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Summary:

 

KEY ISSUES Addressing the Household Debt Overhang The economy is slowly emerging from its balance sheet recession. Housing prices have steadied, exports are rising on expanding global trade, but consumption continues to contract on an annual basis, held down by household deleveraging and weak incomes. The risks to the outlook are on the downside. Near term risks stem from euro area weakness and geopolitical spillovers, while medium-term growth prospects are clouded by the slow progress in addressing the large household debt overhang. Addressing the household debt overhang is key to securing a robust recovery. Encouraging reprofiling of underwater mortgages, increasing intergenerational transfers, and reducing pension contributions for the young would support orderly household deleveraging. Strengthening the banking sector would reduce housing risks and support credit in the recovery. Stronger capital buffers and more ambitious medium-term targets for reducing LTV ratios and mortgage deductibility would encourage more corporate lending and reduce the risks from the housing sector. Expanding the rental market would ease pressures on home ownership. Deregulating private rentals, improving the targeting of social housing, and liberalizing zoning laws would create a more efficient and resilient housing sector. Accommodative macro policies and structural reforms to raise productivity would support balance sheet adjustment and enhance potential growth. During deleveraging, fiscal policy should aim to be supportive by maintaining a structural balance over the medium term, while avoiding targeting headline balances. Structural reforms to strengthen the SME sector, address labor duality and expand the availability of equity financing are also needed to raise productivity.

 

Country Report No. 14/327

 

Source: International Monetary Fund