The banks' stronger appetite for home loans than business lending is putting the economy at risk, creating conditions similar to lead up to the global financial crisis, a fund manager says.
Martin Conlon, head of Australian equities at Schroders, said liquidity manufactured by central banks had ‘‘flowed almost solely into asset prices’’ rather than help businesses further invest, increasing revenues and profits.
‘‘The economy remains an action replay of the structure that gave rise to the financial crisis – an ever narrowing economy based on asset price speculation and ever lower interest rates,’’ Mr Conlon said. ‘‘Call us sceptical, but without change in structure or incentives, we have an uncomfortable feeling that same policies will eventually give rise to the same problems.’’
The important question from an investment standpoint was 'Is the constantly increasing relative size of the financial economy a problem?," Mr Conlon said and answered "a resounding yes".
"As the duration of artificial stimulus continues to grow and what was intended to be temporary appears ever more permanent, the more insidious impact becomes the inability of companies and individuals to discern normal from artificial. To borrow from Pink Floyd ‘The Wall’, they have become ‘Comfortably Numb’."
Mr Conlon adds: "Insurers are still working on the expectation that interest rates return to levels of years gone by, airlines are expecting passenger numbers to continue growing at levels of the past 20 years, wealth managers are expecting the pool of superannuation funds to double over the next 10 years and retailers continue to add floor space as though mid-single digit retail sales growth is a fait accompli."
Since the financial crisis, banks have been forced to become more cautious about how they lend to businesses and place a higher priority on mortgages.
Officials and central bankers at the G20 meetings in Sydney last month said that these new rules were starving small businesses of credit.
In the three months to December last year, the spending plans of Australian businesses posted their biggest fall since 2009, plunging 5.2 per cent. Analysts had forecast a 1.3 per cent drop, and said the poor figures would increase the chances of an interest rate cut later this year.
Mr Conlon said despite deposits and loans growing at similar percentages, on absolute levels lending was outstripping savings. For example, he said Commonwealth Bank posted a ‘‘seemingly innocuous’’ 9 per cent growth rate for its deposits and interest earning assets for the 12 months from December 2012, but loans were $22 billion more than savings.
‘‘This quantum of loan growth means that the absolute levels of loans are growing almost as quickly as at any time in Australian history.
‘‘It goes without saying that most of these are housing loans which need to be supported by individuals’ income. Our long-term caution stems from an inability to accept that the value of loans and the financial system in total can continue to grow at rates beyond that of GDP, as the interest on the loans must eventually be paid out of these revenues and profits.’’
Mr Conlon predicted a lack of income to cause a collapse of the ‘‘artificially supported’’ financial system, saying ‘‘a financial system which continues to grow at rates beyond the income which supports it becomes progressively more unstable’’.
‘‘The unknowable is when this happens and what further extraordinary steps will be taken in attempting to preserve the status quo.
‘‘Logic should dictate that the contraction in the financial economy should be far greater than that of the real economy – this is the only way equilibrium can be restored at an interest rate which resembles what used to be normal.
‘‘This does not mean that the real economy will get off without a contraction, but it does mean that the financial economy and the over-leveraged will wear disproportionate pain.’’
Nevertheless, Mr Conlon said many people were tipping a global recovery and were relying on US Federal Reserve chair Janet Yellen’s ‘‘soothing words’’ such as ‘‘doing whatever it takes’’.
But Mr Conlon said governments had accumulated ‘‘significantly’’ more debt since the financial crisis and remained ‘‘mired in perpetual deficit spending justified by totally realistic longer term forecasts’’.
‘‘As crises gradually envelop an increasing number of industries – car manufacturers and airlines featured prominently in recent months –there seems to be little acceptance of some basic economic facts.
‘‘Wages must be paid from profits, profits are made from providing goods and services which others demand, and governments can only sustainably spend what they take from us in tax.
‘‘As speculative excess builds, asset prices are rapidly becoming the reason for optimism on future growth rather than an outcome of policies which restore economies to a sustainable footing.’’