Household debt to GDP ratio – Australia versus the world
Posted on 26 February 2010
Been working my way through the RBA’s February Statement on Monetary Policy (click here). It’s a good read – and presents a picture of pretty healthy domestic economy.
Still with our housing market continuing to power on - latest gossip is that Australian housing has become the carry trade of choice for Chinese real estate speculation – the question remains how long can we continue to turn up the leverage?
The chart that keeps nagging at me is this one – household debt to GDP:
To put this in some context – from an IMF paper by Japelli, Pagano and Maggio in October 2008 (here) – the US was at 85% and the UK at 75% back then. And because we can – a heat map of Europe’s household debt to GDP in 2008 (apologies for RSS readers – don’t know how to make the map portable – click back to the website for a peek).
Red > 70%, Orange 50% – 70%, Yellow 30% – 50%, Dark Blue 10% – 30%, Light Blue < 10% and Grey n/a
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While in Asia – the emerging world has a great deal of slack in the debt department…
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Now the inescapable conclusion from this is that Australia’s debt to GDP ratio is high – we are glowing bright red. Perhaps it’s sustainable – our disposable incomes will rise to compensate for the elevated debt levels – but the downside risks to the economy from this position are pretty fearsome. External shocks, such as rapidly rising global interest rates, could quickly derail the apple cart.
Still the RBA is sanguine for the moment – pointing to rising disposable incomes:
5 responses to Household debt to GDP ratio – Australia versus the world
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I agree with your analysis. Now take it one step further and consider the strutural problem in our banking market that funds these household debts:
- amount of funding we have from offshore
- the competition we will have to access this funding in the future
- if regulatory reform goes through and our banks need to improve their liquidity holdings (currently own each others paper)to include soverign paper. This is going to require an additional amount of term funding.
Australia’s economic growth for 20 years has been a beneficiary of credit growth running at 2 x nominal GDP (or 10% to 12%). What level do you think is sustainable in the future? (ie 5% to 7%) What does this do to economic growth?
Onto it…
Been digging through the banks funding and the mechanics of the government wholesale funding guarantee scheme. Agree with the conclusion too. Can’t see how debt levels can be pushed much further – and in the context of a global debt glut and consumer deleveraging, it’s more likely that we would end up falling into line notwithstanding favorable demographics and a ‘my home is my castle’ philosophy.
Thanks for the input.
[...] noted earlier (see Household debt to GDP ratio), it’s the retail market that has been merrily running up the credit aggregates. On the other [...]
Income is temporary. Debt is permanent. I think we’re about to see the full force of this illusory effect in action!
From Gone with the Wind (apparently)…
“Death, taxes and childbirth! There’s never a convenient time for any of them.”