UK 'has second-highest debt-to-GDP ratio in the world'

By Joel Stanier

The UK's financial problems have seen the country amass the second-highest level of household debt in the world, relative to GDP - with only Japan ranking higher, research by consultancy McKinsey has found.

UK personal debt now stands at 507% of GDP, compared with 512% in Japan. In layman's terms, that means households collectively owe more than five times the value of the goods and services they produce in a year.

And McKinsey predicted a long and slow recovery, commenting that "the ratio of UK household debt to disposable income would not return to its pre-bubble trend for up to a decade". In 2003, before the financial crisis, the UK's debt-to-GDP ratio was around 300%, according to The Guardian - which is considered a more sustainable level.

Only three of the largest 'mature' economies - the US, Australia and South Korea - have seen their level of debt in relation to GDP fall over the last two years, McKinsey said.

Robert Peston of the BBC said that the report "implies that as we in the UK look for a return to more normal levels of economic growth, momentum is not going to be provided by consumer spending for perhaps up to 10 years".

One of the main issues is that the UK (and many other countries) saw several years of strong economic growth, but they were largely fuelled by consumer debt. This is what economists refer to as the 'debt bubble' - and there came a point at which people had to start focusing on repaying those debts, with many struggling to do so, leading to big drops in consumer spending. As consumers get used to an economy with less reliance on credit, it could take some time before the economy returns to strength.

Image © iStockPhotos / Gordon Bell

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