Australia's Credit Squeeze Creates a Central-Bank Conundrum

(Bloomberg) -- Australians are borrowing and spending less at the same time as firms are hiring and investing more, creating a conundrum for policy makers trying to ascertain just what the economy requires.

Does it need a dose of stimulus to put more cash into consumers' wallets and get them spending? Or should they stand on the sidelines and wait for expanding firms to spur higher salaries and ultimately stronger inflation? For now, the most likely course of action for Reserve Bank chief Philip Lowe on Tuesday -- as with every meeting in the past 2 1/2 years -- is to do nothing.

At the heart of the matter is tumbling property prices that are casting a pall over sentiment, compounded by a crackdown on banks that's discouraging them from lending to Australians already nervous about taking on more debt. The global backdrop of a slowdown in China, which buys one-third of Australian exports, also means there's less certainty offshore.

Australian Property Slump Deepens as Credit Squeeze Hits Buyers

For the RBA, one factor in the housing slump matters most: whether the paper losses on property prompts a deeper retrenchment in household spending -- which accounts for almost 60 percent of total spending in the economy.

“The wealth effect is going to kick in sometime soon, if it hasn't already started,” said Cameron Kusher a research analyst at Corelogic Inc., a property data and analysis firm. “I think that the ongoing declines in the housing market are going to start to be more of a headache for the Reserve Bank.''

Sydney home values have slumped 13.2 percent from their peak in mid-2017, when prices reached eye-watering levels, discouraging buyers just as a new wave of housing supply came online. On top of that, a government banking inquiry that uncovered widespread misconduct has resulted in a sharp tightening of lending standards.

That's seen mortgage growth slow to just 0.2 percent in January, the weakest monthly reading since 1984 when Australia was undertaking a sweeping deregulation program to revive the moribund economy. At the same time, credit for personal purchases dropped 2.8 percent from a year earlier -- the worst annual figure since October 2009.

The RBA meets a day before the release of fourth-quarter GDP that will provide another reading on consumption. A weak result three months ago combined with poor subsequent data prompted Lowe last month to drop a tightening bias in favor of a neutral policy stance.

Data out Monday suggested the final quarter of 2018 may have been a bit lackluster: company profits rose just 0.8 percent compared with an expected 3 percent, while inventories unexpectedly dropped. A report from Australia & New Zealand Banking Group Ltd. showed that job advertisements slid 0.9 percent in February for a fourth monthly decline.

Economists predict Australia's economy expanded 0.5 percent from the third quarter and 2.7 percent from a year earlier -- in line with Treasury's estimated 2.75 percent speed limit.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Malcolm Scott

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