How the Rising Cost of Living Will Impact Lenders

In the U.S. and abroad, the cost of living is rising and consumers and businesses are feeling the squeeze. How will this impact the lending industry in 2023? 

In Episode 19 of our Market Pulse podcast, I interviewed Swarnima Pandey, an Analytics Insights Manager with Equifax Canada, about how lenders can build resiliency into their 2023 plans. This episode is a continuation of the November webinar, Market Pulse: Impact of Global Economic Headwinds on the U.S. Economy.  

Listen to our podcast for the full interview or continue reading for an abbreviated Q&A. 

Katherine: The IMF is predicting that global growth may slow to 2.7% in 2023 and global inflation may rise to 8.8%. Can you give us a latest update on global consumer insights and impacts?

Swarmina: Inflation has been a big talking point for quite some time now. The consumer price index is rising across the globe, and it's affecting not just consumers. It's also affecting businesses, which are feeling the financial pressure from the rising cost of living. Inflation affects our day-to-day lives, especially when it comes to cost of essentials, energy, gasoline, and food. 
 

The costs of all these essentials have risen. In Canada we did see a brief slowdown in the cost of energy and gasoline, but prices are still higher than pre-pandemic. Food prices are extremely high right now in the UK, where the cost of energy has skyrocketed. They're expecting it to increase further, and more consumers are transferring money from their savings to checking to accommodate the rising cost. Both Australia and New Zealand have seen the fastest rise in inflation in the last 21 years, and the prices of utilities have risen at a much faster rate in every region.

This impacts businesses as their operational costs are rising, which will ultimately lead to these costs being passed on to consumers. And as discussed in the Market Pulse webinar in November, the impact of inflation is affecting consumer payment behavior. More consumers are starting to miss payments now, especially on their non-mortgage products, than they were 12 months ago. In the U.S., we are seeing delinquencies on personal score loans rise and they are exceeding pre-pandemic levels. Other non-mortgage products are also approaching 2019 levels. 

Katherine: Let's drill down further to understand the U.S. perspective. You're reporting that consumer loans are exceeding the pre-Covid delinquency levels. You also mentioned auto loans originated earlier this year have started missing payments. So, what does this mean for lenders?

Swarmina: To understand how consumer payment behavior has changed, let's review what happened in 2020. The pandemic hit, lockdowns started, unemployment rates shot up for a very brief period, but then the government intervened with financial support. This helped a lot of people pay off debt and improve their credit performance. Hence, we saw a huge dip in delinquencies all through 2021. 

Fast forward to 2022. As the financial buffer is depleting, consumers have certain missing payments, and we’re returning to some pre-pandemic levels. But now we need to account for high inflation. There is some additional risk coming through, especially when it comes to accounts that were recently opened. This may be due to consumers relying more on credit in a financially difficult time. 

We do anticipate delinquencies will increase further in the future. Therefore, collection practices and identifying financially vulnerable consumers is now more important than ever. So, reviewing application qualification practices to minimize future losses will be essential as the rising cost of living puts immense pressure on consumers.

Katherine: Where can lenders find opportunities during this challenging environment?

Swarnima: Interest rates are rising, and they've slowed down the housing market a little. So, the mortgage frenzy that we saw in 2021 with extremely low rates and a crazy jump in housing prices is coming to an end. The cost of borrowing is very high right now, but the housing market is getting less competitive. So, this will help a lot of first-time home buyers who were previously pushed out of the market due to these high prices. 

Auto could be another area of growth. The semiconductor shortage caused major supply chain issues in the auto industry. This led to historic high prices in the used car market and many people couldn’t afford to buy them. But now that supply chain issues are slowly getting resolved and car prices are stabilizing, it will give rise to more demand and less consumer risk. 

Learn more about our Market Pulse podcast, and send us your questions at marketpulsepodcast@equifax.com. Register for Market Pulse webinars to get relevant economic and credit insights to help your business make more confident decisions.