Re-leveraging will drive Europe’s growth.
At the beginning of this week, the Bank of England issued a warning to the UK’s lending companies. The central bank’s message was clear; it wants lenders to tighten their lending criteria and boost capital buffers to protect against a potential rise in default rates. Specifically, policymakers asked firms to look at the terms under which they are granting zero-balance transfers on credit cards and the basis on which they are issuing personal loans. And with consumer credit in the UK growing at a rate of around 10.9% per annum, significantly more than the 2.3% annual rise in household income, it seems the bank is right to be concerned.
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However, while policy makers in the UK want to slow down the growth of consumer credit, in the rest the world credit growth is being encouraged.
Europe Is In Re-Leveraging Mode
According to UBS’s global economics analysts Arend Kapteyn and Pierre Lafourcade, after nearly 7 years of uninterrupted debt reduction, during the first quarter of the year the overall developed market private sector (including households, corporates and the financial sector, began re-leveraging “albeit very timidly” adding 0.4% of GDP in debt on a rolling 12 month basis.
According to analysis from the Swiss bank, substantially all of this growth comes from the European financial sector, which could mark the beginning of the Eurozone’s recovery as the region moves from financial retrenchment to expansion. According to UBS the “wholesale funding squeeze in Europe explains 84% of EMU post-crisis slowdown in banks' funding, which in turn explains about 93% of the variation in the loan book (and a 650bp post '08 drop in EMU-wide loan growth).” Considering these facts, it’s significant that the pace of de-leveraging' has swung from an annualized rate of -11.6% of GDP in Q1-16 to +1.4%GDP in Q1-17, thanks to sharp improvements in Italy, Germany, and France.
Interestingly, UBS’s report points out that since 2008, excluding China global private debt has fallen by 29%, a figure that might surprise considering the almost continual stream of headlines warning about rising levels of debt. While the total value of debt owed around the world has risen by 36% of GDP since the financial crisis, the entire increase can be explained by the global increase in government debt and China’s rising corporate and household debt. Almost all of the decrease in debt has come from European financials, which does go some way to explain why the region has struggled to return to growth as the US and emerging markets have blossomed. Including China debt as a percentage of GDP across emerging markets has risen from 139% in 2008 to 236% today. Excluding China, emerging market debt has risen from 122% of GDP to 150% of GDP.