In last week’s column (see here), I discussed the importance of public debt as an asset that enables wealth to be transferred to a date in the future, while restricting risk, along with its ability to effectively absorb economic shocks. I also noted that I was less concerned about public debt than private debt, particularly household debt.
The major difference between public debt and household debt is that a credible State issuer can issue debt with sometimes very long maturities, which households cannot do, so they do not have the same flexibility to adapt to shocks. Continue reading
Synthetic indices on economic activity stabilized in August according to the Markit Survey that was out this morning. These figures are consistent with a 0.5/0.6% GDP growth for the third quarter (non annualized figures).
The employment momentum is still robust but doesn’t accelerate anymore. But the business cycle is still virtuous with a strong momentum in the manufacturing sector. The survey price index stabilized in August. The ECB can maintain its accommodative bias on its monetary policy. The more expansive euro has not yet influenced companies’ behavior.
Public debt is evil. This is the kind of statement we often see in the press, but it is wrong. If we are going to be concerned about excessive debt levels, we should worry more about the private sector’s debt: it is this private debt, and in particular household debt, that lay at the root of the 2007 crisis, and not public debt that had already been cut back before the crisis. Ten years later, private debt remains high, especially in Europe, and this restricts private sector players’ ability to adjust.
But before we look at private debt, let’s take a look at the issue of public debt, where we can make a number of observations: Continue reading
In a recent post I was worried by the potential weakness of UK domestic demand after the fall of the real disposable income for three quarters in a row and by the downturn of the saving rate (see here). I also said in this post that consumer credit was growing too quickly. This post is a complement.
We can go further by looking at all the households’ financial liabilities.
The graph below shows the ratio of the households’ total liabilities to the disposable income. This ratio is now higher than the level that triggered the 2008 financial crisis.
When we go into details we see two divergent trajectories for the debt and the disposable income. These profiles are a source of constraints for households. Debt is growing too fast and a rebound in disposable income is necessary to avoid a further weakness first on consumption and after on real estate.
Growth has been robust since the beginning of 2017. In the second quarter, the economic activity was up by 2.5% after 2% during the first quarter and 2.4% in the last three months of 2016 (annual rates). Compared to the second quarter of 2016 the GDP level is 2.15% higher and the carry over growth for 2017 at the end of the second quarter is 1.7% (in other words, if growth is 0% in the third and the fourth quarters than the average growth for 2017 will be the same than in 2016). The graph shows this with a strong acceleration during the last three quarters.
Corporates surveys suggest that the growth momentum is strong so the Euro Area GDP growth will be above 2% on average for 2017 (2.1% for Natixis AM) Continue reading