The key chart
The key message
The household (HH) sector was at the epicentre of the Global Financial Crisis (GFC). Since then, three key structural shifts have changed the sector’s potential impact on macro policy, growth and financial stability:
- a shift away from HH debt towards NFC debt within private sector debt
- a shift away from HH debt towards government debt within total debt
- a regional shift away from advanced economies towards emerging economies (EMs) driven largely, but not exclusively, by Chinese HH debt dynamics
The US ($17tr) accounts for almost a third of total HH debt. The level of US debt is almost 2x China’s HH debt and over 5x Japanese HH debt (the next two largest markets by size). The US and China collectively account for half of global HH debt. Once again, neither rank among the top ten most indebted HH economies, however.
Of the 43 BIS reporting economies, only 11 have HH debt ratios above the maximum threshold level (compared with 20 in the NFC sector). Of these 11, eight also have “above-threshold” NFC debt ratios – Switzerland, Norway, Canada, Denmark, Korea, the Netherlands, Sweden and Hong Kong.
Risks associated with excess HH debt growth in advanced economies are lower than in EM and, in contrast to NFC debt dynamics, are in economies with relatively low levels of HH indebtedness (eg, France and Germany). Growth risks also remain in Norway, Sweden, New Zealand, Canada and Switzerland among advanced economies.
Elevated affordability risks among advanced economies exist in Sweden and Norway where HH debt service ratios are not only high in absolute terms, but they are also above their respective LT averages.
Among the top ten economies that account for over 80% of total HH debt, Korea stands out due to elevated risks relating to HH indebtedness, excess HH debt growth, affordability and house price appreciation. This may explain why some Koreans feel that they are playing a real-life version of the “Squid Game”?
Household debt dynamics
Household debt hit a new high of $55tr during 2021 (see chart above). The HH debt ratio (67% GDP) remains elevated by historic standards but is below its 4Q20 peak (71% GDP) and below the BIS’ maximum threshold level of 85% GDP. This is in contrast to the NFC sector, where global indebtedness (105% GDP) is above the sector’s maximum threshold level of 90% GDP.
There has been a shift away from HH debt since the GFC towards greater levels of corporate (NFC) debt within private sector debt (PSC) and towards government debt within total global debt. HH debt’s share of total PSC has fallen from 45% to 39% over the period (see chart above).
More significantly, HH debt’s share of total debt has fallen from 32% to 25% over the period, while the share of government debt has increased from 29% to 37% (see chart above). This second shift, driven by advance economy debt dynamics (and the US and UK especially), has important implications for financial stability (see “Global Debt Dynamics – I”).
Since the GFC, there has also been a significant geographic shift away from advanced economies towards emerging markets. This shift has been driven largely, but not exclusively, by Chinese debt dynamics. The share of total HH debt accounted for by EMs has risen from 10% to 31%. China’s share of total HH debt has risen from 2% to 19%, while EM x China’s share has risen from 8% to 12%. Note that China accounts for 61% of total EM HH debt alone and that China, Korea, India and Brazil account for 82% of EM HH debt collectively.
The US ($17tr) accounts for almost a third of total HH debt alone. The outstanding stock of HH debt at the end of 2Q21 in the US was 1.7x the stock of Chinese HH debt (the second largest HH debt market) and 5.3x the stock of Japanese HH debt (the third largest HH debt market). Collectively the US and China account for more than half of global HH debt outstanding (see chart above).
Once again, neither rank among the top-ten most indebted HH markets, however (see chart above). The US ranks #12 while China ranks #22. In contrast, Canada, Australia, Korea and Switzerland rank inside the top-ten rankings based on both the level of HH debt ($tr) and the level of HH indebtedness (% GDP).
Of the 43 BIS reporting economies, 11 have HH debt ratios that exceed the BIS’ maximum threshold of 85% of GDP. Of these 11, eight also have NFC debt ratios above maximum thresholds – Switzerland, Norway, Canada, Denmark, Korea, the Netherlands, Sweden and Hong Kong. The remaining three economies with above-threshold HH debt ratios but below-threshold NFC debt ratios are Australia, New Zealand and the UK (see chart above).
The rate of “excess HH debt growth” in advanced economies (2.1%) is lower than the global (3.8%) and EM (8.7%) averages (click here for an explanation of the underlying methodology). In contrast to NFC sector dynamics, the highest rates of excess HH debt growth among advanced economies occurred in economies with relatively low levels of HH indebtedness. As can be seen in the chart above, France (4.2%) and Germany (3.8%) have seen the highest rates of excess HH debt growth over the past three years. Their HH debt ratios are 67% GDP and 58% GDP respectively, below the advanced economy average of 77% GDP and the BIS maximum threshold level of 85% GDP.
Risks associated with excess HH debt growth are also elevated in Norway, Sweden, New Zealand, Canada and Switzerland among advanced economies. In each case, growth in HH debt is outstripping growth in nominal GDP despite high absolute and relative levels of HH indebtedness (see chart above).
HH affordability risks within our sample of advanced economy are elevated in Sweden and Norway. In these economies, the HH debt service ratios (DSR) are not only high in absolute terms, but they are also above their respective LT averages despite low absolute HH borrowing costs. HH DSRs are also relatively high in Canada, Australia, the Netherlands and Denmark in absolute terms. However, in each of these cases the current DSR is below the respective LT average.
HH financial stability heatmap
(* Note HH DSR ratios are only available for selected BIS reporting economies)
Significant variations exist in the impact of HH debt dynamics on financial stability among the ten economies that collectively account for 81% of total HH debt. Key themes include:
- Korea stands out among this sample in terms of elevated risks associated with HH indebtedness, the rate of excess HH credit growth and the affordability of debt (in aggregate terms*). Note also that risks are elevated in terms of the growth in house prices (see chart below). I will return to Korean debt dynamics in more detail in a subsequent post
- Four of the five economies with the largest levels of outstanding debt – US, China, Japan and Germany – have HH debt levels below the maximum threshold level
- The US, which accounts for 31% of total HH debt, has relatively low risks in terms of HH indebtedness, the rate of excess growth in HH debt and the affordability of HH debt
- China has elevated risks associated with the rate of excess HH debt growth and the affordability of debt (at the aggregate level)
- France has elevated risks associated with the rate of excess HH debt growth. France is also the only economy in this sample where the HH debt service ratio is above its LT average. This is despite the fact that the composite cost of HH borrowing is at an all-time low (see chart above).
The next post in this series focuses on EM debt dynamics.
Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.