China, Europe and the Netherlands: Opportunity Is Knocking at Our Doors

Apr. 2015 
  031 
WWW.BOAOREVIEW.COM
USA: Debt and output growth, 5-year ma
$ debt/extra $ GDP
3.6
3.2
2.8
2.4
2.0
1.6
1.2
0.8
0.4
0.0
-0.4
      
180
160
140
120
100
80
60
40
20
0
-20
1964     1969     1974 1979     1984 1989     1994     1999     2004 2009     2014    
Private non-financial debt/GDP ratio, rhs
Incremental private non-financial debt/GDP ratio, lhs
Source: 
Financial Flows of the United States
A rising debt/GDP ratio means that debt is growing 
faster than income. For some time, this can be sus-
tained, not least if the debt is used to invest into some-
thing that will accelerate the growth of future income. 
But this is subject to a number of risks. One is the level 
of interest rates, which are a key determinant of the 
ability to sustain debt. A second is the problem of di-
minishing returns (or, rather, the need to invest more 
in order to achieve the same result). The third is the 
risk that asset prices can fall as well as rise. 
What the future may bring
Memories of debt deflation are extremely power-
ful. The generations that lived through the 1920s and 
1930s were extremely wary of borrowing, having lived 
through (depending on the country) between one and 
three debt deflation episodes. For instance, the Amer-
icans who had to pay down debt during the Great De-
pression never borrowed money until they died. 
One consequence of the Great Recession is that 
monetary authorities have become more concerned 
with macroprudential stability. This can mean many 
things, but one thing they all have in common is more 
control over credit growth and therefore also less credit 
growth. This is not entirely misplaced. Almost every 
boom in history was preceded by rapid credit growth. 
Macroprudential tools – be they, e.g., higher capital/
asset ratios in banks, lower loan-to-value ratios, forced 
amortization of loans, bans on specific types of loans or 
tighter controls over securitization – are all concerned 
with trying to control the excessive growth of credit. 
Although central bank policy in many countries cur-
USA: Debt and output growth, 5-year ma
$ debt/extra $ GDP
Source: 
Financial Flows of the United States
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Average real GDP growth by period, %, rhs
Incremental private non-financial debt/GDP ratio, lhs
1964     1969     1974 1979     1984 1989     1994     1999     2004 2009     2014    
s
s
s
Gabriel Stein
Director, Asset Management Services, Oxford
Economics
P01-96-BAGC3-R5.indd   31
15-3-5   下午10:36

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Macro Economy 
032 
  Apr. 2015
rently is focused on accelerating credit growth, over the 
longer term, monetary authorities will attempt to hold 
back the pace of debt build-up.
The likelihood is therefore that the world will see a 
secular shift, where the incremental debt/GDP ratio in 
advanced economies will revert to its long-term stable 
ratio; and that this long-term stable ratio is around uni-
ty. (Bearing in mind differences between countries and 
the vagaries of the business cycle, perhaps a range from 
0.5:1 to 1.5:1 is a better estimate.) The likelihood of this 
is strengthened by the fact that unity is also the ratio at 
which the rise in debt and the rise in income keep pace. 
What less debt-based growth in the future 
means
One likely consequence of less debt-based growth in 
the future may mean a greater degree of rental housing, 
notably in the Anglo-Saxon economies, through tighter 
rules on mortgage borrowing. This means that first-
time buyers, in particular, will find it more difficult to 
get onto the housing ladder – the more so if they just 
come out of university, already carrying substantial 
debt. 
Larger deposits mean that households will need to 
build up savings, but at the same time, they will need 
somewhere to live.  Moreover, they will now also be 
aware that house prices can actually fall – and fall 
substantially – leaving borrowers with negative equity. 
Housing can no longer be seen as a safe investment. 
Renting thus becomes more attractive.
Interest rates 
The most important consequence of the changes 
analyzed so far, is that long-term interest rates are 
likely to be lower in the future than for much of the 
recent past. Increased household savings will exert 
downward pressure on long-term interest rates. This 
is the more likely as the current global climate tends 
to discourage excessive government deficit spending; 
while the world’s biggest investor, China, is rebalancing 
its economy away from excess investment. In the me-
dium-term, the world is therefore likely again to face 
an ex ante savings surplus. (‘Lower interest rates’ here 
means ‘lower than in the pre-Great Recession period. 
Japan: Debt and output growth, 5-year ma
¥
 debt/extra 
¥ 
GDP
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
240
210
180
150
120
90
60
30
0
1972    
1977    
1982
1987
1992
1997    
Non-financial private sector debt/GDP ratio, rhs
Incremental non-financial sector debt/GDP, lhs
Source: Oxford Economics/Haver Analytics, BIS
UK: Debt and output growth, 5-year ma
 ￡debt/extra ￡ GDP
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
225
200
175
150
125
100
75
50
25
0
1964     1969     1974 1979     1984 1989     1994     1999     2004 2009     2014    
Source: Oxford Economics/Haver Analytics, BIS
Non-financial private sector debt/GDP ratio, rhs
Incremental non-financial sector debt/GDP, lhs
s
s
s
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15-3-5   下午10:36

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