Economic Outlook 2023: Consumer and Commercial Lending

Where should consumer and commercial lenders look for responsible growth in 2023? While lenders should be judicious in challenging economic times, there are opportunities in every industry, said Cris deRitis, Deputy Chief Economist at Moody’s Analytics.

“Recessions are tough, certainly, but they also sow the seeds for future growth,” he said. “Some of the largest, most successful companies were founded during recessions. And some of the best performing loan vintages originated during recessions when credit might be tight.”

deRitis made his comments during the final episode of our three-part Market Pulse podcast series focused on the 2023 economy. Listen to the complete interview or read highlights in our abbreviated Q&A below.

What are you anticipating in terms of lending trends and volume in 2023? Which lines of credit should perform best?

deRitis: Originations will slow, given the higher interest rates. The demand for loans and lines of credit will be pulled back. It's expensive, and people respond to prices. Real estate is the most interest-rate sensitive part of the market, and refinancing volume has slowed to a trickle. Even purchase mortgage volume is down and likely will remain depressed while rates remain high and rising. 

We expect the economy will slow, but not actually go into a broad-based recession. Businesses will think twice about investing and expanding their operations because it's more costly to borrow. Thus, they're going to be more judicious in terms of accessing credit. So, I would expect a slowdown in origination volumes. 

We expect to see delinquencies and default rates rise as the economy slows. Some businesses will have fallen revenue due to a higher interest rate and slowing economy. And of course, we should expect to see defaults, consolidations, and mergers and acquisitions as some businesses are forced to exit their operations. 

Do you anticipate an increase in trade volume? 

deRitis: We're seeing an increased origination volume when it comes to buying now, pay later, personal loans, and credit cards. During the holiday shopping season, consumers tapped into those products. So, I would expect a debt consolidation cycle after the holidays. Lenders can consolidate consumer debts and offer better rates. 

Despite an economic slowdown, I’m optimistic about small business. Broadly speaking, small business applications have remained surprisingly high. Applications for employer identification numbers at the IRS rose substantially during the pandemic. That made sense given the weak labor market, so people were looking for other opportunities, keeping their options open, and considering it a good time to go out on their own. And we have seen some pullback in those applications, but not a sharp decline. The number of people who express a desire to start a small business remains above where it was prior to the pandemic.

I always want my lender partners to keep in mind that recessions are tough, but they sow the seeds for future growth. In fact, some of the largest, most successful companies were founded during recessions. Furthermore, some of the best performing loan vintages originated during recessions when credit was tight. Nevertheless, lenders should be judicious, but the borrowers they extend credit to may turn to become their strongest performers throughout the business cycle.

As a consultant, what are clients not asking you that you think they should know? What are people not focusing on that they should be?

deRitis: I would say focus on the longer term. Specifically for lenders, I am concerned about credit score inflation. Credit quality improved dramatically during the pandemic. Delinquency rates fell to record lows. Part of that was due to an injection of incomes. Government statements, unemployment insurance certainly helped consumers. Programs like the PPP helped businesses. So, they could manage their finances, which improved credit scores. Additionally, consumers didn't have all the spending opportunities they might have otherwise. Thus, savings increased, and it was easier for people to make payments, in addition to student loan deferments and other mortgage.

Overall, consumers and businesses were in a good credit environment. Their credit scores improved, and on paper they looked quite strong. Now those trends are reversing, and that support is going away. So, lenders shouldn’t relay too heavily on credit scores because they may change during a more normalized economy. For example, a 700-credit score today, may shift down to 690 or 680 within a few months.

For more on this topic, listen to our podcast episode and don’t miss parts one and two of this series. 

If you have a request for a future episode, email us at marketpulsepodcast@equifax.com.