Credit Impulse

Further deceleration in the Australian credit impulse – Feb 2017

The latest RBA credit and lending aggregates for Feb 2017 show that the growth in new credit has continued to decelerate.

Total Private Credit – growth in new credit decelerates further in Feb to -$24b

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.

Read more on the Australian Debt and Credit Impulse page of this blog.

Australian credit impulse decelerates further in October 2016

The RBA released its credit and lending aggregates last week which gave me a chance to update the growth in new credit indicators. The growth in new credit is one of two important sources of spending that can provide some insight into the broad direction of growth in spending and house prices in the near term. You can read more about the credit impulse here.

In October 2016, growth in new credit for the private sector continued its much sharper deceleration – the overall trend for growth in new private sector credit remains negative:-

Source: RBA, The Macroeconomic Project

Total private sector growth in new credit peaked back in October 2014 with growth in new credit reaching +$50b. Since then, growth in new credit started to decelerate and this has picked up significant pace since Apr 2016. As of Oct 2016, total private sector growth in new credit is firmly negative at -$20b. To generate growth in spending, credit growth (and/or income) needs to be accelerating.

To be perfectly clear, the overall level of outstanding debt is still growing, but new credit is now growing at a decreasing rate. The longer term chart below of total private growth in new credit in Australia provides some context for where we are in the cycle:-

Source: RBA, The Macroeconomic Project

The main driver behind this recent deceleration is new business credit.

The period of expansion for total private sector credit between May 2013 and Oct 2014 was driven mainly by the acceleration in the growth in new credit for business. For a period of time, the size of the growth in new credit for business was even on par with that of mortgages. This was a strong indication that the economy could expect to see greater stability in employment growth and investment spending (at least to help off-set falls in mining investment spending). Despite drifting off again, there was a period of modest acceleration between Jun 2015 and Jun 2016.

Since Jun 2016, the growth in new credit for business has started decelerating at a much faster pace. As of Oct 2016, the growth in new credit for business is also firmly negative at -$13b. The previous cycle low was -$33b in May 2013, and while we are still a way off this, the negative slope of the curve is what is important:-

Source: RBA, The Macroeconomic Project

The size of the business credit impulse is now smaller than that of mortgages and other personal credit.

This deceleration is not consistent with higher growth expectations for the economy, especially against a backdrop of already low income growth. The peak in this most recent cycle of new credit growth for business also highlights how much weaker this ‘expansion’ (2014-2016) has been compared to the period prior to, and immediately after the GFC. For the moment, we are seeing a much weaker labour market and continued lackluster business investment. Without accelerating business credit, we are likely to see this continue.

There was a small, positive shift in the growth in new credit for mortgages in Oct. Although still negative, the growth in new credit for mortgages accelerated slightly from -$8.3b in Sept to -$6.9b in Oct – the first positive move since mid-2015. Looking at the split between the owner occupier and the investor credit impulse is problematic due to data cycling over large series breaks from 2015. For example, the largest adjustment in loan classification from investor to owner occupier mortgages occurred in Oct 2015 when $17b in mortgage loans were reclassified.

The slope of the overall mortgage credit impulse curve has been negative since Jun 2015, with growth in new mortgage credit decelerating from +$30b to now -$6.9b in Oct 2016. This means that new credit is now growing at a more constant pace, suggesting that price growth is also not likely to accelerate.

Source: RBA, The Macroeconomic Project

The question is, how has this manifested in house price growth at a National level?

Using the latest ABS data (to June 2016), growth in residential property prices has slowed in the last year (to June 2016) compared to the year prior (to June 2015). This is very much in line with what the credit impulse would suggest has happened.

Source: ABS

The slow down in price growth is evident in both established houses as well as attached dwellings and, in both cases, growth has slowed quite significantly. Again this is very much in line with the steep, negative slope of the credit impulse during that time.

The same data, over time, also clearly correlates with the slope of the mortgage credit impulse curve.

Source: ABS

The performance of the housing market in Australia has been very uneven and state performance varies widely, but on aggregate, the deceleration in credit growth suggested that overall residential price growth would also slow. Until there is a more sustained acceleration in the credit impulse for mortgages, we can expect house price growth, on aggregate, to remain low/neutral.

Wage growth in Australia keeps slowing – Sept 2016

The Wage Price Index data for the Sept 2016 quarter shows that wage growth in Australia has yet again slowed to its lowest level since the data was first collected.

The annual nominal growth in total hourly rates of pay excluding bonuses (seas adj) for the year to Sept 2016 was +1.88%. Growth in the latest quarter was +0.4%. This includes both public and private sector hourly rates of pay. The public sector wage price index is growing at a faster rate than that of the private sector, but is clearly also slowing:-

Source: ABS

In real terms, the change in the Wage Price Index is much lower and is barely positive. Annual growth is +0.14% and the latest quarter growth is +0.05%:-

Source: ABS (deflated using trimmed mean CPI)

Since late 2012, the wage price index in real terms, has been flat – growth in hourly rates of pay have (barely) kept pace with growth in core CPI.

Source: ABS

This most likely means that disposable income has not kept pace with CPI growth. For disposable income to remain constant in real terms, wages growth must actually exceed CPI in order to account for the impact of taxation. The chart above clearly shows that real total hourly rates of pay have been flat since the end of 2012.

The slight uptick that is obvious from June 2015 is the result of core CPI falling, rather than wage growth picking up.

Implications for growth

Putting this into context of where spending growth will come from (debt and/or income), highlights that we might expect private sector demand growth to come under pressure in the near term.

Wage growth is just barely ahead of core CPI and most likely, disposable income has been falling (slightly) over the last few years. There has been “relief” for those managing a mortgage because variable rates have gone down. But on the flip side, low rates have hurt those relying on interest income. Globally, interest rates have started rising and, if this continues, this will place greater pressure on spending by indebted households where disposable income/wage growth has not kept pace with inflation.

The other important source of spending growth, credit creation, has recently started showing clear signs of deceleration. This is an early warning sign that private sector growth in Australia may slow further. Read more about the credit impulse in Australia – Sept 2016.

Growth may be increasingly reliant on increases in government spending. At the same time, government borrowing rates have already started rising. The other issue for the government is the ongoing slow-down of wages growth and what it means for the budget. The 2016/17 budget assumptions had the wage price index growth accelerating to 2.5%. We end the first quarter of the financial year well below that assumption.

Credit impulse in Australia turns negative in September 2016

An update on the credit impulse and debt levels in Australia has been posted on the Australian debt and the credit impulse page on this blog. You can read the latest results in more detail, as well as an explanation on measuring the credit impulse on that page.

The growth in new credit for the total private sector has been decelerating since April 2016 and the level of deceleration has been gathering pace over the last five months. In Sept 16, the growth in new credit for the total private sector became firmly negative for the first time since Sept 2013. This is a particularly negative change in the trend.

Source: RBA, The Macroeconomic Project

The level of deceleration in the credit impulse for total private debt, especially over the last three months, has been driven by the deceleration in the growth in new credit for business and, to a lesser degree, the growth in new credit for mortgages. Since Jun 2015, there was at least a slightly accelerating rate of growth in new credit for business (but still low in comparison to other expansions), which was supportive of growth in aggregate demand and broadly supportive of at least more stable employment growth.

The growth in new credit across all sectors (business, mortgages and other personal) is now negative. That means that while total private debt is still growing, growth is no longer accelerating. To generate spending growth or asset price growth, credit growth (and/or income) needs to accelerate.

The annual growth in total private credit as of Sept 2015 was $153.5b. As of Sept 2016, the annual growth in total private credit has slowed to $138.9b – which is $14b lower. The question is whether other sources of spending, such as income or a lower saving rate, are accelerating to offset the deceleration in credit growth.

Indicators of National Income are only available to Jun 2016 at this point – and it’s been mainly in the 3 months since Jun 16 that we’ve started to see growth in new credit start to decelerate at a faster pace.

Source: ABS

From Sept 2015 to Mar 2016, the quarterly growth in Real Net National Disposable Income was accelerating – this has likely been helping to off-set decelerating total private credit growth during that time. Growth in Real Net National Disposable Income has slowed in the latest quarter (Jun 2016), so it will be important to see if this trend continues or not. If National Income continues to slow while credit growth also decelerates, then it’s not likely that we will see growth in aggregate demand accelerating. Growth will be more likely to slow down in the near term and we are more likely to see weaker growth in employment aggregates.

Growth in new credit decelerates – March 2016

The update to the Australian Debt & the Credit Impulse page has now been posted – you can read the results in more detail including background on the credit impulse measure on that page.

The latest data shows that for the total private sector, growth in new credit is decelerating.

The annual growth in new credit has slowed from $27.2b in February to $23.3b in March 2016. This has been predominantly driven by the deceleration in new mortgage plus other personal credit growth.

Source: RBA, The Macroeconomic Project

The performance of the components making up total private credit are mixed.

Business – The growth in new credit for business has accelerated slightly from $14.7b in Feb to $16.6b in Mar. Despite a few up and down periods, the overall trend since June 2015 has been accelerating credit growth. But it hasn’t been a very steep curve and this point matters. Since June 2015, the growth in new credit has accelerated from $7.4b to $16.6b over the ten (10) month period. Compare this to the first ten (10) months from the May 13 bottom where the growth in new credit for business accelerated from -$33.6b to -$1.8b in ten (10) months – a much bigger move and a clearly steeper curve. The implication is the steeper the curve, the higher the growth in new credit which means more growth in spending by business. There was a clear pickup throughout the economy during that time, especially evident in the turnaround in the labour market as business increased hiring. For the moment, the slower acceleration means more of a steady course in activity, rather than implying stronger growth in the near term.

The pick-up in credit acceleration for business in the latest month, and if it continues to improve, may be a better sign for labour market conditions in the near future.

Mortgage plus Other Personal – Unfortunately, the slightly more positive acceleration in new credit for business has been more than offset by the deceleration in the growth of new mortgage plus other personal credit. The chart above includes ‘other personal’ to provide a more consistent trend given the large adjustments made in both data sets. This measure has decelerated from +$12.3b in Feb to +$6.6b in March. Both mortgage and other personal contributed to that deceleration. Growth in new credit for mortgages decelerated from +$27.6b in Feb to $23.4b in Mar (-$3.9b). Other personal also decelerated from -$15.3b in Feb to -$17b in Mar. The deceleration in new mortgage credit continues to imply lower growth in house prices in the future. There has also been a loose relationship with retail sales and mortgage growth throughout these last few years of higher house price growth, so the deceleration is likely to affect spending in these areas as well.

You can read more details here.

The credit impulse for Australia remains in neutral – Feb 2016

I’ve just updated the Australian Debt & Credit Impulse page of this blog with the latest trends on the 1) credit impulse and 2) overall debt levels in Australia. You can read all of the background on the credit impulse and its importance on that page too. I thought it worthwhile posting the top line view of the annual growth in new credit for the private sector.

Private sector growth in new credit going sideways – February 2016

Overall momentum in the annual growth in new credit for total private sector credit remains fairly neutral. This highlights that the lack of acceleration in credit growth is likely to continue contributing to slower spending growth.

Annual growth in new credit for the total private sector remains at $26b, nearly 50% below the peak reached in Oct 2014. The current level of growth equates to roughly 1.6% of annual GDP (at Dec 2015). This is within -1 SD of the average growth in new credit over the last year and highlights the overall lack of credit acceleration at a total level.

Source: RBA, The Macroeconomic Project

The trend in the annual growth of new credit for the two main elements, Business and Mortgage+Personal, differ somewhat.

Annual growth in new credit for Mortgage+Personal peaked back in August 2015 at $22b. This has slowed to $12b as of Feb 2016. In historical terms, the growth in new credit for mortgages remains very high. But for this measure, it is the slope of the curve that matters – and in this case it is negative. This will likely place continued pressure on further acceleration of house prices at an aggregate level.

The annual growth in new credit for Business looks slightly more positive over the last six months, but that growth has also stopped accelerating over the last two months. From the low of $7b back in June 2015, annual growth in new credit for Business is now at $14b (slightly down from its peak in Dec 2015 of $18b). This more neutral level of annual growth in new credit for Business is not supportive of accelerating levels of growth in aggregate demand in the coming months. This is consistent with reports of lower expected investment spending by business.

As of Feb 2016, Australia has $2.53t in total private debt outstanding. This represents $161.2b annual growth in outstanding debt (just the change in the total value of the outstanding stock of debt between Feb 15 and Feb 16). In nominal terms, this is the largest annual change since Oct 2008. The majority of the current $161.2b increase in the stock of total private debt is attributed to the increase in outstanding mortgage debt of $110b. Outstanding business debt grew by $54.6b and outstanding ‘other personal’ debt declined by $3.4b. Mortgages represent 61% of outstanding private debt in Australia.

In real terms, total Private debt to GDP for Australia currently sits at 140.6% and is approx. 9% below the all-time peak reached in November 2008.

Source: RBA, ABS, The Macroeconomic Project

You can read more detail here.

Growth in New Credit Continues to Accelerate in June 2014

Growth in new private sector credit has been accelerating for a year now. The largest component, housing, has gained most of the attention. But the more hidden star of the show has been the acceleration in growth of new credit for business. It’s an important point to focus on because it should be positive news regarding the Australian economy. Credit growth for business should lead to increased capital investment and all the benefits that come along with that – income, employment and economic growth. Yet private sector capex growth has not been a strong performer over the last few quarters, mostly due to the slowdown in growth of mining capex. The main question of this post, is whether this acceleration in the growth in new credit for business has, or will, likely end up driving growth in business investment – especially non-mining investment. Given the forward estimates for total capex (ex housing) in the 2014/15 financial year are still well below current levels, the answer is probably not to the degree needed at this stage.

The other important highlight in the June data is the reversal in the size of new credit growth between investor and owner occupier mortgages. The change was surprisingly large and, if it continues, highlights a potential shift in sentiment in the housing market. The overall continued acceleration of growth in new mortgage credit is likely to feed into ongoing house price growth.

Some clarification is required first. On this blog, I maintain a ‘credit impulse’ page which looks at the growth in new credit as a % of GDP. Growth in credit/debt is one of the major themes driving the Australian economy, along with mining and housing, so the tracking of the credit impulse is a useful indicator of activity in the economy. The data for this post and the credit impulse calculations are sourced from the same data – the stock of outstanding credit (RBA D02). As GDP is released quarterly, the credit impulse tracker is only updated at that time. In between these times, the ‘growth in new credit’ is used to gauge activity in the economy. The growth in new credit looks at second order changes or acceleration in credit growth in dollar terms. Read more here.

There are two significant highlights in the release of the June data by the RBA.

The first is the continued acceleration of growth in new credit for the business component of total private sector credit.

Chart 1

Source: RBA

The growth in new credit for business is now, for the first time in well over 18 months, one of the larger contributors to the overall growth in new private sector credit.

The growth in new credit for business could be an early indication that business is now willing to take on new debt to invest and/or expand. This is generally good news for economic growth. But it’s important to consider what this growth in new credit is being used for and which sectors are driving the growth in new credit in order to ascertain its potential impact on the economy.

As an aside, I generally place greater value on growth in business debt leading to productive capital investment than growth in debt for housing. Growth in new credit for housing does not tend to have the same impact on the economy where the majority of that credit growth is used to just transfer existing assets within the private sector for higher and higher prices. This type of credit growth potentially takes away from more productive forms of investment usually undertaken by business.

The stock of total outstanding credit for business is now only 2% below the peak reached pre-GFC in November 2008. The growth over the last 12 months (especially) is evident, as is the large increase in June 2014.

Chart 2

Source: RBA

The important assumption above is that this credit growth will lead to some form of productive business investment and/or expansion. This is usually part of the transmission mechanism that central banks rely upon when implementing a lower interest rate policy. But, despite the acceleration in growth in new credit for business over the last year, private capital expenditure growth has been poor of late.

Looking at the Mar ’14 GDP results, Private Gross Fixed Capital Formation (GFCF) made a -0.09% pt contribution to annual GDP growth of +3.53%. Breaking Private GFCF down into its component parts reveals the split between a negative contribution from Total Business Investment and a positive contribution from Dwellings & Ownership Transfer costs. This is consistent with the larger contribution from mortgage credit growth than business credit growth in the year leading up to the March quarter.

Chart 3

Source: ABS

The dwellings component is made up of ‘new & used dwellings’ most of which is new dwelling construction but also includes new additions and/or alterations to existing private dwellings. ‘Ownership transfer’ costs relate to all ownership transfer costs, not just for dwellings.

The main drivers of the negative contribution for Total Business Investment was non-dwelling construction and machinery & equipment, together contributing -0.67%pts to the decline in the Total Business Investment component. The Total Business Investment component has made a negative contribution to overall GDP growth for the last three (3) quarters and at a similar rate.

So will this current acceleration in the growth in new credit for business likely feed into growth in business investment? First consider which sectors have been driving this growth in new credit for business.

The RBA series – Bank Lending to Business – Total Credit Outstanding by Size & Sector (D7.3) provides some insight as to which sectors have been driving this growth in new credit for business over the last year. Note that the most recent data is only up until March 2014.

Over the last year, the single largest contributor to the growth in new credit for business was from the Finance & Insurance sector.

Chart 4

Source: RBA

Looking at the trend in the growth of new credit for business by major sector provides a further layer of insight. I’ve split the major sectors into two charts given the relative size of the dollar growth in new credit:-

A) The two largest sectors by share of total credit outstanding are Other (48%) and the Finance & Insurance sector (16%).

Chart 5

Source: RBA

The annual growth in new credit for Finance & Insurance has accelerated to $16b as of Mar 2014 – with the trend over the last 3 quarters to Mar ’14 clearly positive. Despite being the larger share of total bank lending to business outstanding, the growth in new credit for ‘Other’ remains negative and the upward trend no longer in place. Both are well below their recent highs which will likely have implications for the relative impact in the economy.

The question that this raises though, is to what degree will bank lending to the Finance & Insurance sector will lead to growth in capital investment? Finance and Insurance are service based industries, so large capital projects for these firms are likely to be IT or real estate based. According to the latest ABS capex survey (in current dollars), actual annual capex expenditure in the Finance & Insurance sector declined by 6.3% and the sector only accounts for a small proportion of the value of capex in the survey. More likely, this growth in new credit could find its way into the economy through these firms carrying out their core business of providing funding. Whether this ends up funding further housing speculation or more productive business investment remains to be seen.

B) The other major sectors of Agriculture, Mining, Manufacturing, Construction and Wholesale, Retail and Transport account for 36% of total outstanding credit of bank lending to business.

The size of the growth in new credit among these sectors is clearly much smaller than Finance & Insurance (again will have implications for the level of impact in the economy), but the important point to note is the recent acceleration of growth in new credit across most sectors. The direction is important, but the relative size of the growth is still small (which is why the credit impulse is so useful, as it expresses this growth as a % of GDP).

Chart 6

Source: RBA

The important point from this is to see whether this growth in new credit starts to show up in capex in these sectors. Given the continued acceleration of growth in new credit for the business sector (highlighted in chart 1, RBA D.02) between March and June 2014, there may be some upside surprise in private GFCF in the next few quarters GDP.

Looking at the Expected Capex survey from the ABS for March 2014, the small improvements in expected capital expenditure for manufacturing and ‘other selected industries’ are overshadowed by the sheer scale of the slow-down in mining.

Chart 7 – Total Capital Expenditure – actual and expected

Source: ABS 5625 – this survey isn’t a comprehensive over view of capex across all industry sectors – the ‘other selected industries’ does not include agriculture, forestry and fishing, education, and health and community services industries and capital expenditure on dwellings by households.

Firstly, looking at the remainder of the 2013/14 year above. Note that estimate 6 comprises actuals to March and estimates for the June qtr of the 13/14 financial year.

Total capital expenditure at estimate 6 represented a -2.5% decline on the previous estimate 5 at Dec 2013. The largest component of that decline was mining $-7,294m. At the same time manufacturing capex increased by 6.2% or $558m and ‘other selected industries also grew by 4.4% or $2,461m – was this growth driven by the recent growth in new credit? But the growth in capex in both these sectors was clearly overshadowed by the slow-down in mining. The upshot is that significant capex increases (and presumably credit) would be required by industries ex-mining in order to ‘re-balance’ growth as mining capex slows.

Looking further out to 2014/15, estimate 2 for total capital expenditure is set to decline by 15% from where estimate 6 currently stands. The biggest contributor to that decline is mining at -16% or -$15,418m. There is no evidence here to suggest that other sectors will be picking up the slack. For example, capital expenditure in manufacturing at estimate 2 for 2014/15 year is 29% or -$2,788m below where estimate 6 currently sits for the 2013/14 financial year. Other selected industries is similar, sitting at -13% or -$7,581m for the 2014/15 financial year.

The next capex survey for the June 2014 qtr is due for release by the ABS on 28th August 2014 (ABS 5625 Private New Capital Expenditure and Expected Expenditure) and this may shed some more light on whether this recent acceleration in credit growth between March and June has fed into incremental capital expenditure for the remainder of 2013/14 financial year.

Another more up to date indicator of potential capital expenditure is the import of capital goods (ABS 5368.08 – I’ve used trend data here in order to provide a guide on direction). The import of capital goods has declined by 5.5% year on year at June 2014 compared to an increase of 7.9% on the import of consumption goods. The month on month growth in import of capital goods suggests only a slight improvement via a slower rate of decline in the three months leading up to June 2014. In fact, the import of intermediate goods highlights that ‘other parts for capital goods’ has grown annually at over 6%, but the recent month on month data points to decline over the last five months.

The second highlight of the RBA June data was the dramatic shift in the size of the growth in new credit from investor to owner occupier mortgages.

Growth in new credit for housing investor mortgages has been the largest component of growth in total new private credit over the last year, despite the size of outstanding credit being half that for owner occupier activity. But in June, this trend reversed sharply, with growth in new credit for owner occupier mortgages increasing sharply;-

Chart 8

Source: RBA

Given that this has happened in one month, it’s unclear as to whether this is the start of a new trend. But if it is, it marks the start of a change in sentiment. Investor activity has been the key driver behind growth in housing debt and therefore house prices during this current interest rate easing cycle. It appears that owner occupiers were much slower to take advantage of lower interest rates to increase their debt load. Recently, several of the bigger banks have suggested that owner occupiers have used this opportunity to pay down mortgage debt at a faster rate. Full article here (source: SMH 27 July 2014). The data I use here is the stock of outstanding credit (the difference between monthly totals represents the addition of new debt to existing debt, less all debt that is paid down in the period), so a sudden increase in new credit growth could indicate that 1) owner occupier mortgages are now growing faster than households are paying down incremental mortgage debt or 2) that owner occupier households have slowed their faster rate of mortgage pay-down for some reason.

The growth in new credit for owner occupier mortgages only turned positive in May 2014, so the large increase in the June data is surprising. I will delve further into this issue in another post looking at the growth in housing finance and house prices in Australia.

It’s worthwhile pointing out that the growth in new credit for all mortgages is now higher than the pre GFC peak. This was not the case for growth in new business credit.

Chart 9

Source: RBA

Given the data shows the second order change, it means mortgage credit growth continues to accelerate in Australia. This ongoing acceleration suggests that house prices will, on aggregate, also continue to rise in the near term.





The credit impulse strengthens in March 2014

Credit data released by the RBA shows growth in Total Private Credit accelerating, as at March 2014.

This should be a positive sign for the economy – changes in spending in the economy depend on changes in income and changes in net new lending (source: The components of this acceleration are also important indicators of where the economy may be headed and this is what I want to focus on in this post.

The main contributor to the acceleration in new credit continues to be investment housing credit. No surprise and no change. But the real news in this data is the ongoing turnaround in business credit. Whilst the size of the business credit impulse is still very small relative to the other credit components, it is now in positive territory. I’m far more enthusiastic about the improvement in the business credit impulse than the ongoing acceleration in housing credit growth. Schumpeter argues that there is a link between accelerating debt and accelerating incomes – if that debt has been used to fund entrepreneurial activity. In theory, that’s an investment in building the productive capacity of the economy, which is positive for growth in income and in employment. Certainly a part of the RBA’s intention with lowering interest rates has been to ‘rebalance’ investment towards the non-mining sectors. But business investment has been slow to respond and new credit for investment hasn’t grown on a large enough scale yet.

On the other hand, the change in monetary policy seemed to impact the speculative aspect of housing finance almost immediately. The majority of outstanding debt in Australia is related to housing and continued increases in house prices relies on accelerating housing lending/debt. Unfortunately, a large share of growth in new credit, and growth in household debt, continues to goes towards the transfer of ownership of houses in Australia.

Why is the credit impulse important?

The data released by the RBA is the stock of all outstanding credit which takes into account existing debt, new debt and debt paid down. More important than the growth in credit is the growth in new credit that is issued. Starting with a basic premise that borrowing equals spending, its new credit issued in an economy that partly drives new spending in the economy. The other source of new spending in the economy is growth in income – not covered in this post. 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, then $15, then $25, then $40 and finally $60, then there is growth in credit and growth in new credit of $5, $10, $15 and $20. As a result, spending grows each month. So the importance of tracking the credit impulse is that it is one of two important sources of spending that will impact output and/or asset prices.

I first came across the credit impulse through the work of Professor Steve Keen in his quest is to build a more robust and accurate representation of the role of debt and money creation by financial intermediaries in the economy. In working through the impact of growth in new credit on aggregate demand, Professor Keen’s latest work suggests the impact of the credit impulse is also influenced by the velocity of money. His latest thinking:-

“[This formula corrects] a rule of thumb proposition that I have previously asserted, that aggregate demand is the sum of income plus the change in debt (Keen 2014; see also Krugman 2013b). The correct proposition is that, in a world in which the banking sector endogenously creates new money by creating new loans, aggregate demand in a given period is the sum of aggregate demand at the beginning of that period, plus the change in debt over the period multiplied by the velocity of money.”


I have not gone into the velocity of money detail for this post. Whilst I have quite simply represented the growth in new credit, it’s a useful view of credit nonetheless.

To what degree does the growth in new credit drive growth in output versus growth in net change in the value of assets? I think this is a fairly fundamental question that faces our economy and it comes down to the source of the growth in new credit.

Total Private Credit

The usual way to present the credit impulse is as a % of GDP so that we can relate the size of the growth in new credit to the size of the economy. But given that March quarter GDP will not be released for another month, I’m opting to present this data instead in its dollar amount in order to understand the general direction of the growth in new credit. All the credit components – housing, business and personal are all expressed in dollars in this post, which will serve as the basis for comparison.

My proxy for the credit impulse – the growth in new credit – bottomed back in the June quarter 2013. Despite being in negative territory, the slope of the curve has been positive, meaning that the decline is getting smaller. Even a negative credit impulse with a positive sloping curve will have a positive impact.

The dollar growth in new credit for total private credit is approaching its two previous post-GFC highs, but is still well down on growth in the years leading up to the GFC:-

Source: RBA, The Macroeconomic Project

This gives you a sense of the relative size of the current growth and its potential impact on the economy. But for the impulse to become a larger proportion of GDP, it needs to grow faster than GDP (we’ll know this when GDP data is released). The current size of the growth in new credit at Mar 2014 is $26.6b, up from $17.7b in Feb 2014.

The question now becomes which of the main areas of total private credit have been driving growth in new credit?

The four components that make up total private credit (each with their share of total outstanding credit) are – owner occupier housing (40%), investor housing (20%), other personal (6%) and business (33%). Below is the growth in new credit across these four (4) components and total private credit over the last twelve months:-

Source: RBA, The Macroeconomic Project

There have been some large shifts in momentum over the last twelve months and a more positive shift in direction in the first quarter of 2014. The obvious one is the improvement in business credit – this has clearly had the greatest impact on the growth in new total private credit. But the actual dollar size of growth in new credit for business is still small relative to the other components (at Mar ’14). Growth in new investor mortgage credit is the largest of all components, which has also accelerated in the first quarter. Growth in new credit for owner occupier mortgage and personal credit are on par, but are, respectively, flat and decelerating.

Housing Credit – owner occupier and investor housing currently 60% of total private credit

Investor housing credit currently makes up the largest proportion of the growth in new credit. In March 2014, growth in new credit was $12b, up from $10.3b in Feb 2014, despite only currently representing 20% of outstanding total private credit. So approximately half of the current growth in new credit in the economy is for investor housing finance.

The growth in new credit for investor housing is close to reaching its second highest point of the last ten years.

Source: RBA, The Macroeconomic Project

This is only one part of mortgage credit. More broadly, the growth in new mortgage credit was $18.5b in March 2014, up from $16.9b in Feb 2014. This includes the change in new owner occupier housing credit of $6.6b in mar 2014, which was unchanged from $6.6b growth in Feb 2014. This signals a slowing in growth momentum for owner-occupier activity.

The slope of the curves look quite different between owner occupiers and investors – steep for investors and less steep for owner occupiers. The steeper curve suggests faster/larger growth in new credit for investor housing and this is consistent with what we have seen in other housing finance data.

Growth in new credit for owner occupiers has been somewhat more subdued and at March 2014, is about half that of growth in new credit for investor housing finance. Although the slope of the curve started to steepen in late 2013, the latest data suggests that the momentum is starting to slow.

Source: RBA, The Macroeconomic Project

The overall growth in total new mortgage credit remains strong and is obviously driven by investor activity.

So what can we expect as a result? Intuitively, you would expect accelerating housing credit growth to show up in asset values. As long as we have accelerating debt, it’s likely that we will continue to see house prices grow. Below is the mortgage credit impulse plotted with the annual growth in the residential property price index until Dec 2013. There is a reasonably strong correlation between the two (0.68).

Source: ABS, RBA, The Macroeconomic Project

Some of the accelerating growth in housing credit will show up in GDP, but to a smaller degree, in Private Fixed Capital Formation. This part of GDP captures the value of the creation of new assets only – new dwellings and new alterations and/or additions will add to GDP in that quarter. This currently accounts for just under 5% of GDP at Dec ’13. According to the latest housing finance data, purchase and construction of new dwellings has accounted for only 12% of total housing finance over the last year (ex-refinancing). Many of the current First Home Owners grants have focused on the purchase of new dwellings as it’s the creation of new assets that is likely to stimulate the economy more because jobs and income are created through new projects, rather than through transferring ownership of existing dwellings.

The transfer of ownership costs (legal etc.) are recorded as a part of GDP under Private GFCF- ownership transfer costs, but includes all ownership transfer costs, not just those on dwellings. This accounts for approx. 1.4% of GDP at Dec ’13.

Overall, the majority of total private debt relates to housing – debt which continues to accumulate, for what is essentially an unproductive asset. The downside to this is that this debt for the most part does not contribute to growing the future earning capacity of the economy, employing people, innovating or generating productivity gains.

Business Credit – 33% of Total Private Credit

The growth in new credit for business was the bright spot in this report. For the first time since the RBA lowered interest rates in late 2011, the growth in new credit for business has reached positive territory. Business investment is the single area most likely to generate income growth, employment, innovation and productivity gains for an economy.

Source: RBA, The Macroeconomic Project

The growth in new credit for business started to turn positive from mid-2013, but growth accelerated recently. In five months, growth in new credit for business has turned from a large negative to positive growth: Jan ’14 -$11.7B, Feb ’14 -$5.2B and Mar ’14 +$2.6b. Looking at the relative peaks over the last seven years (chart above), there is still a long way to go though.

Where is the growth in new credit for business likely to show up?

The labour market has been improving over the last several months – indicating at least progress on business expansion. There has been a shift from PT to more FT growth in jobs, although it appears that hours worked has not grown at the same rate. But this isn’t directly where growth in new credit is likely to show up.

This is more likely to show up in business investment. Over the last year, business investment has been slowing down and some forward indicators suggest that this will continue. One of the key objectives of the RBA in its easing stance has been to influence business investment and specifically to ‘rebalance’ investment towards non-resource sectors in light of the coming slow-down in mining investment. Recall that the first interest rate cut happened all the way back in Nov 2011.

Business investment and capex are measured in several ways. One way, is via the private new capital expenditure and expected expenditure survey (ABS 5625). This is not the equivalent of, or a complete view of the business investment component from GDP, but provides detail of expected capex expenditure, especially with regard to mining and manufacturing. You can read the full details of the inclusions and exclusions on the ABS website, but ‘all other selected industries’ excludes capital expenditure by all private businesses including units classified to agriculture, forestry and fishing, education, and health and community services industries and capital expenditure on dwellings by households.

The slow-down in mining capex is evident in the actual private capital expenditure data (ABS 5625):

Source: ABS 5625

I’ve opted for quarterly growth in this chart because I think it highlights the change in capex perfectly – “consistently slowing”:-

  • Mining capex growth has slowed since Sept 2011 and started to record quarterly declines from Dec 2012. At Dec 13, growth was -0.6% versus Sept qtr. 2013, a far cry from the high growth recorded in the mid-2000 and during 2010/early 2011. But this not the “mining capex cliff”.
  • Manufacturing capex growth peaked in Jun 2011 at 5.2% quarterly growth and since Mar 2012 has been in decline. Over the last year, the quarterly declines have become smaller, but capex spending continues to shrink – it’s not a drop off a cliff, but it’s a consistently lower value. At Dec 13, capex was -1.7% versus the prior quarter.
  • “All other selected industries” capex has been declining quarter on quarter since Jun 2011. There were two brief quarters of small growth in Jun and Sept 2013, but Dec was back to decline of -0.6% versus the prior quarter. As mentioned though, this is a not a complete representation of all other industries. See note above.

If you really want to know what the coming mining capex cliff will start to look like, then look no further. From the same ABS catalogue (5625):-

Source: ABS 5625

I’m referring to the 2013-2014 labelled graph above. The December ’13 quarter is marked ‘5’, which is half way through the 2013/14 financial year. Estimate 5 is made up of actual capital expenditure for the Sept and Dec ’13 quarters (as at the end of the Dec 13 quarter), plus the short term estimate for the Mar and Jun ’14 quarters. At this time, total capex for 2013/14 financial year is estimated to be $167,066m.

At the end of Dec ’13 quarter the first longer term estimate of capital expenditure is provided (E2) for the next financial year. This is the estimate marked ‘1’ for 2014- 2015 – and this is the estimate that has many spooked. Total capital expenditure is estimated at $124,880m, which is -17.4% lower than for the same period of 2013/14. The main reason for this lower estimate was a decrease in mining capex of -25.2%.

As mentioned, these estimates won’t add up to the investment data shown in the National Accounts – it’s a smaller view of what you would see in the GDP figures, but more detailed with regard to an ‘expectations’ view. The full explanation can be found on the ABS website.

So, looking at the more complete view of business investment from the latest GDP figures at Dec 2013 – this is what the quarterly growth in Private Gross Fixed Capital Formation (PGFC) for total private business investment looks like in the National accounts (ABS 5206.002):-

Source: ABS 5206.002

This includes all private business investments in non-dwelling construction, new machinery & equipment, cultivated biological resources and intellectual property. This represents approx. 17.1% of GDP at Dec ’13. I have excluded private fixed capital formation for new dwellings, new alterations to dwellings and ownership transfer costs – as this relates to mortgage activity.

Growth in total private business investment has been slowing since June 2011 and turned negative in the Sept 2013 quarter and the quarterly decline accelerated in Dec ’13. Given this consistent decline, it’s difficult to see that, based on the small size of the growth in new credit for business, that there will be a large turnaround in business investment at this stage.

Other data sources, such as the 2014 quarter one NAB Business Conditions report highlights a pickup in capex intentions in the coming twelve months, but at the same time points to ‘patchy’ investment intentions across the non-resources sectors.

Source: NAB

The latest NAB Business Conditions report for May 2014 (further out than the credit data I have presented here), suggests further gains in capex spending, but not enough to counter the falls in mining investment:-

Source: NAB

Given the size of the growth in new credit for business, I wouldn’t expect to see large improvements in business investment, but would at least expect a slowing of the decline for the March 2014 quarter GDP. There doesn’t yet appear to be high enough non-resources investment growth to counter the end of the mining investment phase.

Personal Credit – 6% of Total Private Credit

Over the first quarter of 2014, growth in new credit for total personal credit has been decelerating. Growth in new credit for personal lending reached a high of $11.6b in Oct 2013 and that growth has virtually halved since then to $5.4b at Mar 2014.

Source: RBA, The Macroeconomic Project

Total personal credit represents activity conducted with a bank on a non-business basis (excluding housing). This includes all manner of personal spending, so there isn’t one good place where you would expect this growth in new credit to impact output. It would likely be a combination of retail sales, new car sales and/or other discretionary spending etc.

Either way, growth in new credit for personal may be pointing to a slow-down in growth of the more discretionary spending categories (this is most likely where you’d find personal credit used).

Has this started showing up in Q1 retail sales? The month on month growth in retail sales has been slowing (sales remain high though), and whilst it does look like there is a correlation between the two measures, the correlation isn’t strong at all (0.23).

There was a stronger relationship between the actual personal credit impulse (as a % GDP) and the annual change in the Household Final Consumption Expenditure (HFCE) component of GDP (0.46) – at Dec ’13. The HFCE component of GDP is the single biggest part of GDP approx. 50%, so clearly spending that shows up here is ‘funded’ by a combination income as well as change in new credit.

Source: ABS, RBA, The Macroeconomic Project

It’s still not an ideal relationship/proxy, but does at least provide a very general view.

One thing to bear in mind is that a slowing in new personal credit growth could also reflect the current improved labour market conditions. It’s possible that income growth via increased labour market activity may counter any slowing in the growth of new personal credit. Using trend numbers for the first four months of this year we’ve seen +50k FT jobs (the first 4mths of 2013 was -11k FT jobs) and +22k PT jobs (the first 4mths of 2013 was +61k PT jobs) added. Unemployment has ‘only’ grown by 6.8K in the first 4mths of this year (versus 26.7k for the same time last year). This may have an impact on consumer discretionary spending, possibly cancelling out any slow-down in growth of new credit in personal spending for now.

Overall, the majority of the growth in new credit is going into housing – via investor activity. But it’s worth noting that growth in new credit for owner occupier housing appears to be slowing. For the moment, this is still likely to result in continued house price appreciation. Whilst business investment and expected capex, so far, looks like it will fall short of countering the drop in mining investment, the growth in new credit for business is an encouraging sign. But this needs to continue to accelerate in order to fuel business investment in new, productive activity in the economy. Business will likely expand investment if there is a strong growth business case. The continued high level of the Australian dollar, any potential impact of a slow-down in China and changes to fiscal policy are going to weigh on these business investment decisions.














Growth Re-balancing & the Credit Impulse in Australia

On the 1/11/11, the RBA Board commenced what has now become a series of eight (8) interest rate cuts, reducing the benchmark rate from 4.5% to 2.5% (as at Oct 2013). These rate cuts came on the back of a relatively strong AUD, weakening commodity prices, falling Terms of Trade, a softening in the domestic labour market, weaker house prices and overall weakening domestic demand as evidenced by lower than expected CPI.

Since the Oct 2012 board meeting, it’s clear the RBA has recognised the approaching peak in resources investment i.e, the “mining capex cliff”. In its own words “it will be important that the forecast strengthening in some other components of demand starts to occur.” Emphasis added by me. Those “other components of demand” include business, personal & housing spending/investment. According to the RBA, the aim of lower interest rates has been to encourage sustainable growth in the economy consistent with achieving the inflation target and to rebalance growth with a combination of depreciating exchange rate and lower interest rates to stimulate non-mining investment. 

So, two years and eight rate cuts later – is there traction in the economy? Is ‘rebalancing’ underway? I want to look at this through the lens of the credit impulse in Australia.

Demand for Credit

Recently, the RBA released its Lending & Credit Aggregates for Sept 2013.

Source: RBA 

Besides the growth in Government borrowing, Investment and Owner Occupier housing finance have been the main drivers of growth in total credit. It’s easy to get caught up in % changes, but these two areas of credit alone contributed 87% of the actual dollar growth (ex Government) in all lending over the last year.

The very big concern is the fact that Business credit growth is low. Business credit represents 34% of total credit at Sept 2013, but only accounted for 9% of the actual dollar growth in credit over the last year. Other Personal credit has similarly underperformed.

Government credit (not included in Total Credit) has seen strong growth.

The Credit Impulse

Growth in credit is the usual way to relate developments in credit with developments in the economy. Possibly a more insightful way to measure this is by growth in new credit issued relative to the size of the economy. From, if someone is borrowing a fixed amount each month, then spending is constant (the assumption is that borrowing=spending). There is growth in credit, but no growth in spending because the amount borrowed is the same each month. The credit impulse would be zero. If that person borrows more each and every month, then new credit is accelerating and result is that spending is also likely to grow. In this case, the impulse is increasing (there is a positive slope to the line). This perspective follows the change in the flow of money and credit, not the stock. The above chart/table “demand for credit” is the % change in stock.

Total Private Credit Impulse

Below is the estimated credit impulse in Australia for total Private credit comprising Business, Personal and Mortgage credit. It’s calculated by taking the change in new credit expressed as a % of GDP for that quarter. Whilst I have credit data up to Sept 2013, I only have GDP up to June 2013.

Source: RBA & The Macroeconomic Project 

The slope of the line is what counts and since July 2012 the slope has become negative, despite eight (8) interest rate cuts.

Total Private credit has been growing (in nominal terms) but at a decreasing rate. Between June 2012 and June 2013 the growth in new credit has been getting smaller as a % of GDP. For example, new credit grew by $91b between June 2012 and June 2011, but new credit only grew by $61.4b between June 2013 and June 2012. Therefore the change in new credit is -$29.7b or -2% of GDP – a negative credit impulse at June 2013. 

To keep funding new growth, new credit needs to grow by an increasing amount.

Source: RBA, The Macroeconomic Project 

In terms of trend change, real Private credit growth has started to increase again since July 2013 – the red arrow on the chart above. We’ll need to await Sept 2013 qtr GDP figures to understand the size of the impulse.

So with a negative credit impulse, we should have seen a decline in spending in the economy. But the other component to view together with the Private credit impulse is the Government credit impulse.

Source: RBA, The Macroeconomic Project 

Up until June 2013, the Government credit impulse has been strong – as witnessed by the steepness of the curve (chart above). When you compare the change in new credit as a % of GDP (the actual impulse), the positive Government credit impulse of 2% of GDP counteracts the negative -2% print of the Private credit impulse. You could argue that growth in the economy has been held steady by Government spending.

But during July – Sept 2013, real Government credit growth looks to be slowing down again with quite a substantial drop between July & August 2013. Luckily, the growth in Private credit that we saw above may counteract the Government slow-down in this latest Sept 2013 quarter.

Source: RBA, The Macroeconomic Project 

Looking at the Private and Government credit impulse can provide a general view over growth in the economy. One way to look at the effect on the economy is to look at recent trends in GDP growth;

Source: ABS 

Quarterly GDP growth ‘peaked’ around Dec 2011 (trend) and has continued to slow since then. This isn’t the lowest growth environment that we have been in, but the trend in growth in real GDP indicates that the economy is not ‘rebalancing’ after eight (8) interest rate cuts. This is consistent with the low credit impulse in the economy.

But not all pockets in the economy are performing equally. Breaking down the credit data provides some insight as to the areas that have and have not (yet) responded to rate cuts.

Business Credit Impulse

The business credit impulse has been in a down trend since June 2012 qtr and this is the most concerning insight in this study.

Business credit is the second largest area of total credit behind owner occupier housing finance so it has a far reaching impact on the economy. Since Dec 2011, the Business credit impulse has gone from +3.3% to -2.3% of GDP.

Importantly, business investment is the engine of the economy. If business is investing in new technology or additional capacity, then this likely to drive future employment and income growth. This is an important source of the RBA’s sustainable economic growth.

Source: RBA and The Macroeconomic Project 

Growth in real Business lending has been slowing down since June 2012 and started declining (year on year) around March 2013. Make no mistake, the Business credit impulse has been by far the largest contributor to the total Private credit impulse and growth of new credit for Business represents a larger % of GDP than growth in new credit for Mortgages. The performance of the Business credit impulse has shifted dramatically over this time period – as you can see from the chart. Since the RBA started cutting rates at the end of 2011, the Business credit impulse has gone from positive to negative, not the other way around.

Real Business credit growth has been zero or negative since November 2012;

Source: ABS, The Macroeconomic Project 

This means that total outstanding Business debt has been getting smaller – more debt is paid down than new credit is raised.

Source: RBA, The Macroeconomic Project 

As you can see from the chart above, the last 3 months of growth suggest a slightly improving Business credit impulse for Q3 2013. 

Despite eight (8) interest rate cuts, total Business credit has not grown, and in fact has become smaller as a % of GDP – from 62% in 2008 to 47% in June 2013. The impact of this deleveraging is contraction. The only upside is that business will be in a better position to invest should (when) demand conditions pick up.

These next two charts provide some further context about the current business environment – non-mining profits falling as a share of GDP and even mining profits have stopped accelerating as a % of GDP. Business profits have been squeezed and this is showing up (on aggregate) in cost cutting (see recent employment reports) and what appears to be a reduced appetite for debt/investment for future growth.


This is another view of business investment – by industry sector. Share of business investment in most industries, with the notable exception of mining, is declining. This is exactly the situation that the RBA is aiming to ‘rebalance’ given the forecast for mining investment to slow. 


The NAB Monthly Business Conditions report has shown that excess capacity continues to plague the economy across multiple sectors (including mining). There is clearly no reason for business (on the whole) to invest in building capacity;- 

The one thing that immediately jumps out to me on these last two charts is the discrepancy between the growing share of Mining investment and the low and falling capacity utilisation in Mining. 

The other important factor affecting business (exporting ones) is the exchange rate. The aim of the RBA has been to rebalance growth through a combination of a lower $AUD and lower interest rates. Despite the spike down in 2012 (probably more due to speculation of US FED tapering its QE program than interest rate differential), the exchange rate has remained fairly high. The benefit of a lower exchange rate is that exports become more competitive – which should fuel higher investment and employment locally. It also makes imports more expensive, possibly helping locally manufactured goods to compete domestically, but increasing costs of inputs priced in USD eg fuel.


Overall trading conditions continue to be challenging and business has not been investing. In the short-term this does not paint a positive picture for rebalancing economic growth. 

Housing Finance Credit Impulse

This contrasts with the acceleration in mortgage credit growth, especially for Investor housing finance, during this recent rate cut period. There appears to be an increasing disconnect between the relatively weaker underlying business conditions and say, the strength of the housing market.

Since Dec 2011, the mortgage credit impulse in Australia has gone from -2% to -0.09% of GDP at June 2013. The high point was May 2013 at 0.33% of GDP. Clearly a far smaller impact than the Business credit impulse.

Source: RBA, The Macroeconomic Project 

Whilst there is appears to be a slight pull back in the latest months to June 2013, the growth in new mortgage credit (not as a % of GDP) appears to hit a new high in Sept 2013. This is also reflected in the accelerating rate of growth in total real mortgage lending (chart below) – yes that small blip at the end of the chart;

Source: RBA, The Macroeconomic Project 

At this level, we can start to ponder where the main effect of the Mortgage credit impulse is felt. The effect of rising mortgage debt and a rising mortgage impulse (rising faster than housing supply) could be seen in economic growth, but is likely to show up more directly in a change in house prices.

This doesn’t mean that there aren’t benefits from a GDP perspective. These benefits might include transaction costs based on the exchange of dwellings – stamp duty, solicitor fee’s, realtor fee’s etc. Rising house prices can signal the potential for new supply requirements. Construction of new dwellings would have a far reaching economic growth impact through higher employment, income etc. The final way is through higher asset prices – and the ability to use equity to fund more spending. But few scenarios here relate the growth in debt to growth in the future earning capacity of the Australian economy.

Most of the recent lift in the mortgage credit impulse is due to Investment lending. The steepness of the Investor credit impulse curve shows just how strong Investors have been in this market relative to Owner Occupiers.

Since the Dec 2011 qtr, the credit impulse has moved from -1.3% of GDP to +0.17% of GDP in June 2013. It reached a high of 0.7% of GDP in Jan 2013. Again, this is a far smaller impact relative to the Business credit impulse.

Source: RBA, The Macroeconomic Project 

Investors have been leading the way during this spate of interest rate cuts, and whilst the chart above shows momentum stalling, the growth in new credit between July & Sept 2013 has accelerated again. See below growth in real Investment housing credit;

Source: RBA, The Macroeconomic Project 

There has been far more gradual growth in the Owner Occupier credit impulse (below). Despite a negative credit impulse, the slope is positive and that’s the important point. Since the start of rate cuts in Dec 2011 the impulse has improved from -0.8% to -0.27% of GDP in June 2013. The strength in the Investor-led credit impulse has helped to make up for the weaker, but improving, Owner Occupier credit impulse;

Source: RBA, The Macroeconomic Project 

Growth in real Owner Occupier financing has also grown fairly consistently since Feb 2013 and the latest 3 months of data suggests that the credit impulse is likely to continue its modest improvement into the Sept 2013 qtr.

Source: RBA, The Macroeconomic Project 

What it is also saying is that owner occupiers have been quite late to the party on housing.

Personal Credit Impulse

Personal credit has seen a recent uptick in activity which is a positive sign for consumption spending growth in the economy. Since Dec 2011, the Personal credit impulse has gone from -0.3% to +0.2% of GDP. A smaller effect but it will impact spending growth nonetheless.

Source: RBA, The Macroeconomic Project 

Without a doubt, there has been an improvement in rate of growth. But the improving credit impulse can be related back to a slow-down in the decline of real personal credit growth – note the chart below. Current growth is a far cry from the growth in personal credit pre-2008 of anywhere between 5% and 15% growth.

Source: RBA, The Macroeconomic Project 

In the latest months from July to Sept 2013, real personal credit declined by 1% each month – which is an improvement over the June result of -2%.

The stock of outstanding Personal debt has fallen from a high of 13% of GDP to 9% of GDP in the June 2013 qtr.

Source: RBA, The Macroeconomic Project 

The trend is improving but it’s not exactly a ‘snap-back’ rally in personal credit growth. Its also possible that some of the lending traditionally called ‘Personal’ may now be accounted for in mortgages via redraw and offset facilities.  

But with household mortgage debt is back near its highs (84% of GDP), a weak labour market (PT growth over FT growth) and wage growth slowing, its no wonder Personal credit growth is low. 

Unless one of these constraints is removed/reduced, personal credit growth is likely to remain subdued. 

But counteracting this data is the improving consumer confidence index. Together with the slightly improving personal credit impulse, it could be signalling a shift in consumer attitude back to greater consumption. If we see improvements in the labour market, then spending and confidence are likely to improve further.

There have been two key drivers of the credit impulse in Australia over the last six months; 

  • the negative performance of the Business credit impulse, &
  • the positive performance of the government credit impulse

The impact of an improving Mortgage & Personal credit impulse has not been enough to counteract the negative Business credit impulse. Several points about this:-

  • Its been a lucky co-incidence that Government borrowing has helped to stave off the negative impact of the Business credit impulse. But with the Liberal government committed to bringing the budget back into surplus, Government may not be a source of spending growth in the future.
  • In a later post I’ll highlight that the Mortgage impulse and the resulting impact on house prices, does not reflect a broad-based uplift in housing – which is probably why the mortgage impulse hasn’t had a more influencing effect. This is really a much bigger issue. The effect of an improving mortgage impulse will likely stimulate house prices – but is it big enough to rebalance growth in the economy? As more established houses are sold at higher prices, more debt is created but this debt accumulation isn’t an investment in the future prosperity of the economy.
  • The real issue for our economy is the contraction of business activity ie via investment & cost cutting – in response to slack/capacity in the economy. Why is that? Demand for debt (& therefore spending ability) seems constrained apart from investment housing. The shift in interest rates hasn’t moved the credit impulse in a proportional way. Accumulation of debt, together with income, has been a source of spending growth in the past. So do we now have our fill of debt?

The huge fear is that as a result of lower interest rates, we’ve only managed to see rising house prices, more debt, little/no improvement in business investment and therefore no change or improvement in economic growth prospects. If business isn’t investing in expanding capacity or improving competiveness (beyond reducing costs) then the RBA will be hard-pressed to achieve its rebalancing.

Australian house prices, housing finance and the credit impulse

The ABS has released its House Price Index for the Dec 2012 quarter. 

As expected, there was a reasonable bounce back in house prices in the last quarter of 2012 of +1.6% versus the prior quarter.  The Sept 2012 qtr was revised lower in this round of data. 

The Dec qtr was the strongest since the First Home Buyer-fuelled growth in house prices during 2009. The National House Price Index now sits at only 3% below its all-time high.

image 1 house price % chg

Source: ABS

Despite this solid result, there is still some weakness across the states, with only two ‘major’ states posting above national average gains in house prices – Sydney & Perth.

image 2 house price changes by state

Source: ABS

One of the key drivers of house price growth is the availability of & willingness to take on more debt, or accelerating credit.  There has been growth in housing lending finance for quite a few months now.  Although I haven’t proven a correlation between debt & house prices here, you can see that the two move together (it makes sense that they would).

image 3 house price versus lending

Source: ABS

Growth in lending continues to hold up the housing market. Based on the current data, it appears that we aren’t going to see any movement down in house prices yet. Interestingly, we are currently 3% below the peak in house prices, and yet 11% below the peak in lending. Despite lower lending, prices remain high.

At Nov 2012, total housing lending has grown by over $10b (incl refi’s), or 4%, year on year. More specifically, its investment lending that is driving the growth in overall housing finance lending:

  $ Growth (MAT Nov 12 v MAT Nov 11) Growth %
All Dwellings Finance $10,397,895,000 +4.39%
Investment Housing Finance $4,929,143,000 +6.25%
All Owner Occ Finance Ex Refi’s $2,822,5546,000 +2.51%
Owner Occ Refi’s $2,646,206,000 +5.82%

Source: ABS, seasonally adjusted

One of the key drivers for this growth in housing finance is likely to be the recent interest rate cuts.   Since the end of 2011, the RBA has consistently cute rates in order to stimulate growth in lending. 

image 4 indicator interest rates

Source: RBA

This appears to have had/is having the desired effect – on house prices anyway.

Investment Housing Finance

There has been a turnaround in investment housing finance since approx. Feb 2012.  Since then, growth has spiked quite dramatically, especially after a period of low/flat growth throughout 2011. 

image 5 investment housing

Source: ABS

The rolling 12 month growth for investment housing lending is now in positive territory.  Month on month for Nov 2012, it has grown by over 15.5%. Investment housing finance accounts for approx. 1/3 of total housing lending value.

Investment mortgage debt growth has been accelerating since late 2011.  This is an important distinction when thinking about house prices.

image 6 investor credit impulse

Source: RBA, ABS, The Macroeconomic Project

Despite the accelerator being in negative territory throughout 2012, it has been moving in a positive direction, creating a stimulatory effect (growth in the growth of debt stock = credit is accelerating and the addition of new credit is what stimulates asset prices).

Unfortunately, this chart is a little backward looking (only up until Sept 2012, due to GDP lag). There has been a slight pullback in the accelerator in the latest month only (Sept ’12).

The recent up tick in the rate of growth in real investor mortgage lending suggests that the accelerator may continue to rise for the Dec 2012 quarter.

image 7 real investor lending growth

Source: RBA, ABS

 My sense is that investors have responded to the interest rate cuts – just given the timing of rate cuts and the way in which credit growth has starting growing again. What would be really interesting to understand is how these investors are funding their purchases.  Are they interest only loans? It would also be interesting to know what proportion are local v. overseas investors.

Owner Occupied Housing Finance

At first glance, it appears that owner occupiers are also helping to move house prices higher.  Growth in credit has continued to improve and is now in positive territory (ex refi’s).  The uptick in growth from Feb 2012 suggests that interest rate cuts have had some effect.

image 8 owner occ lending

Source: ABS

It’s interesting to break down “owner occupier” lending activity into its parts to understand the picture a little better;


$ Growth (000’s)

(Yr on Yr Nov ’12)


Growth %


Share %

All Dwellings Finance




Investment Housing Finance








All Owner Occ Finance Inc Refi’s




Owner Occ – Construction of Dwellings




Owner Occ – Purch of New Dwellings




Owner Occ – Purch of Other Est Dwellings




Owner Occ  – Refi’s of Est Dwellings




 Source: ABS, seasonally adjusted

The biggest part of owner occupier lending is for the purchase of established dwellings – this activity has grown annually by far less than the average of all dwellings finance at only 1.3%.  The growth in the ‘headline’ number for owner occupiers has equally come from the smaller segments – construction and purchase of new dwellings, as well as refinancing.  The growth in lending for the purchase of new dwellings is mostly driven by changes to first home owner grant initiatives (mostly focusing on the purchase of newly constructed homes). Refinancing has also continued to grow, but note that this does not contribute to house price growth – no sale transaction has actually occurred.

The main point is that single biggest part of the market, owner occupiers purchasing established dwellings, is growing at the lowest rate of growth. 

The acceleration of debt for owner occupiers shows a very different pattern to that of investor lending.  Broadly speaking, owner occupier lending is growing, but that growth has been reasonably constant (relative to the size of GDP) over the last year, so its potentially not stimulating house price growth in the same way that investor borrowing is.

image 9 owner occ mortgage impulse

Source: ABS

Again, we are lagging in this data above due to GDP data. But the growth in real owner occ lending (up until Nov ’12), suggests that we’ll see a further weakness in the credit accelerator for owner occupiers.  The rate of growth in real owner occupier lending continues to slow down – its now reached a low of 1.9% and is on its lows.

image 10 real owner occ mortgage growth

Source: RBA, ABS, The Macroeconomic Project

Whilst growth for both investor and owner occupier housing lending has been slowing down, total mortgage debt outstanding as a % of GDP is still close to its highs – currently 84.5% versus the Mar 2010 high of 87.2%.

image 11 housing debt to gdp%

Source: RBA, ABS

On the whole, I would argue that interest rate cuts have been less successful in stimulating demand for more debt for owner occupiers buying established dwellings.  This could differ slightly on a state by state basis.

Owner occupiers, excluding new home/construction lending, have not/are not participating to the same degree as investors in this ‘interest rate cut rally’. Housing investors appear to have taken advantage of lower interest rates to buy properties and this has been helping to drive house prices higher.

Credit Accelerators – Other Sectors

Further results of the credit accelerator calculations suggest that interest rate cuts have also done little to stimulate the credit impulse in the broader economy.

The personal debt credit impulse remains in neutral.

image 12 personal debt credit impulse

Source: RBA, ABS

Although, the latest month of real personal credit growth (Nov ’12) suggests that there could be some improvement in the accelerator during the last qtr of 2012. 

image 13 real person debt growth

Source: RBA, ABS, The Macroeconomic Project

This level of declining real personal credit suggests that consumers, on the whole, have been cutting back.  This personal debt is being paid down at a pretty constant rate, which is consistent with the zero credit impulse. Personal debt to GDP has continued to fall since late 2007.

image 14 total personal debt to gdp%

Source: RBA, ABS

It appears that consumers have taken advantage of interest rate cuts (via an increase in disposable income) to pay down their personal debt, rather than take on more debt. We are seeing some of this weakness show up in areas of spending such as retail sales.  But they are barely making inroads into paying down their mortgage debt.

Of a larger concern is the change in the business credit impulse. This is quite a ‘noisy’ data set, but I think it shows a further slowdown in business lending/borrowing.  If you consider that new credit issued=new spending in the economy, then a fall in new credit issued will/should correlate to a fall in spending.  This is bad news for the economy and speaks volumes about the real state of business confidence. Consider that this is happening with a backdrop of low interest rates.

image 15 business debt acceleration

Source: RBA, ABS, The Macroeconomic Project

The growth in real business credit further suggests that the business credit accelerator will continue its decline into the last quarter of 2012.

image 16 business real credit growth

Source: RBA, ABS

Growth in business debt in real terms has gone from 5% in June 2012 to zero % in Nov 2012. Business in Australia (I’m referring to manufacturing & retailing) has been struggling with high exchange rates and competition with cheaper overseas imports & online retailers.  The pull back in debt acceleration suggests that business are preparing to further slow their growth and are becoming more uncertain or unwilling to take on debt to fund investment or expansion.  This may not bode well for future employment & income growth.

Just to put this into perspective, business debt outstanding has fallen since the GFC, but has stabilised at around 50% of GDP. So in relative terms, this is an important group from the perspective of stimulating spending & growth in the economy.

image 17 total business debt to gdp%

Source: RBA, ABS

The government credit impulse is also cause for concern – in the sense that it is moving down and not stimulating spending/income. I’m not suggesting that the government should be deficit spending at this stage.

image 18 govt debt acceleration

Source: RBA, ABS, The Macroeconomic Project

The credit impulse for government has trended down since mid-2011.  There has been a further pull-back in new credit/spending by the government (no big news there given we had a government committed to a budget surplus) in the most recent data.  This is also evident in the real government credit growth rate.

image 19 real govt credit growth

Source: RBA, ABS

Only the government sector has grown debt to GDP in the last few years – in an effort to stimulate our economy during the GFC. At less than 10% of GDP, government debt is still quite low.

image 20 govt debt to gdp%

Source: RBA, ABS

Overall, I think the credit impulse data is pointing to a potential slow-down in the Australian economy.  Interest rate cuts have not stimulated the credit impulse for owner occupiers, personal lending or business lending – at least not in the same way as the investor housing credit impulse. Without growth in the credit impulse, its not likely we’ll see growth in spending in the economy.