2 The scenario for the 2019 test includes a deep recession in the UK with GDP falling by 4.7 % from peak to trough, house price falls of 33%, falls in commercial real estate prices of 41%, recessions in the Euro Area, the US, and China and market stresses including a 41% fall in equity prices and a nearly 400bps widening of investment grade spreads 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  In the event of a no deal, no transition Brexit, markets would be likely to be very volatile – as they were after the referendum - as prices adjust to that outcome. The banking system has the ability to withstand the losses that would accompany a serious downturn – but one would still expect there to be losses. And, of course, while we have addressed all of the risks we can foresee, stress events can evolve and combine with other events in unpredictable ways. Second, to return to my opening point, the reason we have focused on the risks from a disorderly no deal, no transition Brexit is not because that is what we expect to happen but because the financial system needs to be able to withstand what could happen. The crisis taught us the costs to the economy and to society of a breakdown in the financial system. Third, we have been fully transparent in our assessment of the risks and the actions necessary to address them.
Since then, global debt has stabilized, growing by only 1% in total, relative to global GDP, over the past 5 years. The aggregate growth rate is not therefore signaling an impending correction. The level, however, may well represent a significant vulnerability given that high levels of debt are associated with deeper and more persistent recessions. Assessing the sustainability of this debt is more difficult. Whether debt is sustainable depends on the difference between the interest rate and the growth rate of the income stream that will be used to repay the debt. The future is not known – in assessing today whether a given level of debt is sustainable, we must rely on our best forecast of future interest rates and growth. The level of debt that is sustainable in an economy is not a constant. It can change over time and indeed has changed enormously over the last 150 years. The ratio of credit to GDP in the late Victorian British economy was under 20% (not including the financial sector). In the mid-twentieth century it was around 60% and by the early 1990s over 100%. It is influenced by many factors including, very importantly, the long run real rate of interest. There is strong evidence that the long run, or trend real rate has come down materially over the past 40 years as a result of slow moving, secular changes in the supply of savings and the demand for investment.