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Credit growth a positive for Aussie economy

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Credit growth a positive for Aussie economy.

Rachel Smalley:
Veda's quarterly business credit demand index indicates that the Australian economy may be improving. Manuel just before we get into the index itself, why is it relevant?

Manuel Greenland:
Veda is Australia's largest credit bureau with an 85% share of consumer credit enquiries and a leading share of commercial credit enquiries. They've been in business for over 40 years and have built a huge database of credit information. Their core product is the provision of credit reports which help their clients to make decisions when extending loans. They can track demand in the economy generally by tracking how the number of loan applications is changing. Presumably the more companies and consumers are applying for loans, the greater the level of demand. So the data they collect may have some read through for the economy generally.

Rachel Smalley:
Their last report showed nearly 3% growth in credit applications in the quarter to June, which is quite positive. That is different to some of the other data around Australia at the moment isn't it?

Manuel Greenland:
Yes it is. I think that the negative view on Australia is well articulated, and every incremental fall in commodity prices only serves to confirm it, so some positive information does stick out as you rightly observe. The Reserve Bank has cut rates twice through the first half of the year and there was a positive nudge in confidence after the May Federal Budget so that may have provided some impetus to Aussie demand.

Rachel Smalley:
When you look at the type of loans that are growing does it support the idea that demand is growing generally?

Manuel Greenland:
Well business loan applications grew most strongly at 8.2%, driven partly by higher mortgage applications and partly by credit cards. I think to the extent that companies are choosing to buy rather than rent properties, we may actually just be seeing an expression of rising property prices rather than a true increase in demand, but the credit card growth data is definitely positive. Trade credit fell which I read negatively as it indicates lower levels of working capital so less commercial activity. Asset finance picked up to about 4% probably in response to tax breaks on lower value purchases — so companies may be using this opportunity to replace smaller items of office and plant machinery. So I think that while the headline number is positive, looking at the detail there may be some questions about the sustainability of this loan growth.

Rachel Smalley:
And regionally, are we still seeing the trend of the mining states weaker and the rest of Australia stronger?

Manuel Greenland:
Absolutely, that trend is very much in place. You have NSW up 5.5% and Victoria up 7.1%, so a very strong showing there, and then Northern Territory down 3.2% and Western Australia down 2%. So yet another indication of a weaker level of activity in states dependent on the iron ore price.

Rachel Smalley:
So overall a positive read?

Manuel Greenland:
Yes, but we think rather than investing based on a general view of Australia, it is valuable to use data like this to identify specific opportunities and risks, so we find it very useful.

 

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