August 26, 2020

Chart of the month

Household balance sheets will deteriorate as joblessness rises

BY Russell Jones

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( 2 mins)

This stands to feed back negatively on the financial sector

 

Household balance sheets will deteriorate as joblessness rises 1

1.    Consumer credit write-offs typically rise with unemployment.

−         Interesting data from the Bank of England show that each 1-point rise in the unemployment rate is accompanied by around a 1 percentage point increase in the consumer debt write-off rate. 

2.    In most countries, the unwinding of policy support is set to drive joblessness significantly higher.

3.    The OECD forecasts that, even in the absence of a second pandemic wave, the unemployment rate will for example end the year:

−         Six percentage points higher in the US than before the crisis; and

−         Nearly eight percentage points higher in the UK than before the crisis.

4.    Extensive underemployment and weak wage growth stand to compound the effects of job losses on household incomes, further undermining the ability of consumers to service debt.

5.    Moreover, the starting position was not good. In the US for example:

−         Non-housing debt as a percentage of disposable income was at an all-time high of more than 25%.

−         Non-mortgage sub-prime debt (auto loan, student loan, credit card and home equity lines of credit) has also expanded to all-time highs in nominal terms.

−         The share of credit card and auto loans not being made on time was on the rise before the crisis, and was close to an all-time high for auto loans.

Bottom lines

Bankruptcies and defaults are set to burgeon.

  • Banks and other financial institutions will have no alternative but to write off consumer loans.
  • The financial sector will become more cautious in extending new consumer loans.
  • All of this adds weight to the likelihood of an extended, hesitant, and uneven recovery trajectory.

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