Insights into Anticipated Deterioration in Credit Conditions
Anticipated Deterioration in Credit Conditions – Economic Outlook
Anticipated Deterioration in Credit Conditions. Credit Conditions Decline Forecast: Bank economists predict a downturn in the next six months, as per the American Bankers Association’s Credit Conditions Index.
Understanding the Index
The Credit Conditions Index provides valuable insights into the expected changes in credit markets. A reading above 50 signifies optimism, indicating that economists predict improved credit conditions for businesses and households. Readings below 50 signal an anticipated deterioration in credit conditions.
Credit Quality and Availability
According to the Q4 2023 report, most economists within the EAC foresee a weakening of credit quality and availability in the coming six months, both for consumers and businesses:
US Household Spending Outlook: Expected slowdown due to wage cooling, lower pandemic savings, and resumed student loan repayments. Increased credit card reliance has led to delinquency rates returning to pre-pandemic levels, still below 1990s and 2000s historical highs.
Businesses: Commercial and industrial lending has declined for most of 2023, reflecting a cautious approach among business owners. EAC forecasts align with this sentiment, projecting a modest 1% annualized growth in business investment over the next year. Financial stress remains relatively low, and strong consumer demand has supported business cash flow.
Q4 2023 Highlights
The Headline Credit Index declined by 2.8 points in Q4 to 4.5, reflecting a consensus among bank economists that credit market conditions will continue to weaken in the next two quarters as part of the anticipated deterioration in credit conditions. Banks are expected to maintain caution when extending credit to both businesses and consumers through the rest of the year.
Consumer Credit Index Drops: Q4 records a 6.5-point decline to 1.8. EAC members unanimously expect a regression in consumer credit quality and availability in the next six months, signaling a probable weakening of credit conditions for consumers with a sub-50 reading.
Business Credit Index Inches Up: Q4 sees a 0.9-point increase to 7.1. Despite mixed expectations among EAC members, the sub-50 reading signals an anticipated decline in business credit quality and availability over the next two quarters.