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Why a Consumer Credit Bubble is an Early Sign of Slowdown

In recent economic reports, the key phrase “credit bubble” is appearing in media regarding increasing use of consumer credit. Countries ranging from the UK to Israel, China and the US are seeing use of consumer credit rising.

Wages aren’t rising as fast. Interest rates are still relatively low. Credit is filling the gaps, allowing consumers to enjoy an improved lifestyle by pushing payments into the future.

Julia Coronado, president and founder of MacroPolicy Perspectives, an economic research consulting firm that analyzes the US economy from a global perspective, noted that China’s consumer credit in the non-financial sector now represents about 220 percent of gross domestic product. “China will slow down its economy to rein in the credit bubble,” she said in a presentation to Rutgers Center for Real Estate. “The tail wind for the past six to nine months from China is going away and will become a headwind.”

Coronado warns that China’s credit problems could spill over to the global economy, especially given the number of countries seeing consumer credit use increase while wages and job creation are flat or declining. “Economic cycles often die from credit bubbles,” said Coronado.

The U.S. may experience a lag in this predicted slowdown. In June, hiring rates in goods producing sectors had a zero net gain in jobs while service sectors also softened. However, with more than 6 million unfilled jobs in the U.S., wages may show signs of increase — at least for a short time — to compete for candidates.

If your company is holding off on hiring while carefully managing credit terms and cash flow, you may be in the minority right now. However, ongoing credit analysis and cash flow management are the hallmarks of companies that remain agile in changing economic cycles. As we near the end of an eight-year cycle of slow recovery, keep your eye on the ball with credit, collections and reserves for the next downturn.

For tips on stronger credit management, read our blog on Finding Cash in Your Credit Department.


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