Tuesday, 3 September 2013

The Norwegian Household Debt Growth Fest is Slowing Down, but Money in Percent of Credit hits Record Low

The five year growth rate (annualised) for household credit in Norway hit yet another new all-time low in July according to a recent data release from Statistics Norway. At 6.28%, it was the lowest growth rate ever reported based on data going back to 1995 (data not published prior to this)*. Growth peaked at 11.86% in November 2007, but has since steadily declined. The current growth rate is 3.49 percentage points, or 35.75%, lower than the average growth rate of 9.77% for the period since 1995.

The five year growth rate (annualised) in money supply for households in Norway finally hit a new all-time record low. Having consistently been above the previous record low of 5.41% set in January 2001 the growth rate in July dropped to 5.40%.

But here is an interesting observation: the amount of M2 money** held by households as a percent of their gross debt (credit) is now the lowest ever reported. At 41.02%, the current ratio is only slightly higher than the record low 39.74% from May this year and 9.57 percentage points, or 19.41%, lower than the 49.31% average since 1995. This basically means that the average Norwegian household today holds substantially less money (currency, deposits and savings) compared to debt than ever before - in effect, Norwegian households have become less liquid. And decreased liquidity means increased risk. This decreased liquidity combined with Norwegian households having become increasingly indebted relative to income in recent years is a highly potent combination that could create serious financial damage to households and the mainland Norwegian economy as interest rates rise. And house prices fall.

So where has the rest of the credit gone (as money is only 41.02% of credit)? It's gone into other items not included in M2 money supply, such as houses/flats/cabins, cars, furniture, the stock market, general consumption etc.

* The 5 year growth rates for M2 and Credit hence start from 2000.
**By Statistics Norway:
The narrow monetary concept (M1): the money-holding sector's notes and coins (in NOK) and transaction deposit accounts with Norges Bank and banks (in NOK and foreign currency). Note that a change in the coverage of M1 compared with the rest of M2 (see below) has caused a break in the data series for M1 between May and June 2001. Twelve-month growth rates for M1 for this period should therefore not be used.
Note that the changes in the demarcation between M1 and the rest of M2 introduced in November 2000 resulted in breaks in the time series. For that reason, twelve-month growth rates for the period June 2001 to May 2002 should not be compared.
The broad monetary concept (M2): M1 + the money-holding sector's other bank deposits (in NOK and foreign currency), excluding restricted deposits (bank savings with tax credit etc.), but including certificates of deposit. As from the publication of monetary aggregates for May 2006, money market fund shares are included in M2. 

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