Credit Impulse

Credit deceleration in Australia should be ringing alarm bells – April 2017

Today, the RBA released its Lending and Credit Aggregates showing that growth in new credit (total private sector) in Australia has continued to slow in the latest month. In April 2017, the annual growth in new private sector credit declined by -$29.8b. In other words, there was $29.8b LESS private credit growth in the year to April 2017 than in the year prior. This doesn’t mean that the stock of outstanding credit is declining (that would be deleveraging), at this stage it means that credit growth has been slowing.

New credit, together with income growth, drives new spending in the economy.

With regulators and media (rightly) focused on reigning in the riskier mortgage credit, namely interest-only mortgages, there has been absolutely no focus on the worsening state of business credit growth. I work on the premise that business spending and investment supports future economic growth and improvements in labour market conditions. So, when I see a chart that shows business credit continuing to decelerate, then it makes me rethink my expectations for economic and employment growth.

The main driver of the slowdown in overall private sector growth in new credit has been the decline in new credit for business. Not even the acceleration in investment mortgage credit has been enough to drive the overall impulse higher, with total annual growth in new credit for mortgages only reaching +$7b in April:-

Source: RBA, The Macroeconomic Project

A longer term perspective highlights just where we are in this cycle, and it’s not good.

In dollar terms, the overall annual decline in new private credit is now larger than it was in the previous downturn of 2012/13. At that point in the cycle, the annual decline in new credit reached -$28.9b at its lowest point. As a % of GDP, it was approx. -1.9% of GDP in size. Although the current dollar amount is slightly larger, -$29.8b, it’s also a slightly smaller % of GDP about -1.7% of GDP (using a rosy GDP forecast).

Source: RBA, The Macroeconomic Project

Remember why credit growth started to accelerate again in 2013? A series of eight (8) official cash rate cuts by the RBA between Nov 2011 and Aug 2013 (-225bps in total) and the acceleration of Chinese credit growth. New credit growth started to accelerate for both business and mortgage credit. Which is why it’s surprising not to see more commentary about the slowing growth in business lending in this part of the cycle.

The annual growth in new credit for business started decelerating back in mid-2016. In dollar terms, the level of deceleration has surpassed the low of 2013. But as a % of GDP, the current annual decline in new credit for business is just shy of that post-GFC low, -2.02% in April 2017 versus -2.14% in June 2013.

Source: RBA, The Macroeconomic Project

In recent posts on this topic, I’ve given this deceleration in business credit growth the benefit of the doubt. The improvement in business profits (led by Mining) over the last few quarters may have cushioned some of this slowdown in new credit growth. But with commodity prices now off again and with consumer spending and labour market metrics looking lackluster, it’s not likely that we’ll see continued high growth in business profits. So without growth in new credit, what will be supporting at least more stable economic growth? We’ve seen hours worked grow by a mere +0.07% in the first quarter of the year (in the Dec quarter aggregate hours worked grew by +0.46%), indicating that activity may be slowing.

Despite the picture I’ve painted here, business sentiment and reported business conditions indices are at multi-year highs. It’s difficult to explain the disparity between improving business confidence & reported conditions and the slowing growth in new credit for business. I would have thought that improving business confidence would translate into decisions to invest and spend. But even the NAB survey for the month of April has a rather large pull back in capex:-

Source: NAB

Maybe business was waiting on the budget outcome in May. Either way, this ‘optimism’ hasn’t translated into better labour market conditions – underemployment continues to rise, unemployment remains elevated and growth in aggregate hours worked is flat.

And in the irony of all ironies, the one area where regulators are focusing efforts to slow lending, investor mortgages, the growth in new credit continues to accelerate. The annual growth in new credit for total mortgages of +$7.6b is the product of 1) continued deceleration in owner occupier credit (-$31b annual decline in new credit) and 2) the continued acceleration of investor lending from +$33b in March to +$38.9b annual growth in April. We are yet to see any slow-down in investor-led activity reflected in the data. Most measures to curb interest only lending only started to come into effect during April.

Whilst it’s the right idea to reign in riskier interest-only lending, know that this is going to happen now against a backdrop of slowing annual new credit growth across the board – business, owner-occupier mortgages and personal credit. Slowing our rate of debt growth isn’t a bad thing, but it comes at a price when economic output growth relies so heavily on accelerating credit growth.

New credit, together with income growth, drives new spending in the economy.

Advertisements

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.