Rich-World Debt Record Has Danes Blocking Credit-Driven Growth

Once burned, twice shy.

Danish households, the world’s most indebted, are refusing to take on more credit. That’s because they are still repaying the bill for the last upturn, according to Danske Bank, Denmark’s biggest lender.

Reducing debt mountains might look like sound house keeping. But the problem for Denmark is that weak exports means it has to rely on consumption to fuel growth, Danske Bank Chief Economist Las Olsen said in an interview.

Normally, Danes would react to the general improvement in economic conditions being experienced today by "going out and making investments, buying houses, cars and kitchens, spending borrowed money to push consumption much higher,” Olsen said. “That’s not happening because the debt load is already high." In effect, "the bill for the previous upswing hasn’t been paid yet.”

Although Danish households remain the most indebted in the developed world, debt ratios are slowly coming down. According to the Organisation for Economic Co-Operation and Development, Denmark’s was 313.5 percent of disposable income at the end of 2014, compared to a high of 339.4 percent in 2008, shortly before property prices bottomed.

Property prices have since risen by 10 percent, while apartment prices have gained 46 percent, data from Statistics Denmark showed on Thursday. Still, “debt levels remain too high compared to the current house price levels,” Olsen said.

Despite negative rates, the Danes are now much more reluctant to borrow than a decade ago. Danske estimates that the rate of growth in private consumption will only be 0.4 percent higher than the growth in disposable incomes this year. The difference stood at 12 percent in 2007, the last of the good years.

"We’re not seeing the kind of lending to finance higher consumption that you would normally see at the beginning of an upturn," Olsen said.

According to the Danish central bank, total borrowing -- including mortgages -- stood at 2.3 billion kroner ($335 million) in November 2015, virtually unchanged from a year earlier.

With Danske revising down its estimates for 2016 economic growth, from September’s 1.9 percent to 1.5 percent on Thursday, Olsen expects "at least four or five years" of contraction in Denmark’s household debt to disposable income ratio.

Before it's here, it's on the Bloomberg Terminal.