Debt dilemmas

Don’t hold your breath waiting for consumers to start spending again in the next few months.

That’s the message from the latest consumer credit report from Dun & Bradstreet, which suggests debt remains very much on the nose with cautious consumers.

The heady pre-GFC days of households borrowing on the credit card and against their homes to fund big purchases are over.

Here is how consumers are expecting to retreat from debt in the June quarter of this year:

• 23% say they will delay a major purchase, while 48% have no intention of making one.
• 20% expect to decrease their debt levels, while 47% expect debt levels to stay steady.
• 75% have no intention of applying for more credit.
• 94% of consumers have no intention of increasing credit card limits.
• 50% say they will be impacted negatively by another interest rate rise.

It’s a portrait of a worried consumer, waiting for the next shock.

Don’t worry that the GFC has been over for 18 months, and that more than half of respondents said they have no problems meeting their current credit obligations – these households are playing it very cautiously until things improve.

That’s terrible news for retailers and the wider economy. It suggests economic growth could remain subdued for much longer than anticipated – perhaps well into 2012, when the economy was supposed to be hurtling along.

Official figures will say growth is really quite strong, but don’t be fooled – if you’re not in mining, it remains a patchy environment.

Another threat to growth emerged from the United States last night, when ratings agency Standard & Poors delivered a shock blow to the US economy, when it downgraded its outlook on US Government debt to negative.

S&P says the US risks losing its AAA credit rating if it cannot start to close its $US1.4 trillion budget deficit and deal with its $US14.2 trillion debt load.

“Because the US has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” S&P said.

The US Government has rejected the threat and commentators have been quick to point out that a downgrade might not be the end of the world – Japan, for example, has a AA credit rating.

But this is another message that the global economy is still in the midst of a GFC hangover.

While corporations around the world have bounced back quickly from the crisis, governments were forced to take on large amounts of debt to nurse their nations through.

That debt has to be repaid – even if it means higher taxes and spending cuts.

Australia is in a great position with its debt so low, but even still, you get the sense that households here are justifiably concerned about how all this is going to play out.