Experts paint bleak picture of UK debt crisis
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Macro economic experts have painted a bleak picture of the UK debt crisis predicting the economic slump will last much of this decade.
A macro study by the McKinsey Global Institute, presented to economists at the Davos World Economic Forum, has assessed the debts of nations in comparison to their GDP. It has surmised that it might be six or seven years before the UK is rid of its debt problems.
The report found that the UK is world’s worst offender for private and public debt in comparison to GDP after Japan. The report says that while debt in mature economies grew rapidly through the first decade of the 21st century, it was the UK that led the way as UK debt grew by 157 per cent in the UK between 2000 and 2008.
According to BBC business editor Robert Peston, this report was the most talked about issue at the World Economic Forum in Davos last week.
The report says: “Even after removing foreign lending by UK banks, UK debt/GDP remains higher than every country except Japan.”
Because the report included public and private debt it blamed households, financial institutes and governments in equal measure. In all of its assessments of debt, the UK topped most of the tables. In 2008, it says the UK’s overall debt to GDP ratio was 469 per cent.
UK financial sector debt grew by 77 per cent between 2000 and 2008, to almost 200 per cent of GDP. This was magnified in the years leading up to the crash as financials debts grew by more than a quarter from 2006.
The report also says that UK household debt relative to GDP grew by 102 per cent in eight years. It says household debt as a debt to income ratio in UK in 2008 was 160 per cent, growing 52 per cent in eight years.
The report says while the US sub-prime mortgage crisis has been labelled as the catalyst of the global financial crisis, that target “misses a large part of the picture”.
Instead the report’s authors looked at historical examples of crashes and found a clear correlation between debt and GDP.
The report suggests that solutions to debt problems come through deleveraging, which it says has only just begun in the wake of the latest crash. It says: “Historically deleveraging takes six to seven years, five years until an economic bounce back. But it is difficult to see how all the affected economies could simultaneously deleverage by boosting net exports, as many countries have done in the past.”
It also warned of the problems facing the UK economy as it balances debt deleveraging with attempting to rekindle a depressed economy.
The report says: “Many historic examples, from the US in 1930s to Japan in 1997, show the danger of withdrawing support of the economy too soon. However, faced with large increases in public debt, many governments face an acutely difficult decision on how long to provide support and when to curtail public spending.
“Each week brings news of another country straining under the burden of too much debt. The bursting of the great global credit bubble is not over yet.”
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Readers' comments (5)
Anonymous | 2 Feb 2010 3:11 am
Of course it is not over yet, it is the grand de-leveraging. This will, as you say, take a number of years.
We are now in a global village and the UK has to compete, and it has to be higher value products/ services and innovations. Everything else can be produced in the Emerging markets a lot cheaper to the same or better standard.
The one thing the UK has in it's armoury is the international banking sector, which, if not battered too badly by legislation will lift the UK out of its gloom.
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John Whipple | 2 Feb 2010 10:34 am
Structural Imbalance
Despite all the ballyhoo about creating the conditions for enterprise and creating wealth there is only one new British FTSE 100 company in the last ten years. Whilst over the same time period a considerable number have disappeared for good either gone bust or overseas.
But the Government has created over 1000 new unelected Quangos costing an estimated £60 - £80 billion a year to run who create no wealth at all in the same time frame.
QE may be the banks life support but it has not "pumped billions of pounds into the UK economy" as is often claimed in fact it has done very little other than re inflate asset prices for a while. As Mr King is just finding out it seems. A once in century opportunity has been missed.
QE the Low IQ Policy
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Lord Gnome | 3 Feb 2010 9:54 am
'But the Government has created over 1000 new unelected Quangos costing an estimated £60 - £80 billion a year to run who create no wealth at all in the same time frame.'
What complete and utter rubbish, Whipple. Labour has indeed created a public sector bubble that needs to be burst, but your figures are in the realms of fantasy.
I just feel sorry for the Tories. When they get into power in May, they will have a huge mess to sort out and will get all the flack for doing what they have to do.
Gordon will be laughing all the way to retirement.
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Graham Turville- Ince | 14 Apr 2010 7:21 am
I live in Sydney and have done so since 1983. Obviously a lot has gone under the bridge (pun) since then . Sterlings recent fall against the A$ has been extraordinary - $2.50 now $1.65. Will the Tories get in - I guess a chance although I gather Gordon believes he was the "Churchill" at the time of the GFC!! They will probably be happy to inherit a mess - after all everything looks good from a low base. They will have to be very tough with things like austerity - increases in taxes etc!!
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Will Richardson | 10 Nov 2011 5:41 pm
For private debt to get down to a more manageable 60% or so means private sector net saving by 10% GNP a year for ten years, with external balance slightly negative and corporations saving 6% a year, by the National Income Accounting Identity the deficit has to be 18%. Currently it's at 10% so that means the private household sector is only paying off debt at 2% a year, i.e. just paying off the interest, so not really paying down the debt. At this rate private debt will never be paid off. Government needs to let the deficit do it's job of funding private sector net saving, and that's before we consider the huge costs of multi-generational mass un-der-employment!
Modern Monetary Theory and the Job Guarantee provided solid evidence based real world economic explanations of this and how to solve the problems much better than plan Austerity death of ordinary people's livelihood death by billions of pounds of cuts.
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