How will a borrowing slowdown effect GDP in 2007/2008

First, some assumptions:

  • Private credit feeds through to some extent to GDP. All other things being equal, extra borrowing will increase GDP, in the short term at least.
  • The ‘one-off’ GDP impacts of borrowing is in the same year or the next year, to account for most direct and indirect effects. I’ve called this ‘credit feedthrough’ below.
  • Much of the growth in Irelands GDP in recent years is directly / indirectly related to borrowing.
  • Other sources of GDP growth will continue on 2002-2006 trends.
    So, allowing for some slowdown in borrowing, what will GDP look like in 2007 and 2008?
    Situation at end of 2006:
  • Total private credit: 317bn, growing at 59bn year-on-year.
  • GDP: 176bn, growing at 9.3% nominal, 5.1% real.
  • Inflation: 4%
  • Debt to GDP: 180%
    All ‘Real’ GDP figures are in ‘2006’ euros, everything rounded to the nearest billion. All input figures are from the central bank and eurostats.

Scenario 1: Slight slowdown in borrowing with low feedthrough
Assumptions:

  • Credit growth of 50bn in 2007, 40bn in 2008
  • Credit feedthrough of 20% in same year, 10% in following year
  • Inflation: 4% in 2007, 4% in 2008Outcome:
  • 2007: Nominal GDP 186bn (+5.7%), real GDP 179bn (+1.6%)
  • 2008: Nominal GDP 195bn (+4.8%), real GDP 180bn (+0.8%)
  • Debt to GDP at end 2008: 208.7%
    Scenario 2: Moderate slowdown, a bit more feedthrough
    Assumptions:
  • Credit growth of 45bn in 2007, 30bn in 2008
  • Credit feedthrough of 40% in same year, 20% in following year
  • Inflation: 4% in 2007, 3% in 2008Outcome:
  • 2007: Nominal GDP 179bn (+1.7%), real GDP 172bn (-2.2%)
  • 2008: Nominal GDP 187bn (-0.5%), real GDP 166bn (-3.5%)
  • Debt to GDP at end 2008: 220.2%
    Scenario 3: Getting nasty
    Assumptions:
  • Credit growth of 45bn in 2007, 25bn in 2008
  • Credit feedthrough of 50% in same year, 25% in following year
  • Inflation: 4% in 2007, 3% in 2008Outcome:
  • 2007: Nominal GDP 178bn (+1.1%), real GDP 171bn (-2.7%)
  • 2008: Nominal GDP 172bn (-3.4%), real GDP 160bn (-6.2%)
  • Debt to GDP at end 2008: 225%
    Scenario 4: Doomed i tells ya
    Assumptions:
  • Credit growth of 40bn in 2007, 10bn in 2008
  • Credit feedthrough of 60% in same year, 30% in following year
  • Inflation: 3% in 2007, 2% in 2008Outcome:
  • 2007: Nominal GDP 169bn (-3.9%), real GDP 164bn (-6.7%)
  • 2008: Nominal GDP 148bn (-12.4%), real GDP 140bn (-14.1%)
  • Debt to GDP at end 2008: 248.0%

nice work

I’ve been wondering about that myself.

I reckon part of the story is who we are indebted too. The second order effects will be different if the debt is to overseas creditors - since then there is little to no possibility that the interest is going to be spent here or reinvested here.

I wonder if that effect is significant?

Agreed. We seem to have three problems:

  • The economy has become addicted to the cash inflow from borrowing, and since this is unsustainable over the long term, there are going to be serious withdrawal symptoms when it slows down. It looks like even a moderate slowdown in borrowing, from “utterly unsustainable” to merely “quite unsustainable” will still trigger a serious recession. This could easily snowball, as the recession discourages borrowing even more, and less borrowing deepens the recession. Since borrowing at 60bn a year is possibly an all time international record at over 30%+ of GDP, the impact will be likewise.
  • Repayments will hurt over the long term unless the economy ‘out-grows’ the growth of the repayments - this is the definition of ‘sustainable’ levels of borrowing. Since borrowing in general has been growing at 20%-30%, while the economy has been growing at 5%-10% (nominal), we’re losing that race badly.
  • Borrowing from foreigners will eventually have the net effect of removing money from ireland. Since much of the borrowing has been funded substantially by germany via the euro bond market, and japan via the carry trade (anyone have a source of numbers on these?), we are getting the benefits akin to exports now but we’ll get the bigger pain akin to imports later.
    Or in short:
  • To stop borrowing will kill us quickly.
  • To keep borrowing will kill us slowly.
  • Past borrowing from foreigners will kill us anyway.

Who was it that said a recession is just money returning to those who really own it. It could be very apt in Ireland’s situation.

I think a fitting time to revisit this thread - given the ongoing reduction in credit.
Perhaps we should change the title to 2011?

centralbank.ie/data/site/cmbs/Money%20and%20Banking%20Statistics%20April%202011.pdf