Credit Impulse Update: Australia in the crosshairs Credit Impulse Update: Australia in the crosshairs Credit Impulse Update: Australia in the crosshairs

Credit Impulse Update: Australia in the crosshairs

Macro
Christopher Dembik

Head of Macroeconomic Research

The March quarter GDP data show that Australia started the year quite well. However, this does not change our view that Australia’s long-term growth prospects will be challenged by an accumulation of domestic and external headwinds. Based on  Bank for International Settlements data, credit growth to non-financial sectors has been slowing down from its recent peak of 7.7% (year-on-year) in Q1 2016 to 4.2% in December 2017. It has already had a very negative effect on credit impulse which is the second derivative of credit growth and a key driver behind economic activity.

As a result, credit impulse reached a post-financial crisis low at minus 3% of GDP at the end of 2017. 

In 2009, the magnitude of the contraction in credit was much larger and yet Australia held up well. The impact on the unemployment rate (see chart below) and on aggregate demand are clearly perceptible but the country has escaped the global recession. 

The real reason for that was that the debt engine restarted quite quickly in Australia in the aftermath of the crisis. The Australian miracle is mostly based on a rapid accumulation of public and household debt from 2008, as shown in the graph below. Over the past 10 years, household debt jumped from 108% to over 121% of GDP. At the same time, the country benefited from its sales of coal and iron ore, especially to China which launched a massive stimulus program in 2009. The last factor that helped to mitigate the crisis was that credit contraction was smaller in Australia than in the US and it followed a period of stronger credit boost with credit impulse reaching a high of 6.8% of GDP before the crisis against a peak at 3.3% of GDP in the US. 

Australian macro data
Source: Saxo Bank

Nowadays, unlike 10 years ago, Australia is less able to cope with headwinds occurring at the same time as negative credit impulse. The Reserve Bank of Australia is on hold until the end of this year and even beyond, but the problem is that global monetary conditions are deteriorating, cost of capital is rising, and liquidity stress can be observed in USD money markets.

At the domestic level, the country faces a number of challenges that negatively impact household consumption: a low savings rate, timid wage growth, and negative wealth effect linked to weakness in home prices while mortgage repayments in the country’s main cities are above the risk zone (30% of average earnings). Sydney and Melbourne are particularly worrying spots for real estate observers. In addition, the Royal Commission that will run through the rest of this year (a final report is due in February 2019) raises many doubts about future lending conditions that might be more restrictive. 

Although the ongoing slowdown in China is also a short-term headwind for Australia, only China may be able to save Australia. China's credit impulse leads Australian nominal GDP by one year (chart below). China credit impulse is still in contraction, at minus 1.9% of GDP, but it is slowly rising and might be back above zero sooner than we think. In the last Chinese State Council’s executive meeting held on June 20, a slight change of wording was mentioned regarding monetary policy indicating that the People's Bank of China will adopt a more accommodative stance (as indicated by the recent RRR cut).

On the back of weaker economic momentum and increasing trade tensions, China is doing what it knows best: stepping in in order to push credit impulse back into positive territory, lending at the same time a welcome element of support to the Australian economy. 

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.