Weakest annual credit growth in 11 years

Record house & near record renovation approvals
Private sector credit; Building approvals; Engineering construction; China PMIs

Lending: Private sector credit (effectively outstanding loans) rose by 0.2 per cent in February (consensus: +0.3 per cent) to be up 1.6 per cent over the year – the weakest annual growth rate in 11 years. Business credit was flat to be down 0.2 per cent over the year – the first contraction in 9½ years.

Dwelling approvals: Council approvals to build new homes rose by 21.6 per cent to 19,422 units in February (consensus: +3.0 per cent). Approvals are up 20.1 per cent on a year ago. Private-sector house approvals rose by 15.1 per cent to record high 13,939 units. The value of alterations & additions approved were up by 11.1 per cent in February to $973.2 million – just below all-time highs.

Engineering construction: Engineering construction work done fell by 4.8 per cent in real (inflation-adjusted) terms in the December quarter, 2020 to be down 2.5 per cent on a year ago. The value of outstanding non-resource projects fell from $46.0 billion in the September quarter to a 2-year low of $44.6 billion in the December quarter.

China purchasing managers’ indexes (PMIs): China’s ‘official’ manufacturing PMI lifted from 50.6 to 51.9 in March (consensus: 51.2). The non-manufacturing or services PMI rose from 51.4 to 56.3 in the month (consensus: 52.0). 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 building approvals and lending finance data has implications for banks, retailers, developers, building and building material companies. The engineering data has implications for banks, retailers, developers, building and building material companies. The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies.

What does it all mean?

• Private sector credit growth or loans outstanding remains weak, expanding at a glacial pace of 0.2 per cent in February on the back of a lift in owner-occupier housing credit (up 0.6 per cent). Annual credit growth hit an 11-year low of 1.6 per cent in February with business credit flat and personal credit down 0.5 per cent in the month. In fact, annual business credit fell by 0.2 in February – the first contraction in 9½ years. Of course, new home lending has surged and annual housing credit growth is up 3.8 per cent – the strongest growth rate in almost 2 years.

• Council approvals to build new private detached houses are at all-time highs with approvals especially elevated in Victoria and Western Australia, supported by the Federal Government’s $15,000 HomeBuilder grants and the Western Australian Government’s $20,000 ‘Building Bonus’ scheme. Commonwealth Treasury data shows that 75,256 HomeBuilder applications have been received since June 2020 with Victorian applications highest at 26,858 as at March 12, 2021.

• The value of alterations & additions approved hit $973.2 million in February – a smidgen below record levels of $975.2 million reached in December 2020, boosting activity for tradespeople and building material suppliers. Engineering construction is healthy but more work can be taken on. Today’s data doesn’t show the new projects advanced by federal, state and territory governments in budgets handed down since October 2020. The additional work should provide a useful boost to economic momentum in 2021 and beyond. In fact, should Brisbane win its bid to host the 2032 Summer Olympic Games then it could kick-start an infrastructure boom in South-East Queensland.

What do you need to know?

Private sector credit – February

• Private sector credit (effectively outstanding loans) rose by 0.2 per cent in February (consensus: +0.3 per cent) to be up 1.6 per cent on the year – the weakest annual growth rate in 11 years.

• Housing credit grew by 0.4 per cent to be up 3.8 per cent on the year – the strongest annual growth rate in almost 2 years. Owner-occupier housing credit lifted 0.6 per cent (+5.9 per cent annual – the strongest rate in 2 years) with investor housing credit up 0.1 per cent (+0.2 per cent annual).

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

• Business credit was flat to be down 0.2 per cent over the year – the biggest annual decline in 9½ years.

• The M3 money aggregate lifted by 0.2 per cent in the month to be up 12.8 per cent from a year ago.

• Broad Money rose by 0.1 per cent to be up 12.5 per cent from a year ago.

• 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 1.9 per cent on the year – a 28-year low.

• Commercial lending (business sector) in February was flat on the year (weakest growth in 9½ years). Total commercial lending fell by 2.1 per cent on the year (weakest growth in a decade).

• The amount of currency in the economy has lifted 18.6 per cent over the past year to February, modestly lower than the 19.0 per cent annual growth recorded on October 2020 (the fastest rate in 45 years).

• The APRA authorised deposit-taking institutional statistics revealed that loans to households via credit cards rose by 0.8 per cent in February. While credit card lending is down 20.5 per cent on the year, the data is affected by series breaks. Credit card lending is down 8.7 per cent since April 2020 when the series break took effect.

Building Approvals – February

• Council approvals to build new homes rose by 21.6 per cent to 19,422 units in February. Approvals are up 20.1 per cent on a year ago.

• Total house approvals rose by 13.7 per cent to a record-high 14,072 units in February to be up 57.9 per cent on a year ago. Private sector house approvals were up 15.1 per cent to an all-time high of 13,939 units to be up 57.5 per cent on a year ago. Public sector house approvals plunged 49.0 per cent in February to 133 units but were still up a massive 125.4 per cent on a year ago.

• Apartment approvals jumped 48.9 per cent to 5,350 units in February but were down 26.3 per cent on a year ago.

• Over the past year 189,473 new homes were approved – a 21-month high.

• Dwelling approvals across states in February: NSW (+16.1 per cent); Victoria (+21.7 per cent); Queensland (+40.5 per cent); South Australia (-3.4 per cent); Western Australia (+19.1 per cent); Tasmania (+31.6 per cent).

• The value of all commercial and residential building approvals rose by 23.3 per cent in February. Total residential approvals lifted 21.0 per cent with new building up 22.8 per cent and alterations & additions up by 11.1 per cent to all-time highs. Commercial building jumped 27.5 per cent.

Engineering work – December quarter, 2020

• Engineering construction work done fell by 4.8 per cent in real (inflation-adjusted) terms in the December quarter, 2020 to be down 2.5 per cent on a year ago.

• The value of work done for the private sector fell by 1.8 per cent but was still 2.8 per cent higher than a year ago.

• The value of work done for the public sector fell by 9.4 per cent in the December quarter to be down 10.1 per cent from a year ago.

• Engineering construction work rose in four of the states and territories in the December quarter: NSW (down by 5.6 per cent); Victoria (down by 6.8 per cent); Queensland (down by 1.2 per cent); South Australia (down by 15.9 per cent); Western Australia (down by 3.9 per cent); Tasmania (up by 12.6 per cent); Northern Territory (up by 21.0 per cent); ACT (down by 8.8 per cent).

• In the year to December, engineering construction work rose in three of the states and territories: NSW (down by 7.8 per cent); Victoria (down by 4.3 per cent); Queensland (down by 5.0 per cent); South Australia (down by 15.4 per cent); Western Australia (up by 14.5 per cent); Tasmania (down by 5.3 per cent); Northern Territory (up by 37.7 per cent); ACT (down by 13.9 per cent).

• The value of engineering work yet to be done fell further from 5-year highs of $76.7 billion in the March quarter to 2½-year lows of $62.9 billion in the December quarter. Commencements fell from $77.0 billion to a 3½-year low of $76.8 billion in the December quarter.

• The value of outstanding non-resource projects fell from $46.0 billion in the September quarter to a 2-year low of $44.6 billion in the December quarter.

• Work yet to be done on roads and highways stands at a 4½-year low ($14.6 billion); oil, gas, coal and other minerals at 2½-year lows ($17.1bn); but recreation at 6-year highs of $0.9bn.

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’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

• The ABS releases detailed data on engineering construction work each quarter. The data provides insights into activity for building and construction companies, civil engineering businesses, building material suppliers and associated businesses.

• 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?

• Aussies are cashed-up with ample currency (cash) circulating around the economy. The amount of currency in the economy has lifted 18.6 per cent over the year to February, only modestly lower than the 19.0 per cent annual growth recorded in October 2020 (the fastest rate in 45 years).

• Aussies are increasingly shunning credit cards, preferring other payment methods during the pandemic. Consumers have also paid down debt using government stimulus receipts over the past year. Today, APRA authorised deposit-taking institutional statistics revealed that loans to households via credit cards rose by 0.8 per cent in February. While credit card lending is down 20.5 per cent on the year, the data is affected by series breaks. Credit card lending is down 8.7 per cent since April 2020 when the series break took effect.

• China’s consumers are back after virus restrictions at the beginning of 2021 dampened services sector activity. In fact, it was the biggest jump in activity since China’s economy re-opened in 2020. But China’s steel industry purchasing managers’ index fell from 48.6 to 47.9 in March, with new export orders down 17.7 points – the biggest fall in 8 years – to 43.7. While signalling a potential weakening in demand for Australia’s iron ore exports, the sub-index was at 8-year highs in February.

Published by Ryan Felsman, Senior Economist, CommSec