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.