The key chart
Private sector debt service ratios (1Q23) compared with deviations from respective LT averages since 1999 (Source: BIS; CMMP)
The key message
Private sector “affordability risk” is an increasing focus of attention as we move to a “higher-for-longer” rate environment. The focus typically centres on the US private sector. Is this justified or more a reflection that we live in a highly US-centric world of financial reporting?
The debt service ratio (DSR) is the ratio of interest payments plus amortisations to income. It provides a flow-to-flow comparison ie, the flow of debt service payments divided by the flow of income. The BIS compiles this data using a unified methodological approach, but compilation challenges mean that comparisons that include both the absolute level and the deviation from respective LT averages are more useful than comparisons of absolute levels alone. The chart above plots private sector DSRs (x-axis) for BIS reporting nations in relation to the deviation from LT averages since 1999 (y-axis).
The US private sector DSR was 14.9% at the end of 1Q23. This compares with a LT average of 15.5% and the high of 18.3% recorded in 3Q07. As can be seen, the US private sector DSR is neither high in absolute terms nor in terms of the deviation from its LT average when viewed in a global context.
The latest BIS data release suggests that attention would be focused better on “affordability risks” in developed economies including Canada, Switzerland, Sweden, France and Finland and emerging markets including Brazil, China and Korea instead. In these cases, the latest DSRs are both high in absolute terms and in relation to their respective LT averages.
Perspective matters….
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.