Consumer financial stress to remain elevated in early 2013

Consumer financial stress levels are expected to remain elevated for the first three months of 2013, continuing the consumer conservatism experienced throughout much of 2012.

These findings stem from illion's Consumer Financial Stress Index, which was published for the first time this month. The index has three and a half years of history, allowing it to be benchmarked against key macroeconomic variables as a leading indicator of specific economic and consumer trends.

The Index reveals a slight increase in the level of consumer financial stress, with the index rising to 19.8 in December 2012, driven primarily by a greater number of applicants with impaired credit applying for additional finance as well as a relative drop off in unsecured finance enquiries as compared to the prior year.

The forecast for the March quarter 2013 remains relatively flat, with an index of 18.5. This suggests a continuation of weak growth in retail spending and further weak demand from consumers for credit. In this environment, the business sector is likely to find trading conditions challenging, a theme that was evident in the most recent illion Business Expectations Survey and in the official data for retail sales and credit.

According to illion's CEO, Gareth Jones, the Consumer Financial Stress Index correlates closely with other macroeconomic variables that are suggesting consumers will remain cautious in early 2013.

"Sluggish growth in retail spending, buoyant levels of household savings, weak consumer credit growth and only moderate rates of job creation all align with the index forecast, which indicates that consumer caution, as it relates to personal finances and discretionary spending, will continue in the near-term," said Mr Jones.

"It's not surprising to see a result that shows slightly negative, or flat, future sentiment given the continued problematic economic conditions in both the domestic and international economies. With many consumers bunkering down and focusing on saving, and others finding it difficult to meet their financial commitments, Australia's businesses will need to carefully manage input costs and potentially sluggish sales activity."

illion Consumer Financial Stress Index vs Annual Personal Credit Growth
* The Annual Personal Credit Growth rate in the above chart has been inverted for display purposes.

The index shows that the level of consumer stress deteriorated from around the middle of 2010 and got continuously worse through to the early part of 2012. At this time, consumer sentiment was weak, the number of individuals with impaired credit that were seeking additional credit was on the rise and house prices were starting to fall. In addition, concerns were being expressed about the risks to the Australian economy from the problems in Europe and a slowdown in China.

The level of consumer stress has been broadly stable since the middle of 2012. However, it has stabilised at a relatively high level given the three and a half year history for the data series. Consumers are still plagued by the loss of wealth from falling share prices, and flat or falling house prices that occurred as a result of the GFC. Broad measures of consumer confidence remain subdued and are unlikely to rise strongly while there are still question marks over the strength of the global economy and the implications this might have on Australia's economic performance.

According to Stephen Koukoulas, illion’s Economic Advisor, the Consumer Financial Stress Index presents a unique and high-level view of the financial comfort and behaviour of consumers, thus providing useful insight into the near term momentum of the economy.

"The three and a half years of history of the index has been distorted by the hangover from the global banking and financial crisis, however changes in the level of the index are closely correlated with growth in personal credit, employment and to a slightly lesser extent, retail trade," said Mr Koukoulas.

"It is interesting to note that the elevated level of consumer stress in the latter part of 2012 has coincided with record low growth in housing and personal credit, and with no net growth in retail spending since June 2012. While employment growth has been firm over the same time horizon, the falls in job advertisements and job vacancies suggests consumers may have some anxiety over the security of their job.

"Furthermore, interest rates are an important variable in determining the level of consumer financial stress. To that end, reductions in the official cash rate since November 2011 have assisted in halting, but not reversing, the on-going elevated level of consumer stress in Australia. Consequently, further interest rate cuts may be needed in the months ahead to see consumer financial stress levels improve."