2  BIS central bankers’ speeches  And they are long lived – probably on average around 15 years from one peak to the next.4 In contrast, business cycles are typically relatively short-lived affairs: for instance, the average duration of business cycles in the UK and US economy in the post-war period has been estimated at 5 ½ years.5 However, though financial cycles build up much more slowly than business cycles, the amplitude – the swings between the peaks and troughs – is greater. In the UK the peak-totrough variation in credit has been around 40 percentage points on average for financial cycles, whereas the average peak to trough change in GDP in the business cycle has been around 10 percentage points. Financial cycles do not always mirror or drive business cycles. To a headline writer, the fact that credit grew twice as fast as GDP for 10 years before 2007 and that household debt rose from levels of around 100% of household income in 1997 to 155% shouts “unsustainable, debt financed growth”. But over those 10 years, the economy was not obviously growing at abovenormal rates and inflation remained subdued, albeit aided perhaps by the favourable terms of trade shock that followed China’s admission to the World Trade Organisation in 2001.6 While the increase in debt may have had some impact on growth, the UK certainly did not appear to enjoy a credit financed boom.
The debt-to-GDP ratio in 2020 is expected to grow by more than 20 pp under scenario 1 and by some 25 pp under scenario 2, up to 116.8% and 120.6% of GDP, respectively. High public debt also means future vulnerability. In the short term this risk has been mitigated: first by the measures taken by the ECB, which have prevented fragmentation of the euro area sovereign debt markets; and second by the European response, with the launch of mechanisms to jointly address the costs of the pandemic. However, if such a high level of public debt were to remain in place over time, the Spanish economy would be exposed to a situation of chronic vulnerability to changes in investor sentiment in the financial markets. For its part, the negative net international investment position of the Spanish economy and the foreign debt position have risen, in terms of GDP, as a consequence of valuation effects and of the fall in output. Specifically, in 2020 Q2, the negative net international investment position stood at 77.4% of GDP, 6.5 pp more than in Q1, influenced by the sharp contraction in output. The nation’s gross external debt rose by € billion in 2020 Q2, owing solely to valuation effects, to 188.1% of GDP, a record high. The high net liability position of the Spanish economy continues to be another factor of vulnerability, especially in the present setting of high uncertainty over future economic developments.