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Defusing the debt bomb

Careful management of the consumer debt burden is essential to avoid plunging the economy into a great depression, says James Norrington
Defusing the debt bomb

Central bank intervention and a retreat of more apocalyptic narratives on Covid-19 can be credited for the FTSE All-Share rallying around 28 per cent from its March low. Investors in shares have had a reprieve, but a genuine recovery depends on the real economy, which is vulnerable to a dreaded second wave reigniting the fear factor.  

Ultimately, companies must justify share prices with profits and hard cash, which requires economic growth on the back of all-important consumer confidence. Household indebtedness, people’s ability to manage liabilities and carry on spending – and the effect fear of unemployment has on their willingness to do so – places a question mark against corporate profits.

Household debt was lower as a percentage of gross domestic product (GDP) going into the coronavirus lockdowns than it had been before the global financial crisis in both the UK (83 per cent at end-2019, but above 90 per cent in 2008) and the US (75 per cent versus 98 per cent before the financial crisis).

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