Maximum caution as credit growth drags

Business and household credit growth remain subdued despite historically low interest rates, reflecting ongoing concerns about the health of the economy and labour market.

Credit growth is on the rise but still remarkably weak given the historically low interest rates available to households and businesses.

Private sector credit rose by 0.3 per cent over October to be 3.5 per cent higher over the year. Credit growth continues to be driven by the housing sector, with housing credit rising by 0.5 per cent over October to be 5 per cent higher over the year. But business credit remains incredibly weak, although it will rise significantly in year-ended terms in November.

Graph for Maximum caution as credit growth drags

The rise in housing credit was driven by investors. Investor housing credit rose by 0.6 per cent over October and is now rising at almost an 8 per cent annual rate. Owner-occupier housing credit has picked up a little, with monthly growth now at its highest level since July 2011. But by historical standards, housing credit growth remains at a fairly low level and is largely tracking nominal income growth.

The pick-up in housing credit is largely consistent with recent house price growth rising, but overall credit growth remains fairly contained. My view on the housing market is that the recent ‘boom’ is almost entirely Sydney-based and that should also be reflected in the credit data.

Despite low interest rates, I expect households to remain fairly cautious given the subdued outlook for the labour market over the next year. Investors will be more optimistic (otherwise they wouldn’t be investing), but an overall slowing in house price growth may dampen their rosy outlook.

Graph for Maximum caution as credit growth drags

For businesses, lending activity has been on the rise in recent months, but is only just beginning to show in outstanding credit. Clearly there are still a significant proportion of Australian businesses firmly in deleveraging mode that remain cautious about the domestic outlook. Credit growth is much weaker for smaller businesses, which makes sense given they are at greater risk in a cyclical downturn and the outlook right now is fairly subdued.

On a year-ended basis, business credit is likely to pick up to around 2 per cent in November, due to a particularly large fall in November last year that will drop out of the annual data. But that may be short-lived given the sharp bounce in business credit growth that occurred last December (up 0.7 per cent over December 2012).

Other forms of household credit outstanding, such as car and credit card purchases, declined modestly over October to be 0.6 per cent higher over the year. This weakness is particularly concerning because personal credit tends to be the most cyclical measure of credit.

Most personal credit transactions are of a discretionary nature and therefore the first purchases to go when economic conditions sour. Personal credit is also usually of a shorter duration than business or housing credit, which allows it to provide a timelier read on conditions. The lack of any strength in personal credit is evidence that households are particularly concerned about economic and employment prospects – sufficiently concerned that low interests rates are not yet enough to change their minds. 

On balance, the credit data indicates that most sectors of the economy are still fairly cautious about the economic outlook. Many households and businesses continue to deleverage, which is weighing on credit growth. I expect credit growth to pick up a bit in the months ahead but the rate of growth will be remarkably weak given the interest rates available to lenders.

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