Australia’s Credit Spending Scenario



Recently, the Australian government was given two warnings, one from the international credit rating agency Moody’s and the other from Reserve Bank of Australia about their deteriorating state of the economy. Moody’s jeopardized Australia’s AAA credit ranking in case they do not take any initiatives to cut their rising federal budget deficit and debt levels. Moody’s reported that Australia’s government debt had tripled to 35.1% of gross domestic product (GDP) in 2015 as compared to 11.6% of GDP in 10 years earlier. But the country estimated government debt to enhance to over 38% of GDP in 2018. The Reserve Bank of Australia said a glut of inner city apartments could end in a property market collapse that would endanger Australia’s financial stability.


Credit Growth by Sector (Source: Reserve Bank of Australia)

Meanwhile, the Reserve bank of Australia cash rate was cut to 1.75% in the May 2016. Housing lending rise has dropped while business lending rates are already at historic lows hence increasing strongly. The total credit growth is at 6% in six-month annualized terms in which the growth in housing credit has eased a little while the business credit growth is growing at a robust pace. Liabilities are more than the disposable income and accordingly the ratio of household debt to disposable income has almost tripled from 64% in 1988 to 185%. There has been a massive expansion in household debt that continued to be persistent while low interest rates have softened the Australian repayment burden. The mortgage interest rates have fallen from a peak of 16.5% in 1989 to their current level of 5 to 6%.

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With regard to the credit spending, the recent updates from Reserve Bank of Australia show that purchases on credit cards in April were of the order of A$23.5bn as compared to A$25.5bn in March while the same were at A$27.58bn in December 2015. There was no change in the outstanding balance on credit cards as seen in the previous month (A$51.8bn). With the new RBA regulations, the credit card perks and surcharges are expected to fall which may impact the spending accordingly. For instance, the regulations entail new interchange benchmarks effective from 1 July 2017 that will introduce a ceiling on individual interchange rates of 0.80 per cent while the weighted-average benchmark for credit card transactions will be maintained at 0.50 per cent.

Factors Affecting Credit Spending

  • Global Investments: Australian banks and finance houses would be under pressure, as they depend on borrowing funds from the international markets to finance their domestic lending, mainly in the housing market which are the major contributor for profits. In this case, the Australian economy would face challenging conditions. Moreover, over supply of new apartments, especially in Sydney, Melbourne and Brisbane, would cut the property prices and rents. The limited and partial data available from the Foreign Investment Review Board (FIRB) indicates that the approvals for all non-residents applying to purchase residential property have increased substantially in recent years.
  • China’s Investments: China had invested significantly in Australian residential and commercial property in recent years as they were doing in property markets of other countries, such as the United States, the United Kingdom, Canada and New Zealand. The Chinese economy is facing economic slowdown which has lowered their spending. Moreover, the Chinese authorities has restricted the ability of Chinese households to invest abroad through capital controls and accordingly some are selling the property they have. This might affect the Australian domestic property prices and would lead to the losses on the banks’ broader property related exposures.
  • Australia’s Consumer Spending: The consumer spending in Australia has increased all time high to AUD 233,040 million in the first quarter of 2016 from AUD 231,494 million in the fourth quarter of 2015. The household’s debt to Gross Domestic Product (GDP) in Australia has increased to all time high to 124.3% of GDP in the fourth quarter of 2015 from 123.10% of GDP in the third quarter of 2015. The household consumption growth has increased from the second half of 2015 due to relatively strong growth in New South Wales and Victoria, while the pick-up in consumption growth comprised employment growth and low interest rates, as well as lower petrol prices. The growth in household disposable income is below average while the saving ratio is declining. The motor vehicle sales to households has continued to decline in early 2016, though they picked up from 2015 level but they are at the average level. The Housing credit has fallen in recent months as there is increase in mortgage interest rates implemented by most lenders towards the end of 2015 and tightening of lending standards. The dwelling investment has grown strongly due to low interest rates and major increase in housing prices in recent years. The private business investment has fallen 3% in the December quarter and by 12% over 2015 on the back of fall in mining investment. There is less little change in non-mining investment.


Australia Consumer Spending (Source:

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