Risks to households' future ability to service debt remain high
Recently, the news for the household/consumer sector has become mildly better, with interest rates and inflation having declined significantly. Insolvencies growth has slowed sharply from near 109% in the 3rd quarter of 2008 to 10% by the 1st quarter of this year, and decline (negative growth) in both this figure as well as banks’ non-performing loans may not be far off.
This mild recovery in households’ ability to service debt, however, remains something of a “high risk” recovery, because it depends solely on interest rate cuts while the overall level of indebtedness remains near historically highs.
Our “Debt-Service Risk Index” therefore remains at high levels as a result of ongoing high level of overall indebtedness, and has actually started to rise again over the past 2 quarters due to renewed rise in the household debt ratio as well as due to the approaching end to interest rate cuts. The most recent 1st quarter reading of 5.9 is still lower than the 7.1 risk peak reached in early-2006, but that’s still on the high side, given a multi-decade average of near 5. So, interest rate cuts may be starting to help have helped improve the household financial and debt situation somewhat, but it is a moderate and “HIGH RISK” recovery, and the risks have already begun to show some short term increase again.
Click here to download the full pdf file (99KB)
