Has The Debt Crisis Bottomed Out?

John Vaughan (Financial Advisor) @ Lucid Living

According to the latest figures released by Statistics SA, retail sales rose to 3,2%, year on year for April 2010. Consensus amongst economist, support the view that the rise in retail sales appear to be underpinned by sound fundamentals and suggest a move toward sustained recovery.

Economist are of the view that the March interest rate cut of half a percentage point to 6,5%, the seventh reduction in 16 months, fuelled the higher sales data. Economist are optimistic that retail sales for the year would be supported by the World Cup, improved consumer confidence, lower interest rates and some improvement in the labour market.

However, according to Nedbank economist Dennis Dykes “the pace of improvement in consumer spending will partially be inhibited by the effect of higher debt levels, with consumers opting to use the period of low interest rates to reduce debt rather than increase spending.”

Dykes’ view is supported by the latest Statistics SA figures which show that civil summonses issued for debt increased 13 percent between April 2009 and April this year. The number of civil judgments recorded for debt increased 11,6 percent year on year in April 2010.

The significant increase in the number of summonses and judgments, highlight the fact that consumers continue to battle high household debt levels and are falling behind on their payments, leaving creditors with no option but to take legal action to recover monies owed.

According to the latest figures released by the National Credit Regulator, there was an increase of 78,786 consumers whose accounts are 3 months or more in arrears at December 2010, when compared to the previous quater, reflecting a continuous level of debt stress among credit-active consumers. These delinquent accounts are a lead indicator of the summonses and judgments seen in April 2010.

The total number of consumers with impaired records increased to a staggering 45.3 percent of all credit-active consumers. Consumers with judgments on their credit record accounted for 13,3 percent or just over 1 million consumers.

While this is an indication of the extent to which high household debt levels remain a constraint to the growth of new credit extension in the economy, it will no doubt contribute to reducing household debt stress, which bodes well for embattled consumers.