Back in Significant slowdown for Australia ahead?, we explained how the slowdown in credit growth can suck away aggregate spending in the economy. Today, we will show you credit growth in Australia from January 2000 to April 2010:
As you can see, year-on-year credit growth almost ZERO on November 2009 before bouncing up and then returning down from March 2010 onwards.
As you can see, such a precipitous fall in credit growth should be very painful for the economy. However, the reason why it did not fall into serious recession was due to the crutch of government spending.
If the private sector continues to de-leverage, then the government will have to continue spending in order to prevent the economy from falling into recession. If so, then it means that the budget deficit will have to continue to grow.
Tags: budget deficit, credit growth, de-leveraging
