A US-style housing crisis and lower long-term growth could result, says new report
The research arm of McKinsey has published its latest Debt and Deleveraging report, and it’s not good news for the UK.
McKinsey identifies the United Kingdom as almost uniquely over-indebted and is failing to deleverage with sufficient speed. It warns long-term growth in the UK could be harmed as a result.
Total debt in the UK is now the second highest of the world’s ten largest mature economies. Total UK public and private sector debt reached 507 percent of GDP in mid-2011, compared with 487 percent at the end of 2008 and 310 percent in 2000, before the bubble.
Mortgage debt is one particular area of concern: McKinsey says: “The Bank of England estimates that up to 12 percent of home loans are in a forbearance process. Another 2 percent are delinquent. Overall, this may mean that the UK has a similar level of mortgages in some degree of difficulty as in the United States.”
A rise in interest rates could precipitate a wave of mortgage defaults: “Two-thirds of UK mortgages have floating interest rates, and monthly debt payments of UK households as a share of income are already one-third higher than those in the United States. On top of this, 23 percent of UK households report that they are ‘somewhat’ or ‘heavily’ burdened in paying off unsecured debt.”
But UK mortgage holders are not paying off their borrowings whilst the going is good: “At the recent pace of debt reduction, we calculate that the ratio of UK household debt to disposable income would not return to its pre-bubble trend for up to a decade.”
The report emphasises that high total debt levels as a proportion of GDP are a drag on growth. When nations reduce their debt burden they can return to prosperity, as evidenced by Sweden and Finland in the 1990s following the crisis caused by their credit bubbles going pop. When nations will not, or can not, deleverage they may face decades of stagnant growth, as evidenced by Japan since its 1990 crisis. The UK is in danger of following the path of Japan.
Unfortunately the path to deleveraging is a narrow one, says the McKinsey. “Overall, the United Kingdom needs to steer a difficult course: reduce government deficits and encourage household debt reduction – without limiting GDP growth. The United Kingdom will need renewed investment by nonfinancial businesses to achieve this.”
The report also warns UK banks are uncomfortably exposed to the private debt of the eurozone economies.