Friday, June 04, 2004
Warning on looming debt crises
The New Zealand Herald's lead article today should send alarm bells ringing in many high places. According to Deutsche Bank chief economist Ulf Schoefisch, households are piling up debt at nearly three times the pace of a few years ago - and it cannot go on indefinitely.
Household debt has been increasing by more than $1.1 billion a month over the past year, compared with an average rate of $430 million a month between mid-1998 and mid-2002. Because wages are growing much more slowly than that rate, paying off debt is taking an increasing bite out of household incomes.
Debt servicing is taking about 10 percent of households' disposable income, exceeding the previous peak in the debt-service ratio, reached in 1998.
Market economists expect Reserve Bank Governor Alan Bollard to lift interest rates another quarter of a percentage point next week, which would push floating mortgage rates to 8 per cent. The markets are also expecting another rate increase after that.
Mr Schoefisch says things could bowl along for another year or two, but at some stage there will be a correction, which could be quite dramatic.
I have been warning for a long time that there are danger signs in the economy which are being ignored. Much of our economic growth is reliant on fragile factors, such as overseas investment. If Mr Schoefisch's prediction comes to pass, the government could be in for a very rough ride leading into the next election. But it will nothing compared to the rough ride for many households faced with a debt mountain they cannot repay.
The New Zealand Herald's lead article today should send alarm bells ringing in many high places. According to Deutsche Bank chief economist Ulf Schoefisch, households are piling up debt at nearly three times the pace of a few years ago - and it cannot go on indefinitely.
Household debt has been increasing by more than $1.1 billion a month over the past year, compared with an average rate of $430 million a month between mid-1998 and mid-2002. Because wages are growing much more slowly than that rate, paying off debt is taking an increasing bite out of household incomes.
Debt servicing is taking about 10 percent of households' disposable income, exceeding the previous peak in the debt-service ratio, reached in 1998.
Market economists expect Reserve Bank Governor Alan Bollard to lift interest rates another quarter of a percentage point next week, which would push floating mortgage rates to 8 per cent. The markets are also expecting another rate increase after that.
Mr Schoefisch says things could bowl along for another year or two, but at some stage there will be a correction, which could be quite dramatic.
I have been warning for a long time that there are danger signs in the economy which are being ignored. Much of our economic growth is reliant on fragile factors, such as overseas investment. If Mr Schoefisch's prediction comes to pass, the government could be in for a very rough ride leading into the next election. But it will nothing compared to the rough ride for many households faced with a debt mountain they cannot repay.
