CMMP)

The key message – seven perspectives

First, the US has the highest outstanding stock of debt in the world but deeper analysis is required to determine whether it has a “debt problem”
Second, in terms of debt ratios (debt/GDP), the US ranks outside the world’s highly indebted economies across the government, household (HH) and corporate (NFC) sectors
Third, the US is also one of only four developed market economies to have both HH and NFC debt ratios below the BIS maximum thresholds
Fourth, the current structure of US debt is the mirror image of the pre-GFC structure following the significant shift away from HH to government debt
Fifth, this changing structure reduces associated risks since the government faces different financial constraints to the HH and NFC sectors and cannot, as a currency issuer, become insolvent
Sixth, the risks associated with the level, growth and affordability of HH debt remain moderate in absolute and relative terms
Seventh, risks are elevated in the NFC sector, however, due to the recent rates of excess credit growth and affordability concerns but these risks are not exclusive to the US.

In short, risks associated with US debt are concentrated rather than systemic. More elevated risks exist in other developed and emerging economies where some of the highest rates of excess credit growth are occurring in highly indebted economies and affordability risks are rising despite the low interest rate environment. Investor attention should not be restricted to US debt simply due to its size – more immediate concerns lie elsewhere.

Does the US have a debt problem?

**Outstanding US debt and market share by sector** (Source: BIS; CMMP)

The US has the highest outstanding stock of total, government, HH and NFC debt in the world but deeper analysis is required to determine whether it has a “debt problem”.

The US has outstanding total, government, NFC, and HH debt of $61tr, $27tr, $18tr and $16tr respectively (as at end 3Q20). The US accounts for 29% of global debt alone and almost 50% together with China (see key chart above) and has market shares of 34%, 22% and 32% of global government, NFC and HH debt respectively (see chart above).

To understand the implications here and consider whether the US has a debt problem, CMMP analysis considers the stock of debt in the context of the level of GDP (debt ratios), its structure, its rate of growth and affordability.

**Ranking of BIS reporting economies by total debt/GDP** (Source: BIS; CMMP)

In terms of debt ratios (debt/GDP), the US ranks outside the world’s highly indebted economies in all sub-sectors. It is ranked only #18 in terms of total debt ratio for example (see chart above), and #22 and #12 in terms of NFC and HH debt ratios. In the case of government debt (129% GDP), the US is ranked higher, however, at #10 after Japan (235%), Greece (212%), Italy (172%), Portugal (146%), Belgium (137%), France (134%), UK (133%) and Spain (132%).

**NFC and HH debt ratios plotted against BIS maximum threshold levels** (Source: BIS; CMMP)

The US is one of only four developed market economies to have both HH and NFC debt ratios below the BIS maximum thresholds. The BIS considers HH and NFC debt ratios of 85% and 90% GDP to be threshold levels above which debt becomes a constraint on future growth. The BIS provides debt ratios for 22 developed and 21 emerging economies. As can be seen in the scatter diagram above, the US sits in the lower LH quadrant with a HH debt ratio of 78% and a NFC debt ratio of 84%. Germany, Greece and Italy are the only other developed economies to sit within the same quadrant.

**Breakdown of outstanding US debt by sector** (Source: BIS; CMMP)

The current structure of US debt is the mirror image of the pre-GFC structure following the significant shift away from HH debt to government debt. The share of HH debt peaked at 44% total debt in 2Q07 and fell to 27% by end 3Q20. In contrast, the share of government has risen from 26% to 44% over the same period.

As the Federal Reserve Bank of St Louis noted back in 2018, “The fall in household debt was primarily driven by the fall in mortgage debt that followed the housing crash. The surge in public debt, on the other hand, was partly driven by the large fiscal stimulus packages that were deployed to fight the Great Recession.”

The changing structure of US debt reduces associated risks since the government faces different financial constraints and cannot, as a currency issuer, become insolvent. HHs, NFCs and financial institutions are all “currency users” who face obvious constraints on their levels of debt. “Taking on too much debt can, and does, lead to bankruptcy, foreclosure, and even incarceration” (Kelton, 2020). In contrast, the US government, as a currency issuer, cannot become insolvent in its own currency since it can always make payments as they come due in its own currency.

In the seventh lesson from the money sector, I highlighted an article published by David Andolfatto of the Federal Reserve Bank of St Louis (4 December 2020). In line with my preferred financial sector balances approach, Andolfatto questions the “government as a household” analogy and notes that, “to the extent that government debt is held domestically, it constitutes wealth for the private sector.” From here, and more significantly, he argues that:

“…it seems more accurate to view the national debt less as a form of debt and more as a form of money in circulation…The idea of having to pay back money already in circulation makes little sense, in this context. Of course, not having to worry about paying back the national debt does not mean there is nothing to be concerned about. But if the national debt is a form of money, wherein lies the concern?”
“Does the National Debt Matter?” Federal Reserve Bank of St. Louis, December 2020

**Trend in HH debt/GDP ratio over past 20 years** (Source: BIS; CMMP)

Sixth, the risks associated with the level, growth and affordability of HH debt remain moderate in absolute and relative terms. High levels of household indebtedness were an important contributing factor to the GFC and subsequent recession. The HH debt ratio rose to a peak of 99% GDP in 1Q08 well above the 85% BIS threshold level. This ratio is 78% GDP today. Not only was the level of HH debt a matter of concern, but the pace of growth was sending clear warning signals too.

**Rolling 3-year RGF for US HH sector over past 20 years** (Source: BIS; CMMP)

CMMP analysis uses a relative growth factor to analyse the rate of growth in debt. This compares the 3-year CAGR of debt with the 3-year CAGR in nominal GDP. As can be seen in the chart above, the RGF for the US HH sector peaked at 7% in 1Q04, fell and then remained negative for 41 consecutive quarters from 2Q10 until the last reporting quarter (3Q20).

**HH RGFs plotted against HH debt ratios for advanced BIS economies** (Source: BIS; CMMP)

In the context of other developed economies, the risks of excess HH credit growth are much lower in the US than in Norway, Sweden, Canada, Switzerland, New Zealand and the UK. Each of these economies are experiencing excess HH credit growth (ie, RGF > 1) despite relatively high debt ratios that exceed the BIS threshold level of 85% GDP.

**DSR (%) and deviation from 10Y average for advanced BIS economies** (Source: BIS; CMMP)

In terms of affordability risk, the debt service ratio for the US HH sectors is low in absolute terms (7.6%) and in relative terms against its own 10Y average of 8.3% and against other developed economies.

**Trend in NFC debt ratio over past 20 years** (Source: BIS; CMMP)

Risks are elevated in the NFC sector, however, due to the recent rates of excess credit growth and affordability concerns but these risks are not exclusive to the US. The NFC sector experienced 33 consecutive quarters of a rising debt ratio since 1Q12 and at 84% GDP is very marginally below the recent peak in 2Q20. Note however, that while the current NFC debt ratio is high in the context of the US, it remains below the 90% BIS threshold.

**Rolling 3-year RGF for US NFC sector over past 20 years** *(Source: BIS; CMMP)*

Of more concern is the current 4ppt rate of excess NFC credit growth. As can be seen, the current RGF is close to previous peaks. This is despite fact that the absolute level of NFC debt is higher than at previous peaks in excess growth. The current RGF places the US among a group of seven developed economies experiencing excess NFC credit growth of more than 4ppt. Within this sample, Sweden, France, Canada, Switzerland and Japan are experiencing higher rates of excess growth despite having higher levels of NFC debt that exceed the BIS maximum threshold level of 90%.

**NFC RGFs plotted against NFC debt ratios for advanced BIS economies** *(Source: BIS; CMMP)*

Finally, the highest level of concern relates to the affordability of NFC debt. The current NFC debt service ratio of 47% is only marginally below its all-time high and is 8ppt above its 10-year average of 39%. Among developed economies, this places the US NFC sector among the higher risk sectors, albeit it below the NFC sectors in France, Canada and Sweden.

Conclusion

The risks associated with US debt are more concentrated than systemic and relate mainly to the rate of excess NFC credit growth and its affordability.(Further incentive for the Federal Reserve to keep rates lower for longer?) From a global perspective, debt risks are more elevated in other developed and emerging economies. Some of the highest rates of excess credit growth are occurring in highly indebted economies and affordability risks are increasing within and outside this sub-set despite the low interest rate environment.

Investor attention should not be restricted to US debt simply due to its size – more immediate concerns lie eslewhere.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available seperately.

“Beyond the headlines”

Growth, affordability (and structure) matter too

The key chart

**Are the risks associated with excess growth re-emerging? Excess credit growth versus penetration rates** (Source: BIS; CMMP)

The key message

Risks associated with “excess credit growth”, which had been declining in the pre-Covid period, have re-emerged during the pandemic.

Some of the highest rates of excess credit growth are currently occurring in economies where debt levels exceed maximum threshold levels (Singapore, France, Hong Kong, South Korea, Japan, Canada).

Affordability risks are also increasing within and outside (Sweden, Switzerland, Norway) this sub-set despite the low interest rate environment.

Risks are more elevated in the corporate (NFC) sector than in the household (HH) sector but are not unique to either the developed market (DM) or emerging market (EM) worlds – one more reason to question the relevance of the current DM v EM distinction

Much of the debate relating to global debt focuses exclusively on the level of debt and, to a lesser extent, on the debt ratio (debt as a percentage of GDP). This analysis highlights how the addition of growth and affordability factors provides a more complete picture of the risks associated with current trends and their investment implications.

Introduction

As noted above, much of the recent debate about global debt has been restricted to its level in absolute terms or as a percentage of GDP. The addition of other factors – the rate of growth in debt, its affordability and, in the case of many EMs, its structure – provides a more complete picture, however.

In this post, I add condsideration of the rate of growth in global debt to my previous analysis in “D…E…B…T, Part II.” The approach is based on the simple relative growth factor (RGF) concept which I have used since the early 1990s as a first step in analysing the sustainability of debt dynamics. I also link both to the affordability of debt as measured by debt service ratios (DSRs).

In short, this approach compares the rate of “excess credit growth” with the level of debt penetration in a given economy. The three-year CAGR in debt is compared with the three-year CAGR in nominal GDP to derive a RGF. This is then compared with the level of debt expressed as a percentage of GDP (the debt ratio).

The concept is simple – one would expect relative high levels of excess credit growth in economies where the level of leverage is relatively low and vice versa. Conversely, red flags are raised when excess credit growth continues in economies that exhibit relatively high levels of leverage or when excess credit growth continues beyond previously observed levels.

The key trends

Rolling private sector RGF for all BIS reporting, developed and emerging economies (Source: BIS; CMMP)

In the pre-COVID period, the risks associated with excess credit growth had been declining in developed (DM) and emerging (EM) economies (see chart above illustrating rolling RGF trends). In response to the pandemic, however, credit demand has risen while nominal GDP has fallen sharply. As a result, the RGF (as at the end of 3Q20) for all economies, DM and EM have risen to 3%, 2% and 4% respectively. As can be seen, these levels are elevated but remain below those seen in previous cycles during the past 15 years.

Private sector credit snapshots

**Excess PS credit growth versus PS debt ratios as at end 3Q20** (Source: BIS; CMMP)

**Top ten ranking of private sector RGF by country** (Source: BIS; CMMP)

Importantly, out of the top-ten economies experiencing the highest rates of excess private sector credit, six have private sector debt ratios higher than the threshold levels above which debt is considered a constraint to future growth – Singapore, France, Hong Kong, South Korea, Japan and Canada. In the graph above, and in similar ones below, the orange bar indicates where debt ratios exceed the threshold level.

**Excess PS credit growth versus PS debt ratios as at end 3Q20 in LATEMEA** *(Source: BIS; CMMP)*

Argentina and Chile have the highest private sector RGFs among the sample of LATEMEA economies. The associated risks are higher in the case of Chile than in Argentina given the two economies debt ratios of 169% GDP and 24% GDP respectively. As highlighted below, the risks in Chile relate primarily to excess growth in the NFC sector.

**DSR and deviations from 10-year averages** (Source: BIS; CMMP)

Within this subset, the debt service ratios in absolute terms and in relation to respective 10-year averages are also relatively high in France, Hong Kong, South Korea, Japan and Canada despite the low interest rate environment. Outside this subset, affordability risks are relatively high in Sweden, Switzerland and Norway where DSR’s are relatively high in absolute terms and in relation to each economy’s history.

NFC credit snapshots

**Excess NFC credit growth versus NFC debt ratios as at end 3Q20** *(Source: BIS; CMMP)*

**Top ten ranking of NFC RGF by country** *(Source: BIS; CMMP)*

Similarly, out of the top-ten economies experiencing the highest rates of excess NFC credit, seven have NFC debt ratios above the threshold level (90% GDP) – Singapore, Chile, France, Canada, Japan, South Korea and Switzerland.

Within this second subset, the debt service ratios in absolute terms and in relation to respective 10-year averages are relatively high in France, Canada, Japan and South Korea. Despite lower rates of excess NFC credit growth affordability risks are also relatively high in Sweden, Norway and the US. (Note that the availability of sector DSRs is more restricted than overall private sector DSRs).

HH credit snapshots

**Excess HH credit growth versus HH debt ratios as at end 3Q20** *(Source: BIS; CMMP)*

**Top ten ranking of HH RGF by country** *(Source: BIS; CMMP)*

In contrast, out of the top-ten economies experiencing the highest rates of excess HH credit, only two have HH debt ratios above the threshold level – Hong Kong and Singapore. This is not surprising given that HH debt ratios are lower than NFC debt levels in general. Of the 42 BIS reporting countries, 11 have HH debt ratios above the 85% GDP HH threshold level whereas 20 have NFC debt ratios above the 90% GDP NFC threshold level.

**Rolling HH RGFs for China and Russia** (Source: BIS; CMMP)

That said, experience suggests that the current levels of excess HH credit growth in China and Russia indicate elevated risks, especially in the former economy. In “Too much, too soon?“, posted in November 2019, I highlighted the PBOC’s concerns over HH-sector debt risks – “the debt risks in the HH sector and some low income HHs in some regions are relatively prominent and should be paid attention to.” (PBOC, Financial Stability Report 2019). Excess credit growth remains a key feature nonetheless.

Within this third subset, the debt service ratio in absolute terms and in relation to respective 10-year averages is relatively high in South Korea. Again, despite lower rates of excess HH credit growth, affordability risks are also relatively high in Sweden and Norway.

Conclusion

This summary post extends the analysis of the level of global debt and debt ratios to include an assessment of the rate of growth in debt and its affordability. Together, these factors provide a more complete picture of the sustainability of current debt trends.

Risks associated with excess credit growth are re-emerging and will be a feature of the post-COVID environment going forward. The two key risks here are: (1) some of the highest rates of excess credit growth are currently occurring in economies where debt levels exceed threshold levels; and (2) affordability risks are increasing within (and outside) this sub-set despite the low interest rate environment.

To some extent, little of this is new news – I have been flagging the same risks in an Asia context for some time – and the implications are the same. Despite recent market moves, the secular support for rates remaining “lower-for-longer” remains, albeit with more elevated sustainability risks in the NFC sector.

“D…E…B…T, Part II”

Revisiting the level and structure of global debt six months on

The key chart

**What are the implications of new highs in global debt and debt ratios?** (Source: BIS; CMMP)

The key message

Global debt hit new highs in absolute terms ($211tr) and as a percentage of GDP (277%) at the end of 3Q20, driven largely by government ($79tr) and NFC debt ($81tr).

Public sector and NFC debt ratios both hit new highs above the maximum threshold level that the BIS considers detrimental to future growth.

These trends provide on-going support for the “lower-for-longer” narrative but also raise concerns about sustainability risks in the NFC sector.

The US and China account for nearly 50% of global debt alone and more than 75% with Japan, France, the UK, Germany, Canada and Italy – but only Japan and France are included in the top-ten most indebted global economies.

The post-GFC period of private sector deleveraging/debt stability in advanced economies has ended as the private sector debt ratio increased to 179% GDP.

China’s accumulation of debt has eclipsed the “EM catch-up story”. Chinese debt now accounts for just under 70% of EM debt and EM x China’s share of global debt has remained unchanged over the past decade.

The traditional distinction between advanced/developed markets and emerging markets is increasingly irrelevant/unhelpful, especially when analysing Asian debt dynamics.

New terms of reference are required for analysing global debt trends that distinguish between economies with excess HH and/or corporate debt and the rest of the world. From this more appropriate foundation, further analysis can be made of the growth and affordability of debt…

D…E…B…T, Part II

**Breakdown of global debt and trend in debt ratio since 2008** (Source: BIS; CMMP)

Global debt hit new highs in absolute terms and as a percentage of GDP at the end of 3Q20, driven largely by public sector debt and NFC debt. According to the BIS, total debt rose from $193tr at the end of 1Q20 to a new high of $211tr. Within this:

Government, NFC and HH debt all hit new absolute highs of $79tr, $81tr and $51tr respectively
The global debt ratio increased from 246% GDP in 1Q20 to a new high of 278% GDP
The public sector debt ratio increased from 88% GDP to 104% GDP and the NFC debt ratio increased from 96% GDP to 107% GDP over the same period. In both cases, the debt ratio was a new high and above the maximum threshold level of 90% above which the BIS considers the level of debt to become a constraint on future growth
The HH debt ratio also increased from 61% GDP to 67% but remains below its historic peak of 69% (3Q09) and the respective BIS threshold level of 85% GDP.

These trends provide on-going support for the “lower-for-longer” narrative but also raise concerns about sustainability especially in the NFC sector.

**3Q20 ranking of BIS reporting economies by total debt and cumulative market share** (Source: BIS; CMMP)

The US and China account for nearly 50% of global debt, but neither is ranked in the top-15 most indebted economies. At the end of 3Q20, total debt reached $61tr (29% global debt) in the US and $42tr in China (20% global debt). In absolute terms, these two economies are followed by Japan $21tr, France $10tr, UK $8tr, Germany $8tr, Canada $6tr and Italy $tr. In other words, the US and China account for almost a half of global debt and together with the other six economies account for over three-quarters of global debt. Note, however, that only two of these eight economies rank among the top-ten most indebted global economies (% GDP).

**3Q20 ranking of BIS reporting economies by total debt as % GDP** (Source: BIS; CMMP)

The post-GFC period of private sector deleveraging/debt stability in advanced economies has ended as the private sector debt ratio rose to 179% GDP, close to its all-time-high. Following the GFC, the private sector debt ratio in advanced economies had fallen from a peak of 181% GDP in 3Q09 to 151% in 1Q15. It had then stabilised at around the 160% of GDP level.

**Private sector debt in advanced economies in absolute terms and as % GDP** (Source: BIS; CMMP)

As discussed in “Are we there yet?”, this had direct implications for the duration and amplitude of money, credit and business cycles, inflation, policy options and the level of global interest rates. In subsequent posts, I will examine the implications of these recent trends on the sustainability and affordability of private sector debt in advanced economies.

**Trends in China’s private sector debt and share of EM private sector debt** (Source: BIS; CMMP)

China’s accumulation of debt has eclipsed the “EM catch-up story”. Fifteen years ago, China’s debt was just under $3tr and accounted for 35% of total EM debt. At the end of 3Q20, China’s debt had increased to $33tr to account for 67% of total EM debt. The so-called EM catch-up story is in effect, the story of China’s debt accumulation. Excluding China, EM’s share of global debt in unchanged (12%) over the past decade.

**China and EMx China’s share of global debt** (Source: BIS; CMMP)

The traditional distinction between advanced/developed markets and emerging markets is increasingly irrelevant/unhelpful, especially when analysing Asian debt dynamics. The BIS classifies Asian reporting countries into two categories: three “advanced” economies (Japan, Australia and NZ) and eight emerging economies (China, Hong Kong, India, Indonesia, Korea, Malaysia, Singapore and Thailand).

**Asian NFC and HH debt ratios** (Source: BIS; CMMP)

The classification of Japan, Australia and New Zealand as advanced economies is logical but masks different exposures to NFC (Japan) and HH (Australian and New Zealand) debt dynamics.

The remaining grouping is more troublesome as it ignores the wide variations in market structure, growth opportunities, risks and secular challenges. I prefer to consider China, Korea, Hong Kong and Singapore as unique markets. China is unique in terms of the level, structure and drivers of debt and in terms of the PBOC’s policy responses. Korea and Hong Kong stand out for having NFC and HH debt ratios that exceed BIS maximum thresholds. Hong Kong and Singapore are distinguished by their roles as regional financial centres but have different HH debt dynamics. Malaysia and Thailand can be considered intermediate markets which leaves India and Indonesia as genuine emerging markets among Asian reporting countries (see “Sustainable debt dynamics – Asia private sector credit”).

**Global NFC and HH debt ratios** (Source: BIS; CMMP)

New terms of reference are required for analysing global debt trends that distinguish between economies with excess HH and/or corporate debt and the rest of the world. In this case, excess refers to levels that are above the BIS thresholds. Among the BIS reporting economies (and excluding Luxembourg) there are:

Eight economies with excess HH and NFC debt levels: Hong Kong, Sweden, the Netherlands, Norway, Denmark, Switzerland, Canada and South Korea
Eleven economies with excess NFC debt levels: Ireland, France, China, Belgium, Singapore, Chile, Finland, Japan, Spain, Portugal, and Austria
Three economies with excess HH debt levels: Australia, New Zealand, the UK
The RoW with HH and NFC debt levels below the BIS thresholds

These classifications provide a more appropriate foundation for further analysis of the other, key features of global debt – its rate of growth and its affordability. These will be addressed in subsequent posts.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Debt dynamics in the developed world”

The developed world continues to deleverage but risks remain

The key chart

**Only Italy, Austria, Greece, Germany and the US have NFC and HH debt ratios (% GDP, 1Q19) below BIS “maximum threshold” levels (dotted red lines)**
Source: BIS; Haver; CMMP analysis

Summary

The developed world continues to deleverage. This process has already led to dramatic shift in the structure of global private sector debt (see “The Changing Face of Global Debt”). With private sector debt levels still “too high” in the developed world, this trend is set to continue.

Risks associated with excess credit growth in the developed world are lower than in past cycles and remain concentrated by economy (Sweden, Switzerland, Canada and France) and by sector (NFC credit more than HH credit). Despite lower borrowing costs, affordability risks are still evident is both the NFC (Canada, France) and HH sectors (Norway, Canada, and Sweden).

Progress in dealing with the debt overhang in the Euro Area remains slow and incomplete. Long term secular challenges of subdued GDP, money supply and credit growth persist while unorthodox monetary policy measures risk fuelling further demand for less-productive “FIRE-based” lending with negative implications or leverage, growth, stability and income inequality (see “ Fuelling the FIRE” – the hidden risk in QE).

Trends in DM debt ratios

Aggregate private sector debt ratios for the Euro Area, and the BIS sample of advanced and emerging economies (% GDP) – the developed world continues to deleverage while the emerging world plays “catch-up”
Source: BIS; Haver, CMMP analysis

The developed world continues to deleverage. Private sector credit as a percentage of GDP has fallen from a peak of 181% in 3Q09 to 162% at the end of the 1Q19. This has involved a (relatively gradual) process of “passive deleveraging” where the stock of outstanding debt rises but at a slower rate than nominal GDP.

The process of deleveraging in the Euro Area started later. Private sector credit as a percentage of GDP peaked at 172% in 1Q15 and has fallen to 162% at the end of 1Q19, in-line with the average for the BIS’ sample of advanced economies.

**The outstanding stock of debt continues to rise ($ billion) but at a slower rate than nominal GDP**
Source: BIS; Haver; CMMP analysis

This process has led to a dramatic shift in the structure of global debt. In 1Q00, the advanced world accounted for 90% of global private sector credit, with advanced economies excluding the Euro Area accounting for 70% and the Euro Area 20%. Emerging markets accounted for only 10% of global private sector credit with 7% from emerging markets excluding China and 3% from China.

**The changing face of global debt (% GDP) – shifting East and towards emerging markets**
Source: BIS; Haver; CMMP analysis

At the end of 1Q19, the advanced world’s share of global debt had fallen to 64% (advanced economies ex Euro Area 47%, Euro Area 18%) while the emerging markets share has increased to 36% (EM ex China 12%, China 24%).

Where are we now?

**The key chart repeated. The Netherlands, Sweden, Norway, Canada, Switzerland and Denmark have** **NFC and HH debt ratios (% GDP, 1Q19) above BIS threshold levels (dotted red lines)**
*Source: BIS; Haver; CMMP analysis*

With debt levels remaining “too high” in the advanced world this trend is likely to continue. The BIS considers corporate (NFC) and household (HH) debt ratios of 90% and 85% respectively to be maximum thresholds above which debt becomes a constraint on future growth.

In our sample of advanced economies, only Greece, Germany, Italy, Austria and the US have debt ratios below these thresholds in both sectors. In contrast both NFC and HH debt levels are above the BIS thresholds in the Netherlands, Sweden, Norway, Switzerland, Denmark and Canada. NFC debt ratios remain above the threshold in Ireland, Belgium, France, Portugal and Spain and while the UK has “excess” HH debt. In short, progress towards dealing with high levels of private sector debt remains incomplete.

Associated risks

Private sector growth risks

**The highest rates of “excess credit growth” (3-year RGF 1Q19) have occurred in economies where PSC debt levels are already high: Switzerland, Sweden, Canada, France**
Source: BIS; Haver; CMMP analysis

Risks associated with “excess credit growth” in developed markets are lower than in past cycles. I introduced my Relative Growth Factor analysis in “Sustainable debt dynamics – Asia private sector credit”. In short, this simple framework compares the relative growth in credit versus GDP (3 year CAGR) with the level of debt penetration in a given economy.

**Among the high risk economies, Canada has seen the most obvious adjustment (trends in 3-year RGFs since March 2002)**
Source: BIS; Haver; CMMP analysis

In terms of total private sector debt, the highest “growth risks” can be seen in Sweden, Switzerland, Canada and France. Private sector credit in each of these economies has outstripped GDP growth on a CAGR basis over the past three years despite relatively high levels of private sector debt. Canada has made the most obvious adjustment among this sample of relatively high risk economies with the RGF falling from over 4% two years ago to 1.8% currently.

NFC sector growth risks

In the NFC sector, the highest risks can be observed in Switzerland, Sweden, Canada and France. RGFs for these for these economies were 3.9%, 3.0%, 2.7% and 1.8% respectively, despite NFC debt levels that are well above the BIS threshold. As above, Canada’s rate of excess NFC credit growth is slowing in contrast to trends in Switzerland and Sweden.

**Contrasting trends between NFC sector risks in Canada versus Switzerland and Sweden**
Source: BIS; Haver; CMMP analysis

HH sector growth risks

In the HH sector, RGF analysis suggest that the highest risks are in Norway, Switzerland, Canada, Norway (and the UK). RGFs in these economies were 1.3%, 1.1%, 0.7% and 0.4% respectively. In other words, excess HH credit growth risk is lower than in the NFC sector. Furthermore, the rates of excess HH credit growth in each of these economies is lower than in the recent past, especially in Norway and Canada.

**Rapid adjustments in Norway and Canada among relatively high HH sector growth risk economies**
Source: BIS; Haver; CMMP analysis

Affordability risks

Despite lower borrowing costs, affordability risks remain. BIS debt service ratios (DSR) provide, “important information about the interactions between debt and the real economy, as they measure the amount of income used for interest payments and amortisations.” (BIS, 2017). The perspective provided by DSRs complements the analysis of debt ratios above but differs in the sense that they provide a “flow-to-flow” comparison ie, the debt service payments divided by the flow of income. In the accompanying charts, DSR ratios for private sector, corporate and household credit are plotted against the deviation from their respective long term averages.

**Canada and France display the highest NFC affordability risk levels (1Q19 DSR versus LT average)**
Source: BIS; Haver; CMMP analysis

NFC affordability risks are highest in Canada and France. Debt service ratios (57% and 55% respectively) are not only high in absolute terms but they also illustrate the highest deviations from their respective long-term averages (47% and 49% respectively). In the HH sector, the highest affordability risks are seen in Norway, Canada and Sweden, although the level of risk is lower than in the NFC sector.

**Norway, Canada and Sweden display the highest HH sector affordability risk (albeit lower than in the NFC sector)**
Source: BIS; Haver; CMMP analysis

Implications for the Euro Area

Progress in dealing with the debt overhang in the Euro Area remains slow and incomplete. Long term secular challenges of subdued GDP, money supply and credit growth persist. The European Commission recently revised its 2019 forecast down by -0.1ppt to 1.1% and its 2020 and 2012 forecasts down by -0.2ppt to 1.2% in both years, with these forecasts relying on “the strength of more domestically-oriented sectors.

**Subdued Euro Area growth forecast to continue (% YoY)**
Source: European Commission; Haver; CMMP analysis

Growth in broad money (5.5%) and private sector credit (3.7%) in September remains positive in relation to recent trends but relative subdued in relation to past cycles. Furthermore, the renewed widening in the gap between the growth in the supply of money and the demand from credit (-1.8%) indicates that the Euro Area continues to face the challenge of deficiency in the demand for credit.

**Gap between growth in supply of money and demand for credit illustrates the fundamental problem – a deficiency in credit demand across the Euro Area (% YoY, 3m MVA)**
Source: ECB; Haver; CMMP analysis

This has on-going implications for policy choices. Unorthodox monetary policy measures risk fuelling further demand for less-productive “FIRE-based” lending with negative implications or leverage, growth, stability and income inequality (see “ Fuelling the FIRE” – the hidden risk in QE).

**“Fuelling the FIRE” – split in EA lending over the past twenty years between productive (COCO) and less productive (FIRE) based lending (% total lending)**
Source: ECB; Haver; CMMP analysis

Please note that the summary comments above are abstracts from more detailed analysis that is available separately.