Friday, 7 August 2015

A credit boom?

Judging by recent page-views, and despite the fact that they have better things to do with their lives, people seem to be pretty interested in the overall topic of monetary policy - where it is now, where it should go, has it been managed well in the past, should we stick with what we're doing, what's happened to inflation and what'll happen next.

So I thought I'd chuck in another way of looking at current monetary conditions (and also because I've been having a wee exchange of views on Twitter about whether bank lending is growing quickly or not). Here it is: it's the difference between the year on year growth in private sector credit to NZ residents (or 'PSC(R)' as it's called), and the year on year growth in nominal GDP. It's sometimes been called 'excess credit growth', and it's positive when credit is growing faster than the economy as a whole and negative when credit is growing more slowly. The data run from March 1989 to March of this year (we don't have the June quarter GDP yet).

Credit growth is strongly linked to the business cycle, as you'd have imagined. As growth picks up, firms borrow to invest, there's pent-up demand from consumers so they borrow to buy things, and away we go. On occasions, the process gets carried away: that boom in credit in the pre-GFC mid 2000s foundered later, as (in particular) lending on commercial property went awry.

Should we be worried about the current rate of credit growth? I'd say not: given the recent strength of the economic cycle, and based on what's happened in other strong cyclical periods, you might well have expected it to have risen more than it actually has. There may be regional issues if (for example) the banks' increased lending has been heavily into the incandescent Auckland housing market, but there's little sign of an outsize national surge in bank lending.

The graph could be a little dated, and it's possible that this 'excess credit' measure may have picked up since March. The year on year rate of growth in PSC(R) has picked up from 5.4% in March to 6.4% in June, but on the other hand the March quarter nominal GDP growth was unusually low (2.2%) and may also have picked up since: net net the 'excess credit' measure may not have increased very much (we won't know for sure till we get June quarter GDP, which comes out on September 17). So no red (or even amber) lights flashing at this point, but something to keep an eye on a few months down the track.

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