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

  1. David_Lazarus says

    This outcome has been known about for years. Australia has had a spectacular property/credit bubble for years and quite frankly it is surprising that it has survived this long. It is still not unwinding so when that happens it will turn nasty. 

    1. dibbsy says

      It is unwinding supported by any statistic. Credit growth, sales, number of proerties on market, auction clearances, HOUSE PRICES.. ? Can you be more specific?

      1. David_Lazarus says

        Well I am not watching Australia particularly closely, but the fact that the housing market is only slightly off its peaks, is still worrying. With the first time buyer subsidies a few years ago sucking in many at inflated prices means that when the bubble bursts these people will be locked out of the market for years. Then the Australian banks are loaded up with hot chinese money which could leave the banks insolvent if there were a bank run. Australia has two things in its favour and that is that it is a currency issuer and a big commodity exporter. Australia’s current situation rests with China. If the slowdown in iron exports continues then that will increase pressures. As with most countries the real problems lie in the banks. How the government deals with them is the key to the outcome. 

  2. Marko says

    Oz has fiscal space and some room to cut rates more but housing prices have to come down to earth eventually , which will be bad for the economy if the common pattern holds.

    They seem to run a more sensible stimulus than most , judging from the last time , in that they target households more directly.

    If China is slowing , it’s probably game-over for them regardless. Maybe for the global economy as well , what with the EU , Japan , and the U.S. all in dicey situations.

    If you wanted to establish a good environment for WWIII , this is how you’d do it.

    1. Edward Harrison says

      Australia does have fiscal space if they want to use it when house prices come down. The question is whether they will use it and whether prices are so elevated that the amount of countercyclical fiscal needed would be politically feasible.

      I agree that a lot does depend on China. If China slows, there is no way to deal with the moderating credit growth without a painful recession.

  3. theo says

    I live in Australia. The media and govt here all have claimed that things are really good, we should be grateful because things are booming etc; but the reality is Australia has been in recession for years. Mining is the mainstay, but it only employs 2% of the workforce.
    Australia is really just the capital cities, the provincial parts of Australia are pretty much in permanent recession with few industries, jobs or opportunity. The biggest industries are red tape and bureaucracy to a level scarcely to be believed, all paid for by looting businesses for tax and fines, ripping off households for rates, tax and energy cost; and govt borrowings. A word of advice- don’t believe any official figures about Australia.

    1. dibbsy says

      The RBA exclude so many factors of the CPi yet incluide them in their reasoning for manipluating credit rates. Rotten to the bone.

      1. Tom says

        What di the exclude from the cpi?? Then reiclude?

        It would be good to know if I have to argue with ppl

  4. Hod says

    Here Here Theo. I am in Brisbane and am amazed by the bureaucracy and waste at all levels of government. 

    We need a Ron Paul here.


    1. Beauner says


      Australia is doomed….

  5. Phil & T S says

    Well things are hardly rosy in NSW! Mind you we’re doing marginally better than Victoria where over-reliance on the Stamp Duty Revenue Stream has led to a major current (and predicted future) shortfall.

    Just wait until the Housing Bubble realy starts to leak – and the amateur investors all decide to gallop to the exit at the same time. “No-one able to pay your fantasy price for your mass produced shack = bye bye “Equity, Mate”!!”

  6. Pr729 says

    Two comments:
    1. The credit accelerator isn’t Steve Keen’s idea.  Biggs, Mayer and Pick were the first to publish literature on the matter (they termed it the credit impulse).
    2. In my view housing and commodity market issues are the side show for the Australian economy.  The big issue is the reliance on foreign funding and how that has linked into Australia’s current account deficit which economists for so long argued that Australia was a special case.  If you want some decent analysis on this then refer to or if you have access then Goldman’s Aussie economist is more on the ball than most of the other sell side dribble.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More