Consumers struggle to shrug off debt - dampens economic recovery prospects
The latest Credit Bureau Monitor prepared by the National Credit Regulator (NCR) shows that the number of consumers with impaired credit records increased marginally from 8.59 million in the quarter ending September 2010 to 8.61 million in the quarter ending December 2010. This represents 46.5% of all credit active consumers, up from 46.3% in the previous quarter. Since the NCR started reporting these figures in June 2007, this is the largest number of consumers that are struggling to cope with their debt repayments. Over this three and a half year period the number of consumers with impaired credit records has increased by 40.9%. These trends suggest that consumers are not winning the battle against over-indebtedness.
Consumption expenditure accounts for about 60% of GDP. This means that the overall direction of the economy is significantly linked to the ability of consumers to spend on goods and services. As long as consumers remain weighed down by debt, the economy will grow at a subdued rate. Given the continued strain that debt places on households, it is not surprising that the FNB/BER consumer confidence index declined from 14 to 9 between the third quarter of 2010 and the first quarter of 2011.
Why the marginal increase in impaired credit records?
The last quarter of 2010 saw new momentum in the recovery of the domestic economy. On a year-on-year basis, after growing by 2.7% in the third quarter, the economy expanded by 3.8% in the final quarter. Consumer demand played a role in this new buoyancy in the economy, as shown by the 15.3% and 7.7% year-on-year growth in motor trade sales and retail trade sales respectively. Part of this increased spending was financed through instalment credit which grew by 5.6% on a year-on-year basis from the fourth quarter of 2009 to the fourth quarter of 2010. Therefore, the slight increase in credit impairments can be partially explained by the marginal increase in credit-driven consumer spending towards the end of 2010. This view is supported by the increase in credit records that were 1-2 months in arrears at the end of December.
Economists have rightly pointed out that the high level of unemployment is also contributing to the high level of credit impairments. Losing your job takes away the income that you use to pay your monthly credit commitments. This means that the success or otherwise of government’s job creation initiatives has important implications for consumer indebtedness. The success of these efforts hinges on several factors including: a high sustained rate of economic growth, the global macroeconomic environment, a higher level of saving, an improvement in the skills base, and a labor market environment that minimises the costs associated with absorbing labour.
While the role of unemployment is important, it should not be overstated. Unemployment is highly skewed, affecting the youth disproportionately. According to National Treasury those under 30 have an unemployment rate of 42% compared to less than 17% for those above 30. A large proportion of the youth has never had a job and therefore do not have a credit record. This means they do not feature much in the data being analysed.
Figure 1: Relationship between unemployment and impaired credit records
Click on image to enlarge
Source: Statistics South Africa and National Credit Regulator
The weak culture of saving is also a major reason why consumers continue to struggle with debt. Consumer appetite for credit has clearly re-emerged, and perhaps too soon after the recession. Although many households were under severe strain during the recession, some to the point of losing their cars and homes, it appears that limited progress was made in improving the savings culture. One hoped that the recession served as a ‘wake-up-call’, encouraging households to examine their spending habits. The emerging evidence indicates that this expectation was not met. Notably, the number of credit active consumers actually increased steadily throughout the recession. This is surprising to say the least when one considers that massive job losses were experienced during this period. Clearly, changing financial culture is a very difficult undertaking.
Figure 2: Credit active consumers (millions)
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Source: National Credit Regulator
Where to from here?
Looking ahead we can take some comfort in the fact that this recent increase in impaired credit records is marginal. Not much ground has been lost. Reversing the trend in a sustainable manner will however require a concerted effort, primarily on the part of consumers. Nothing short of a culture change is required. Even if jobs are created, unless a different approach to spending, debt and saving is embraced, those taking up these new jobs are likely to join the ranks of the over-indebted. Financial education can contribute positively towards this difficult, but necessary process of culture change.
The prospects for the economy will remain weak as long as consumers are over-extended in their borrowing. While credit can give the impression of success in the short term, the recent global financial crisis is a highly convincing monument reminding us that long term economic progress cannot be attained through excessive credit. Although change towards a stronger savings culture will result in some pain, the long term benefits will justify the short to medium term costs of this required adjustment.
