Why does the indebtedness of families fall to the lowest level in more than 25 years?

BarcelonaHousehold debt stood at 729 billion euros in the second quarter of this year, 1.5% more than twelve months ago, but its weight in the gross domestic product (GDP) fell to 41.9%, the lowest level since the third quarter of 1999. According to the financial accounts published by the Bank of Spain, companies also reduced the weight of their liabilities relative to the state's total wealth during this period, between April and June of this year. In this case, it stood at a total of 1.077 trillion euros, 2% more than a year ago, but at 61.9% of GDP, the lowest level since the third quarter of 2001.

In any case, this evolution, which portrays a healthy economy with an intense process of private deleveraging, is a coin with two sides. The downside is that it points to a reduction in consumption, one of the main components of GDP (around 60% of the total), given that households are spending less; and also in investment, another of the pillars on which the country's wealth is based (around a fifth of the total), as the pace of corporate debt is also lower.

The downward trend was already noticeable in the first quarter data. The increase in savings and the lower weight of household and business debt has been ongoing since the outbreak of the COVID pandemic in 2020. And, in parallel, there is an increase in the net financial wealth of households, which is obtained by deducting liabilities and debts from assets. In this case, it stood at 2.8 trillion euros, 161.8% of GDP, an increase of 12.2% and an unprecedented level in absolute terms.

A significant contribution to this development is "the revaluation of holdings in company capital (shares) and investment funds", highlights Josep Soler, founder and executive advisor of EFPA Spain (Spanish Association of Financial Advisors and Planners). Last year alone, the Ibex, the main stock market indicator, soared by almost 50% and since the beginning of this year it has exceeded 10%.

In any case, the data reflect that "the Spanish economy is deleveraging, with the exception of the public sector, whose spending is increasing, which shows that it is healthier". But the other side of the coin is that the downward trend in the weight of liabilities, for both households and businesses, may reveal that "household consumption is being held back and that business investment is losing momentum", states Soler. A level that is too low may be signaling an economic slowdown, the expert warns.

Mortgages

There is also less capacity for housing acquisition and, therefore, for mortgage demand. The July data reflect a year-on-year increase of 4.9% in mortgages in Catalonia, but a decrease of 3.5% for the country as a whole. The rise in apartment prices is reflected in the average amount borrowed, which was also a record, according to data from the National Statistics Institute (INE).

Regarding the evolution of financial asset balances, "a slight increase in equity holdings (shares) and investment funds is observed". Cash and bank deposits, the most widely used instruments by individuals, decreased. In any case, the sum of four quarters reflects a greater investment in household holdings in investment funds and in cash, bank deposits, insurance, and pension funds, according to data from the Bank of Spain.

In cash and deposits there are 1.167 trillion euros, 3.5% more than a year earlier. These are the financial assets where families have the most resources. Their average return in August (the last month for which there is data) was 0.16%, according to data from the Bank of Spain. This is money that is losing value, since inflation is currently at 4.9%. The return only moves in term deposits or with highly conditioned offers, with limited amounts, with the obligation to include a payroll or else contract insurance or other services. "In fact, the evolution from deposits towards other financial assets is very slow," states Soler.