Australia: RBA overview

A quick review of the RBA chart pack released today.

Household finances remain in a precarious position with debt at 150 percent of disposable income — three times the level of the early nineties.

Housing credit growth slowed to around 5 percent, but will probably fall further by the end of the cycle — following personal credit into a contraction — in order to reduce the debt to disposable income. Declining growth rates leave a hole in aggregate demand but this is being offset by rising business credit.

Bank capital ratios are improving but these are based on risk-weighted assets. As Deep T pointed out last year:

“……..the average minimum amount of Total Capital against total residential assets held by those [the 4 major] banks is less than 2%.”

They still have a long way to go to build sufficient reserves to withstand a collapse of the housing bubble, brought about by household deleveraging.

Bank interest margins are being squeezed, making them reluctant to expand their balance sheets. Further decline in net interest margins could precipitate a credit contraction.

Bulk commodity prices are falling but the full impact of the sharp drop in iron ore spot prices has not yet been felt on the current account and government tax revenues.

The current account trade balance is improving but, as a net debtor, interest and dividends to offshore investors drag the country into deficit. As David Murray points out: the fact that Australia was unable to post a current account surplus throughout the mining boom indicates we are living beyond our means and will lead to burgeoning debt levels.