27 February 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

Australian shares vs credit conditions

Sources: Reserve Bank of Australia, Australian Chamber of Commerce and Industry, and Sensis. 

Australians appear to be facing tougher conditions when borrowing money.  Notably the Reserve Bank of Australia (RBA) recently commented that “credit conditions for housing and small business have been tighter than they have been for some time”¹.   

A broad measure of Australia’s credit conditions shows a progressive tightening over the past year. Credit conditions have moved from being easy and supportive in 2018 to mildly tight in 2019 (red line). Essentially housing credit growth has slowed, corporate bond spreads have increased and small businesses perceive there are tighter conditions to borrow money.

These tighter credit conditions could have two significant implications for investors. Firstly tighter money provides a significant headwind to the performance of the Australian share market (blue line). Both corporate profits and consumer spending can slow down given these tougher credit conditions, thereby constraining Australian shares. Secondly, this tight money could also motivate the RBA to contemplate lowering the cash interest rate even further to mitigate any potential downside risk to the Australian economy.
 

1. ‘Statement on Monetary Policy February 2019’, p 43, Reserve Bank of Australia, 7 February 2019.

Source: Nab assetmanagement February 2019

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