Credit growth hopes hang on a falling dollar

Despite record-low interest rates, business lending growth has slowed as the non-mining sector fails to pick up momentum. But the falling Australian dollar could spark a turnaround.

Commercial lending declined in October, but we should be more interested in the trend that points to solid (yet slowing) growth in lending activity. On a trend basis, Australian Bureau of Statistics data today showed commercial lending rose by 0.6 per cent in October to be 17.6 per cent higher over the year. But we are seeing a clear decline in the pace of growth over the past six months, with monthly trend growth slowing from 3.2 per cent in May to 0.6 per cent in October.

Graph for Credit growth hopes hang on a falling dollar

At this point of the cycle you might expect lending growth to either still be rising or to at least stabilise. Slowing credit, on the other hand, might prove indicative of a lack of investment opportunities, continued deleveraging or mounting pessimism regarding the economic and financial outlook.

The economy certainly doesn’t need businesses to take on reckless amounts of leverage. But it is perhaps surprising that, given the historically low level of interest rates, businesses have not expanded their activities to a greater extent. As it stands, commercial lending activity is around 25 per cent below its peak in December 2007.

Business credit outstanding continues to grow at a modest pace. Combined with lending data, this indicates that while some firms are expanding their activities, there are a significant number of businesses that continue to refinance or deleverage.

It is consistent with an economy that is still overly reliant on the mining sector. The non-mining sector disproportionately uses domestic sources of credit compared with the mining sector, which can more readily tap international financial markets.

It is therefore no surprise that business lending growth has slowed a little, as the non-mining sector muddles along with no clear momentum. With the dollar declining and currently sitting under 90 US cents, the non-mining sector of the economy should begin to pick up a little, which could see business lending expand in 2014.

Personal lending continues to trend downward but is still 6 per cent higher over the year. Personal loans have been on a downward trajectory over the past five months, in contrast with both commercial and housing lending (Low rates have a high price tag for first home buyers, December 10).

Households have reason to be a little cautious right now, with the unemployment rate on the rise and the outlook fairly subdued. This cautiousness is likely to take hold earlier in personal lending – often discretionary items that are not necessities – than in other forms of lending. These are the first items people pull back on when things get tight.

But in saying that, I should acknowledge that despite its fall, personal lending remains at a fairly high level. It was around its peak level before the recent drop-off.

Graph for Credit growth hopes hang on a falling dollar

On balance, we still have a two-tier lending environment. Some businesses are expanding but there are still a lot of others deleveraging or refinancing existing loans. The pace of commercial lending growth has slowed significantly since May, and credit growth – as with economic growth more generally – will largely depend on the recovery in the non-mining sector.

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