The synchronised nature of the global economic recovery has fanned speculation that the post-crisis deleveraging in developed countries has finally come to an end. However, we err on the side of caution and cite evidence from the UK, which suggests there has been limited progress on balance sheet repair.
In the aftermath of a financial crisis the sharp reduction in central bank policy rates lowers the servicing burden of private sector debts and allows borrowers to swiftly reduce leverage. In the UK, monetary easing has instead triggered a mini-consumer boom at the expense of debt reduction. Of the 75% point increase in the household debt-to-income ratio in the 10 years up to 2007, only a third has been unwound, while the ratio of long-term saving (ISAs and time deposits) to short-term saving (cash and instance access deposits) has collapsed. On the asset side, the weak rebound in disposable income since the crisis has further limited the improvement in balance sheet stability. With that in mind, the scale and speed of monetary policy normalisation in the UK will remain anaemic. We re-highlight the dovish Short-Sterling trades (buying Sept 18 or Dec 18 outright, or June/Dec curve flatteners (short June, long December).
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Source: Bloomberg, Macrobond and Variant Perception