Debt levels and weak wages growth impacting consumer finances

The level of financial stress in Australia is forecast to reach a new high for a third quarter of the year as consumers' financial capacity strains under the weight of high household debt, weak wages growth and fragile sentiment.

Despite easing to 18.4 points in the June quarter, from 19.7 points last year, Dun & Bradstreet's Consumer Financial Stress Index is forecast to hit 25.3 points by the end of this month, the second-highest level in the four-and-a-half year history of the index.

The rising index, which measures consumer activity, demand, capacity and confidence, is being driven by increases in the number of consumers with an adverse credit history and individuals with a greater likelihood of failing to make their repayments. 

D&B's analysis follows figures from the Australian Bureau of Statistics that show household debt at a 25-year high, and June quarter findings from the Australian Financial Security Authority (AFSA) that personal debt agreements during the June quarter were the highest quarterly number on record.

Confidex - Q3 2014 - chart1

"The rising index is concerning, but not surprising, given that inflation is now outstripping wages growth," said Steve Brown, Director of Consumer Risk Solutions at Dun & Bradstreet.

"What's particularly worrying, is that this rising stress is coming at a time when we have very low interest rates and a relatively steady jobs market.

"These findings also have the potential to undermine the positivity we've seen in the business sector, which is generally indicating it expects greater growth, increased sales and higher profits than last year.

"The important thing for businesses is to ensure they are properly screening and monitoring their customers to avoid those that are unlikely or unable to pay," added Mr Brown.

Having increased from 12.8 points last year to 23.6 points, financial stress during Q2 2014 was most severe in Queensland. During the same period, figures from AFSA show that personal debt agreements in the sunshine state jumped 33 per cent compared to last year, while total personal insolvency activity was the nation's second highest.

Financial stress eased in both New South Wales and Victoria during the second quarter, with strong population growth, construction activity and new jobs benefitting the local economies. Year-on-year the NSW financial stress index fell from 27.7 points to 22.1 points, and in Victoria from 25.5 points to 18.5 points.

Across all states and territories, however, financial stress is forecast to rise for the third quarter of the year, with Western Australia, Northern Territory and South Australia set to move from a negative to a positive reading. An index below zero indicates less financial stress, while a positive number indicates increased stress.

Confidex - Q3 2014 - chart2

According to Stephen Koukoulas, Economic Adviser to Dun & Bradstreet, the escalation in consumer financial stress poses a risk to the economic growth outlook.

"Despite record low interest rates, consumers are under increasing financial pressure from an unwelcome mix of falling real wages and rising unemployment, Mr Koukoulas said.

"Consumer debt levels also remain high, which by itself is not a reason for elevated financial stress, but when labour market conditions weaken, financial pressures inevitably rise," Mr Koukoulas added.

Mr Koukoulas noted that high levels of financial stress usually point to a period of subdued consumer spending: "With financial stress rising, there is some risk that the looming Christmas sales period will disappoint some retailers."