Australia's two-tier credit boom

Lending data shows that credit appears to be expanding across the economy, but is not translating into rising debt. It suggests many households and business are using low rates to deleverage.

Business lending is on the rise but conditions need to improve for activity to be sustainable. Meanwhile, despite low interest rates, households are pulling back on personal loans as the labour market continues to soften.

On a trend basis, commercial lending rose by 1.4 per cent in September to be almost 20 per cent higher over the year. Despite rising throughout 2013, commercial lending activity is still 25 per cent below its previous peak in late 2007. Annual growth has been driven by demand for fixed business loans (up by 23.5 per cent) rather than for revolving loan facilities (up 7 per cent).

Graph for Australia's two-tier credit boom

Importantly, this latest pick-up in business lending does not reflect widespread refinancing, as was the case during 2011 and 2012. During that period, lenders took advantage of low interest rates to refinance their loans and improve their financial position. Instead of reflecting new lending activity, refinancing is simply old lending looked at a different way.

While some businesses have increased their lending activity, many businesses continue to deleverage. Consequently, business credit outstanding rose by just 1.1 per cent over the year to September.

As noted earlier, growth for fixed lending facilities has been stronger than for revolving facilities. This is true of both commercial and personal lending.

Personal lending fell modestly in September on a trend basis, to be 6.0 per cent higher over the year. Personal loans have been on a downward trend over the past five months, in contrast to commercial and housing lending (Housing’s dangerous disappearing demand, November 11). Although at odds with trends in the housing market, this may reflect some added cautiousness from households who face a softening labour market and concerns about the non-mining sector outlook.

Graph for Australia's two-tier credit boom

By state, business lending in New South Wales continues to drag although it has picked up moderately over the past few months. Lending activity is strongest in Victoria.

Graph for Australia's two-tier credit boom

It can often be difficult to get a good read on business lending from these statistics. The data is volatile from month-to-month and prone to significant revisions. Generally I do not put a whole lot of weight on them and I recommend that readers treat these data with some caution.

That said, when coupled with household lending growth, credit appears to be expanding across the economy. Hardly surprising given the historically low interest rates. However, so far this has yet to translate into rising debt growth, suggesting that many households and businesses are using low interest rates to refinance or deleverage.

Low interest rates should sustain business lending in the near-term but with conditions still weak I am concerned that firms may not have the investment opportunities to warrant this level of lending activity. A lot will depend on whether the Australian dollar can depreciate boost the non-mining sector.

A lot of people are convinced there is already a credit boom. Monthly data such as this provide some justification for this view. However, personally I am still waiting for this activity to translate into rising debt. We are beginning to see this for investor housing, but that is not yet the case for businesses. Until that point it strikes me that we are looking at a two-tier economy filled with some businesses that are only too happy to expand while others remain decidedly cautious.

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