Fed: Credit growth sinks to a 15-year low

AAP General News (Australia)
04-30-2009
Fed: Credit growth sinks to a 15-year low

By Colin Brinsden, Economics Correspondent

CANBERRA, April 30 AAP - The federal government will be under pressure to extend its
more generous first home owners grant in some form after new data showed mortgages are
propping up the credit industry.

Weak business confidence and households fretting about their job prospects has meant
other forms of credit are in a slump.

Prime Minister Kevin Rudd has previously hinted that the increased grant announced
as part of last October's first stimulus package will end as scheduled on June 30.

But his Finance Minister, Lindsay Tanner, has said it remains under consideration in
putting together the May 12 budget.

Reserve Bank of Australia (RBA) data released on Thursday showed total credit grew
just 0.1 per cent in March to be 4.9 per cent higher than a year earlier - a 15-year low.

Twelve months ago, annual credit was racing along at more than 15 per cent.

The breakdown is grim.

Personal credit - other than home loans - has tumbled to a 32-year low, while business
credit is at an eight-year low.

This is despite official interest rates being at a 39-year low.

And while housing credit is at a 26-year low, the pace of growth far outstrips other
forms of credit.

"Today's credit data ... will keep pressure on the government to retain the increase
in the first home owners grant - or at least some form of it - which has lent considerable
support to the lower end of the housing market," RBC Capital Markets senior economist
Su-Lin Ong said.

The grant was doubled to $14,000 for purchases of established homes and trebled to
$21,000 for new properties.

ANZ chief executive Mike Smith said the government's two stimulus packages and boosted
grant has helped prop up the banking industry, and maintained a degree of turnover and
activity in the housing sector.

ANZ reported a 28 per cent plunge in first half profit on Wednesday after bad debts
and losses on derivative trades spiked.

Mr Smith predicted official interest rates may fall again, but couldn't promise the
cuts would be passed on to borrowers.

"It's a question of what we can do at the time," Mr Smith told ABC Radio.

The major banks managed to pass on only a fraction of this month's 25 basis point cut
by the RBA because of high wholesale funding costs.

Still, first home buyers are taking advantage of the grant and low mortgage rates,
making up a record 26.9 per cent of all new mortgages.

New home approvals are showing improved signs of growth after months of decline.

But an Australia National University academic said the grant is just encouraging Australians
to jump into the "sinking ship" of an over-priced property bubble about to deflate.

"As the recession bites and interest rates start to rise because of a rapidly increasing
public debt, our bubble will deflate," Professor Quentin Grafton of the Crawford School
of Economics and Government said.

"As it deflates over the next two years it will both exacerbate and lengthen the recession
in Australia. People will feel less wealthy and will spend less. Construction will fall
off resulting in job losses and this will multiply through the rest of the economy."

In March, housing credit grew 0.6 per cent for an annual rate of 7.2 per cent. This
included a 0.8 per cent increase in owner-occupied loans, an 8.5 per cent rise over the
year.

Personal credit declined for a 10th straight month, down 0.3 per cent in March for
an annual drop of 6.2 per cent.

Demand for credit from business fell 0.6 per cent, growing at just 4.1 per cent in
the past 12 months.

The data coincided with National Australia Bank's quarterly business survey that showed
companies are at their most pessimistic about the outlook in more than 20 years.

"Clearly business is expecting further significant deterioration in economic activity,"

NAB chief economist Alan Oster said.

"Given these outcomes, it is not surprising that business is positioning itself for
tough times ahead."

AAP cb/apm

KEYWORD: ECONOMY WRAP

2009 AAP Information Services Pty Limited (AAP) or its Licensors.