Credit Contraction Continues

Data released by the RBA today showed that credit conditions continue to tighten in Australia. Private sector credit contracted in December by -0.3%, that is the first month on month contraction in private sector credit since Dec 1992. Year over year private sector credit rose 6.7%, the lowest year over year rise since April 1994.

The RBA attributed most of the contraction to a decline in business credit. That does not bode well for the Australian economy in 2009. My opinion continues to be that the Australian economy probably fell into recession sometime in Q4 of 2008 and we are only just getting warmed up.

Whilst the Rudd government makes forlorn attempts to prop up an over-leveraged household sector and the RBA talks up the prospects of the Australian economy with rose-coloured glasses on, the economy continues to deteriorate.

Serious changes are afoot with respect to the availability of credit and the willingness to lend. Businesses that have traditionally relied on foreign sources of credit will find it tough to roll when it becomes due. The idea that Australia will somehow avoid this fate is wishful thinking yet there seems to be a fair dose of denial still going around.

Expect the RBA to cut the cash rate to historical lows in 2009 as the spectre of deflation and a contracting economy become the focus of attention.