Somewhat improved financial stability outlook, but imbalance in debt growth
The decline in interest rates this year has substantially strengthened household and corporate sector debt servicing capacity. Fewer companies went bankrupt in the third quarter, and the total market value of bankrupt entities has fallen since last autumn. Banks' earnings have fallen somewhat by comparison with 2002, but improved from the second to the third quarter of this year. On balance, we consider the outlook for stability in the financial sector to be satisfactory, and somewhat improved compared with six months ago", said Governor Svein Gjedrem in connection with the publication of the report Financial Stability 2/2003 on Tuesday, 25 November.
Credit growth is still somewhat higher than economic growth. In relation to gross domestic product, credit to mainland Norway is back at the high level of around 1989-90. Debt growth is in imbalance, with strong growth in household debt and low growth in corporate sector debt. This situation reflects high house prices and substantial growth in household consumption, while corporate investment remains low. After falling somewhat through the spring, house prices have been on the rise again since the summer. The household debt burden - debt in relation to disposable income - has increased substantially. Viewed in isolation, this increases households' vulnerability. However, the fall in interest rates has boosted households' debt servicing capacity in the short term. Credit risk associated with banks' loans to households is therefore assessed as relatively low, and lower than it was six months ago.
The fall in interest rates has also improved companies' debt servicing capacity. An economic upturn will have the same effect. The property industry is the largest recipient of bank loans. Because earnings have been low, the risk associated with parts of the property industry is considered to be relatively high, and unchanged since the May report. Enterprises in some industries, such as fish farming and commercial services, are still vulnerable. Although financial vulnerability differs across industries, overall vulnerability is assessed as moderate, and somewhat lower than six months ago.
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