Financial Stability 2/2003
The outlook has improved somewhat, but
there are divergent trends in debt growth
The decline in interest rates since December 2002 has reduced the interest
burden of the household and enterprise sectors and strengthened their debt
servicing capacity. Fewer companies went bankrupt in the third quarter, and
total sales of bankrupt entities have fallen since last autumn. At the same
time, the decline in both property values and rental prices in parts of the
commercial property market is eroding the value and earnings of many property
companies. Bank lending to these companies is extensive. Although banks’
earnings have declined somewhat, banks’ financial strength is satisfactory.
Credit growth is still somewhat higher than economic growth. In relation to
gross domestic product, credit to mainland Norway has returned to the high
level prevailing in the period 1989-90. There are divergent trends in debt
growth, with strong growth in household debt and low growth in enterprise
debt. This situation reflects high house prices and substantial growth in
household consumption, while corporate investment remains low.
The fall in interest rates is boosting activity in the Norwegian economy and
strengthening the enterprise sector. At the same time, the household debt
burden is still on the rise, adding to the uncertainty surrounding economic
developments. If households have to reduce their demand for goods and services
later in order to service their debt, turnover and results in the enterprise
sector will be adversely affected. This in turn may lead to higher loan losses
for banks.
Norway’s stable, low inflation and the change in monetary policy from
exchange rate targeting to flexible inflation targeting have reduced the probability
that households will be subjected to a ”dual shock” in the form
of both higher unemployment and higher interest rates, as was the case during
the banking crisis. In recent years cyclical fluctuations have also been substantially
less pronounced than in the 1970s and 1980s. This may imply that households
will be able to cope with a somewhat higher debt burden than prior to the
banking crisis.
On the whole, the outlook for financial stability is considered to be satisfactory.
As a result of the improved debt servicing capacity of households and enterprises,
the outlook for financial stability is assessed as being somewhat better than
it was six months ago.
Svein Gjedrem