Monday 8 May 2017

UK debt dynamics

Its pretty easy to look through the US Fed flow of funds tables, but UK data is harder to add up.
With signs of falling house prices, just how dependent is the UK on credit growth?

There are a myriad of stats from the government but I have just tried to add up central government borrowing and individual lending, as they are both a form of consumption supporting credit creation. While corporate borrowing finances balance sheets and financial debt is driven by disintermediation.
Since the end of 2009 the UK economy in nominal terms has grown 14.5%, or £240bn in output to the end of 2016. Unfortunately debt has grown by £820bn, or +44% of 2016 GDP. Over the last 5 years the sum of government and individual borrowing had been roughly 3.5x nominal GDP growth.

In the last 5 years growth in credit to government and individuals has averaged 6.4% of GDP, while nominal GDP has only grown 2.1%.

Over the last 5 years the UK government has borrowed an average of £83bn a year and individuals £30.5bn.

With final demand being so dependent on credit being created for consumption and credit growing 3.5x faster than GDP, its hardly surprising Carney is reluctant to raise interest rates and Osborne resorted to pumping up a housing bubble to try and offset austerity.

Only problem is what happens if housing starts to fall and takes individual credit demand with it, or in a state of full employment wage pressures force the BoE to start raising interest rates, as is happening in the US.

I suspect it will take a strong dose of a very weak currency and Perfidious Albion, with respect to Brexit arrangements, to get out of this one.

For what its worth, the US has been growing combined Federal, state and individual debt around 3x GDP during this cycle as well.

Source: UK data is from ONS and BoE datasets

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