Credit Aggregates for April 2012

Today the RBA released the credit aggregates for April. The headline message was a small growth in total credit.

The detailed message was a second month of solid growth in business credit as seen in the following chart of monthly and trend growth in credit.

Looking beyond the monthly data points, the Henderson moving average trends are as follows.

But this welcome sign in business credit needs to run for a bit before we will see business credit growth where it was prior to the GFC.

The other sectors are not growing as as healthily (neither on their individual historical standards, nor in terms of the change in their growth rate) ... although investor housing has turned a corner.

The recent combined growth story is as follows.

The actual aggregates are as follows.

Retail Trade April 2012

Some charts from today's ABS publication on Retail Trade.

Debt

Most people who come here will be familiar with the Australian private sector debt story over the past 35 years. Since Q4-1976, private sector debt has risen from a touch over 40 per cent of nominal GDP. It peaked with the onset of the Great Recession at around 155 per cent and is currently a touch over 140 per cent.

Nominal credit growth ran at between 15 and 20 per cent prior to the early 1990s recession. It ran between 10 and 15 per cent prior to the Great Recession.

Of concern is the productivity of that debt. The next chart looks at the annual change in credit and compares it with the annual change in nominal GDP.

While this comparison (a flow compared with an acceleration) is problematic; we can divide the two lines to find out what an extra dollar in debt contributed in terms of the change in GDP - a measure of productivity.

In the late 1970s an extra dollar in private debt delivered around $1.80 in GDP growth. In the period immediately prior to the Great Recession (what Australians call the global financial crisis) an extra dollar in debt was giving us around 40 cents more in GDP - not the best return on investment.

Why was our debt becoming increasing non-productive over time? It's a good question and I am not sure I know the answer. But my suspicion is that over time our debt was increasingly being used to finance non-productive housing asset acquisition. Business as a proportion of our aggregate credit shrunk, while housing grew.

The ABS housing finance data suggests a compositional change that would have also impacted on credit productivity - a substantial increase in borrowings to purchase established dwellings, combined with a decline in the purchase of new dwellings and a long period of little growth in the construction of dwellings. Of note, the purchase of existing dwellings is not counted in GDP: it is not an addition to national output.

The thing that intrigues me is those people who hope for a cut in interest rates to restart the housing boom (in the hope this will boost the economy). I am not convinced. Australia is undergoing a structural change. We are saving more - and this propensity to save appears entrenched.

House prices are falling (some argue they were well over-valued). Apologies on the heading for the next chart - it is the index for established houses over 8 capital cities.

In part at least, because of the fall in house prices, the debt to assets ratio continues to rise.

For these reasons, I am not convinced we will see a return to burgeoning housing credit growth, even with more cuts in official interest rates.

Data Sources

• Credit Aggregates from RBA table D2
• Growth in Credit Aggregates from RBA table D1
• Nominal GDP and savings ratio from ABS National Accounts
• Housing finance statistics from the ABS
• House price index from the ABS
• Housing debts to assets from RBA table B21

Nominal GDP v Fed Govt Total Revenue

The following chart is a comparison of through-the-year growth in nominal GDP (original series from the ABS National Accounts) with through-the-year growth in federal government total revenue (from the RBA table E1). Both sets of growth figures compare the flow in a quarter with the same quarter in the previous year.

Because of the noise/volatility in the total revenue series, I applied a 9-term Henderson moving average to the revenue series simply to get a better look at what is going on.

Another way of looking behind the noise is to compare the through-the-year growth in the rolling total for four quarters.

A few things look interesting: First, there appears to be a broad relationship between the two lines.

Second, with most of the downturns, it looks like nominal GDP fell before tax revenues (1977, 83, 91). The only case where GDP was not the lead indicator was the recent global financial crisis (aka Great Recession).

Third, growth in nominal GDP appears to be slowing at the moment. Dating back to Q3 2010, it is over too long a period to reflect the recent decline in headline inflation. Anyway, I would expect inflation changes to have a similar impact on both series. And it begs a question on whether this slowing in the nominal GDP growth rate is about to foreshadow another slowdown in the growth of tax revenues.

A look at Unemployment Benefit payments

DEEWR publishes monthly data on its payments. The April data was released today.

Based on this advice from Centrelink, it looks like two of these payment data series - Youth Allowance Other and New Start Total Recipients - can be added together and used as a rough proxy for the number of people who are unemployed (noting that the DEEWR payments data suffers from subtle and not so subtle series breaks as the eligibility requirements for payments change over time).

Collectively these series added together look like the following.

These unemployment payment figures compare with the original ABS count of the number of unemployed people as follows. While the series have different seasonal patterns, there is a close relationship between the two.

Applying a seasonal decomposition to the DEEWR data, we get the following trend and seasonally adjusted series. (Note: the decomposition was 'periodic')

Looking at the seasonally adjusted series since September 2011, the number of unemployed persons on DEEWR payments has been rising.

Interestingly, this is quite a different story from the last few months of the unemployed persons data from the ABS.

I am more inclined to favour the payments data over the labour force survey data as the best indicator on what is happening in the labour market.

The trend monthly and annual growth of people on unemployment payments is as follows.

Just for the fun of it, let's look at the most recent bit of that data in detail ... unemployment benefits payments are trending upwards.

Thank-you: to the DEEWR Income Support Information Section for providing me with the payment statistics back to late 2001.

The DEEWR leading indicator

Every month, DEEWR publishes its Monthly Leading Indicator of Employment. It is designed to give advance warning of turning points in cyclical employment. The average lead time of the Indicator (i.e., the time between a peak or trough in the Indicator and the corresponding peak or trough in cyclical employment) is around nine months.

A ‘turning point’ in the Indicator is said to be confirmed when there are six consecutive monthly movements in the same direction after the turning point. With the May print of the series, we now have five consecutive prints in the negative direction.

More RBA interest rate cuts

Markets appear to be moving early to price in a June rate cut. The swaps indicator (which gives a lot of false positives) is well into rate cut territory. Even the more cautious 30-day bank bills rate is edging towards pricing in a rate cut in June.

The ASX Target Rate Tracker is presaging official interest rates at 2.5 per cent by October this year. I am less convinced. I think the RBA will have an eye to tradables inflation as the dollar falls.

More generally, the market nerves indicator is moving up.

But we are still along way off the GFC highs.