Chart of the Day: Australian Credit Growth Has Collapsed

Steve Keen’s thesis about the credit accelerator adding to aggregate demand is interesting. Basically, Steve is saying that private debt adds to the ability of one consumer to purchase goods, services and assets without a concomitant decrease in another economic agent’s ability to do the same because banks can create money ‘out of thin air’. The upshot of this is that credit growth propels economic growth forward even in the absence of income growth. Obviously, you cannot have ever accelerating credit growth because credit can’t grow to the sky unless you are deep into Ponzi. So eventually credit growth in any economy wanes.

If you look at the rate of growth in credit, it tells you something. When it hits an inflection point i.e. when credit growth peaks and begins to decelerate, investors should take it as a harbinger of declining GDP and a signal to shift assets toward risk-off trades. Right now, Australia is demonstrating some serious softness in credit growth as the chart below attests.

The analysis by David Lawson goes:

The lack of expansion in the Australian private credit markets is certainly having an adverse effect on commerce in the post 2008 financial crisis period. Annual private credit growth has averaged 3.5%, since it dropped down to single digit figures in October 2008.

Personal credit and business credit have been the deadweight’s, averaging an annual growth of -1% and -0.5% respectively. Housing credit has offset this with an average annual growth rate of 6.9% since October 2008. However, this has since slowed to an average annual rate of 5.3% for the first 3 months of this year and is continuing on this slowing trend. With significantly less credit coming into the market, the Government have had no choice but to compensate deficit spending.

Question: how long will the government compensate with deficit spending? If Australia turns to austerity, you don’t even need to know your financial sector balances to realise Australia would be a serious risk-off bet. This day is coming soon.

More below

Source: Nowhere to Grow – Steve Keen’s Debtwatch


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.