Credit aggregates confirm that Australia remains stuck in a nominal recession

The credit aggregates confirm that animal spirits in the household and business sectors remain dormant.  Despite solid growth in September, the stock of business credit has taken almost six years to reach its pre-GFC peak. 

Faced with persistent revenue headwinds and investors' insatiable appetite for income, the ASX200 companies continue to undertake restructuring, defer capital spending where feasible, sell or de-merge under-performing and non-core assets,  and trim costs aggressively to boost profitability and return capital to shareholders.  Although this is a welcome development to shareholders and imposes a discipline on capital allocation decisions, it accounts for the reluctance of CFOs to lift gearing to fund expansion and is contributing to a shortfall in aggregate demand. 

Small to medium sized businesses have probably also suffered credit constraints due to the risk weighted asset methodology widely used by banks, which encourages lending to 'safer' mortgages over 'riskier' business loans.

The household sector's animal spirits also remain dormant.  Personal credit has been stagnant in the past year, and remains 10% below its pre-GFC peak, which is anaemic considering the population boom that Australia has undergone.  During this period, Australia's population has ballooned by almost 2 million people or 10%.

House prices and low interest rates are clearly encouraging much needed investment into housing construction, with both owner occupier and investor housing credit growing strongly (see chart).  The rapid growth of the investor segment - obviously a source of concern to the RBA - would not pose a systemic risk if the banks had more loss absorbing capital.  At present, the majors typically finance $100 of assets with less than $8 of common shareholder equity compared to $50 of equity for the typical non-financial company in the ASX200.

The RBA Governor continues to under-estimate the power of monetary policy to revive the corporate sector's entrepreneurial risk taking and lift expectations of revenue growth.  Against this backdrop, the September credit aggregates suggest that it will be a while yet before the Australian economy pulls out of its nominal recession.