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Spain Debt/GDP Ratio Still Falling Thanks To Intensity Of Credit Cycle

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Posted By: Carlos Díaz Guell 21st June 2016

If we accept that the evolution of debt is a relevant factor in the explanation of the economic cycle, with the usual affirmation that the increase in debt explains the evolution in GDP,  with a certain lag, then the credit cycle in Spain has been particularly intense. It has gone through the typical phases, although it is still in the active deleveraging phase (reduction in the volume of debt). The debt/GDP ratio has dropped from 215% to 170%, but far off the level of 125%  reached in 2001.
The decline in the flow of credit has allowed for a reduction in the debt ratio of 32 percentage points of GDP and of 15 percentage points in arrears or restructuring. On the other hand, inflation has only contributed 2 percentage points, while the evolution of real GDP has actually fuelled an increase of 2 percentage points in the debt ratio. Households debt/GDP ratio has fallen from 82% to 70% and that of companies fom 135% to 105%.
The estimations on the economy’s cyclical position show that GDP is in an advanced recovery stage. That said, debt is still in an adjustment phase and so it is much further behind in its cycle.
The estimations on the credit gap suggest that this has closed and that it is now at its trend level, which would allow it to grow at a somewhat faster pace than would appear from the cyclical estimations.

The outlook points to the active deleveraging phase still having some way to go. It will then be followed – probably from 2017 onwards – by a period of passive deleveraging (lending growth below that of nominal GDP). That is consistent with a positive boost to GDP growth from credit, which is needed to sustain any increases beyond its potential – although more moderate – , given the prospect of fiscal adustments.

The importance of credit in the economic cycle varies from country to country. For example, it is related to how active the fiscal policy is or whether there is a relevant net savings position which can finance spending without the need for credit. Or whether there is a desire to take on debt to accumulate financial or real assets instead of spending.

About the Author

Carlos Díaz Guell
Editor at consensodelmercado.com and innovaspain.com, Carlos began his career in financial journalism as founding member of El País. He's been communications director of Bank of Spain, member of the ECC at the European Central Bank, Institutional Relations director at Iberia and editor at La Economía 16 magazine.