It is interesting to watch emerging economies take up credit cards as we did in a recent research note on the BRIC countries (Brazil, Russia, India, and China), but it is the US consumer that drives global credit card growth. The question du jour is how long will that last. Many point to stress in current markets, evidenced by increased loan reserves, is that we are maxed out. Again.
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S. consumers account for 18 percent of global gross domestic product, and it’s tempting to rely on them to continue carrying the aging recovery to support world growth.
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The data and growing lender anxiety, though, suggest investors should prepare for what is increasingly looking like an inevitable slowdown in economic growth next year.
It is not a matter of being a weary leader. All indications are that credit card growth should slow down. Instead of pushing continued credit card growth that outpaces economic growth, it makes sense to slow it down a little before the bubble bursts.
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Although American households managed to maintain their spending levels in the face of dwindling prospects for future economic expansion, they have done so by taking on incremental debts, which could soon prove unsustainable.
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The go-go run of the 1990s, though, was the first major break from history; consumer credit as a percentage of household discretionary spending rose to 24 percent by the turn of the century and remained there until the recession of 2007-2008.
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And while there was a movement toward deleveraging, it was short-lived. Today the ratio sits at a high of 26 percent.
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The upshot is that when consumer credit is combined with government transfer payments the total amounts to about 43 percent of all consumer spending
If the underwriters aren’t going to slow things down, maybe what is needed are some good 2018 household financial resolutions. Go ahead and use that credit card to reap rewards, but begin to think about it as a debit card and pay the balance. In the days of the Equifax breach, pull your annual credit report and read every line item, then match it to payment terms and dump expensive cards in favor of incentive offers and better deals. Slow down the spending. The economy is only growing at a 2% pace; don’t be the one that increases credit by 8% just because you can do it.
And, issuers, circle the wagons for those that don’t execute a conservative strategy.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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