Monday, August 23, 2010

Household leverage: what does the US have that the UK does not?

Earlier this week I compared household saving rates across the US, UK, Canada, and Germany. My conclusion was pretty simple:
So generally, this simple analysis would suggest that Menzie Chinn's skepticism of a "status quo" of US consumer imports is worthy. But with the status quo firmly in place in Germany, the household saving data paint a foreboding picture - certainly for the Eurozone, but possibly for the global economy as well.
The financial circumstances of US and UK households are very similar despite their diverging saving rates over the last two quarters (see saving rate chart here): leverage is high.

The chart above illustrates the total stock of household loans/debt (including non-profit organizations, which is small relative to the "household") as a share of personal disposable income.

In the UK, household leverage peaked above that of the US at 161% of personal disposable income in Q1 2008, having fallen to 149% by Q1 2010. Furthermore, recent deleveraging by UK households has occurred through income gains, rather than paying down debt: spanning the period Q2 2009 to Q1 2010, the UK household stock of loans increased 1.2%, while disposable income grew 3.1% (you can download the data here).

Given the remaining leverage on balance, the divergence in household saving rates across the US and UK is probably not sustainable. The UK household saving rate is likely to increase, or at the very minimum, hold steady.

The problem is: that according to the sectoral balances approach, it's impossible for the government and the private sector to increase saving simultaneously unless the UK is running epic current account surpluses (it's not). Therefore, the £6.2billion in public "savings" may push UK households farther into the red. However, the more likely outcome is that UK public deficits rise amid shrinking aggregate demand (and with it, tax revenue) and the increasing household desire to save.

The punchline: the US household has something that the UK household does not: (still) expansionary fiscal policy ($26 billion in state aid and extending unemployment benefits, for example).

Rebecca Wilder


  1. Hi Rebecca,
    Thank you very much for this. 
    Alternatively, if both British households and the public sector increase their savings ratio, it could simply lead to a contraction in nominal GDP, in the absence of an epic CA surplus?

  2. Hi Aidyn,

    Actually what you suggest is the same scenario as I highlighted above:

    "However, the more likely outcome is that UK public deficits rise amid shrinking aggregate demand (and with it, tax revenue) and the increasing household desire to save."

    Another scenario is that the GBP depreciates in order to drive the epic CA surplus! I don't think there's external demand sufficient for that outcome. See, this is what Sweden was able to do in the early 1990s - won't work this time around.

    Thanks for stopping by, Rebecca

  3. Rebecca,

    I'm not sure how you are defining "expansionary".  Doesn't stimulus go from a tailwind to GDP to a headwind in this quarter?  I seem to remember an analysis by Mark Zandi showing this.  I'm not sure if he included the $26b, but I'm also not sure it is actual deficit spending (wasn't it paid for?), and in any case it is quite small.