Summary: Private sector credit up 0.8% in May, above expectations; annual growth rate up from 8.6% to 9.0%; “a late cycle flourish”, likely near peak; business loans account for about 55% of net growth.
The pace of lending to the non-bank private sector by financial institutions in Australia followed a steady-but-gradual downtrend from late-2015 through to early 2020 before hitting what appears to be a nadir in March 2021. That downtrend ended later in the same year and now annual growth rates are above the peak rate seen in the previous decade.
According to the latest RBA figures, private sector credit increased by 0.8% in May. The result was greater than the 0.6% increase which had been generally expected but slightly less than April’s 0.9% increase after it was revised up from 0.8%. On an annual basis, the growth rate accelerated from April’s figure of 8.6% to 9.0%.
“We interpret the strength of the past two months as likely representing a late-cycle flourish,” said Westpac senior economist Andrew Hanlan. “Annual credit growth at 9% currently is, or is likely very near, what will be the cycle peak.”
Commonwealth Government bond yields fell on the day, especially at the short end. By the close of business, the 3-year ACGB yield had shed 9bps to 3.37%, the 10-year yield had lost 4bps to 3.72% while the 20-year yield finished 2bps lower at 3.92%.
In the cash futures market, expectations of higher rates were wound back. At the end of the day, contracts implied the cash rate would rise from the current rate of 0.81% to 1.185% in July and then increase to 1.685% by August. November contracts implied a 2.82% cash rate while May 2023 contracts implied 3.66%.
Business loans accounted for about 55% of the net growth over the month, while owner-occupier loans and investor loans accounted for the balance. Total personal debt increased slightly.
The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.6% over the month, in line with increases in March and April. The sector’s 12-month growth rate slowed slightly, from 9.0% to 8.9%.
Total lending in the business sector increased by 1.3%, slightly less than the 1.5% increase recorded in April. Growth on an annual basis accelerated from 11.7% to 12.9%.
Monthly growth in the investor-lending segment slowed to a halt in early 2018. Shortly into the 2019/20 financial year, monthly growth rates slipped into the red before posting a series of flat or near-flat results until mid-2020. In May, net lending grew by 0.6%, in line with increases in March and April. The 12-month growth rate accelerated from 5.8% to 6.1%.
Total personal loans expanded by just 0.1%, down from April’s 0.3%, maintaining the annual contraction rate at 2.8%. This category of debt includes fixed-term loans for large personal expenditures, credit cards and other revolving credit facilities.