The key chart
Trends in UK private sector debt ratio (% GDP, RHS) and relative growth versus nominal GDP (3Y CAGR %, LHS) (Source: BIS; CMMP)
The key message
Don’t whisper it softly this time – shout it out loudly instead:
…the UK private sector debt ratio is back to March 2002 levels
This matters because neither Jeremy Hunt (the current UK Chancellor) nor Rachel Reeves (his likely successor) appear to recognise the folly of combining austerity with private sector deleveraging (“pre-COVID Britain”). The next election will be fought on the wrong macro battleground as a result.
According to the latest BIS data release, the UK private sector’s debt ratio was 147% GDP at the end of 2Q23, down from its all-time high of 186% GDP in 1Q10 and its recent high of 177% GDP in 1Q21 (see key chart above).
The corporate sector debt ratio has fallen from 90% GDP in 4Q08 to 66% GDP in 2Q23, while the household sector debt ratio has fallen from 98% GDP in 4Q09 to 81% in 2Q23. The UK now joins the US, Germany and Italy among the small group of advanced nations where both sector’s debt ratios are below the BIS threshold limits, above which debt is considered a drag on future growth.
Note that the private sector’s share of total UK debt has fallen from almost 80% at the time of the GFC to 62% now. In short, the UK has followed the US in substituting higher-risk household debt with lower risk government debt since the GFC.
As the UK approaches a general election next year, the macro policy debate should be around:
- what is the purpose of UK banks? and
- what is the correct role of fiscal policy?
UK banking is geared currently towards less-productive FIRE-based lending that supports capital gains rather than productive COCO-based lending that supports investment, production and income formation. UK banking also fails SMEs – the lifeblood of the UK economy. Only 22 pence in every pound lent in the UK is for productive purposes and only 7 pence is lent to SMEs. This is despite the fact that SMEs account for 50% of private sector turnover and 60% of employment.
Equally troubling, the UK policy debate focuses on reducing the level of government borrowing further based on the flawed narrative that governments face the same financial constraints as households and equally flawed macro thinking that sees public debt as a problem while largely ignoring private debt. The irony for “post-Brexit” Britain is that this leaves us increasingly dependent on financial flows from the RoW. A depressing thought at the end of the year.
Time for shouting not whispering…
Please note that summary comments and chart above are abstracts from more detailed analysis that is available separately.