ric battellino : some observations on financial trends address by mr ric battellino, deputy governor of the reserve bank of australia, to finsia - melbourne centre for financial studies, 12th banking and finance conference, melbourne, 25 september 2007. * * * the topic i would like to talk about today is credit provided by intermediaries, or what is broadly its mirror image, the debt of the household and business sectors. in many countries – including most of the english - speaking ones – credit has been rising strongly relative to gdp for many years now. this has been an ongoing topic of discussion among the world ’ s central banks and financial commentators, as people try to understand whether this trend is sustainable, what it means for the performance of economies and what it means for financial stability. i would like to touch on some of these issues today, particularly as they relate to australia. some facts let me start with a few facts. this first graph shows two statistics for a range of developed economies : - the orange bars are the annual average growth in credit over the past 30 years ; and - the purple bars are the annual average growth in nominal gdp over the same period. in each of the 15 countries shown, credit has grown substantially faster than gdp over the past 30 years. graph 1 the gap between the growth of credit and that of gdp has been particularly large in countries such as ireland, spain, australia, the united kingdom, new zealand and the netherlands. across these six countries, credit has grown on average about 5 percentage points a year faster than nominal gdp over the period covered by this graph. it is a matter of arithmetic that if credit is growing faster than gdp, then the ratio of credit outstanding to gdp will rise. across the 15 countries shown in graph 1, the ( unweighted ) average ratio of credit to gdp has risen from about 60 per cent in 1977 to around 135 per cent today ( graph 2 ). graph 2 the extent of the upward trend in this ratio, and its persistence over such an extended period, is unusual from an historical perspective, if not unprecedented. for australia, we have data on credit going back 150 years and it is certainly the case that there is no domestic precedent for what has happened over the past 30 years ( graph 3 ). 1 the closest previous experiences were those in the 1880s and 1920s. in the former case, credit started to expand much more quickly than gdp in the early 1880s, but this trend lasted for less than 15 years,

”, address to bloomberg seminar, sydney, 14 february 2012. bis central bankers ’ speeches the size of the fiscal consolidations in individual countries is unprecedented, but rather because the consolidations are occurring simultaneously in a large number of countries. unusually, they are also taking place in an environment where output in the affected countries is considerably below potential. the economic literature is mixed on the effects of fiscal consolidation on growth. there are certainly some examples where consolidation has been associated with fairly strong gdp growth. but in most of these examples, the countries undertaking the fiscal consolidation have benefited from some combination of robust growth in their trading partners, an easing of monetary policy and a depreciation of their exchange rate. given the nature of the current situation, it is unlikely that the advanced economies, as a whole, can benefit from these factors. there is therefore a material risk that fiscal consolidation weakens growth in the short run, which leads to more fiscal consolidation in order to meet previously announced targets and, in turn, yet weaker growth. we are currently seeing this dynamic play out in a couple of the countries in southern europe. if it is not to be repeated on a wider scale, the fiscal consolidation in the north atlantic economies will need to be accompanied by reforms to the supply side that lift the underlying rate of growth of these economies. as interesting as the developments in europe are, it is important that we do not lose sight of what is going on elsewhere in the world. in the united states, the recent data, particularly on the labour market, have been better than was widely expected ( graph 3 ). there are also some tentative signs of improvement in the housing market. corporate balance sheets are generally in good shape and borrowing costs are low. while, undoubtedly, the us economy still faces many challenges, it does seem to have emerged from the soft patch in the middle of 2011 with some momentum. the chinese economy is also continuing to grow solidly. the pace of growth has slowed, but it has done so in line with the authorities ’ intentions. inflation in china has also moderated. across the rest of east asia, the recent data have been mixed. nevertheless, for the region as a whole, growth in 2012 is expected to be around trend, with domestic demand likely to play a more important role in generating growth than it has for most of the past two decades. overall, as the imf recently noted, the global risks still look to be tilted to the downside. but the better - than