Offshore Capitalist

Lower household debt will stunt economic recovery

The failure of banks to lend will stall economic recovery in the developed world, as households take on less debt than before and so reduce demand, according to Legal & General Investment Management LGIM.

LGIM economist James Carrick pictured said that while policymakers in the developed world have been working to encourage banks to resume lending at the levels seen before the financial crisis, returning to such levels is not realistic.

Ageing populations, a drying-up of sub-prime lending and interest rates not being able to fall any lower mean that household debt levels will fall, stunting economic recovery, he said. ‘Previous economic recoveries have been vigorous because households have been able to take on more debt, bringing forward consumption from the future,’ said Carrick.

‘The belief that everything can return to ‘normal’ and household debt can continue to rise on the same trend path it has taken for previous decades is too optimistic.’

LGIM analysis of the US suggests that US household debt as a share of income could fall from 130% in 2008 to 110% by 2014, as net lending remains weak. This will lead to a subdued period of growth rather than a double-dip recession, Carrick argued.

In emerging markets, meanwhile, appetites for debt are growing, and companies with emerging market exposure are likely to be the better performers.

via Lower household debt will stunt economic recovery | New Model Adviser ® | Citywire.

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