Borrowing lifts from lows. Awash in cash.
Private sector credit; Producer prices; China purchasing manager indexes

Lending: Private sector credit (effectively outstanding loans) rose by 0.4 per cent in March (consensus: +0.3 per cent) – the biggest increase in 13 months. But credit was up just 1.0 per cent on the year – the weakest annual growth rate in 11 years.

Currency: Currency was up 19.1 per cent on the year to March – the fastest rate in almost 46 years (since June 1975).

Business inflation: The “final demand” component of producer prices (business inflation) rose 0.4 per in the March quarter to be up just 0.2 per cent on a year ago.

China purchasing managers’ indexes (PMIs): China’s ‘official’ manufacturing PMI eased from 51.9 in March to 51.1 in April (consensus: 51.7). The non-manufacturing or services PMI eased from 56.3 to 54.9. The Caixin manufacturing PMI rose from 50.6 to 51.9 in April (survey: 50.8). Readings above 50 denote an expansion in activity.

Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. The data on producer prices shows price pressures being faced by Australian businesses. The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies.

What does it all mean?

• Aussie consumers and businesses are again interested in taking on some debt. Private sector credit (outstanding loans) rose 0.4 per cent in March, the biggest increase in 13 months. Housing led the gains, up 0.5 per cent. And even non-housing personal credit recorded the biggest increase in six years, up 0.2 per cent. Business credit rose 0.3 per cent in the month but it was still down 2.6 per cent on the year.

• The inflation genie remains in the bottle. Producer prices rose just 0.4 per cent in the quarter to be up just 0.2 per cent on the year. Petrol prices and tourist accommodation were amongst the areas to record price gains in the quarter. Accommodation services rose 5.4 per cent “due to increased interstate travel demand”.

• Of interest the ABS said the cost of passenger car rental and hiring rose 23.6 per cent in the March quarter, “due to increased interstate travel demand and reduced fleet sizes compared to pre-COVID-19. Strong demand for new vehicles and worldwide car production disruptions have affected the ability of car hire companies to increase supply.” The cost of passenger car rental and hiring was up 58.6 per cent on the year.

What do you need to know?

Private sector credit – March

• Private sector credit (effectively outstanding loans) rose by 0.4 per cent in March (consensus: +0.3 per cent) – the biggest increase in 13 months. Credit was up 1.0 per cent on the year – the weakest annual growth rate in 11 years.

• Housing credit grew by 0.5 per cent to be up 4.1 per cent on the year – the strongest annual growth rate in 25 months. Owner-occupier housing credit lifted 0.7 per cent (+6.1 per cent annual – the strongest rate in 26 months) with investor housing credit up 0.2 per cent (+0.6 per cent annual).

• Personal credit rose by 0.2 per cent in March – the biggest lift in six years. Personal credit is still down 10.7 cent over the year.

• Business credit was up 0.3 per cent in the month but down 2.6 per cent from a year ago.

• The M3 money aggregate lifted by 0.1 per cent in the month to be up 9.8 per cent from a year ago.

• Broad Money was flat in March but up 9.6 per cent on the year.

• Currency was up 19.1 per cent on the year to March – the fastest rate in almost 46 years (June 1975).

• Loans and advances by banks grew by 1.6 per cent on the year – a record (45-year) low. Loans by all financial institutions were up by 1.2 per cent on the year.

• The APRA authorised deposit-taking institutional statistics revealed that loans to households via credit cards rose by 1.3 per cent in March after rising 0.8 per cent in February. While credit card lending is down 17.2 per cent on the year, the data is affected by series breaks. Credit card lending is down 7.5 per cent since April 2020 when the series break took effect.

Producer prices – March quarter 2021

• The “final demand” component of producer prices (business inflation) – excluding exports – rose by 0.4 per cent, to be up 0.2 per cent on the year.

• According to the Australian Bureau of Statistics (ABS), there were rises in Petroleum refining and petroleum fuel manufacturing (+20.6 per cent), building construction (+0.5 per cent) and accommodation (+5.8 per cent). Falls were recorded in Electronic equipment manufacturing (-5.3 per cent), Other transport equipment manufacturing (-3.1 per cent) and Furniture and Other Manufacturing (-1.7 per cent).

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 producer price indexes are measures of business inflation and are important in flagging price pressures at an early stage. If business costs are rising, the risk is that these will be passed on in terms of higher prices of final consumer goods. The Consumer Price Index is regarded as the key gauge of economy-wide inflation.

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for investors?

• Ample currency (cash) is circulating around the economy. The amount of currency in the economy has lifted 19.1 per cent over the year, the fastest rate in almost 46 years. The question is what people are doing with it – transactions are increasingly completed electronically.

• Is debt back in vogue? We need to see a few more months of gains, but housing, personal and business credit all lifted in March.

• The Reserve Bank has even more reason to stay on the interest rate sidelines with business inflation still tame. Covid-19 has driven up the cost of car hiring and rental of tourist accommodation. Home building costs are up in response to the HomeBuilder-driven spike in house construction. And petrol is dearer on expectations of stronger travel demand with the re-opening of global economies.

Published by Craig James, Chief Economist, CommSec