Transcript of Global Financial Stability Report Launch of the Analytical Chapters
IMF News, October 4, 2017
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Bibliographic details
- Published: October 4, 2017
Purpose and scope
- Goal: Go beyond headlines to identify structural trends in the global financial system and likely consequences for financial stability; develop tools to help policymakers identify risks to financial stability and take action if needed.
- Focus: Two analytical chapters—Chapter 2 on household debt and its relationship to economic growth and financial stability; Chapter 3 on using financial conditions to forecast risks to growth.
- Sample and methods: Comprehensive look using macroeconomic and microeconomic data, a variety of statistical techniques, and a broad sample of countries.
Findings on household debt (Chapter 2)
- General patterns:
- Broad-based increasing trend in household debt-to-GDP across both advanced and emerging market economies since the global financial crisis.
- Some advanced economies experienced a short decline in household debt-to-GDP (e.g., U.S., U.K., some European countries, the Baltics), but the decline was fairly short-lived and the ratio picked up again.
- Emerging market economies: no decline observed; gradual or more rapid increases from much lower starting levels (examples of starting levels: about 10 percent in some EMs versus about 50–60 percent in advanced economies).
- Composition:
- Global composite measure includes mortgage and non-mortgage debts: consumer loans, car loans, student loans; any loan from a bank or other lender.
- Heterogeneity and timing of effects:
- Short-term: household debt can boost economic growth, consumption, and employment.
- Medium term (a couple of years): effects often reverse; higher debt-service burdens can lead to reduced consumption and negative macroeconomic effects following shocks.
- Statistical result: a 5 percent increase in household debt over a three-year period can have a negative effect on GDP of -1.25 percent three or four years out.
- Drivers of cross-country variation:
- Initial level of household debt.
- Institutional and country characteristics: dependence on external financing; currency denomination of loans (foreign-currency loans are riskier); presence of credit bureaus; quality of financial regulation; financial literacy; income inequality.
Country vignettes and case evidence
- China:
- Household debt-to-GDP rose from roughly 18 percent in 2007 to around 38 percent in 2016.
- Legacy of housing policy: historically high homeownership (90 percent of Chinese households own property), but post-1990s market pricing and rising house prices have driven household borrowing.
- Assessment: debt level at 40 percent is lower relative to the chapter’s sample; development-related financial deepening explains part of the rise; vulnerabilities can increase debt-service burdens if downturns occur.
- United States and Canada:
- Pre-crisis: household debt-to-GDP rose from around 55 or 60 percent to 80 percent; to 100 percent in the U.S.
- Post-crisis divergence: U.S. households delevered; Canadian households increased debt-to-GDP from 80 to 100 percent.
- Coverage:
- Analysis covers 80 countries: about 40 advanced economies and 40 emerging markets and low-income countries.
Policy implications and recommendations (Chapter 2)
- Full assessment must be country-specific, taking into account initial debt levels and institutional characteristics.
- Policies to mitigate risks (examples highlighted):
- Macroprudential policies to curb household debt growth.
- Good financial regulation and reporting systems (e.g., credit bureaus, loan transparency).
- Household protection and financial literacy to reduce overborrowing.
- Consideration of macro factors (e.g., external financing dependence, foreign-currency loan exposure).
- Timing: Actions can materially reduce medium-term household-debt-related risks (three to five years out) if properly implemented.
Financial-conditions tool to forecast growth risks (Chapter 3)
- Objective: Create a tool that maps the state of the financial system (financial conditions) to forthcoming risks to growth, complementing stress tests, expert judgment, and early-warning indicators.
- Structure of financial conditions (three blocks):
- Price of risk: asset prices and returns, investor risk sentiment, market volatility, spreads (cost of funding). Signals imminent risk of large macroeconomic downturns within a year or earlier when risk premia rise or asset returns fall.
- Leverage: credit growth and leverage across households, corporates, and financial institutions. Signals higher likelihood of downturns in the medium term (two to three years out) when debt accumulates.
- External/global conditions: global risk sentiment (e.g., VIX or MOVE), commodity prices, exchange rates—carry information relevant to domestic growth via external channels.
- Quantitative illustrations:
- Global growth averaged about 3½ percent over the last quarter century.
- Average likelihood of global growth falling below 1 percent: 5.8 percent.
- Feeding financial conditions from Q1 2008 into the model: likelihood of growth falling below 1 percent one year out would rise to around 20 percent.
- Practical uses:
- Assess odds of recession in one quarter, one year, or further ahead given current financial conditions.
- Evaluate hypothetical movements in financial variables and their consequences for recession probabilities.
- Complement policymakers’ surveillance toolbox and guide evaluation of policy options; should be customized and regularly updated for country-specific calibration.
Key statistics and figures (as presented)
- Number of countries analyzed: 80 countries (about 40 advanced economies, and 40 emerging markets and low-income countries).
- China household debt-to-GDP: roughly 18 percent in 2007; around 38 percent in 2016.
- Chinese homeownership: 90 percent of Chinese households own property.
- Typical advanced-economy household debt level cited: about 50, 60 percent of GDP.
- U.S./Canada historical dynamics: household debt-to-GDP rose from around 55 or 60 percent to 80 percent; to 100 percent in the U.S.; Canadian households increased from 80 to 100 percent of GDP.
- Model results on global growth probabilities:
- Historical average likelihood of growth falling below 1 percent: 5.8 percent.
- Q1 2008 financial conditions imply likelihood rising to around 20 percent one year out.
- Estimated medium-term impact: a 5 percent increase in household debt over a three-year period → GDP effect of -1.25 percent three or four years out.
Transcript of Global Financial Stability Report Launch of the Analytical Chapters, October 4, 2017 — IMF Communications Department