Tuesday, March 31, 2009

MGI on Consumer Deleveraging

McKinsey Global Institute tackles the question of consumer deleveraging and asks: "Will US consumer debt reduction cripple the recovery?".

They state: "If consumers continue to reduce their debt, the effect on consumption will depend on income growth. For example, if incomes grow by 2 percent per year, households could reduce their debt-to-income ratio by five percentage points with a saving rate of just 2.3 percent. This would require $254 billion less spending per year. Without income growth, the same reduction in leverage would require more than twice as much saving, or $535 billion less consumption."

And then
conclude: "But the bottom line is this: Given that the US household debt-to-income ratio rose to 27 percentage points above its long-term trend, it is easy to see how consumer deleveraging could result in hundreds of billions of dollars worth of foregone consumption in coming years."

The full report is here (free registration needed) and has tons of great charts.

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