Buy now, pay later

Probably the most striking divergence in macroeconomic statistics in the current environment can be found in the US, between GDP growth – running at 2.9% year-on-year in the third quarter of 2023 – and GNI (Gross National Income) which contracted by -0.1% year-on-year. This is an historic difference and far from innocuous, since these two aggregates – whose development is usually more or less identical – are supposed to measure the same thing – economic growth – via two different prisms. This type of divergence is rare and suggests that growth is being fuelled via consumption by high dependence on credit and/or a propensity to draw deeply on available savings.

Indeed, the surprising momentum of household consumption in the US noted over recent quarters has in fact been supported by these two factors. On the one hand, intensive use of the savings accumulated during the Covid crisis together with very low levels of new savings. On the other, increased dependence on credit. The use of revolving credit linked to credit cards has shot up from its lows at the beginning of 2021, outstripping its pre-Covid trend. And that’s not all. In response to the surge in interest rates on credit cards, which topped 20% in 2023, households are increasingly turning to a different form of financing for consumption – buy now, pay later schemes. These are based on a simple principle – payments for purchases are spread over several months, mostly with no fees or interest payable. This is not a new system, but its use has risen significantly in recent years and this trend has only accelerated in 2023.

Whilst the potential benefits of buy now, pay later schemes are real – higher value for the average basket of purchases, better quality/durability of the products purchased, etc. – its risks are significant. These financing schemes are neither centralised nor regulated in the same way as credit cards and significantly raise the risk of over-indebtedness and of impulse purchases that are beyond the buyer’s actual means. Furthermore, as they are not reported to the main credit rating agencies, it is difficult to assess their real volume, which can result in a type of hidden debt. The risk is that households are more indebted than traditional measures indicate.

At this stage, this phenomenon does not appear to pose a real systemic risk. On the other hand, it emphasises that the rude health of the US economy recently is a smokescreen. To sum up, it has basically been supported by private consumption fuelled by the overuse of savings and higher recourse to credit, which is most likely higher than official measures indicate, given the sharp rise in the use of buy now, pay later schemes. This precarious balance may hold – providing the US labour market does not show any significant deterioration – thanks to the rise in real income as inflation falls. On the other hand, if the labour market sees a real slowdown, it is highly likely that consumption on credit will grind to a halt. And in this case, the gap between GDP and GNI will be closed on the downside, no doubt inevitably triggering a recession.

Final version of 12 January 2024 – Enguerrand Artaz, Fund Manager, LFDE