McKinsey in warning on British debt

THE UK may miss out on long term economic growth if it does not speed up the rate of debt reduction, according to a report by McKinsey Global Institute (MGI).

Researchers compared the UK’s current deleveraging with historic debt reduction efforts and concluded Britain may face an extended period of restrained growth, similar to that experienced by Japan in the 1990s.

The data combines financial institution debt with that of households, firms and the government.

The analysts found that the most effective way to turn a debt bubble into economic growth was to act “decisively” and follow the model of Finland and Sweden during the 1990s by reducing debt fast, stabilising the banking sector and enacting reforms to encourage private investment.

Susan Lund, director of research for MGI, said: “Countries that did not enact such reforms, such as Japan, have felt the lingering effects of the financial crisis for many years.”

The report emphasises that although the UK is only just entering the deleveraging phase, early signs suggest that its efforts lag substantially behind the US.

American financial institutions have already reduced their debt to levels last seen in 2000 while household debt has been cut by 15 per cent relative to income.

By comparison, in the UK the total debt relative to GDP has actually increased due to substantial borrowing by the government and non-bank financial sector, reaching 507 per cent of GDP in mid-2011, compared with 487 per cent at the end of 2008 and 310 per cent in 2000.

Ominously MGI says that at current rates it will take up to a decade for the ratio of UK disposable income to household debt to hit pre-bubble growth levels. Ultimately Britain “will need renewed investment by nonfinancial businesses” if it is to reduce debt without holding back growth.