United States: can growth withstand a steeply negative credit impulse?

Chart of the Week

Credit impulse is a concept first introduced by Michael Biggs following the 2008 financial crisis. At the time, he was Global Economist at Deutsche Bank. The idea underpinning his framework is that to analyse the role of credit in economic growth, we must recall that credit is a stock variable while GDP is a flow variable. To obtain credit data comparable with growth, which is the first derivative of GDP, we need to look at credit impulse, which is the second derivative of credit. In other words, we need to compare the change in the flow of credit with the change in GDP.

Our Chart of the Week illustrates credit impulse using data from the Federal Reserve’s quarterly Flow of Funds Accounts, which document aggregate balance-sheet trends in the economy’s main sectors. Below, we focus on private sector borrowing (households and businesses).


The chart illustrates a high correlation between recessions and sharp falls in the flow of credit. Covid-19 disrupted this correlation, but did it undo the relationship between growth and credit impulse?

We have estimated credit flows for the second quarter of this year based on weekly bank lending data and bond market statistics published by the Securities Industry and Financial markets Association (SIFMA). The data suggest that the stock of bank loans will contract slightly and that bond issuance will remain in line with previous quarters. The result is a sharp slowdown in new borrowing and, barring a dramatic recovery in the months ahead, the credit impulse will become increasingly negative.

With a similar picture in Europe, the question is whether economies will emerge unscathed from this sudden slowdown in credit. And the answer is that only time will tell.


Written on July 21, 2023. This is not an investment advice. Opinions subject to change.

See also: https://latribune.lazardfreresgestion.fr/en/eurozone-no-rebound-in-retail-sales/


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