Mounting household debt a stability risk: IMF

WASHINGTON: Growing household debt may offer a quick boost to economic growth but can raise the risks of a financial crisis over the medium term, the International Monetary Fund (IMF) warned on Tuesday.

The findings come as central bankers in some advanced and emerging economies warn of financial stability risks after years of easy money in the wake of the global financial crisis.

Research by IMF staff economists published Tuesday shows household debt levels have steadily grown in the decade since the crisis — with median levels rising from 52 percent to 63 percent of GDP in advanced economies between 2008 and last year.

In the developing world, household debt levels were lower, rising from 15 percent to 21 percent over the same period.

The findings analyzed economic data across a sample of 80 advanced and developing economies and consistently showed economic gains in the short term but growing dangers thereafter.

“Higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high, and with greater risk of declines in bank equity prices,” the report found.

Borrowing lets households buy goods and services, driving up consumption and employment and causing home and bank equity prices to rise, resulting in economic expansion, according to the report.

But after one or two years, these relationships turn negative. As households remain in debt, they can be vulnerable to negative shocks. Higher debt burdens can also predict lower income growth.

“The negative medium-term consequences of increases in household debt are more pronounced for advanced than for emerging market economies,” the report also found.

Credit is more freely available to larger shares of the population in wealthier nations while average debt levels are lower in emerging markets, perhaps explaining some of the disparity, the report said.

The report said its findings were “consistent with the presence of a policy trade-off between short-term and medium-term growth and financial instability.”

But, within countries, poorer households are most vulnerable and their share of total debt is growing, it added.

According to the New York Federal Reserve Bank, US household debt broke pre-crisis levels in the second quarter of this year, reaching $12.8 trillion.