Consumer stress to worsen

Budget cuts expected to squeeze personal finances

27 May 2014

Financial stress was heightened during April and is set to worsen in the next three months as slow wages growth, high household debt and costs of living impact consumers' capacity to manage their finances.

After improving through the second half of 2013 as record-low interest rates and a focus on savings improved the financial position of Australians, Dun & Bradstreet's Consumer Financial Stress Index has risen from 13 points in January to 18.7 points in April.

By July the index is forecast to hit 24.8 points, the second highest level in its four-year history, as consumers find it more difficult to make their finance repayments and the quality of credit applications deteriorates.

With household income and sentiment expected to be impacted by the Federal Budget, and first quarter figures from the ABS showing that wages grew at a moderate 0.7 per cent, the credit bureau anticipates its stress forecast will trend in a higher range as the year progresses.

Confidex - May2014 chart 1

"The upward trajectory in the index is concerning, given the number of otherwise improving signals we're seeing from the economy," said Gareth Jones, CEO of Dun & Bradstreet - Australia & New Zealand.

"Over the past months businesses have been reporting more positive expectations for sales and profits, and the jobs market has surprised on the upside - however the financial position of consumers forms a significant piece of the recovery puzzle."

"Given the potential for the budget to weaken already shaky consumer confidence, in addition to soft wages growth and World Bank findings that we're living in the most expensive G20 nation, it wouldn't be a surprise to see the financial position of consumers come under more strain," Mr Jones added.

After rising steeply from late 2010, when Australia experienced a delayed economic impact from the global financial crisis, the Consumer Financial Stress Index has remained at an elevated level. In contrast, New Zealand's stress index has been improving through the year and has returned to negative territory (an index reading below zero indicates lower financial stress, while above zero indicates higher stress).

Confidex - May2014 chart 2

Despite a relatively strong local economy, Queensland has the highest Consumer Financial Stress Index in Australia with 23.1 points recorded for April. The index is forecast to rise to 37 points by July, driven by a spike in the likelihood of small business failures projected by D&B.

Highlighting the pressure on Queenslanders this year, personal debt agreements during Q1 were the highest quarterly number on record, with increases in 22 regions of the sunshine state. According to the Australian Financial Security Authority, Queensland also had the greatest number of business bankruptcies related to personal proprietary interests.

The country's most populous state was the only to record a month-on-month improvement in financial stress. With the New South Wales economy benefitting from strong population growth, booming construction activity and a lion's share of new jobs created in Australia, the index eased from 22.8 points to 22.4 points in April. The forecast is for a moderate rise to 24.7 points in July, moving it below Victoria which is projected to hit 26.5 points at the same time.

While consumers in Western Australia experience low levels of financial difficulty as the economy continues its relatively strong performance, the stress index is edging upwards, along with unemployment, and is expected to reach 9.2 points in July.

Confidex - May2014 chart 3

"The rise in consumer financial stress fits with other recent news including the sharp falls in consumer sentiment, a moderation in house prices and ongoing subdued growth in wages," said Stephen Koukoulas, Economic Adviser to Dun & Bradstreet.

"It is looming as a genuine threat to the recent strength in spending, if consumers respond to financial difficulty by paring back expenditure."

"Causes of the rise in consumer financial stress are hard to pinpoint, but appear linked to the still weak growth in household incomes, accelerating credit growth and a still fragile jobs market. While the current low level of interest rates is helping to alleviate consumer financial stress, this is clearly being overwhelmed by other negative factors."

"The Reserve Bank is unlikely to increase interest rates with consumers on the cusp of scaling back their spending," Mr Koukoulas noted.

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