Data Diary

Australian lending finance (Apr10) – expect further falls in consumer debt

Posted on 15 June 2010

Australian lending finance for April release by the ABS today (here).  Overall trend is still down lead by contraction in consumer finance:

This is consistent with recent months building approvals (here) and housing finance data (here).  The residential market has peaked and with it Australia’s credit expansion.

On a more positive note, commercial lending looks like it is continuing to feel out a floor:

Australia’s corporate sector is in pretty good shape – with excessive leverage being given a workout through equity placements and asset sales over the last 2 years.  At best, Australia’s corporates could embark on a investment cycle that would help cushion the domestic economy from a slowing world economy.  At worst, if asset price deflation is to continue to stalk markets, with reduced leverage the impact on Australia’s corporate sector will be softened.

The question is whether commercials will expand capacity in the face of economic uncertainty and declining demand at home.  To put this in a longer term context consider the following charts:

This chart maps total lending since the commencement of our credit bubble.  The red line is where 7.5% per annum growth would have taken us across the period.  Scary really, all that expansion in debt and only 4′ish% growth in GDP per annum across the same period.  Based on this evidence, there is good reason to expect further falls in total credit.

The chart looks at consumer finance as a propertion of commercial lending.  At one end of the spectrum we can see the 1987 boom driven as it was by excessive corporate debt.  Not even the recent Babcock and Brown, Allco, Centro and friends, corporate debt seraglio could rival our infamous 80′s entrepreneurs.  Perhaps, this was because the rise in corporate debt was overshadowed by the housing boom.  And with this in mind, the more recent climb in housing finance to commercial debt looks well overdone.  If this chart is in mean reversion mode, then either housing debt is set to fall or commercial debt is set to rise.