The prospects for Australia avoiding a serious slump continue to shrink with news that our biggest trading partner, Japan, had a record fall in industrial output last month and that business spending here fell sharply in December.

The news of the decline in the highly important business lending came from the Reserve Bank’s credit growth figures for December and 2008. They revealed that if anything, the credit crunch and economic slowdown have already taken a firm grip on lending and our financial system.

The drop in Japanese industrial production followed the 35% plunge in exports in the month and a sharp fall in household spending, while unemployment rose. The record plunge followed the previous record set in November which was originally forecast at an 8.1% fall, then revised down to 8.5%. That holds out the prospect that the December figure could reach an unheard of 10% cut.

The market had been forecasting an 8.9% fall and the drop over the December quarter was a nasty 11.9%, the fourth quarterly fall in a row.

Japan’s unemployment rate jumped to 4.4% from 3.9%, the biggest jump in 41 years. The Government said household spending fell 4.6% in December, the 10th fall in a row as Japanese consumers refuse to open their wallets.

In Australia, the Reserve Bank revealed that lending to Australian consumers and businesses shrank last month for the first time since 1992, with the slowdown in loans in foreign currencies a big part of that development.

“The fall in total credit in December reflected a fall in business credit, which is estimated to have contracted by 1.1 per cent. This reflected a fall in foreign currency denominated lending,” the RBA said.

That development alone will help the RBA cut rates by at least 1% on Tuesday, or even more. It was the first drop in business lending for years.

There was also was a sharp fall of 9.1 points in the latest reading of the Roy Morgan Consumer Confidence poll. The index’s reading of 92 is 26.6 points down from this time a year ago.

“Today more than half of Australians 61% (up 10%) expect “bad times” for Australia economically over the next 12 months compared to just 13% (down 2%) of Australians that expect “good times” economically,” Morgan said in commentary on the poll result.

“Australians are also increasingly worried about their family’s financial situation over the next 12 months with 25% (up 6%) of Australians expecting their family to be “worse off financially” this time next year compared to 32% (down 4%) of Australians that expect their family to be “better off financially.”

The RBA’s credit figures, especially the slump in business lending and the reason for it, justifies the move by the Federal Government to set up various funds to replace loans and lending to property, cars and other sectors that might be threatened by the exit of foreign lenders from the Australian market.

Total credit fell 0.3% in December from the previous month, according to Reserve Bank of Australia figures out today. That was after a 0.4% rise in November.

The news took the market by surprise, as economists had been forecasting a 0.5% month-on-month gain. For 2008, total credit grew by 6.7% higher, compared with an expectation of a 7.5% increase.

The surprise slump in lending fell largely in the business sector, which fell 1.1% (down 5.2% over the year, thanks in part to the fall in margin lending as the stockmarket plunged). Housing lending rose 0.4% for an annual rate of 7.6%. There are signs the first home buyers grant given in the $10.4 billion budget stimulus is working. But the annual rate was still the lowest for over a decade.

After falling in December, business credit was up 8% over the year, but down by around two thirds from the 23.8% rate in December, 2007. Seeing business spending had been holding up the economy as personal spending and housing credit fell, it’s a real worry if the slump continues into the early months of this year, or is made worse by more foreign banks cutting lending that can’t be replaced locally.

Peter Fray

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