Private sector credit (lending) rose by 0.2 per cent in August after rising by a similar amount in July – and matching the weakest monthly growth in seven months. Annual credit growth eased from 4.2 to 4.1 per cent.
- Personal credit fell by 0.3 per cent in August after dropping by 0.3 per cent in July. Personal credit was down 1.4 per cent over the year, and has been falling in annual terms for over a year.
- Weakest growth of housing credit on record. Housing credit grew by 4.8 per cent over the past year – the weakest growth in records dating back to 1976.
What does it all mean?
- The private sector credit data tends to be a good forward looking indicator on activity. If borrowings pick up, spending should follow suit over the next few months. In that context the lack of a significant improvement in overall borrowings is disappointing. But lending barely budged in July and the annual growth rate backed away from three year highs. At the same time, housing lending is growing at the slowest pace since records were first maintained in the mid-1970s. And personal credit is still going backwards.
- Granted there are pockets of encouragement, such as the recent improvement in business borrowings. However even business borrowing fell in August and despite the annual rate holding just shy of the best levels in three years, it raises questions about the health of the business sector, given the ongoing profitability squeeze and slowdown in activity.
- The lacklustre personal credit figures continue to paint a picture of a conservative Aussie consumer. In fact in annualised terms growth of personal credit and has been falling for over a year. Looking forward, a sizeable lift in consumer confidence will be required to justify a turnaround in household spending. And given that the immediate effect of the rate cuts and Federal government handouts have already run their course, it is unlikely that confidence will ratchet significantly higher in coming months.
- The Reserve Bank is unlikely to get overly excited by the latest batch of data. There are some reasons for encouragement but overall the data doesn’t highlight any significant shift in activity patterns across the economy. The central bank is likely to be more focussed on the global economy and the downside risks to global growth. Ongoing weakness in China and the Euro zone is likely to prompt further action in coming months. CommSec has pencilled in the next rate cut to take place in November after the next round of inflation data.
What do the figures show?
- Private sector credit (lending) rose by 0.2 per cent in August after rising by 0.2 per cent rise in July. Annual credit growth eased from 4.2 per cent to 4.1 per cent.
- Housing credit grew by 0.3 per cent in August after a similar rise in July. Housing credit is up 4.8 per cent on a year ago – the weakest annual growth in records going back 34 years.
- Owner occupier housing credit rose by 0.3 per cent in August to stand 4.6 per cent higher than a year ago. And investor housing finance lifted 0.4 per cent in August to be up 5.4 per cent over the year.
- Personal credit fell by 0.3 per cent in August after dropping by 0.3 per cent in July. Personal credit was down 1.4 per cent over the year, and has been falling in annual terms for a year.
- Business credit fell by just 0.1 per cent after a 0.1 per cent increase in July and 0.5 per cent lift in June. It was the weakest monthly growth in seven months. Business credit is 4.0 per cent higher than a year ago, down from 4.4 per cent in June which was the fastest annual growth rate in just over 3 years.
What is the importance of the economic data?
- Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
What are the implications for interest rates and investors?
- The continued weakness of lending growth means that rate cuts must stay on the agenda. However we don’t expect a rate cut till November – to give the Reserve Bank time to gather another month’s worth of data and also take a look at the quarterly inflation numbers.
- Over the medium term the lower fixed and variable rates will tempt businesses and consumer to once again borrow. However over the short term it is hard to see a catalyst to justify a turnaround in activity. The key factor is confidence. The outlook for the economy looks bright from a longer-term perspective but the lack of confidence is the key detriment. It is likely confidence levels will gather pace as activity levels improve over the next six months.