Thursday, 2 October 2014

UK Private Debt Levels - Q2 2014

As I mentioned in my sector post, this week's National Accounts release represents a complete review of the framework in the UK too bring it up to date with the latest European Standard - ESA 10.

This affected my private debt and credit accelerator calculation and I've had to go back to basics to rebuild it. The good news is that the review has simplified the calculation - since derivatives have been moved out into their own section on the balance sheet.

Additionally ONS now publishes a flow of funds presentation which gives a much clearer view of the interactions between the sectors, and between the UK and the Rest of the World. As usual with the ONS it isn't really indexed anywhere in the release calendar! You can find it though with a bit of perseverance

So now the private debt levels in the UK look like this:

Still the same picture really. The UK is deleveraging - mostly in the commercial sector. This shows the benefits of GDP growth and how it shrinks the percentage of debt very quickly. What is really interesting, though, is that the debt isn't just growing more slowly, it is actually shrinking in nominal terms.

All this means that the 'Credit Accelerator' has been negative now for four quarters, which suggests - if the concept still stands and my calculations are correct - that we probably have the brakes on. Debt reduction is weighing down on aggregate demand. It will be an interesting test of the idea to see if things start to slow up and everybody begins looking around puzzled wondering what happened, or if borrowing restarts with a vengeance to keep the party going, particularly with an election brewing.

Here's the chart:

Source: Office of National Statistics. Private sector debt based on tables NLBC, NKZA, NNQC, NNRE, NNXM, NNWK, NLSY, NLUA, NJCS and NJBQ (Lending and securities per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted). Data and calculations are available online