Everyone worries about consumer debt. Investors have been selling off shares of major banks, payments companies and fintech firms on fears of the pain that rising living costs and interest rates will inflict on borrowers. However, households in the US, UK and much of Europe are in pretty good shape and show few signs of financial stress, writes Paul Davis for Bloomberg, writes Bloomberg TV Bulgaria.
The reasons for concern are obvious. JP Morgan is cutting hundreds of jobs in its US home lending division due to a collapse in mortgage demand after prime lending rates began to rise. Meanwhile, buy-now-pay-later lenders such as Block (formerly Square) and privately held Klarna Bank are down as investors worry about slower spending and rising risks. Even Goldman shareholders reacted badly to a Bloomberg report last week that Marcus, its online bank, would post another $1.2 billion in losses this year, though that was due to heavy investments to build the business, not expected hit from lending.
The world looks fragile, especially if you look at the financial markets and against the background of the decline in consumer confidence. But households – and potentially Western economies – have a huge amount of savings and reduced debt since the coronavirus crisis. People started the year with spare funds equivalent to more than 13% of 2019 gross domestic product in the UK, 11.5% of GDP in the US and between 5.5% and 7.5% in Germany, France and Italy.
Household balance sheets are much stronger than they were before the pandemic. There are far fewer subprime auto loans and credit card users in the U.S. than in the past, said Matthew Misch, credit strategist at UBS. The trend towards financial health was accelerated by lifestyle restrictions and income support during the Covid-19 containment measures, but improvements have been in place since 2013.
The proportion of borrowers defaulting has been rising in recent months, but is still below 2019 levels. over the next few quarters,” Misch commented. “I’m more concerned about consumers’ willingness to spend than their ability,” he adds.
Spending remains stable for now. US consumer spending weakened in May for the first time this year, but the decline was limited. There is no collapse in demand and spending on services continues to rise even as orders for goods shrink. Along with high savings rates and low debt, consumers are supported by very high employment rates and labor shortages, helping to boost wages. In the US, even high gas prices aren’t as bad as they seem.
Still, inflation is eating away at wage growth for many, and economists fear it will burn through their savings. What happened after World War II may be indicative of events to come. Then people in the US and UK entered the post-war era with high levels of savings and pent-up demand that offset inflation within years.
Today, spare funds are mostly in the hands of the rich, who are less likely to spend them anyway. But those on lower incomes are still financially stronger than before. There are some signs that people in the US are adding debt to support everyday expenses. Growth in revolving credit as a share of consumer spending rose to levels not seen since 2007, data from the St. Louis Federal Reserve showed. Consumer credit growth hit an annual rate of nearly 13% in March, the fastest acceleration in more than two decades.
However, indebtedness is still relatively low: the total share of US consumer credit to GDP is down to around 18.5%, the same level since late 2015.
If anything, banks and credit card companies want consumers to borrow more. Life is undoubtedly getting harder and more expensive for some, but investors in the banking sector seem to be overreacting for now. Employment levels will be key – if people start to lose their jobs and wage growth weakens, bad loans will quickly start to rise.
Place a rating:
☆
☆
☆
☆
☆
–
5
Assessment 5 from 2 voice.
–
– –
