Deflationistas like respected economist David Rosenberg point to a sharp decline in bank credit over the past 12 months as evidence of deflation.
By the end of April, commercial bank loans and leases had declined by $510 billion, or 4.7% of total, over the past 12 months.
That would be cause for concern but it does not take into account the massive $742 billion surge in lending in the preceding two months, March-April 2020, when borrowers drew on lines of credit to ensure that they had sufficient liquidity during the pandemic. They were afraid that banks would withdraw credit facilities in anticipation of widespread corporate defaults.
There is no credit contraction.
Bank credit did shrink by $510 billion in the past 12 months but this followed an unusual $742 billion surge in credit as borrowers drew on credit facilities to ensure liquidity during the first two months of the pandemic. What we have witnessed is the normalization of bank credit, with borrowers repaying credit temporarily drawn at the height of the liquidity crunch.
We expect normal credit growth to resume.