Since the start of the recovery in 2013, private consumption has been the main driver of economic growth in the eurozone. Supported by the improvement of the labor market and income growth, actual individual consumption has recovered what it lost during the crisis: it is estimated that on average in the area in 2017, per capita expenditure may have come close to 20.500 euros, over 1.000 euros more than the low four years earlier. The more favorable economic situation is accompanied by lively growth in net wealth (close to 50 trillion, +5% y/y in the third quarter of 2017), thanks to the increase in both the non-financial component (+5,4%) and the financial one (+3,9%) while liabilities progress at a more moderate pace (+3,1%).
The improved economic climate has strengthened the dynamics of loans to households, especially in the form of consumer credit: in the euro area, the 7% growth in the stock granted by banks in 2017 positions the increase at pre-crisis levels. The market in Spain (+15,5%) and Italy (+8,8%) was particularly lively thanks above all to the demand for the purchase of new cars. In some countries, the possible adverse effects of excessive growth in consumer credit have begun to attract the attention of the authorities: in the United States, loans granted to subprime customers by financial companies linked to car companies are experiencing an increase in insolvencies; in the UK, the results of a bank balance sheet stress test highlight the potentially large losses (£30bn) in the event of a risk scenario realizing; bubbles are feared in China due to the improper use of consumer credit, which is frequently diverted to the property and stock market.
In Italy, retail credit is playing its part in supporting the recovery in household spending on durable goods purchases postponed in recent years. With an annual growth of more than 8%, consumer credit contributes to half of the change in loans to households (2,8%). The level of risk is decreasing slightly and the indications for the current two-year period envisage a still increasing amount, albeit at a slower rate than the current one, thanks to a demand that will continue to be sustained and to favorable supply policies.
EURO AREA: CONDITIONS OF FAMILIES IMPROVE
In 2017, GDP data confirm private consumption as the main driver of growth in the Eurozone, on a par with the previous four years. With an estimated increase of around +1,8% yoy, slightly more moderate in the two-year period 2018-2019 (+1,7% and +1,5%), private consumption (which accounts for 55% of GDP ) benefit from improvements in both the labor market and household disposable income. In December, the unemployment rate fell on average to 8,7% (9,7% a year earlier) and the increase in household income was supported by the growth in labor income (+3,8% on /yy wk) and from those coming from other sources to a large extent attributable to the increase in corporate profits.1 Further certification of the improvement in the household situation comes from the climate of consumer confidence positioned at levels never reached in the last ten years.
The observation of effective individual consumption, the indicator used to measure the material well-being of families,2 shows how in the Eurozone, after the minimum reached in 2013 (19.400 euros), annual per capita spending has recovered more rapidly and more decisively than what was lost since 2008 (-500 euros). In 2016 the average amount reached €20.200 and preliminary indications for 2017 suggest that the amount should have further increased by more than €200. Only in four economies is the level of expenditure still significantly lower than the pre-crisis level: Ireland (-900 euros), Greece (-4.300 euros), Italy (-1.300 euros) and Cyprus (-2.300 euros). Furnishing and maintenance of homes (+1,8%), recreational activities (+2,1%), hotels and restaurants (+2,6%), transport (+3,3%) and communications (+3,5% ) are the items of expenditure that have recorded the most consistent increases since the recovery in consumption.
The improvement in the economic situation was also accompanied by an increase in the wealth of households: last September in the euro area the net wealth came close to 50 trillion, an increase of 5% compared to the corresponding period of the previous year thanks to the increase both of the non-financial component (at 34 trillion euros, +5,4%) and of the financial one (at 24 trillion, +3,9%); however, the increase in liabilities stopped at +3,1%. For almost all aggregates, this is the most robust growth of the last ten years.
INCOME, CONSUMPTION AND LOANS INCREASING
The greater availability of households, the consequent reduction in credit risk and the easing of lending criteria together with very low interest rates have meant that in recent months the dynamics of loans to households has gradually strengthened ( +2,8% in Dec.) continuing the recovery that began at the end of 2014. If loans for the purchase of homes closed last year with growth of just over 3%, the most significant result can be observed in credit to consumption, which grew in the euro area at a rate of 7%, a dynamic similar to that preceding the crisis.
The trend is attributable in particular to new medium and long-term loans which largely exceed the volume of those maturing of the same duration. The strengthening of consumer credit affects the main economies of the euro area, albeit with rather uneven growth rates ranging, at the end of 2017, between 5,6% in Germany and 15,5% in Spain with France and Italy in the middle with growth of 7% and 8,8% respectively. Greece and the Netherlands continue to contract (more than -3%). For Spain and Italy, an important role is played by the recent trend in purchases of new cars which in both countries came close to 8% in 2017 after having recorded double-digit increases.
Overall, the modest recovery of loans to households in the euro area and the improvement in their income contribute to the reduction of the level of debt: compared to the peak of 98% at the end of 2010, the ratio with disposable income has stabilized around 93% for about two years. Despite the recent reductions, Spain (100), Portugal (103), Ireland (140) and especially the Netherlands (200) show levels well above the average for the area.
The indicator remains among those placed under surveillance by the authorities as part of the procedure for macroeconomic imbalances due to the negative effects that could be had on consumption growth in the event of a possible weak trend in incomes or an increase in debt servicing , factors that could make families belonging to the lowest income brackets particularly vulnerable. The higher degree of financial leverage and the lower economic resources of the category, together with a higher propensity to consume would have an unfavorable effect on the expenditure trend and, consequently, on economic activity in general.
CONSUMER CREDIT: A WIDESPREAD EXPANSION
In the euro area, the recovery of consumer credit is being monitored carefully but overall it does not cause particular alarm; however, a different experience was recorded in some countries where the level of household indebtedness arouses concerns that have only recently been overcome (the United States and the United Kingdom) or where improper management of personal credit could have risky repercussions (China). In the United States, consumer credit reached $3.840 billion (+5,8% y/y) last December, recording the eighth consecutive year of growth: all types of loans are expanding, with those for students leading (at $1,36 trn, +6,1%), followed by $1,2 trn for the purchase of cars (+6,9%) and finally with $0,8 trn of credit cards (+8,2% ).
What attracts attention, however, is the growing trend of insolvencies on the various types of financing. If in general the phenomenon does not reach alarming levels considering that defaults are 2% of consumer credit, it should however be noted that for student loans the share rises to 11,2% (Q3 2017) and to 4% for those relating to the purchase of cars which are mainly affected by disbursements to subprime customers by the financial companies associated with car manufacturers.
In the United Kingdom, the alarm on consumer credit was highlighted by a stress test conducted by the Central Bank: in the event of an adverse economic situation, unsecured credit (such as consumer credit) would be responsible for 40% of insolvencies despite affecting only 7% of total credit system exposures. An unfavorable scenario could lead to £30bn of losses, 20% of the amount of consumer credit. The current positive macroeconomic environment accompanied by the improvement in credit quality seems to have led financial institutions to excessively expand retail lending underestimating any risks.
In China, the central bank has long been underlining how the intense development of household credit is bringing household debt to the level of Western economies. In 2017, consumer credit exceeded 31 trillion yuan (+26% y/y, around $5trn) and new consumer credit disbursements amounted to Y6,5 trillion, 370 billion in XNUMX more than the previous year. Local authorities fear that loans granted for the purchase of consumer goods could actually be invested in real estate or equity purchases, activities that could end up triggering dangerous bubbles.
In Italy, consumer credit is playing its part in supporting the recovery in household consumption. The growth dynamics of loans for consumer purposes continued to strengthen during 2017, reaching just below 9% in December (7,4% in 2016), returning to pre-crisis levels. Overall, consumer credit contributes to half of the growth in loans to households. Expectations are for a further increase in the stock over the current two-year period, but at a slower pace than the current one: the intention of households to proceed with the purchase of durable goods postponed in recent years and an expansion of the offer thanks to the observed greater financial solidity, they should contribute to the growth of the segment.
Furthermore, precisely loans aimed at the purchase of durable consumer goods are characterized by a lower credit risk than other forms of debt: according to Crif estimates, in the last five years, the average deterioration rate on targeted loans was at 1,5% compared to 3,5% for personal loans. In general, there has been an improvement in risk indicators: compared to the peak of 6,2 billion in non-performing consumer loans recorded at the end of 2015, the latest survey (Sept. 2017) places them at 5,4 billion, equal to 5,8% of over 93 billion in consumer loans granted by the banking system, compared to a percentage of 6,4 recorded on loans for the purchase of homes.
