Via Damien Boey of Credit Suisse on yesterday credit aggregates:
Private sector credit was materially softer than expected, barely rising 0.1% in June, with downward revisions to prior months’ data. Year-ended growth has slowed to 3.3% from 3.6%. Compositionally, weakness in business and personal credit lines underpinned the downside surprise. The story here seems to be about global uncertainties weighing on business confidence, and a distinct lack of consumer confidence.
Notwithstanding the downside surprise, we are optimistic that credit growth is in the process of bottoming out, because:
- Loan approvals have started to rise again, even before we have seen the full effects of RBA and APRA easing.
- Credit conditions have eased materially of late, with our proprietary credit conditions index pointing to further acceleration in loan approvals growth.
- House prices and housing turnover have stopped falling, removing a large drag on housing credit growth.
Moreover, we can see a situation where the Federal government is forced to step up deficit spending and ramp up public debt levels. Already, we have seen state governments outsource more of their financing requirements back on to the government. And with the trade balance now rising to almost $8 billion per month, the Federal government has more than hit its surplus “key performance indicators”.
Interestingly, the credit impulse in Australia seems to be hanging in there, even as private sector credit growth decelerates. The rise in trade, combined with less fiscal austerity seems to be matching the effects of slower credit creation.
Credit growth is a key driver of earnings for domestic cyclical and financial companies in the stock market. The downside surprise in credit growth is a near-term problem for earnings. However, if the leading indicators of credit growth are anything to go by, we should be careful to extrapolate a trend. Follow momentum at one’s peril!
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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