“Sluggish” credit growth, where does NZ fit in?

Via Tyler Cowen on Twitter was this article, combined with the comment “credit growth sluggish”.  The view here is that the 4% growth in private sector credit is too weak when compared with historic averages – and that the goal of the Fed should be to focus on the “quantity of credit” here, rather than target the price.

Now in New Zealand we have similar data here.  According to this, private sector credit growth was 2.3% year-on-year (or 3.2% if we exclude repurchase agreements – which is preferable IMO).  This compares to a decade-long average of 7.3%pa (8.3%pa), and if we were solely quantity focused this would seem insufficient.  [Note:  I did decade instead of history, as the implicit inflation target moved significantly over the decades – a factor that pushes this figure around.  Would be best to look at “real growth” for a longer-term focus]

I’m not concluding anything from this per se – it is just interesting that NZ analysts are running around getting concerned about inflation and rising credit growth, while analysts in the US, who are observing stronger credit growth than we are, are generally complaining that more needs to be done.  Tbf, their unemployment rate is a lot higher, and their output gap is correspondingly larger (presumably).

But with underlying inflation in the lower end of the RBNZ’s target, credit growth numbers objectively soft, and the unemployment rate undeniably elevated I feel that the inflation calls may be a touch overplayed.  [Note:  A relative price lift in construction due to a rebuild in Canterbury is not inflation – it is a signal of scarcity, as prices are supposed to be].

  • Miguel Sanchez

    I imagine that NZ analysts are concerned that (1) credit growth is accelerating, (2) it tends to lag the economic cycle, and (3) the Reserve Bank seems more reluctant to raise interest rates than it’s ever been. Also:

    – The US figures are for lending by the private sector, not to it. (Makes no sense to exclude credit to the public sector if you’re thinking about inflationary effects.) So the comparable figure for NZ is domestic credit growth at 5%.

    – What would you consider an acceptable rate of credit growth, given that sustainable nominal income growth is probably no more than 5%?

    • “I imagine that NZ analysts are concerned that (1) credit growth is accelerating, (2) it tends to lag the economic cycle, and (3) the Reserve Bank seems more reluctant to raise interest rates than it’s ever been”

      Indeed, I don’t disagree on any of those points at all.  I was just trying not to be too “two handed” in the post.  Thanks for raising them.

      “The US figures are for lending by the private sector, not to it. (Makes no sense to exclude credit to the public sector if you’re thinking about inflationary effects.) So the comparable figure for NZ is domestic credit growth at 5%.”

      Aha, good to know.  I had assumed that at first, but then ended up switching from DC to PSC.

      “What would you consider an acceptable rate of credit growth, given that sustainable nominal income growth is probably no more than 5%?”

      The equilibrium rate of growth, yes.  But when we have excess capacity I wouldn’t say that experiencing this sort of growth over one or even two years would lead to anyone batting an eye-lid.

      The difference in response to what are quite similar lending figures in two different countries is interesting, that is about as far as I would go.

      • Miguel Sanchez

        I think the difference in response is less about the current growth rates and more about where economists think it should be.  For some bizarre reason US economists think that the experience of the 2000s is something to aspire to – they’re hopelessly addicted to the ‘Greenspan put’. Whereas in New Zealand there’s strong opposition to a repeat of the housing boom.

        • Hmmm, that makes sense as an explanation of how it is being interpreted.

          However, I’m not sure how a “housing boom” matters for monetary policy outside of any perceived impact on consumer demand for general goods and services – as you say, the growth in credit aggregates gives us keen insight into this.

          The key issue for me at this point is the question of how “anchored” inflation expectations are, and how far we believe the economy will persist below potential.  The more anchored expectations are, the more any looseness in monetary policy/growth in credit will have to come through output.  In the US people are so determined to see higher credit growth because of the view that inflation expectations are anchored and the economy is well below potential – in NZ we seem to believe in the first, but our view on potential is very different.

          What do New Zealand analysts believe is so different about New Zealand such that there is agreement potential is lower here – while few other countries overseas are willing to make the same assumption.  And I’m willing to say that contemporaneous views on potential/output gaps are most definitely assumptions rather than estimates.

        • Miguel Sanchez

          You’re focusing too narrowly on the price stability goal. These days the thinking has swung around to the idea that the Reserve Bank has both a responsibility to address asset bubbles (through the “stability of the financial system” clause in its Act) and the means to do so (macroprudential tools, although these probably won’t get them out of using interest rates altogether).

          As to why US analysts don’t have a similar view – as I said, they’ve been captured by Greenspan’s idea that it’s better to clean up after bubbles burst than to try leaning against them at the time. Even those who disagree with it have taken the St Augustine plea – “Lord make me good, but not just yet” – having inflated the housing bubble in the first place, the Fed shouldn’t compound the mistake by neglecting to clean it up.

        • As a financial stability issue I can buy it – however, even in that case we would need a focus on it separately from monetary policy.  We could then argue that a large relative price shift in housing is a systematic risk while admitting that general demand in the economy is insufficient (for example).

          Tbh, I’m still very much in the camp of ignoring bubbles outside of their impact on demand – if we need greater regulation of the banking system to counteract systematic risk from this, then this is a structural policy that needs to be put in place, not an argument about current growth in credit aggregates or house prices.  This is an argument for macroprudential policy for sure – but as I say in the post I think the complaints about inflation coming out at the moment are potentially exaggerating that side of the risks with regards to monetary policy.