Australian Debt & The Credit Impulse

The purpose of this page is to provide an updated reference for the growth and size of Australian debt. I look for accelerating growth in new credit as an indicator supporting future growth in aggregate demand and, in the case of housing, asset price growth. The work of various economists, such as Prof Steve Keen, have highlighted the importance of tracking the credit impulse, especially in our debt driven economies.

This data has now been updated with the latest February 2017 credit data (source: RBA), December 2016 GDP (source: ABS) and December 2016 CPI data (source: ABS).

RBA credit data – various “data issues” came to light from July 2015 highlighting inaccuracies in housing credit data reporting by the ADI’s. The upshot is that the various measures of owner occupier, investor and personal credit outstanding, on their own, exhibit series breaks. I’ve taken the approach of reporting on credit and lending trends at a more aggregate level in order to see the broader trends. Thus, reporting “Total Mortgage Credit” rather than splitting out owner occupier and investor mortgages.

More important than the growth in credit is the growth in new credit that is issued.

Starting with the basic premise that borrowing equals spending, it is new credit issued in an economy, together with income growth, that drives new spending (growth) in the economy. Consider a simple example – if you borrow $10 each month for six months, total credit grows by $10 each month, but after month one, growth in new credit equals $0 or, in other words, there is constant growth in credit and therefore you only spend $10 each month. But if you borrow $10 in the first month, $15 in the second month, $25, $40 and finally $60 in the fifth month, then there is growth in credit and growth in new credit of $5, $10, $15 and $20. As a result, spending also grows each month. To generate spending growth, credit growth (and/or income) needs to accelerate. The importance of tracking the credit impulse is that it is one of two important sources of spending that will impact output growth and/or asset price growth.

The annual “growth of the growth” in the stock of credit is usually expressed as a % of the rolling 12mth GDP (in real terms). Where the latest GDP data is lagging, I refer to the growth in new credit in dollar terms.

The data used to calculate the credit impulse is released by the RBA each month, D.02, which is the stock of outstanding credit. Calculating the change in the stock of outstanding credit, as opposed to using the flow of new credit data, provides a more complete picture of the impact of credit changes on the economy. It incorporates the value of existing debt, debt paid down and new debt issued in a particular time period. In the first instance, debt paid down would have a contractionary impact on spending. The stock data incorporates all of these elements at an aggregate level. Calculating the growth in new credit turns this data into a flow so that it can be compared with spending.

For the purpose of this update (February 2017), I have looked at the growth in new credit in billions of dollars.

Private sector growth in new credit continues to decelerate in February 2017

The growth in new credit at the aggregate level (total private sector) began to decelerate sharply from April 2016. Since then, the annual growth in new credit has gone from +$30b in April 2016 to -$24b as of the latest February 2017 data. This is now approaching the lows reached in mid-2013:-

Source: RBA, The Macroeconomic Project

The main driver of this slowing growth in new credit has been business credit, which has continued to slow since June 2016. The growth in new credit for mortgages started to accelerate in November 2016, but this has not been large enough to offset the deceleration in business credit growth.

Progressively smaller increments in the growth in new credit are likely to result in lower spending and growth. Consider that the annual growth in the stock of total private credit in February 2016 was $161.9b and this annual growth in credit slowed to $137.9b in February 2017 – overall, this is -$24b less annual credit growth in the economy. This equates to approx. -1.4% of nominal GDP.

Given the recent strength in economic growth data (which is so far only the Dec ’16 quarter), the question is whether other sources of spending growth, such as income, are accelerating to offset this deceleration in total private credit growth.

Throughout 2016, the quarterly growth in Real Net National Disposable Income has accelerated.

Source: ABS

The driver of this high rate of growth in National Income has been business Gross Operating Surplus (profits). This has likely been helping to offset decelerating business credit growth during that time.

As of February 2017, Australia has $2.67t in total private debt outstanding. This represents a $137.9b increase in total outstanding debt (the change in the value of the outstanding stock of private sector debt) between Feb 16 and Feb 17. The majority of the $137.9b annual increase in the stock of total private debt is attributed to the annual increase in outstanding mortgage debt of $106.9b (which is only slightly higher than the annual growth of $105.1b recorded in Feb 2016). Total business debt outstanding grew by $32.5b, which is significantly lower than the annual growth of $55.7b recorded as of Feb 2016. Total ‘other personal’ debt outstanding continued to decline and fell by -$1.7b for the year to Feb 2017.

Mortgages represent 61.7% of outstanding private debt in Australia.

Business – growth in new credit continues to fall

After a brief reprieve during November and December 2016, the annual growth in new credit for business has continued to decelerate and, as of February 2017, is now -$23.1b:-

Source: RBA, The Macroeconomic Project

This level of deceleration would normally be quite concerning – business spending and investment is an important driver of economic activity and employment growth. Decelerating growth in new credit suggests lower spending in the near term. While this is a concerning result, there is something slightly different in the current environment which may be helping to buffer the impact of this slowing growth in new credit.

The size of the decline in new credit is now approaching the lows of 2013 – when the investment phase of the mining boom was ending and commodity prices were falling. Back then, between Nov 2011 and Aug 2013, the RBA cut rates eight (8) times to support the economy during this ‘transition’ period. Yet, in this current part of the cycle, the economic data has appeared stronger, despite this similar level of decelerating credit. One of the main reasons for this is likely the rebound in commodity prices on the back of further Chinese credit growth throughout 2016. In the space of one year, the Terms of Trade (ToT) has gone from annual decline of 13% (Dec 2015) to annual growth of +15% (Dec 2016). This has had a large and positive impact on the growth of business profits throughout 2016:-

Source: ABS (5676.15)

Mining has clearly been the major beneficiary of this rebound in prices, but so have related industries. Businesses related to real estate have also seen growth in profitability. This improvement in profitability is likely helping to offset or soften the deceleration in new credit growth for business.

The latest NAB monthly business survey for March 2017 highlights a more stable business conditions. But in the report there is an interesting point related to business credit:-

“Borrowing conditions deteriorated since last December, and the index is negative – meaning that on balance, more firms found it more difficult to borrow than easier. The demand for credit also fell in that time.”

So while there is some evidence suggesting at least more stable trading conditions, so far, this improvement in business profit has not translated into better/improving labour market conditions. Consider that the largest part of our National Income is Compensation of Employees (47%). Throughout 2016 and in the first few months of 2017, growth in hours worked and wages have continued to slow. Annual growth in hours worked has slowed to +0.63% in Feb 2017, down from +2% in Feb 2016. Annual wage growth has continued to slow to a record low rate of +1.87%, only just above the rate of annual core CPI growth of +1.63%. In the latest National Accounts data, Compensation of Employees actually fell in the Dec 2016 quarter – which is a highly unusual event. Quarter on quarter declines in Compensation of Employees (5206.07) has only occurred thirteen times since Dec 1959.

Overall employment growth has also slowed and is now back to a situation where employment growth is lower than that of the total labour force (thereby increasing the number of unemployed persons):-

Source: ABS

Despite the ‘bumper’ GDP result for Dec 2016, there is evidence of only a small pick-up in private sector capex. For the Dec 16 quarter, private capital expenditure grew by +1.5% versus the Sept 16 quarter – the first quarterly increase in two years. But the Dec 16 result was still down -2.6% versus Dec 2015. Expectations for expenditure in the 2017/18 financial year (estimate 1) are for spending to remain 4% below year prior (versus estimate 1 for the 2016/17 financial year).

So whilst business profits have improved, we are yet to see improvement in labour market conditions and, at best, business capex has at least stopped declining. It’s not likely that these improvements in business profits will be maintained. The spot price for one of our main commodity exports has already fallen 20% since Feb 2017 on the back of rising inventories.

Overall, business isn’t investing and labour market conditions are not improving. If the growth in new credit for business continues to decelerate and income growth starts to slow, then this does not provide a strong basis for growth expectations in the near term.

Annual growth in new credit for mortgages is flat in February 2017

First, the usual disclaimer on the data. The series breaks in the mortgage data have continued to make the analysis at a detailed level (owner occupier versus investor mortgages) problematic. At the ‘total mortgages’ level (the addition of owner occupier plus investor mortgage debt), data has at least been consistent since Jul 2015. The issue muddying the waters between investor and owner occupier mortgage growth is the ongoing reclassification of loans. Since the first curbs on investor lending were implemented in 2015, approx $50b in mortgage loans were reclassified from investor to owner occupier loans and this has continued into the present month. The reclassifications (“adjustment for changes in loan purpose”) commenced in Jul 2015 (source: RBA).

Since Jul 2015, the annual growth in new credit for mortgages has decelerated from +$22.6b to -$8.3b in Nov 2016 (mostly as a result of the first round of lending limits implemented by APRA in 2015). Only in the last three months has the growth in new credit for mortgages shifted to acceleration. In the latest month though, annual growth in new credit for mortgages has remained flat versus the previous month at +$1.8b:-

Source: RBA, The Macroeconomic Project

At an aggregate level, this is likely to be fairly neutral for house price growth in the near future. Given the heated debate going on in the Australian media at the moment, this is a controversial assertion.

Underlying this result is a very different dynamic between owner occupiers and investors. For the moment, it is growth in new investor lending that has been accelerating. This is only just offsetting the deceleration in the growth in new credit for owner occupiers. While the credit impulse for investors is currently larger than for owner occupiers, most of the outstanding debt in Australia is for owner occupier mortgages ( just over 42%) followed by business credit and then investor mortgage credit.

Apart from the endless debate over whether Australian property is in a bubble, one of the main issues is how investor lending (spurred on by tax incentives) is creating an affordability issue, especially for first home buyers. The other important issue is the ‘risk’ associated with a rising number of interest-only loans.

According to the latest Housing Finance data (ABS 5609 – measures the flow of new mortgages), new investor lending now represents nearly half of new mortgages in Jan & Feb 2017. This is the result of slowing annual growth in new owner-occupier lending, slowing from +11% in Feb 2016 to +1.2% in Feb 2017 (ex refi’s) and….

Source: ABS, The Macroeconomic Project

…an increasing rate of growth in investor lending…again. Investor lending is sitting well above its 20mth moving average, and despite the Feb result, has been rising quickly. Even the Feb 2017 month versus Feb 2016, growth was +14%. The annual growth (total of last 12mths versus 12mths prior) is only just flat, ‘growing’ at -0.8% p/a.

Source: ABS, The Macroeconomic Project

With bond yields rising recently, many banks have started to increase lending rates, more so for investors than for owner occupiers.

The latest lending results are being driven predominantly by activity in Vic & NSW markets. Despite this, APRA has re-set limits on lending for interest only loans to 30% of new loans.  Riskier investor lending has been growing much faster than the initial speed limit of +10% set in 2015 and this is against a backdrop of rising interest rates, falling wages growth, and weaker labour market conditions.

Size of Debt in Australia (more housing debt records broken…)

Total real private debt (business, other personal and mortgage) as a % of real GDP stands at 143.35% as at Dec 2016. This is now only -6.7% points below the high of 149.1% reached in November 2008:-

Source: RBA, ABS, The Macroeconomic Project

The biggest component of total private debt in Australia is mortgage debt. Real mortgage debt to GDP in Australia continues to hit new all-time highs and is now 87.9% of GDP. This is +5.1% points above the previous all-time high reached in Dec 2010:-

Source: RBA, ABS, The Macroeconomic Project

Business debt to GDP peaked at 61% in Nov 2008. As of Dec 2016, real business debt to GDP is still well below that peak, currently at 47.7%:-

Source: RBA, ABS, The Macroeconomic Project

The final component is personal credit which is currently 7.8% of real GDP as of Dec 2016:-

Source: RBA, ABS, The Macroeconomic Project



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