Weakest annual growth in business loans in 9 years.

Private Sector Credit; COVID-19 business survey

Lending: Private sector credit (effectively outstanding loans) rose by 0.2 per cent in January (consensus: +0.3 per cent) to be up 1.7 per cent over the year. Business credit fell by 0.1 per cent to be up 0.5 per cent over the year – the weakest annual growth rate in over 9 years.

The amount of currency in the economy has lifted 18.6 per cent over the year to January, only modestly lower the 18.9 per cent annual growth recorded in October 2020 (the fastest rate in 45 years).

Loans to households via credit cards fell from $30.7 billion in December to $29.5 billion in January. While credit card lending is down 20.8 per cent on the year, the data is affected by series breaks. Credit card lending is down 9.4 per cent since April 2020 when the series break took effect.

Federal Budget: Over the full twelve months to January the budget deficit was $192.579 billion or 9.8 per cent of GDP. The underlying cash balance for the 2020-21 financial year to 31 January 2021 was a deficit of $133.9 billion against the MYEFO (mid-year) profile deficit of $148.4 billion.

Business survey: The Australian Bureau of Statistics (ABS) has released the Business Conditions and Sentiments survey for February. According to the survey, “The proportion of businesses facing reduced cash flow and lower demand has reduced but challenges still remain.”

Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. The business survey provides key insights into how the COVID-19 crisis has affected the broader business sector.

What does it all mean?

• Business conditions and confidence have improved at the beginning of 2021. Australia’s success at supressing the virus and economic re-opening have boosted economic activity as restrictions have eased. Private sector business investment surged 3.0 per cent in the December quarter with spending on plant, equipment and machinery up 5.7 per cent, thanks in-part to generous government tax incentives and record low borrowing costs.

• But challenges remain. In another Covid-19 survey from the Bureau of Statistics (ABS) released today, 41 per cent of respondents said that border restrictions, capacity constraints and on-going cleaning requirements were still significantly impacting Aussie businesses. Aside from the successful roll-out of vaccines, state and territory government policies still remain a risk to business operating conditions and supply chains.

• Perhaps even more of a concern is that businesses reported weakening revenue growth over the summer months. In fact, the proportion of firms reporting an increase in revenue fell from 25 per cent in December to 17 per cent in February. Two in five business owners said that their cash-on-hand would cover less than three months of business operations. And just 23 per cent of businesses reported that they had planned capital expenditure plans over the next three months.

• The caution is also reflected in very weak business demand for loans or credit. The Covid-19 shock has seen business credit contract in eight out of the past nine months to January. Excess capacity remains – as is usual in a recession – and mostly cashed-up businesses appear reticent to invest in the near-term. Nevertheless, hiring intentions remain firm in the more buoyant parts of the economy.

• The Federal Government has so far spent around $9 billion less than expected. In addition, Government receipts are around $5.4 billion higher than expected. As a result the Federal Government has scope to provide further assistance to consumers and business as needed.

• The budget deficit may have soared but the servicing cost is actually lower than three years ago – courtesy of rock-bottom interest rates. If you had to borrow, now is the time to be doing it.

What do you need to know?

Private sector credit – January 2021

• Private sector credit (effectively outstanding loans) rose by 0.2 per cent in January (consensus: +0.3 per cent) to be up 1.7 per cent on the year.

• Housing credit grew by 0.4 per cent to be up 3.6 per cent on the year with owner-occupier housing credit up by 0.5 per cent (+5.7 per cent annual) and investor housing credit up 0.1 per cent (+0.1 per cent annual).

• Personal credit fell by 0.9 per cent to be down 12.4 cent over the year.

• Business credit fell by 0.1 per cent to be up 0.5 per cent over the year – the weakest annual growth rate in over 9 years.

• The M3 money aggregate lifted by 0.7 per cent in the month to be up 13.0 per cent from a year ago – the strongest annual growth rate in 11½ years.

• Broad Money rose by 0.7 per cent to be up 12.8 per cent from a year ago – the strongest annual growth rate in 12 years.

• Loans and advances by banks grew by 2.1 per cent on the year – an equal 41-year low. Loans by all financial institutions were up by 2.2 per cent on the year – remaining steady at 27½-year lows.

• Commercial lending (business sector) in January was up 0.7 per cent on the year (weakest growth in 9½ years). Total commercial lending fell by 1.0 per cent on the year (weakest growth in 7½ years).

• The amount of currency in the economy has lifted 18.6 per cent over the past year to January, only modestly lower the 18.9 per cent annual growth recorded on October (the fastest rate in 45 years).

• The APRA authorised deposit-taking institutional statistics revealed that loans to households via credit cards fell by 4.0 per cent in January after rising 2.0 per cent in December. While credit card lending is down 20.8 per cent on the year, the data is affected by series breaks. Credit card lending is down 9.4 per cent since April 2020 when the series break took effect.

Business Conditions and Sentiments Survey – February 2021

• The Bureau of Statistics (ABS) survey was conducted between February 10 and February 17, 2021.

• According to the ABS, “30 per cent of businesses were impacted by reduced cash flow and 28 per cent by reduced demand. This compares to 72 per cent and 69 per cent in April 2020, when businesses were last asked about these impacts.

• Two in five (41 per cent) businesses reported being impacted by COVID-19 restrictions in February. This compares to 53 per cent in April 2020.

• International and domestic border restrictions, capacity limits, and increased cleaning requirements were highlighted as concerns.

• The survey results also showed that for 41 per cent of businesses, cash on hand would cover less than three months of business operations. This compared to 29 per cent in October and June 2020.”

Monthly government financial statements

• In the full twelve months to January 2021, the Budget deficit stood at $192.6 billion (9.8 per cent of GDP). According to the Mid-Year review (MYEFO), the underlying cash balance in 2020/21 is expected to be a deficit of $197.7 billion (9.9 per cent of GDP), a $15.9 billion improvement since the 2020/21 Budget.

• The budget deficit for the seven months to January was $14.5 billion lower than the ‘profile’ deficit.

• Public debt interest in the 12 months to January fell from $16.65 billion to $16.61 billion – a 40-month low.

What is the importance of the economic data?

• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

• The Bureau of Statistics is conducting regular surveys like Business Conditions and Sentiments to show the impact of COVID-19 on the economy. The data is important in gauging the impact on individual businesses and business sectors.

• The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every month. The statement allows investors to track the current Budget position and provides insights into the effectiveness of fiscal policy.

What are the implications for investors?

• The only lending that is picking up at present is owner-occupier home loans – annual growth is at 2-year highs. With interest rates at record lows, government stimulus and incentives encouraging first-home buyers into new homes, home prices lifting and residential property offering relatively attractive investment yields, home lending will likely grow from here. In fact, Commonwealth Bank (CBA) Group economists expect housing credit growth of around 5 per cent in 2021 – but not enough to cause any angst for macroprudential-focused policymakers.

• Aussies are cashed-up with ample currency (cash) circulating around the economy. The amount of currency in the economy has lifted 18.4 per cent over the year to January, only modestly lower the 19 per cent annual growth recorded in October 2020 (the fastest rate in 45 years).

Published by Ryan Felsman, Senior Economist, CommSec