Mark Lister, 18 September 2018

The ten-year anniversary of the Lehman Brothers bankruptcy was met with a lot of reflection about how things have changed since those dark days of 2008.

While progress has certainly been made, the elephant in the room is the fact that debt levels across the world are even higher than they were back then.

That hasn’t been an issue in recent years, as borrowing costs have fallen to record lows, economic growth has been steady and things have been generally stable. However, that debt burden could leave us in a precarious position when the winds inevitably change.

In 2008 the US housing market was central to many of the problems, along with low quality lending and bankers who packaged those loans together masking their true risks.

Today, the deckchairs have been shuffled but the underlying problem remains. The US has come out the other side in good shape, the housing market isn’t overheated and lending standards are much better.

However, at 90 per cent of gross domestic product (GDP) government debt is much higher, and the expansionary fiscal policies of the Trump administration are adding to that.

The story is similar in Europe, where government debt levels are equally high. Japan is even worse, although it is somewhat of an anomaly given the exceptionally strong domestic saving base it enjoys.

In China, it’s the corporate sector that is heavily indebted at 207 per cent of GDP, up substantially from 160 per cent five years ago.

Much of that rests with state owned enterprises, which might afford China the ability to make decisions more swiftly. However, the approach President Xi chooses to take when dealing with this could be crucial for countries with significant linkages to China.

That happens to be this part of the world, with China the biggest export market for both New Zealand and Australia. At the same time, we aren’t squeaky clean when it comes to debt levels either.

Government debt is low, particularly in New Zealand at less than 30 per cent of GDP. We look better than just about everywhere else on that measure, and it gives us options.

Should the economy run into trouble, we have the ability to dip into that war chest, as the Key Government did in the wake of the GFC and Christchurch earthquakes a decade ago.

However, when you consider household debt the picture gets a lot uglier. As a proportion of GDP, our mortgage and consumer debt adds up to more than 90 per cent, while Australia is even worse at 121 per cent.

Not only does that put us ahead of the US and UK, but our households are more indebted than those in Spain, Greece and Italy.

Our Reserve Bank talks about household debt as a proportion of disposable income. Today that ratio is at 166 per cent, above 2008 levels and well up from 100 per cent 20 years ago.

The authorities had a lot of firepower during the Lehman period. Our Official Cash Rate was 8.25 per cent, the US equivalent was 5.25 and in Australia it was 7.25.

That left plenty of room to slash interest rates and soften the blow to borrowers. Today, the world doesn’t have quite the same sort of ammunition.


This article was also published in the New Zealand Herald on 17 September 2018 under the title "Mark Lister: The ugly truth about our household debt".