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chart of the week: Is Australia in a credit crunch?

05 October 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Australian credit and economic activity

Source: Reserve Bank of Australia.  

Recent media articles* have suggested that Australia could be facing a ‘credit crunch’. Tighter lending standards for housing appear to be restraining credit availability. If credit has become hard to access, this would suggest potential downside risks for Australia’s future economic growth.

While there is no accepted definition of a ‘credit crunch’, typically this involves a very sharp and sudden reduction in available credit. Credit becomes so restrictive that economic activity struggles to continue growing. Australia has experienced some painful ‘credit crunches’ before. Australia’s 1990/91 recession is a prime example of a credit crunch. The potent combination of problems in commercial property and troubles in the respective state banks of South Australia and Victoria in the early 1990s magnified into a sharp slowdown in credit growth (red line) and economic growth (blue line). The Global Financial Crisis (2007/09) can also be considered a ‘credit crunch’ with a similar sudden slowdown in both credit and economic growth in Australia.

Currently, Australia’s total credit growth is running at a subdued annual pace of 4.5% which is just below nominal economic growth at 5%. However this does not appear to be a sharp and sudden slowdown in total credit that matches a ‘crunch’. Australia’s credit growth has generally been modest and restrained over the past decade. So on the available data, Australia seems to be now experiencing a selective squeeze on housing investors rather than a broader ‘credit crunch’ for all borrowers.

*Recent media articles:

The Australian Financial Review, (2018, 1 October). RBA, Treasury warn regulatory response to Hayne commission risks credit crunch

ABC, (2018, 1 October). Banking royal commission: Will the credit squeeze become a credit crunch?

 

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