Generation Y hard hit by credit crunch

A new business survey shows how hard small-to-medium-sized firms have been hammered by the credit crunch, with commercial defaults up 47 per cent in the third quarter compared with the third quarter of 2007.

The survey, by credit information provider Veda Advantage, reveals finance companies (150 per cent increase) and trade credit providers (131 per cent) are posting the most significant increase in defaults.

Other major contributors are the building/construction sector and restaurant/hospitality companies.

Commercial credit inquiries have dropped 9 per cent overall, with banks reporting a 19 per cent drop in credit applications and finance companies 16 per cent.

John Roberts, Veda Advantage NZ director, says the trend is similar to that in the consumer credit market.

"This is clearly an uncertain time for the economy; businesses are wary about saddling themselves with more debt and there will have been an attitude of "wait and see' [before the election]."

Roberts says 62 per cent of those surveyed said they were optimistic about the impact of a change of government on their businesses "so it will be interesting to see whether there is any recovery in the credit market."

A survey into the economic mood of the business community two months ago found about a third of small businesses were finding debt levels harder to service than a year ago.

"The default figures recorded on our bureau for the third quarter would suggest that the stress on business is more significant than the survey findings indicated."

Roberts says the defaults do not necessarily mean receivership or liquidation.

"They simply mean somebody has handed over a debt to a debt collection agency."

The survey also shows stress on household disposable incomes has boosted credit card applications, particularly among Generation Y (people born between 1982 and the present) consumers.

Credit card applications have risen a total 12 per cent this year compared with 2007. Of these, Baby Boomers (born post-WW2) are up 12 per cent, Generation X (born 1961-1981) is up 8 per cent and Generation Y applications have risen a whopping 18 percent.

Much of this is believed to be debt consolidation as consumers amalgamate their debts onto one credit cards, encouraged by new, low-interest products being marketed by the major banks.

But anecdotal information suggests others are increasingly relying on their credit cards to pay household bills such as groceries, and phone and electricity accounts.

At this stage, Roberts says, there's no indication that Kiwi banks are following the lead of their American counterparts and cutting credit limits, even for non-defaulting cardholders. But there are signs that credit limits are not being extended and issuers are monitoring credit use much more closely.

The debt cycle begins when a business can't easily access credit to cover its operating expenses. This, combined with uncertainty, causes business confidence to fall (in October the National Bank's Business Outlook suffered its biggest monthly fall in the history of the survey) which, in turn, means employers lay off staff.

Those made redundant then can't pay their mortgages, and default on other bills such as utilities and credit card payments. This may cause creditor companies to default or even collapse into insolvency.

Another key area is mortgage inquiries.

Roberts says this is down 10 per cent overall on the same time last year. But category figures reveal Generation Y - the youngest segment of potential home owners - has been particularly hard hit. Compared with a year ago, mortgage inquiries from Generation Y are down 23 per cent while hire purchase applications from this group have dropped 20 percent.

Roberts won't reveal hard numbers from his survey, saying this is commercially sensitive information.