While the Swiss banking sector has deleveraged over the past decade, the household sector exploited record low interest rates and strong income growth to take on more debt and fund acquisitions in the booming property market.
Relative to GDP, household debt is now the largest among major economies at 128%. Switzerland also ranks highly on the level of debt as a percentage of net disposable income (213%) and has experienced one of the fastest increases in real house prices over the past decade (40%).
Invariably, in the middle of a credit boom the “this time is different” syndrome reigns supreme. In Switzerland’s case, high debt levels are justified by the appearance of a robust and ‘well-managed’ economy. However, debt sustainability relies on simple arithmetic: income growth must exceed debt servicing costs over time. With risks to economic growth mounting (a simmering trade war, a tentative shift towards monetary tightening and a disorderly Brexit to name but a few), this delicate equilibrium could soon be derailed.
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Source: Bloomberg, Macrobond and Variant Perception