Business borrowing down but private loans up

Bank lending to the business sector continued to shrink last month.

The stock of loans at $72.8 billion was down 8.2 per cent on April last year, extending the string of negative year-on-year changes every month since August last year.

The contraction was widespread: of the 23 business sectors (excluding agriculture) the Reserve Bank statistics recognise that only five experienced any increase in credit.

Goldman Sachs JB Were economist Philip Borkin said some of the 8.2 per cent annual decline would reflect a shift out of bank borrowing into other forms of debt for a number of firms, particularly larger ones.

"However, there's still an element of deleveraging occurring. While business surveys point to firms intending to increase investment, we need to see this in the credit numbers to have more confidence it is occurring."

Overall credit growth remained torpid last month.

Private sector credit to residents was up just 0.4 per cent on April last year - less than one-tenth of the growth recorded the previous year, which in turn was only a third of that in the year to April 2008.

Loans to households at $180.6 billion were up just 2.7 per cent on April last year - the same annual rate of increase it has been stuck in for the past six months. Within that, consumer credit fell 3.1 per cent.

Meanwhile lending to farmers at $47 billion was up 4.5 per cent, but that contrasts with an increase of 21 per cent in the year to April 2009 and 17 per cent in the year before that.

"We believe an ongoing economic recovery will foster more confidence to take on debt. However, we see it as very unlikely that credit growth picks up to levels that had become the norm between 2003 and 2007," Borkin said.

Indeed, that would be disappointing after the progress the economy had made towards rebalancing away from borrowing and more towards earning and saving, he said.

Borkin does not expect the turbulence on financial markets offshore to turn into a repeat of the crisis of 2008.

"However, if credit markets were to deteriorate further, given what is a clear deleveraging backdrop in New Zealand and already low credit growth, this potentially could put the handbrake on the country's nascent recovery."