Covid winners & losers; Cash rich
Private Sector Credit; Producer prices

Lending: Private sector credit (effectively outstanding loans) rose by 0.3 per cent in December (consensus: +0.2 per cent) to be up 1.8 per cent over the year.

Currency: The amount of currency in circulation in December was up 18.4 per cent on a year ago, down from the 19 per cent annual growth in October that was the fastest annual growth rate in 45 years.

Business inflation: The “final demand” component of producer prices (business inflation) rose 0.5 per in the December quarter but was down 0.1 per cent on a year ago.

Winners & losers: Over the past year the cost of car rental has risen a record 32.2 per cent. But office rents fell 5.1 per cent over the year – the biggest drop in a decade.

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. .

What does it all mean?

• During the pandemic, Aussies have been reluctant to travel on public transport. As a result, used cars have been in demand and prices are up 35.2 per cent on the year – the biggest rise in 21 years. Rental cars have similarly been in demand, lifting more than 25 per cent in the December quarter to be up over 32 per cent on the year. Rental car companies can be counted as a Covid-19 ‘winner’ – that is, those operators that do have cars available for hire.

• It’s a different story for owners of offices and other commercial space. People have been working from home, reducing demand on office space. Office rents fell 2.3 per cent in the December quarter and were down over 5 per cent on the year – the biggest annual decline in a decade.

• The only lending that is picking up in a notable sense at present is owner occupier home loans – annual growth is approaching 2-year highs. With interest rates super-low and the job market recovering, home lending will lift further over 2021.

• There is no shortage of currency (cash) circulating around the economy. The amount of currency in the economy has lifted 18.4 per cent over the past year, only modestly lower the 19 per cent annual growth recorded on October (the fastest rate in 45 years).

What do you need to know?

Private sector credit – December

• Private sector credit (effectively outstanding loans) rose by 0.3 per cent in December (consensus: +0.2 per cent) to be up 1.8 per cent on the year.

• Housing credit grew by 0.4 per cent to be up 3.5 per cent on the year with owner-occupier housing credit up by 0.6 per cent (+5.6 per cent annual) and investor housing credit up 0.1 per cent (unchanged on the year).

• Personal credit fell 0.5 per cent to be down 12.3 cent over the year.

• Business credit rose by 0.2 per cent, to be up 1.0 per cent over the year.

• The M3 money aggregate lifted by 0.6 per cent in the month to be up 12.7 per cent from a year ago – the strongest annual growth rate in 11½ years.

• Broad Money rose by 0.6 per cent to be up 12.6 per cent from a year ago – the strongest annual growth rate in 12 years.

• Loans and advances by banks grew by 2.2 per cent on the year, up from the record 40½-year low in November. Loans by all financial institutions were up by 2.2 per cent on the year, again up from a 27½-year low.

• Commercial lending (business sector) in December was up 1.0 per cent on the year with total commercial lending flat on the year (weakest growth in 7½ years).

• The APRA authorised deposit-taking institutional statistics revealed that loans to households via credit cards rose by 2.0 per cent in December after rising 3.3 per cent in November. While credit card lending is down 19.7 per cent on the year, the data is affected by series breaks. Credit card lending is down 5.6 per cent since April when the series break took effect.

Producer prices – December quarter

• The “final demand” component of producer prices (business inflation) – excluding exports – rose by 0.5 per cent, but was down 0.1 per cent on the year.

• According to the Australian Bureau of Statistics (ABS), there were rises in building construction (+0.5 per cent), child care services (+7.9 per cent) and accommodation (+4.3 per cent). Falls were recorded in specialised machinery and equipment manufacturing (-2.4 per cent), sugar and confectionary manufacturing (-5.2 per cent) and cigarette and tobacco manufacturing (-5.0 per cent).

• Inputs to house construction rose 0.1 per cent in the quarter and rose 1.8 per cent on the year.

• Output of the construction industry rose 0.6 per cent in the quarter and rose 0.8 per cent on the year.

• Inputs to manufacturing rose 0.3 per cent in the quarter and rose 1.1 per cent on the year.

• Output of manufacturing rose 0.1 per cent in the quarter and fell 0.3 per cent on the year.

• Accommodation services rose 9.0 per cent in the month but fell 9.8 per cent on the year.

• Cafes, restaurants and takeaway food services rose 1.1 per cent in the quarter to be up 1.6 per cent on the year

• Passenger Car Rental and Hiring rose 25.4 per cent in the quarter “due to increased demand from eased travel restrictions and the summer holiday season, coupled with reduced supply of cars available for hiring. Over the past twelve months Passenger Car Rental and Hiring rose 32.2 per cent.”

• Non-residential property operators fell 2.3 per cent in the quarter, “due to increased sublease supply for office spaces and reduced demand for retail space. Over the past twelve months Non-residential property operators prices fell 5.1 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.

What are the implications for investors?

• The Covid-19 pandemic has produced a mix of ‘winners’ and ‘losers’. Amongst the unlikely ‘winners’ are used car dealers and car rental operators. And the strong demand for ‘safe’ forms of travel won’t end any time soon.

• The Reserve Bank has done as much as it can to support the economic recovery. The good news is that the monetary, as well as fiscal stimulus, is working. The job market continues to quickly heal. While retail spending growth is buoyant.

• Success is not guaranteed. With foreign borders likely to remain closed for much of the year, there are challenges for tourism, agriculture, housing and education sectors.

Published by Craig James, Chief Economist, CommSec