Business credit rises at fastest pace 6½-years

Business Indicators; Inflation; Private sector credit; Weekly petrol prices

• Lending up: Private sector credit (lending) rose by 0.7 per cent in October after a similar rise in September. Annual credit growth rose from 6.6 per cent to 6.7 per cent – a near 7-year high. Business credit rose by 1 per cent in October to be 6.6 per cent higher than a year ago – a 6½-year high.
• Profits rise for first time in five quarters: Company operating profits rose by 1.3 per cent in the September quarter to be up just 0.1 per cent over the year.
• Sales rose in 12 of the 15 industry sectors in the September quarter. Sales rose the most in Mining (up 4.9 per cent) followed by Electricity, gas, water and waste services (up 2.0 per cent), and Construction (up 1.9 per cent).
• Inflation gauge: The TD Securities/Melbourne Institute monthly inflation gauge rose by 0.1 per cent in November after a flat result in October. The annual rate of inflation held steady at 1.8 per cent.
• Petrol: According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.1 cents per litre to 126.3 cents per litre in the week to November 29.

What does it all mean?

• The latest economic data was generally upbeat. Petrol prices remain depressed, company profits rose for the first time in five quarters, inflation remains contained, and annual growth in private sector credit lifted to a near seven-year high.
• Encouragingly the lift in lending was driven by business borrowings and with less reliance on investors housing. In fact investor housing recorded the slowest growth in 2½-years in October. While business borrowings surged by 1 per cent in October, with annual growth at a 6½-year high. And while it is still early days it is a welcome result after the decidedly weak business investment data last week.
• The lift in company profits was a welcome reprieve after four straight quarters of declines. Interestingly sales rose the most across mining, utilities and construction. Growth is still patchy across the economy and the data is likely to remain volatile.
• The downward pressure on global oil prices will keep petrol prices depressed and also ensure that it doesn’t add significantly to inflation. In that context the monthly inflation data confirms that inflation remains well and truly in check and the Reserve Bank will keep an easing bias in play over the next six months.
• The rebalancing continues to be taking place across the economy. No doubt the weaker Aussie dollar is helping to alleviate some of the pressures for the weaker investment story. And from the Reserve Bank’s standpoint there is nothing to do but to monitor the transitions to ensure that the process moves as smoothly as possible.

What do the figures show?

Business indicators

• Company operating profits rose by 1.3 per cent in the September quarter to be up just 0.1 per cent over the year. Profits fell in 8 of the 15 industry groups. Profits rose by 10.1 per cent in Accommodation & food services and 3 per cent in Mining. Profits fell by 2.6 per cent in Manufacturing, fell by 100.6 per cent in Financial and insurance services and by 11.5 per cent in Construction.
• Unincorporated gross operating profits actually rose by 2.3 per cent in the September quarter after rising by 4.6 per cent in the June quarter. Business gross operating profits rose by 1.4 per cent in the September quarter after rising 0.2 per cent in the June quarter.
• Inventories rose by 0.1 per cent in the September quarter after rising by 0.2 per cent in the June quarter. Inventories rose in Electricity, gas, water and waste services (up by 5.7 per cent) and by 1.7 per cent in Mining (up by 1.7 per cent). Inventories fell in Manufacturing (down by 0.9 per cent).
• Sales rose in 12 of the 15 industry sectors in the September quarter. Sales rose the most in Mining (up 4.9 per cent) followed by Electricity, gas, water and waste services (up 2.0 per cent), and Construction (up 1.9 per cent). Sales fell most in Professional, scientific and technical services and Administrative & support services (both down 1.3 per cent).
• In current prices, sales rose in four states and territories in the September quarter: Tasmania (up 2.5 per cent), NSW (up 1.6 per cent), Victoria (up 0.9 per cent), and Northern Territory (up 0.1 per cent).
• Sales fell in Queensland (down 0.7 per cent), Western Australia (down by 0.5 per cent), and South Australia (down 0.1 per cent).
• Wages & salaries rose by 1.0 per cent in the September quarter to be up 2.5 per cent over the year.

Inflation gauge

• The monthly inflation gauge rose by 0.1 per cent in November after a flat result in October. The annual rate of inflation held steady at 1.8 per cent.
• Tradable good prices rose by 0.3 per cent in November after falling by 0.3 cent in October. Tradable good prices are up just 1.1 per cent on the year. Non-tradable prices were flat in November to be up 2.3 per cent over the year.
• The underlying rate (trimmed mean) was flat in November after a similar result in October. The annual rate rose eased from 2.2 per cent to 2.1 per cent.
• Excluding volatile items like petrol and fruit & vegetables, the core inflation gauge was flat in November to be up 2.1 per cent over the year.
• TD Securities noted that: “Contributing to the overall change in November were price rises for fruit and vegetables (+3.7 per cent), newspaper, books and stationery (+5.2 per cent), and medical, dental and hospital services (+1.3 per cent). These were offset by price falls in holiday travel and accommodation (-0.8 per cent), rents (-0.8 per cent), and automotive fuel (-1.3 per cent)”.

Private sector credit

• Private sector credit (lending) rose by 0.7 per cent in October after a similar rise in September. Annual credit growth rose from 6.6 per cent to 6.7 per cent – a near 7-year high.
• Housing credit grew by 0.6 per cent in October after a similar rise in September. Housing credit is up 7.5 per cent on a year ago – the strongest annual growth since October 2010.
• Owner occupier housing credit rose by 0.7 per cent in October to stand 6.1 per cent higher than a year ago – the fastest annual growth since July 2011. Investor housing finance lifted 0.4 per cent in October – the slowest growth in 2½-years. Investor housing credit was up by 9.7 per cent over the year, down from 10.3 per cent annual growth in October.
• Personal credit fell by 0.3 per cent in October after a flat result in September. Personal credit was up unchanged over the year.
• Business credit rose by 1 per cent in October to be 6.6 per cent higher than a year ago – a 6½-year high.
• Term deposits held with banks fell by $1 billion in October to $505.7 billion. Term deposits are down 5.7 per cent on a year ago – holding near the sharpest decline in 12 years. Term deposits have been regularly falling in annual terms for 23 months – the longest period in records going back almost 30 years.

Petrol prices

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.1 cents per litre to 126.3 cents per litre in the week to November 29. The metropolitan petrol price rose by 0.5 cents to 125.2 cents per litre while the regional price fell by 0.6 cents to 128.7 cents per litre.
• The national average Australian price of diesel petrol fell by 0.3 cents to 126.9 cents per litre in the week to November 29. Last week the metropolitan price fell by 0.3 cents to 124.9 c/l, while the regional average price fell by 0.3 cents to 128.5 c/l.
• Average unleaded petrol prices across states and territories over the past week were: Sydney (up 5.6 cents to 129.1 c/l), Melbourne (up 1.7 cents to 120.3 c/l), Brisbane (down 7.2 cents to 127.8 c/l), Adelaide (up 1.5 cents to 123.7 c/l), Perth (down 1.4 cents to 122.8 c/l), Darwin (down by 0.6 cents to 128.0 c/l), Canberra (unchanged at 128.1 c/l) and Hobart (down by 0.1 cents to 133.9 c/l).
• Today the national average wholesale (terminal gate) unleaded petrol price stands at 110.2, down 0.3 cents on a week ago. The terminal gate diesel price stands at 109.5 cents a litre, down 1.3 cents over the week.
• Last week the key Singapore gasoline price rose by US$1.39 or 2.4 per cent to US$58.79 a barrel. In Australian dollar terms the Singapore gasoline price rose by $1.56 a barrel or 2 per cent to $81.35 a barrel or 51.16 cents a litre. In the past month the Singapore gasoline price has fallen by AUD$5.43 or 6.3 per cent.

What is the importance of the economic data?

• The quarterly Business Indicators publication by the Bureau of Statistics contains measures such as inventories, company profits and income from sales. Higher inventory (stock) levels can be either intentional or unintentional. If stocks are low and sales are expected to rise in the future, businesses will seek to build up stocks. However an unintentional build-up in stocks is where sales fall short of expectations, leaving more goods on the shelves than desired. If profits are increasing then this may point to increased capital spending and employment in the future. Rising profits are also a sign of favourable business conditions.
• 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.
• The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.

What are the implications for interest rates and investors?

• The Australian economy is evolving as best as can be expected.
• Over the last seven years the Australian economy has experienced the biggest structural swings in a century. Mining investment and prices soared; resource prices retreated; mining investment was completed; mining production has ramped up to record highs; interest rates fell to record lows; and home building approvals hit record highs. Major swings and transitions have already occurred and the process is a long way from over.
• The Reserve Bank can feel justifiably happy about how the process has gone so far.