Household debt is defined as the amount of money that all adults in the household owe financial institutions. It includes consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.
Household debt rose as living standards rose, and consumers demanded an array of durable goods. These included major durables like high-end electronics, vehicles, and appliances, that were purchased with credit. Easy credit encouraged a shift from saving to spending.
Households in developed countries significantly increased their household debt relative to their disposable income and GDP from 1980 to 2007 — one of the many factors behind the U.S. and European crises of 2007–2012. Research indicates that U.S. household debt increased from 43% to 62% of GDP from 1982 to 2000.
U.S. households made significant progress in deleveraging (reducing debt) post-crisis, much of it due to foreclosures and financial institution debt write-downs. By some measures, consumers began to add certain types of debt again in 2012, a sign that the economy may be improving as this borrowing supports consumption.
Reference Materials – Household Debt
A rise in the household debt to GDP ratio predicts lower output growth and a higher unemployment rate over the medium-run.
US’s household debt-to-GDP hits as high as more than 95% before the global financial crisis hit in 2007-2008. Since recession, there has been significant deleveraging within the US financial sector.
Malaysia’s and Thailand’s household debt to GDP ratios have almost doubled between 2008 and 2015. Thailand’s ratio stands at about 80%.
Bank Negara recently announced that Malaysia’s household debt-to-gross domestic product (GDP) ratio increased to 89.1% as of 2015 from 86.8%.
With recent massive retrenchment exercises in Malaysia (especially with the O&G sector), we are seeing an increasing rise in unemployment rate:
Furthermore, Malaysia is experiencing a slowing GDP growth rate in tandem with domestic and global uncertainties.
Final Words: It Is A Matter Of Time
Fitch downgraded Malaysia’s long-term local bonds’ credit rating to “A-” from “A” last week. The key factors now absent in Malaysia are strong public finance fundamentals against external finance fundamentals, and the erstwhile preferential treatment of local-currency creditors against the foreign-currency ones.
It is a matter of time when Malaysia’s high households debt to GDP will lead to significant problems in the domestic economy, including a likelihood of a recession in the medium term.
So when is the breaking point for Malaysia?
- When interest rate rises (unlikely the case at this juncture) : harder for Borrowers to meet debt service obligations
- Falling property prices : will affect collateral value pledged to property loans
- Falling GDP leads to increasing unemployment rate
- Rising NPLs, potentially resulting in the shutoff of credit environment
- Budget deficits and fiscal issues
- Global externalities
DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.