The Economy: Home Lending At Record Lows

The mixed nature of the Australian economy was on display yesterday in reports from the monthly National Australia Bank business survey and the Reserve Bank's credit data for December and 2011.

While the NAB survey showed business confidence picked up a bit in December and conditions retained the improvement seen in November, the RBA figures showed the lowest annual rate of growth in home lending since the Reserve Bank started keeping the figures back in 1976.

The central bank said home lending grew by just 5.4% for all of 2012, and a very weak 0.4% rise in December, which was unchanged from November and one of the smallest monthly rises recorded.

Owner-occupied lending grew 0.4% in December and 5.7% for the year, the lowest on record, while the slowdown in investor housing was even more noticeable: growth of 0.3% in December, the slowest for years and an annual growth rate of 4.8%, which was also the lowest so far seen.

And yet the tepid monthly and annual growth in housing credit was the star performer (if you can call it that) last year for the country's banks and other lenders. Housing credit grew much faster than lending to business, personal lending to consumers and credit overall.

Home lending is in fact the lifeblood of the banks at the moment and its slow growth is why they are moaning so much about higher borrowing costs: while borrowing costs are rising slowly, income growth is rising more slowly.

Overall, credit rose 0.3% in December, unchanged from November and an increase of 3.5% for all of 2011, slightly faster than the 3.4% seen in 2010.

Business lending grew 0.3% in December (up from 0.2% in November) and 1.4% for the year, which is far better than the 2.2% contraction seen in 2010.

Other personal credit fell 0.1% in December, after rising by 0.1% in November.

Over the year to December, other personal credit dropped 1%, after a rise of 1.5% in 2010.

Meanwhile the NAB said that business confidence strengthened a little in December, although it remained below the series long-run average.

"Business conditions were unchanged in December, after edging higher in November, to remain consistent with an economy growing at around trend.

"While conditions remained fairly soft in December, they continued to hold up in the face of slowing global activity.

"As for the survey's other indicators of activity, trading conditions, profitability and stocks all improved in the month, but employment, capacity utilisation and forward orders weakened.

"Credit demand and capex was also significantly weaker.

"Nonetheless, the survey's activity readings over the December quarter are consistent with underlying demand growth of around 3.5% and GDP (ex. coal) growth of around 3.5 - 3.75% in the December quarter (6-monthly annualised rate)."

The NAB said that business conditions remained varied across industries but the disparity between the weakest and strongest performing industries narrowed in December.

"Conditions recovered remarkably in construction and manufacturing, while mining, recreation & personal services and retail conditions weakened.

"By state, conditions recovered very strongly in SA, which was the equal strongest mainland state with WA, while conditions were poor in Queensland and Victoria.

"Labour costs growth softened marginally in December, though remained elevated.

"Consistent with the soft CPI outcome for the December quarter, final product and retail prices remained subdued in December. Indeed retail prices were unchanged over the quarter," the NAB commented.

Implications for NAB forecasts

"While financial markets remain volatile and full of downside risks, the latest economic indicators of global activity have fared better than expected.

"The US economy has performed well over recent months given the difficult environment, although the Euro-zone appears to have entered recession.

"Emerging economies are showing clear signs of slowing, with China performing the best in terms of maintaining growth momentum.

"Overall, we continue to see global growth slowing to 3.25% in 2012, a below-trend outcome highly reliant on the emerging economies as the OECD faces a long period of modest growth.

"The outlook for the domestic economy remains firm but global uncertainty is not helping hiring and investment intentions.

"Forward indicators of activity suggest a slightly weaker start to 2012, with labour market conditions weakening in recent months and the expected coal export rebound now seemingly less robust.

"As a result, our GDP forecast has been lowered to 3.75% in 2012 (from 4.5%) but is broadly unchanged at 3.5% in 2013.

"Consistent with this, we have softened our core inflation forecasts (ex carbon tax) - we now expect 2.2% over 2011/12, rising to 2.6% over 2012/13.

"We now see the RBA lowering cash rates twice in 2012.

"As well as the February cut, weaker near-term demand and price forecasts, together with uncertainty on the extent of bank pass-on given higher funding costs, point to an additional cut in mid 2012 - possibly in August (timing data dependent)."