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As the major advanced economies sputter
along at sub-par growth and sovereign debt
concerns weigh heavily on Euro-zone
members, attention has turned increasingly to
whether the debt accumulated before and
through the ‘great recession’ is a key factor
holding back growth. While the most recent
headlines out of the Euro-zone (and the US not
so long ago) have focused on government
debt, the indebtedness of the private sector is
equally relevant in assessing the prospects for
the growth of private demand.
In recent work we have discussed government
indebtedness and the challenge of fiscal
consolidation in the advanced economies. Here
we focus primarily on the developments in
household and corporate sector indebtedness.
Broadly speaking, households and corporates
in the developed markets are already a couple
of years into the deleveraging process from
peak debt levels.
Part of that private sector deleveraging has
occurred through an implicit transfer of debt to
the public sector as governments stepped in to
support growth through the crisis. So the
process of public deleveraging is much more
recent, and in most places has not even started
in earnest. While it is difficult to assess
precisely how far the overall deleveraging
process has left to go, the countries in the
Euro-zone periphery are likely to face the
hardest challenge given weakening growth
prospects, higher interest rates and falling
asset values.
Private and Public Sector Indebtedness in Advanced Economies
As the major advanced economies sputter along at subpar
growth and sovereign debt concerns weigh heavily on
Euro-zone members, attention has turned increasingly to
whether the debt accumulated before and through the
‘great recession’ is a key factor holding back growth.
While the most recent headlines out of the Euro-zone
(and the US not so long ago) have focused on
government debt, the indebtedness of the private sector is
equally relevant in assessing the prospects for the growth
of private demand.
In recent work we have discussed government
indebtedness and the challenge of fiscal consolidation in
the advanced economies (see The Balancing Act of Fiscal
Consolidation, Global Economics Weekly 11/20). Here
we focus primarily on the developments in household and
corporate sector indebtedness.1 Broadly speaking, DM
households and corporates are already a couple of years
into the deleveraging process from peak debt levels. Part
of that private sector deleveraging has occurred by an
implicit transfer of debt to the public sector as
governments stepped in to support growth through the
crisis. So the process of public deleveraging is much
more recent, and in most places has not even started in
earnest. While it is difficult to assess precisely how far
the overall deleveraging process has left to go, the
countries in the Euro-zone periphery are likely to face the
hardest challenge given weakening growth prospects,
higher interest rates and falling asset values.
How Much ‘Deleveraging’ Has There Been?
Indebtedness or leverage can be measured in many
different ways, but it is often calculated as debt relative to
GDP (a measure of national income). Private sector debt
levels, on this measure, have grown significantly in
advanced economies in the past decade. In many cases, in
addition to a longstanding upward trend that reflected
financial deepening and decreases in nominal and real
interest rates, private sector debt accelerated in the 2000s.
Since the great recession, however, there has been a
significant adjustment in private sector debt levels, driven
initially and substantially by the corporate sector but
followed recently by the household sector as well. Private
sector debt levels have declined in pretty much all
advanced economies in our sample, with the most
significant reductions from peak levels taking place in
Ireland and the UK (Table 1).
Much of this decrease has happened in the non-financial
corporate sector, where indebtedness peaked in 2009
across most countries, and subsequently started to fall.
Cumulatively from peak levels, the biggest declines were
in Ireland, Sweden, Norway, the UK, and Germany.
Some of these declines have been very large indeed. In
Ireland, indebtedness has fallen almost 40ppt relative to
GDP since 2009Q4 (even with a large fall in GDP),
although it is still the highest in the group. In Sweden and
Norway, debt-to-GDP ratios for the corporate sector have
corrected about 20ppt from peak levels in 2009Q1, and
even in the UK they have corrected almost 15ppt since
peak levels in 2009Q3. In the US, non-financial corporate
debt-to-GDP was relatively low to start with, and it has
corrected by another 6ppt since its peak in 2009Q1.
In many cases (such as the US, UK and Germany),
corporate leverage measured in this fashion is not far off
pre-crisis levels. So, overall, this has been a story of
corporates in many advanced economies lowering their
leverage aggressively in response to the great recession.
And whereas we have focused on the overall nonfinancial
sectors, the story is even more true at the top
end of the distribution of firms. As Charlie Himmelberg
has pointed out, for the rated credit universe, corporate
leverage (measured by the debt-to-EBITDA ratio) is the
lowest in 25 years. By many metrics, corporate credit
quality for the higher-rated corporate is very strong.
OUTLOOK KEY ISSUES
UNITED STATES We lowered our growth forecast and now expect real
GDP growth of just 1.5%-2.0% (annualised) in 2011H2
and 2.0%-2.5% through the end of 2012. Since this
pace is below the US economy’s potential, we now
expect the unemployment rate to be at 9.4% by the end
of 2012, slightly above the current level. The large—
and now growing—output gap will result in significant
renewed disinflation, pushing core inflation from a peak
of around 2% in late 2011 to 1¼% in late 2012.
The US economy has not fallen off a cliff, despite the
‘confidence shock’ precipitated by the debt ceiling
impasse, the downgrade of its sovereign rating and
the recent turmoil in financial markets. We continue to
see a one-in-three risk of renewed recession due to
the worsening European financial crisis and the
potential for greater-than-expected fiscal drag in early
2012 if the payroll tax cut is not extended for another
year.
JAPAN We forecast growth of –0.5% in 2011 and 2.6% in
2012. On a quarterly basis, we expect real GDP to
rebound sharply in Q3 (+4.4%qoq annualised) after
contracting between 2010Q4 and 2011Q2. While
production has recovered nearly to its pre-earthquake
level, there are growing risks to the production outlook
for autumn due to declining foreign demand, prolonged
Yen strength and supplementary budget delays.
Finance Minister Noda won the run-off election to
become the DPJ’s next president and was elected
soon after as the 62nd prime minister. We expect him
to respect the path laid out by the previous
administration and think there will be little disruption in
economic policy. We believe the BoJ will be affected
by the outcome of the September FOMC meeting and
the degree to which the Yen rises in response.
EUROPE For 2011 and 2012, we forecast growth of 1.8% and
1.6% for the EU-27 and 1.7% and 1.3% for the Eurozone.
We believe that the first estimates of Q2 GDP
growth in the core Euro-zone countries understate the
underlying pace of economic expansion; as such, we
expect a rebound in growth in the core in 2011H2 to
steady, albeit not spectacular, rates. By contrast,
further fiscal austerity, intensifying financial dislocation
and the ongoing effects of the required substantial
balance sheet adjustments all point to substantially
weaker growth in the periphery.
Political leadership is required to address the deeper
fiscal, structural and institutional weaknesses in the
Euro-zone. In our view, demonstration of such
leadership is unlikely. In the face of this political
impasse, the ECB will continue to address financial
dislocations in the periphery through non-standard
means, because the alternative—a financial collapse
in the periphery, with contagion to the core—is simply
too costly for the ECB to contemplate. In this context,
market tensions, punctuated by episodes of stress,
are likely to persist.
NON-JAPAN ASIA For Asia ex Japan, we forecast growth of 7.7% and
7.8% in 2011 and 2012. Our baseline remains that AEJ
growth will remain resilient, as weaker external demand
is offset by less tight macro policies. In China, we
expect growth of 9.3% in 2011 and 9.2% in 2012. In
India, we also are expecting slower growth of 7.3% in
2011, followed by a reacceleration to 7.8% in 2012.
In China, we expect policymakers to keep policy
relatively tight in the very near term as year-on-year
CPI inflation remains elevated. But as inflation and
growth data both show a clear downward trend in the
coming months, the policy stance will likely become
incrementally looser than it is now, thereby softening
the growth impact of a weaker external environment.
LATIN AMERICA Our LatAm growth forecast is 4.7% in 2011 and 4.0%
in 2012. Following a period of determined monetary
policy rate normalisation moves, the majority of the
regional inflation-targeting central banks are expected
to moderate the pace of rate normalisation significantly.
In Brazil, we recently lowered our growth forecasts to
3.7% and 3.8% in 2011 and 2012, respectively, from
4.5% and 4.0% previously, owing to weaker incoming
domestic data and a deterioration in the global
outlook.
CENTRAL & EASTERN
EUROPE, MIDDLE
EAST AND AFRICA
The broad ‘sustained recovery’ theme in the CEEMEA
region remains intact, although we expect the weaker
global picture to have a negative impact on growth
prospects for the small open economies (Czech Republic,
Israel) and the relatively more leveraged/balance-sheetconstrained
economies (Hungary, Turkey). We see a
number of downside risks, including further weakening in
the global picture and contagion from the Euro-zone.
We maintain our constructive views on Russia and
expect to see sustained, strong growth going into
2012, but see downside risk from the debate on the
political transition, which is proving more drawn out
than we initially thought. We are now substantially
less upbeat on South Africa, given continuing
weakness in domestic demand and the supply
disruptions caused by recent industrial action.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
As the major advanced economies sputter
along at sub-par growth and sovereign debt
concerns weigh heavily on Euro-zone
members, attention has turned increasingly to
whether the debt accumulated before and
through the ‘great recession’ is a key factor
holding back growth. While the most recent
headlines out of the Euro-zone (and the US not
so long ago) have focused on government
debt, the indebtedness of the private sector is
equally relevant in assessing the prospects for
the growth of private demand.
In recent work we have discussed government
indebtedness and the challenge of fiscal
consolidation in the advanced economies. Here
we focus primarily on the developments in
household and corporate sector indebtedness.
Broadly speaking, households and corporates
in the developed markets are already a couple
of years into the deleveraging process from
peak debt levels.
Part of that private sector deleveraging has
occurred through an implicit transfer of debt to
the public sector as governments stepped in to
support growth through the crisis. So the
process of public deleveraging is much more
recent, and in most places has not even started
in earnest. While it is difficult to assess
precisely how far the overall deleveraging
process has left to go, the countries in the
Euro-zone periphery are likely to face the
hardest challenge given weakening growth
prospects, higher interest rates and falling
asset values.
Private and Public Sector Indebtedness in Advanced Economies
As the major advanced economies sputter along at subpar
growth and sovereign debt concerns weigh heavily on
Euro-zone members, attention has turned increasingly to
whether the debt accumulated before and through the
‘great recession’ is a key factor holding back growth.
While the most recent headlines out of the Euro-zone
(and the US not so long ago) have focused on
government debt, the indebtedness of the private sector is
equally relevant in assessing the prospects for the growth
of private demand.
In recent work we have discussed government
indebtedness and the challenge of fiscal consolidation in
the advanced economies (see The Balancing Act of Fiscal
Consolidation, Global Economics Weekly 11/20). Here
we focus primarily on the developments in household and
corporate sector indebtedness.1 Broadly speaking, DM
households and corporates are already a couple of years
into the deleveraging process from peak debt levels. Part
of that private sector deleveraging has occurred by an
implicit transfer of debt to the public sector as
governments stepped in to support growth through the
crisis. So the process of public deleveraging is much
more recent, and in most places has not even started in
earnest. While it is difficult to assess precisely how far
the overall deleveraging process has left to go, the
countries in the Euro-zone periphery are likely to face the
hardest challenge given weakening growth prospects,
higher interest rates and falling asset values.
How Much ‘Deleveraging’ Has There Been?
Indebtedness or leverage can be measured in many
different ways, but it is often calculated as debt relative to
GDP (a measure of national income). Private sector debt
levels, on this measure, have grown significantly in
advanced economies in the past decade. In many cases, in
addition to a longstanding upward trend that reflected
financial deepening and decreases in nominal and real
interest rates, private sector debt accelerated in the 2000s.
Since the great recession, however, there has been a
significant adjustment in private sector debt levels, driven
initially and substantially by the corporate sector but
followed recently by the household sector as well. Private
sector debt levels have declined in pretty much all
advanced economies in our sample, with the most
significant reductions from peak levels taking place in
Ireland and the UK (Table 1).
Much of this decrease has happened in the non-financial
corporate sector, where indebtedness peaked in 2009
across most countries, and subsequently started to fall.
Cumulatively from peak levels, the biggest declines were
in Ireland, Sweden, Norway, the UK, and Germany.
Some of these declines have been very large indeed. In
Ireland, indebtedness has fallen almost 40ppt relative to
GDP since 2009Q4 (even with a large fall in GDP),
although it is still the highest in the group. In Sweden and
Norway, debt-to-GDP ratios for the corporate sector have
corrected about 20ppt from peak levels in 2009Q1, and
even in the UK they have corrected almost 15ppt since
peak levels in 2009Q3. In the US, non-financial corporate
debt-to-GDP was relatively low to start with, and it has
corrected by another 6ppt since its peak in 2009Q1.
In many cases (such as the US, UK and Germany),
corporate leverage measured in this fashion is not far off
pre-crisis levels. So, overall, this has been a story of
corporates in many advanced economies lowering their
leverage aggressively in response to the great recession.
And whereas we have focused on the overall nonfinancial
sectors, the story is even more true at the top
end of the distribution of firms. As Charlie Himmelberg
has pointed out, for the rated credit universe, corporate
leverage (measured by the debt-to-EBITDA ratio) is the
lowest in 25 years. By many metrics, corporate credit
quality for the higher-rated corporate is very strong.
OUTLOOK KEY ISSUES
UNITED STATES We lowered our growth forecast and now expect real
GDP growth of just 1.5%-2.0% (annualised) in 2011H2
and 2.0%-2.5% through the end of 2012. Since this
pace is below the US economy’s potential, we now
expect the unemployment rate to be at 9.4% by the end
of 2012, slightly above the current level. The large—
and now growing—output gap will result in significant
renewed disinflation, pushing core inflation from a peak
of around 2% in late 2011 to 1¼% in late 2012.
The US economy has not fallen off a cliff, despite the
‘confidence shock’ precipitated by the debt ceiling
impasse, the downgrade of its sovereign rating and
the recent turmoil in financial markets. We continue to
see a one-in-three risk of renewed recession due to
the worsening European financial crisis and the
potential for greater-than-expected fiscal drag in early
2012 if the payroll tax cut is not extended for another
year.
JAPAN We forecast growth of –0.5% in 2011 and 2.6% in
2012. On a quarterly basis, we expect real GDP to
rebound sharply in Q3 (+4.4%qoq annualised) after
contracting between 2010Q4 and 2011Q2. While
production has recovered nearly to its pre-earthquake
level, there are growing risks to the production outlook
for autumn due to declining foreign demand, prolonged
Yen strength and supplementary budget delays.
Finance Minister Noda won the run-off election to
become the DPJ’s next president and was elected
soon after as the 62nd prime minister. We expect him
to respect the path laid out by the previous
administration and think there will be little disruption in
economic policy. We believe the BoJ will be affected
by the outcome of the September FOMC meeting and
the degree to which the Yen rises in response.
EUROPE For 2011 and 2012, we forecast growth of 1.8% and
1.6% for the EU-27 and 1.7% and 1.3% for the Eurozone.
We believe that the first estimates of Q2 GDP
growth in the core Euro-zone countries understate the
underlying pace of economic expansion; as such, we
expect a rebound in growth in the core in 2011H2 to
steady, albeit not spectacular, rates. By contrast,
further fiscal austerity, intensifying financial dislocation
and the ongoing effects of the required substantial
balance sheet adjustments all point to substantially
weaker growth in the periphery.
Political leadership is required to address the deeper
fiscal, structural and institutional weaknesses in the
Euro-zone. In our view, demonstration of such
leadership is unlikely. In the face of this political
impasse, the ECB will continue to address financial
dislocations in the periphery through non-standard
means, because the alternative—a financial collapse
in the periphery, with contagion to the core—is simply
too costly for the ECB to contemplate. In this context,
market tensions, punctuated by episodes of stress,
are likely to persist.
NON-JAPAN ASIA For Asia ex Japan, we forecast growth of 7.7% and
7.8% in 2011 and 2012. Our baseline remains that AEJ
growth will remain resilient, as weaker external demand
is offset by less tight macro policies. In China, we
expect growth of 9.3% in 2011 and 9.2% in 2012. In
India, we also are expecting slower growth of 7.3% in
2011, followed by a reacceleration to 7.8% in 2012.
In China, we expect policymakers to keep policy
relatively tight in the very near term as year-on-year
CPI inflation remains elevated. But as inflation and
growth data both show a clear downward trend in the
coming months, the policy stance will likely become
incrementally looser than it is now, thereby softening
the growth impact of a weaker external environment.
LATIN AMERICA Our LatAm growth forecast is 4.7% in 2011 and 4.0%
in 2012. Following a period of determined monetary
policy rate normalisation moves, the majority of the
regional inflation-targeting central banks are expected
to moderate the pace of rate normalisation significantly.
In Brazil, we recently lowered our growth forecasts to
3.7% and 3.8% in 2011 and 2012, respectively, from
4.5% and 4.0% previously, owing to weaker incoming
domestic data and a deterioration in the global
outlook.
CENTRAL & EASTERN
EUROPE, MIDDLE
EAST AND AFRICA
The broad ‘sustained recovery’ theme in the CEEMEA
region remains intact, although we expect the weaker
global picture to have a negative impact on growth
prospects for the small open economies (Czech Republic,
Israel) and the relatively more leveraged/balance-sheetconstrained
economies (Hungary, Turkey). We see a
number of downside risks, including further weakening in
the global picture and contagion from the Euro-zone.
We maintain our constructive views on Russia and
expect to see sustained, strong growth going into
2012, but see downside risk from the debate on the
political transition, which is proving more drawn out
than we initially thought. We are now substantially
less upbeat on South Africa, given continuing
weakness in domestic demand and the supply
disruptions caused by recent industrial action.
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