Financial Stability 1/2004
Growth in household debt remains strong
Global economic growth has picked up. The financial balance sheets of households and enterprises have improved in many countries, and the banking industry has achieved solid results. This has contributed to reducing the vulnerability of the global financial system. However, the trade deficit and central government budget deficit in the US have continued to increase. Financial market participants expect a rise in key rates in many countries in the period ahead. How a rise in interest rates will affect financial markets is uncertain.
In Norway, household debt and assets have both been growing strongly for a number of years, even in periods with a substantially higher interest rate level. This may partly reflect a structural adaptation among households. The transition to flexible inflation targeting has reduced the risk of a sharp rise in both interest rates and unemployment at the same time, and thereby made such an adaptation less risky. There is nevertheless reason to monitor developments in households’ debt burden closely in the period ahead. Debt relative to disposable income is approaching the level during the banking crisis. The value of assets is dependent on prices that may fluctuate substantially. Moreover, debt and assets are unevenly distributed among households.
Growth of total credit to municipalities, non-financial enterprises and households has declined, and is now approximately in line with the growth in the Norwegian economy. An important reason for this is that enterprises continue to reduce their debt. Rising capacity utilisation in the economy may be expected to lead to renewed growth in investment, and then enterprises will probably also raise new loans. Corporate profitability improved from 2002 to 2003. The number of bankruptcies has fallen from the peak level in the second quarter of 2003.
The low interest rate level has reduced the interest burden, making it easier for households and enterprises to service debt. However, it is important that long-term investments are not made on the assumption that interest rates will remain low for the duration of the loan.
Bank earnings improved from 2002 to 2003, with a further improvement in the first quarter of 2004. The positive developments are due to increased earnings on securities and lower loan losses and operating expenses. However, banks’ net interest income declined somewhat through 2003, primarily as a result of the fall in interest rates. Banks’ financial strength is satisfactory, and their risk management has been substantially strengthened since the banking crisis.
On balance, the short-term outlook for financial stability is regarded as satisfactory and somewhat better than six months ago. However, the sharp rise in debt has made households more vulnerable to economic disturbances. This represents an element of uncertainty regarding economic developments.
Jarle Bergo