Daily Commentary BY THE CURVE TEAM –

Government Props Up Businesses as Credit Struggles

1st of September, 2020

The juxtaposition of the business survey indicators and private credit data released yesterday summarises the state of the Australian economy well.

Company profits were up 15% for Q2 despite the obvious hits to economic activity from Covid-19. One clear indicator of activity being down was hours worked falling 8.4% for the quarter.

The profits data was inclusive of government assistance, namely JobKeeper. This also prevented wage incomes falling further, with a drop of only 3.3% for the quarter.

Given the government has indicated that JobKeeper and other support measures are temporary, the rosy Q2 data shows that the economy is being propped up by government spending. It means the sustainability of government spending and the transition away from current stimulus measures are key agenda items for the government and the economy.

Private credit data yesterday for July highlighted the economy’s underlying woes. It fell for a third consecutive quarter, which has left credit 0.5% lower than April.

Owner-occupied housing was the only category to rise over the last 3 months, with personal, business and investor housing all declining for the last 3 months. Business credit is a particularly interesting one, as it spiked 3% in March as businesses drew down credit lines fearing a drastic hit to revenues. These gains have since been undone as demand for credit has waned and debt lines have been paid down.

Credit will continue to be a good gauge for how the economy is recovering. Credit growth usually implies more economic activity and broad money growth, so if it picks up then the economy will likely be less reliant on government support.

At the moment broad money is expanding in spite of declining credit, which reflects not only the government support measures but also the RBA’s current policy measures. Their measures have increased liquidity in the financial system drastically.

The RBA’s policy decision is today, with no change expected. Another sign of the economy recovering would be an unwinding of the current very accommodating policy stance.

Josh Stewart

Client Relationship Manager