## Transcript of Global Financial Stability Report Launch of the Analytical Chapters _IMF News, October 4, 2017_ ## Source details **Canonical URL:** [Transcript of Global Financial Stability Report Launch of the Analytical Chapters](https://www.imf.org/en/news/articles/2017/10/04/tr100317-transcript-of-global-financial-stability-report-launch-of-the-analytical-chapters) ## Other formats - [Markdown version](/en/news/articles/2017/10/04/tr100317-transcript-of-global-financial-stability-report-launch-of-the-analytical-chapters/index.md) - [Structured JSON version](/en/news/articles/2017/10/04/tr100317-transcript-of-global-financial-stability-report-launch-of-the-analytical-chapters/index.json) - [Bundle manifest](/en/news/articles/2017/10/04/tr100317-transcript-of-global-financial-stability-report-launch-of-the-analytical-chapters/bundle-manifest.json) ## 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* --- ## References - [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm) - [Canada and the IMF](http://www.imf.org/external/country/CAN/index.htm) - [IMF Surveillance -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [Transcripts](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2017/10/04/tr100317-transcript-of-global-financial-stability-report-launch-of-the-analytical-chapters_