Revolving Credit Commitments Down 19.4% in March

If you want budget news, head to the papers. Today it's Australia's platypus-like economy.

The platypus is such a bizarre looking animal that when the first specimen was sent form Australia to England, most scientists thought it was a fraud. The platypus lays eggs, shoots venom from its hind foot, has a bill like a duck, and a tail like a beaver. It is, according to genome researchers at Washington University in St. Louis, both a mammal and a reptile.

In other words, just like Australia's economy, the platypus has the DNA of two very different species in it. In nature, the combination produces the goofy animal we know and love. In Australia's economy, it produces one economy that's based on debt and asset growth, and another based on tangible goods and real production. Both exist in the same place at the same time. But one is a much better investment bet than the other.

In the one economy (reptile or mammal, take your pick) we find that personal finance commitments have dropped the most in 15 years. The Australian Bureau of Statistics reported yesterday that March personal finance commitments (household borrowing) fell by 11.5% for the month. Looks like rising interest rates are biting harder than expected.

The headline grabbing number was the 4.4% fall in borrowing for owner-occupied housing. Perhaps some doubt is beginning to creep in about the inevitability of rising house prices. But the number that grabbed our attention was the 19.4% fall in revolving credit commitments.

What's a revolving credit commitment? Good question! We called the ABS to ask and they were more than happy to clarify. It's an agreement between a borrower and a lender to extend credit. It's an expression of both the supply of and the demand for credit card debt. Other kinds of fixed-interest debt like car loans are tracked separately (though those were down 1.9%).

In any event, whether it was lenders being stingy or borrowers being frugal, there was a 19.4% decline in the amount of credit being extended between February and March. Finally, some good news. Glenn Stevens will be pleased. Interest rates seem to be doing the trick and slowing down demand.

Of course, as we mentioned yesterday, banks need to extend MORE credit to expand the balance sheet and keep earnings growing. The two charts below from the Reserve Bank's most recent chart pack tell the story. Banks are making less money lending money, but making up the difference with higher fees.

Dan Denning
The Daily Reckoning Australia

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