by Akrur Barua, economist and manager, Deloitte Research, Deloitte Services LP.
The global financial downturn of 2008–2009 was a watershed in the evolution of economic theory and policy. It spurred central banks to innovate and led to greater oversight of banking and financial services. It also sparked discussion on the sustainability of growth models driven by debt-fueled consumer spending as in the United States and the United Kingdom.
Not only did high household leverage add to the vulnerabilities in these countries, it also aggravated the resulting economic downturn. In contrast, Asia and some parts of Europe escaped the worst of the crisis, arguably due to lower leverage and higher savings. Not surprisingly, criticism from Asian commentators was harsh.¹ And they have been quick to suggest improvements to Western capitalism.² In particular, they showcased the prudent Asian consumer as an ideal alternative to leveraged households in the West.
A Twist in the Tale
However, as the world economy chugs along, (albeit in fits and starts) there appears to be an unravelling of the myth of Asian prudence.³ In many countries in the region, households have gone on a credit binge, aided by loose monetary policy and fiscal sops. Although GDP growth benefited as a result, economic risks have increased. Household debt is now at a record high in many Asian economies. For example, as a share of personal disposable income, household debt in Singapore, South Korea and Malaysia is higher than in the United States before the global credit crisis (Figure 1).
The Fuel that Fed the Fire
The immediate cause of this rising household indebtedness is loose monetary policy post the outbreak of the global credit crisis of 2008-2009. The sharp economic downturn in the West forced Asian economies, especially export-driven ones, to turn to their domestic markets for growth. In addition to fiscal stimulus, policymakers unleashed monetary easing and increased sops for consumer spending. While this led to greater contribution of private consumption to GDP growth during 2010–2014 (Figure 2), it also pushed household debt up sharply in many countries. For example, in Thailand, the ratio of household debt to personal disposable income jumped by an astounding 56 percentage points during 2007–2014.
A number of other factors have likely led to soaring household debt in parts of Asia over the years.
—Rising incomes contributing to higher consumption in Asia. Economic fortunes in Asia have improved remarkably in the past few decades. Over 1990–2014, per-capita income in current international dollar of purchasing power parity (PPP) grew by 8.4% a year on average in emerging Asia; in more advanced economies, the figure was 3.5%.⁴ Strong income growth, in turn, helped alleviate poverty and added to the legions of the middle class. This has fueled consumption, with households increasingly using debt for spending. This trend is expected to continue, given that the size of the middle class in the Asia-Pacific region is expected to rise to 3.2 billion by 2030 from 525 million in 2009.⁵
—Greater access to credit. Buoyed by the fast-growing Asian market, banks and financial institutions have expanded their services. These include housing loans, personal loans, credit cards, investment accounts and insurance products.⁶ Economic liberalization has also made access to financial services easier.⁷ Moreover, a young population, attracted to new products and aware of global trends, has also pushed up credit-driven spending in many parts of Asia.⁸
—The lure of home ownership. In Asia, the share of housing in household liabilities has been going up. A key factor behind rising housing demand is growing prosperity.⁹ Home ownership is also ingrained in the cultural psyche; India is a good example of this.¹⁰ However, first-time home buyers are not the only ones driving demand and, hence, credit to the sector. Housing is an important investment option as well, given limited financial savings instruments. Real assets, including housing, constitute about 86% of household wealth in India and Indonesia, and 50% in China; for the United States, it is 30% to 38% based on the inclusion of unincorporated enterprises in the calculation.¹¹
Read the full report on household debt in Asia to learn about the emerging challenges this region faces, including concerns about housing bubbles, risks to the banking sector and complications related to monetary policy. In addition, the report, which is part of the Asia Pacific Economic Outlook, Q3 2015, examines whether high household debt in Asia poses immediate risks for economies and what Asian policymakers may want to consider moving forward.