Credit markets around the globe have taken a battering recently, both in real terms and figuratively speaking. The world of credit is invariably described as ‘frozen', ‘crunched', or, see above, ‘battered'. And while these may be suitable adjectives for the US or European markets, in Australia it's hard to see how they apply.
Figures out today from the Reserve Bank show total credit growth increasing at an annual rate of 15.4% after rising by 1% in the month of October. While down slightly on the August peak of 15.7%, the rate of growth is still very strong.
Overall credit growth was driven primarily by business lending, which rose 1.4% in October for an annual increase of 21.7%. Reflecting continued poor housing affordability, growth in housing credit continues to decline on an annual basis, rising 11.7% year on year compared to 14.4% growth 12 months earlier.
Personal credit (credit cards, personal loans etc) revived in October after slipping the previous month to post an annual growth rate of 12.3%. In short, there doesn't appear to be any sign of Australian credit markets feeling the effects of the global chill – not yet anyway.
So if you're wondering why Aussie banks keep delivering record profits, ongoing strength in overall credit markets provide a large part of the answer. Banks are in the business of providing credit, which sits as an asset on their balance sheet and provides a steady income stream. As banks' assets grow, so does their profit assuming the loans remain well serviced, and don't turn ‘bad'.
However, one person's assets are another's liabilities and the flip side of the credit boom in Australia is an increasing build-up in household debt. Debt is fine when employed productively, (as is largely the case in the business sector currently) but debt used purely for consumption or for buying overvalued housing stock may not be too wise.
Remember, debt comes at a cost, known as an interest rate. To create wealth, a debt funded investment should ideally be at least achieving its ‘cost of capital' – the rate of interest – if not wealth is destroyed.
The RBA also realised statistics on the money supply, also known as M3. In October, M3 jumped a massive 3.3% and is now running at an annual rate of 20.7%. Perhaps food prices are rising because of the drought. Maybe they're rising too because the RBA's monetary policy is nowhere near tight enough?
