Chart of the Week: China credit impulse vs Australian GDP

In this edition, we have plotted in the same chart China credit impulse and Australia’s GDP in current prices. After sending our latest Monthly Macro Outlook where we mentioned China credit impulse, we received questions regarding calculation. Our leading indicator is based on the flow of new core credit, based on quarterly data from the BIS, calculated as % of GDP. It tends to lead the real economy by 9 to 12 months.

Without much surprise, there is an obvious link between Australia’s economic activity and the evolution of China credit impulse due to the intense trade relationship. China is Australia top trade partner with total two-way trade with China representing about 11.7% of Australia’s GDP.

China’s slowdown has negatively impacted Australia’s economy and put an end to the economic miracle. We see very well in the below chart that Australia avoided recession during the GFC due to the strong credit pulse from China coupled with a rapid accumulation of public and household debt at the domestic level.

This period is over. The external shock linked to China’s deleveraging that has pushed into contraction credit pulse since 2017 along with trade war friction put Australia’s economy in a very vulnerable position. If our model is correct, we should see lower GDP growth in the coming quarters before a rebound in Q1 2020. It would be fueled by the slight improvement of China credit impulse and the combination of rate cuts by the RBA and likely fiscal push from the Australian government.