Credit cycle in downswing phase


There is a lot of disappointing economic data coming out for Australia lately. Today the ABS released its January 2019 Lending to households and businesses estimates which  confirmed the credit cycle is in the downswing phase (see chart above). This is related to a range of factors, including a weaker property market and falling house prices in Sydney and Melbourne, tighter lending standards possibly related to the banking Royal Commission, and slowing economic activity nationwide, and it will likely reinforce the slowing down of the economy. As legendary US investment fund manager Howard Marks explains in his latest book Mastering the Market Cycle (on p. 137):

…the credit cycle…is both highly responsive to economic developments and highly influential. Lastly it is also extremely volatile. Thus its movements are powerful and extreme, and they greatly affect activity in many other areas. And all these things are exacerbated by the swings of psychology…

When credit was growing strongly it supported residential construction and flowed into rising house prices and capital gains which supported consumption spending. But now that wealth effect on consumption spending has reversed and residential construction activity is falling.

Lending to households for both owner occupied and investment properties has fallen massively (see chart below).


While business lending recorded strong growth of around 11% in seasonally adjusted terms in January, I don’t think that indicates any upswing in business lending as business lending is highly variable from month-to-month and the trend measure continued to decline in January (see chart below).


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