Private sector credit (lending) rose by just 0.1 per cent in October after rising by 0.3 per cent in September.
- Annual credit growth eased from 4.0 to 3.8 per cent but the annualised pace in the past four months is closer to 2.5 per cent.
- Personal credit rose by 0.1 per cent in October after dropping by 0.3 per cent in September. Personal credit was down 0.7 per cent over the year, and has been falling in annual terms for over a year.
- Housing credit grew by 4.7 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. Lending barely budged in October and the annual growth rate looks anaemic.. 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 over the past year.
- Scouring through the data there certainly wasn’t any rays of sunshine. The only excuse that could be made is the result is for October and the rate cut in early October is yet to have had a profound impact on activity. Having said that it is clear that any improvement in lending is really off a low base.
- Yesterday’s CAPEX data highlights how the uncertainty in domestic and global environment had resulted in businesses paring back investment plans by the fastest rate in 21 years. And today’s credit data further amplifies the lack of confidence across the business sector. Business borrowing fell by the fastest pace in 16-months October. The tough trading conditions 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. The one positive is that confidence has shown signs of improving in recent months, however another rate cut may be needed to ensure the improvement is sustained.
- The Reserve Bank is likely to be disappointed by the latest round of data. There are not many reasons for encouragement and 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. At the Reserve Bank Board meeting next week, it is likely that the merits of another rate cut will be debated long and hard. We believe the Reserve Bank should be cutting rates by 25bps in a effort to spur activity and shore up domestic growth.
What do the figures show?
- Private sector credit (lending) rose by just 0.1 per cent in October after rising by 0.3 per cent in September. Annual credit growth eased from 4.0 per cent to 3.8 per cent.
- Housing credit grew by 0.3 per cent in October after a gain of 0.4 per cent in September. Housing credit is up 4.7 per cent on a year ago – the weakest annual growth in records going back to 1976.
Owner occupier housing credit rose by 0.3 per cent in October to stand 4.3 per cent higher than a year ago. And investor housing finance lifted 0.4 per cent in October to be up 5.4 per cent over the year. - Personal credit rose for the second consecutive month, up by 0.1 per cent in October. Personal credit was down 0.7 per cent over the year, and has been falling in annual terms for 15 months.
- Business credit fell by 0.3 per cent in October after rising by 0.3 per cent in September. Business credit is 3.3 per cent higher than a year ago, down from 3.7 per cent in September.
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. The Reserve Bank has made mention of the modest rise in inflation in recent commentary. However the construction and CAPEX data has confirmed that building cost and equipment costs pressures remain benign.
- 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 month.