IMF warns that us­ing con­sumer debt to fuel growth risks cri­sis

The Malta Business Weekly - - FRONT PAGE -

The In­ter­na­tional Mon­e­tary Fund has is­sued a warn­ing to govern­ments that rely on debt-fu­elled con­sumer spend­ing to boost eco­nomic growth, telling them they run the risk of an­other ma­jor fi­nan­cial col­lapse.

In a re­port ahead of the IMF’s an­nual meet­ing in Wash­ing­ton next week, it said anal­y­sis of con­sumer spend­ing and lev­els of house­hold debt showed that economies ben­e­fited in the first two to three years when house­holds raised their lev­els of bor­row­ing, but then risks be­gan to mount.

Once growth be­comes de­pen­dent on house­hold debt, it can be a mat­ter of two to three years be­fore a fi­nan­cial crash, the IMF said in its an­nual re­port on the global fi­nan­cial sys­tem.

The study fol­lows a se­ries of warn­ings about ris­ing lev­els of house­hold debt in the UK from fi­nan­cial reg­u­la­tors and debt char­i­ties.

In a blog­post ac­com­pa­ny­ing the re­port, one of the au­thors, Nico Val­ckx, warned: “Debt greases the wheels of the econ­omy. It al­lows in­di­vid­u­als to make big in­vest­ments to­day – like buy­ing a house or go­ing to col­lege – by pledg­ing some of their fu­ture earn­ings. That’s all fine in the­ory. But as the global fi­nan­cial cri­sis showed, rapid growth in house­hold debt – es­pe­cially mort­gages – can be dan­ger­ous.”

He added: “Higher debt is as­so­ci­ated with sig­nif­i­cantly higher un­em­ploy­ment up to four years ahead. And a one per­cent­age point in­crease in debt raises the odds of a fu­ture bank­ing cri­sis by about one per­cent­age point. That’s a sig­nif­i­cant in­crease, when you con­sider that the prob­a­bil­ity of a cri­sis is 3.5%, even with­out any in­crease in debt.”

Ear­lier this year the IMF cut its fore­cast for the UK’s GDP growth in 2017 by 0.3 per­cent­age points to 1.7% and it is ex­pected to re­duce its pre­dic­tion fur­ther next week when its global out­look is pub­lished. The un­cer­tainty cre­ated by the Brexit vote and ne­go­ti­a­tions to leave are likely to be blamed, along with a re­liance on con­sumer spend­ing, which has slowed this year.

The Bank of Eng­land, which reg- ulates the bank­ing sec­tor, said last month that the UK’s banks could in­cur £30bn of losses on their lend­ing on credit cards, per­sonal loans and for car fi­nance if in­ter­est rates and un­em­ploy­ment rose sharply.

Debt char­ity Stepchange has warned that 6.5 mil­lion peo­ple used credit to pay for ba­sic items like food after a change in their cir­cum­stances. And MPs have called for an in­de­pen­dent com­mis­sion to ex­am­ine the ef­fects of ris­ing house­hold debt lev­els in the UK.

House­hold debt lev­els fell in re­la­tion to the UK’s na­tional in­come im­me­di­ately fol­low­ing the 2008 crash from a peak of al­most 170% to be­low 140%. But in the last two years the fig­ure has be­gun to creep up­wards, fu­elling con­cerns that the UK’s GDP growth is al­ready de­pen­dent on con­sumer bor­row­ing.

Val­ckx said coun­tries with high lev­els of debt were able to re­duce the risks by in­tro­duc­ing strict lim­its on lev­els of bor­row­ing and tight reg­u­la­tions on the bank­ing sec­tor.

“Coun­tries can mit­i­gate the risks by tak­ing mea­sures that mod­er­ate the growth of house­hold debt, such as rais­ing the down pay­ment re­quired to pur­chase a house or the frac­tion of a house­hold in­come that can be de­voted to debt re­pay­ments,” he said.

Most of the risk re­lates to the mort­gage mar­ket, which is 10 times the size of the con­sumer debt mar­ket in the US and the UK. In the UK, the level of mort­gage debt rel­a­tive to GDP has re­mained sta­ble since 2008.

How­ever, the num­ber of bor­row­ers have be­come more con­cen­trated as large num­bers of older home­own­ers pay off their mort­gages and high prop­erty prices limit the num­ber of first time buy­ers en­ter­ing the mar­ket.

Newspapers in English

Newspapers from Malta

© PressReader. All rights reserved.