Australia | Jan 30 2009
By Chris Shaw
Anyone clinging to the hope Australia’s 16-year long economic expansion still has legs should look at today’s credit data for December, as according to TD Securities senior strategist Joshua Williamson it confirms the expansion is well and truly over.
Private sector credit fell by 0.3%, which ANZ senior economist Katie Dean notes was a much weaker outcome than the increase of 0.5% predicted by the market and was in fact the first contraction in the number since December of 1992.
According to Dean, the numbers show a continuation of the de-leveraging trend in the Australian economy, as firms are now scaling down their investment intentions and households are choosing to pay down debt levels. The 1.1% fall in business investment is coming sooner than the bank had anticipated.
Westpac expects further falls in business credit in coming months as investment intentions continue to be lowered, a trend that has seen the annual growth rate in this measure fall to just 8.0% from the 23.8% recorded in 2007. Commonwealth Bank senior economist John Peters agrees, pointing out the downturn is seeing both businesses reasess their credit needs and lenders reassess their credit standards.
The only sector to hold up was household credit, which rose by 0.4%, though as Westpac notes even this was a little below its estimates and represents a fall from the 0.5% increase recorded the month before. As Dean notes, the data reflect both improving affordability of housing in Australia and the impact of the expanded first home owners grant.
Economic growth is expected to come under further pressure given today’s data, with Peters suggesting the loss of momentum in both housing and business credit growth is likely to continue given the fall in household wealth and resultant lower consumer spending in recent months.
On the back of the data, the consensus view is nothing now stands in the way of the Reserve Bank of Australia (RBA) cutting interest rates significantly next week, with Dean expecting a cut of 0.75-1.0% will be announced. Peters sees the cut next week as up to 1.0%, while pointing out there is scope for rates to fall below 3.0% in coming months.
Williamson agrees a substantial cut is in the offering next week as the data imply a weak 1Q09 GDP growth outcome, while he expects an indication of more of the same in coming months as the RBA attempts to deal with what is now clearly negative sentiment towards the economic outlook.