Fitch Ratings’ measure of the combined credit impulse for the US, China and eurozone (G3) turned sharply negative in 2Q21, according to a new economics dashboard.
“This largely reflects a normalisation in credit conditions after exceptional policy support boosted credit flows last year, but nevertheless signals how macro policy support for global growth is now fading fast,” said Robert Sierra, Director in Fitch’s Economics team.
Our measure of the G3 credit impulse is derived by taking the annual change in the flow of credit to firms and households (expressed as a percent of G3 GDP) rather than the annual growth rate in the stock of credit. Historically, a decline in the credit impulse has been accompanied by a general downturn in economic conditions. However, the current decline looks more like a normalisation in lending conditions after exceptional circumstances in 2020.
When the Covid-19 pandemic struck, policymakers responded with significant support to the private sector through higher asset purchases, greater access to central bank funding for commercial banks and state-backed loan guarantees. The collective response led to a surge in the G3 credit impulse driven by corporate loans as firms made use of bank credit lines and stepped up bond issuance to tide them over during the health crisis.
As economies have begun to recover, the credit impulse has sharply reversed as firms no longer need the liquidity facilities utilised in 2Q20 and 3Q20. As the private-sector economy reopens, policy support and borrowing flows can begin to be eased in the US without ultimately damaging the recovery. However, the recent contraction in China’s credit impulse does appear to signal a real deterioration in the economic outlook. We expect the Chinese authorities to respond with policy measures that will see credit growth start to pick up again before year-end.