There appears to be increasing concern about the health and resilience of the consumer creeping into discussions on Australia’s economic outlook and GDP growth. Other issues exercising forecasters’ minds include the implications of escalating US/China trade tensions and the impact of the Hayne royal commission on credit growth, including the possibility of a credit crunch.

A credit crunch, in reaction to the financial services royal commission, could add further pressure to weakening house prices, at a time when the Reserve Bank (RBA) is unable to lower rates to stimulate demand. The official cash rate is already at a record low, although the cash rate has been increasingly ignored by banks, as the rising cost of offshore wholesale funds drives out-of-cycle margin-protecting mortgage rate increases.

In keeping the official cash rate at 1.50% at the 2 October board meeting, the RBA again singled out household consumption as a source of uncertainty. This was against a backdrop of solid economic growth, positive business conditions, increasing non-mining business investment, higher levels of public infrastructure investment and growth in resource exports. The central bank’s language is carefully chosen as to not create undue tension, but clearly households are furrowing brows at the top of Martin Place.

Financial aggregates statistics for the year ended (y/e) 31 August 2018, released on 28 September show a disturbing trend in credit growth. The rate of growth of total credit slowed from 5.4% y/e August 2017 to 4.5% y/e 2018, a slowing of 17%. Housing, the dominant source of total credit, slowed by 18% from 6.6% to 5.4%, business credit by 12% from 4.3% to 3.8% and personal credit by 29% from minus 1.0% to minus 1.4%. These are meaningful percentage declines and clearly reflect the tightening credit standards of banks following the repercussions from damming evidence at the royal commission. The supply of credit is being crimped.

A continuation this trend for an extended period, combined with sluggish household consumption could result in an economic contraction. The bond market is sending a similar signal. So far, the equity market is seemingly unperturbed. Morningstar’s senior banking analyst David Ellis expects housing credit growth to continue to decline to around 4%–4.5% through 2019, a further 21% fall from the y/e 31 August 2018 rate of 5.4%. He warns the rate could approach 2%–4% should house prices continue to fall.

While the RBA remains upbeat on economic growth after a 3.4% year-on-year GDP growth in the June quarter, and the outlook for the labour market remains positive, there are signs growth is likely to taper. Consumption—household and government—underpinned June quarter growth. Household consumption was supported by strong immigration and a falling savings rate—both are unsustainable. Government consumption was reflected in infrastructure spending, which is likely to continue, but probably at a slower pace.