Slowest pace of borrowing in three years

Private sector credit; China Purchasing Managers Indexes

• Lending: Private sector credit rose by 0.4 per cent in April after a 0.4 per cent gain in March. Annual credit growth of 4.9 per cent is the slowest in three years.
• Consumers not borrowing: The annual decline of personal credit (-1.5 per cent) equals the biggest decline in 7½ years.
• Banks: Deposits are up 7.8 per cent over the year; loans are up 6.3 per cent.
• Margin lending: The number of margin lending client accounts hit a 13-year low of 129,000 in the March quarter while the average number of margin calls per day fell to 0.17 – the lowest in around 17 years of records.
• China data: The National Bureau of Statistics manufacturing purchasing managers’ index was unchanged at 51.2 in May (51.0 forecast) with the services sector result up from 54.0 to 54.5. Any reading above 50 signifies expansion or growth of activity.

What does it all mean?

• What if you had the lowest interest rates in a generation but no one wanted to borrow. While Aussie consumers continue to take out loans to buy homes, they continue to slash other debt. In fact personal credit is falling at the fastest rate for over seven years. Businesses are also not keen to borrow – credit growth is the slowest in three years. Banks and other lenders certainly have the funds – in fact annual growth of bank deposits exceeds that of loans by the biggest margin in four years.
• In these more conservative and less volatile times, borrowers are also less keen to embrace margin lending. The number of client accounts stands at 13-year lows while the average number of daily margin calls is at record lows (almost 17 years of records).
• The Chinese economy continues to turn over nicely despite constant worries from doomsayers to the contrary. The economy is transitioning from manufacturing to services. And the good news is that the services sector is expanding just below the fastest pace in three years. The 54.5 result for the services gauge in May was just below the recent high of 55.1 in March. The results of the purchasing manager surveys are good news for Australian exporters and importers.

What do the figures show?

Private sector credit

• Private sector credit (lending) rose by 0.4 per cent in April after a 0.4 per cent gain in March. Annual credit growth eased from 5.0 per cent to a near 3-year low of 4.9 per cent.
• Housing credit grew by 0.5 per cent in April to be up 6.5 per cent on a year ago – annual growth is lifting from the lowest levels in 30 months.
• Owner occupier housing credit rose by 0.5 per cent in April to stand 6.1 per cent higher than a year ago – the slowest growth in 19 months. Investor housing finance lifted 0.6 per cent in April to stand 7.3 per cent higher over the year – the fastest growth in 15 months.
• Personal credit fell by 0.1 per cent in April to be down 1.5 per cent over the year – equalling the biggest annual decline in 7½ years.
• Business credit rose by 0.4 per cent in April after a 0.1 per cent rise in March and 0.1 per cent fall in February. Business credit is 3.1 per cent higher than a year ago – the slowest growth in almost 3 years (35 months).
• Loans and advances by banks rose by 6.3 per cent in the year to April – the slowest pace in 3½ years. Bank deposits (term, current, other and certificates of deposit) rose by 7.8 per cent in the year to April – the fastest pace in 2½ 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.
• The National Bureau of Statistics in China releases purchasing manager survey results for manufacturing and services sectors around the end of the month/first day in the month. The data is useful in tracking the health of the Chinese economy – Australia’s major trading partner. The data is valuable for Australian exporters and importers.

What are the implications for interest rates and investors?

• The Chinese economic data remains encouraging, showing that the transition from the industrial sector to household sector remains on track. The manufacturing sector is expanding, while the services sector is clearly the driver taking up any slack.
• The Reserve Bank may fret that housing debt is exceeding that of wages, but that is only part of the story. Consumers are trimming other debt including personal loans and credit card debt. Margin loans are out of favour despite low interest rates, low sharemarket volatility and healthy returns on investments. The issue for banks is that inflows of cash are growing at a faster rate than outflows, putting pressure on margins, profitability and potentially dividends.
• Interest rates will remain on hold over the rest of 2017. There is no pressing need for a change in rates in any direction.