=
Rising Rates and Inflation Eats into Credit Demand
Falling confidence, rising inflation, and rising interest rates are eating into disposable incomes and leading to sharp declines in consumer, mortgage, and business lending.
Centrix, a credit reporting company that collects data from 74 organisations including banks, finance companies, telcos, and utility providers. Recently published data that showed new household lending in May was down 33 percent on May of last year and business credit demand was down 13 percent over the same period.
Customer requests for Buy Now, Pay Later (BNPL) and new credit card demand were down 32 percent and 22 percent, respectively, in May compared with in May of last year.
Although new residential mortgage lending was down 34 percent when compared with May of last year, it was down only 4 percent when compared to pre-pandemic May 2019.
Centrix managing director Keith McLaughlin said financial hardship cases also continued to drop. He stated:
"We're yet again experiencing another record low in hardship levels since December 2019 with only 8,750 borrower accounts flagged in financial hardship. So, while spending is low, people are generally not getting into severe financial distress.”
He said further changes to the Credit Contract and Consumer Finance Act rules will kick in from July 7. The Act has been an effective brake on lending since changes were first made on December 1 of last year.
Furthermore, he said that low company closure and liquidation rates shows a level of resilience in the economy.
Closures were down 37 percent in this quarter, compared to the previous quarter, and company liquidations were also down 14 percent year-on-year.
However, company credit defaults are starting to rise, primarily in the building and hospitality sectors, which have experienced the highest default rates since the final quarter of 2019.
This rise in default rates coupled with falling consumer confidence may prove to negatively affect business earnings in these sectors. As current market demand might not be sufficient enough to keep the budget of many building and hospitality companies in the black.
Additionally, credit demand in the hospitality sector fell sharply by 21 percent year-on-year, and agriculture credit demand is down 24 percent year-on-year.
The drop in credit demand in these sectors and the negative GDP growth in the previous quarter might be a harbinger of worse things to come.
With credit demand falling, inflation rising, and confidence dropping we could likely see further negative GDP growth in the next two quarters of this financial year.
Especially if growing amounts of businesses in certain key sectors, such as hospitality and construction, continue to face dismal earnings projections. If these sectors prove to be the canary in the coalmine for the wider macro-economy, then we might expect to see negative GDP growth in the coming quarters.