Norway and Sweden may be in high-debt/asset bubbles that look “unstable” and may leave them “vulnerable” to market corrections, according to HSBC economist James Pomeroy. In Sweden, “growth may not be sustainable,” he says.
It’s not the first time we’ve seen economists argue that a bubble may be forming in Northern Europe. Analysts at Moody’s called one a few weeks ago in house prices in Germany, the UK and — gulp! — Norway.
Pomeroy argues that the economies of both Sweden and Norway are carrying huge debt loads relative to GDP, but consumers there may be lulled into thinking everything is OK by their high property prices.
Both countries have central banks that have set interest rates near zero. (Sweden’s is actually negative.) The upshot, Pomeroy says, is that if a recession comes — or interest rates rise — then neither economy will be equipped to deal with it. Central banks can tackle recessions by lowering interest rates, but that weapon is effectively unavailable in both countries. Similarly, debt levels are comfortable now because interest on debt is so low. If rates rise, then the risk of consumers defaulting on their debts increases in both countries.
Here is Pomeroy’s argument, excerpted from his recent note:
Norway and Sweden’s high debt and asset booms look unstable
… Developed bubbles: In the developed world, countries with buoyant asset prices and high levels of household debt concern us. In Sweden and Norway, high debt is coupled with central bank easing while Hong Kong’s house price growth is worrying.
… Sweden and Norway: Both countries suffer from high levels of household debt, rising house prices and have central banks that have cut policy rates to record lows. This leaves them vulnerable to financial stability risks that could leave the economies exposed to any downturn or, at some later stage, a rise in rates. In Sweden, inflation remains very low (prompting negative rates and possible further easing to come) and investment has boomed suggesting that the recent run up in growth may not be sustainable. Norway’s growth outlook is blighted by a lower oil price despite no fears over government finances or the current account.
… The concerns come from Hong Kong, Norway and Sweden, where private sector debt continues to rise. All three countries are seeing very fast house price growth and debt is already at elevated levels. In the cases of Sweden and Norway, the central banks have been cutting rates over the past year (Norway -50bps, Sweden – 60bps), which serve to further fuel these risks.
And here’s a chart showing how both countries come near the top of countries with high credit to GDP, with both countries’ ratio between the two getting worse: