The key chart
Forty year trends in UK debt “relative growth factors” (3Y CAGR in debt versus 3Y CAGR in nominal GDP) (Source: BIS; CMMP)
The key message
The two sources of UK money creation – government spending and bank lending – are being squeezed at the same time. This does not bode well for future growth prospects (or for the re-election prospects of the current government).
Turning both taps off at the same time
UK government and private sector debt are growing at a slower pace than nominal GDP, and at the same time.
According to the latest BIS data release, government debt has declined by -2.4% on a rolling 3-year CAGR basis to the end of 1Q23. Over the same period, nominal UK GDP has increased by 3.8%, resulting in a “relative growth factor” of -6.0ppt.
Household (HH) and corporate (NFC) debt have risen by 3.1% and 0.2% on the same basis, but again at a slower rate of growth than nominal GDP, resulting in relative growth factors of -0.6ppt and -3.5ppt respectively (see key chart above).
So what?
Some economists draw the analogy between debt to GDP ratios and the relative growth factors described above and the speed of a car and the rate of acceleration or deceleration respectively. In this context, the “UK car” is not only travelling slower, the rate of growth is also decelerating at the same time.
Why do economists often overlook (or underestimate) these trends?
For the simple season that traditional macro frameworks typically ignore private sector debt and its impact on aggregate demand.
When aggregate demand is viewed correctly as being equal to income (GDP) plus the change in debt, these dynamics become far more concerning, however – especially for an incumbent government seeking re-election.
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.