The Consumer Credit Index (CCI) that TransUnion released today shows that consumer credit health deteriorated marginally in Q2 2014. The CCI declined to 48.9 in Q2 2014 from 49.8 in Q1, extending the decline in credit health to 10 consecutive quarters since Q4 2011.
The CCI is a unique indicator of consumer credit health based on a 100-point scale. An index above 50.0 indicates improving credit health, below 50.0 represents deterioration. Credit health refers to the ability of consumers to service existing credit obligations within the constraints of their monthly household budgets.
TransUnion, a global leader in credit and information management, stated that the index shows that while consumer credit is not deteriorating rapidly, there is still no confirmed sign of an improvement in household financial stability and credit behaviour. Transunion CEO, Geoff Miller, said that despite some encouraging trends this year, there are still millions of consumers that have been in arrears for three to nine months, have already written off the debt, or are under judgement or in debt counselling.
“Things may not be getting rapidly worse,but nor are they really improving, and households are still sitting with a lot of debt to work through before they can free up more disposable income to spend into the economy,” said Miller.
Inflation continues to be a threat to household financial stability and has steadily affected disposable incomes in 2014. Miller said this inflation was one of the biggest concerns facing consumers right now, adding that it would undoubtedly have a negative impact on credit behaviour and a household’s ability to pay off loans.
Higher inflation tends to be associated with higher interest rates., While the Reserve Bank did not raise the benchmark repo rate in Q2, it did do so in July, signalling that more rate hikes may be needed should inflation pressures intensify. Miller warns that real household disposable income is not growing at all on a year-over-year basis, which indicates that prices of everyday goods and services are rising as fast as aggregate incomes. “This leaves little wiggle room in the budget, meaning that if interest rates rise further from here, a lot of households will find it very difficult to fully service their loans,” Miller added.
Another concern is weak economic growth that is not showing much sign of improvement. According to Stats SA, GDP declined by 0.6% on a real, seasonally-adjusted, annualised basis in Q1*, highlighting just how weak the general economic environment is. Strikes in the mining and metal industries have also created large amounts of temporarily non-earning staff, which negatively affects the ability to service loans not only of those directly involved, but also those affected in up and downstream industries.
“It’s hard to know how much of a negative impact the strike is having on the CCI, but it is certainly having an impact and one which may intensify before it improves,” said Miller.
TransUnion did note however some relatively encouraging trends. Distressed borrowing appears to have stabilised in recent quarters and, while still high, it did not appear to be on a worsening trend. Also, the rate of new consumer defaults was seen to be quite stable in Q2. Miller said that while credit card utilisation was quite a lot higher than in 2010, it did not seem to be a problem that was anywhere near spiralling out of control. He added, “Credit providers have done a lot of good work in managing their debt books into better health and helping their customers restructure their debts. This is helping and this vigilance needs to continue given the underlying risks to consumer credit markets.”
Released on a quarterly basis to the public, the TransUnion CCI measures aggregate consumer loan repayment records; tracks the use of revolving consumer credit facilities as an indicator of distressed borrowing; estimates household cash flow as a means of determining financial pressure/relief; and quantifies the relative cost of servicing outstanding debt. These aspects are then combined into a single numeric score of consumer credit health. The index is compiled by TransUnion Credit Bureau with technical support from market intelligence firm ETM Analytics.
TransUnion’s indicator combines actual consumer borrowing and repayment behaviour obtained from the extensive TransUnion credit database with key, publically available macroeconomic variables impacting household finances. “Unlike other indices in the market, the CCI is driven by objective market data rather than consumer surveys or questionnaire responses,” Miller explained.
Analysis suggests that the CCI may be a good leading indicator for business activity in certain economic sectors, particularly those more closely related to consumer spending. A full report on the quarterly TransUnion CCI can be found on www.transunion.co.za