The rate of annual growth of the broad monetary aggregate and money lending to the private sector has remained unchanged or has not changed significantly. This suggests that the pace at which the underlying expansion of money has stabilized at a moderate level. In the recent times, assessment to this situation supported that the regularly monitored range of all the measures that quantify underlying money growth is bound to remain broadly unchanged. This is due to the fact that monetary developments have signaled the risks to price stability though it is balanced over the medium term.
In addition to that the leveling off in the pace of monetary expansion is also visibly affecting the money lending scenario to households though the largest component of money lending is to the private sector. Indeed, the annual growth rate of loans offered to the households originated by adjusting the sales and securitization which by itself is the relevant a significant measure for determining the developments in in money lending to the households which has noticeably remained unchanged.
Loans offered to the households as well as the narrow monetary aggregate have both unveiled relatively consistent leading indicator properties especially for the business cycle developments. This presents insights through the detailed analysis of all the indicators with regard to the present cyclical momentum of the economy.
Forces driving developments in money lending
The money lending process and scenario has shown strong fluctuations over the period from 2008 which signifies the forces that are driving such developments. Study reveals that:
- The annual growth rate of money lending stood still at 0.6% initially
- It went up to 12.3% in late 2009 and
- Again fell back to 0.9% in 2011.
Expert analysts of monetary system and funding suggest that since the early 1990s witnessed strong fluctuations, the growth has been of much greater amplitude than the nominal growth in GDP. Therefore, given the pace of the growth, it is not possible to simply map a corresponding pace of the growth in GDP.
It is also suggested that at the same time, the rate of annual growth of money lending deflated. By using the GDP deflator experts saw that there are good leading indicator properties for the economic activity. It indicates:
- There are several turning points which is the peaks and troughs of the rate of the annual growth of real GDP
- On an average, each peak and trough of annual growth rate of real lead corresponding to the turning points
- Developments in annual real growth in GDP during previous major peaks in real annual growth
- A strong increase in the growth rate following the sharp decline in short-term interest rates
- The presence of a “liquidity effect” and
- There was portfolio adjustment as the opportunity cost of holding declined.
However, financial innovations in recent years have indeed led to the increased use of assets in portfolio management whether it concerns the banks or private money lenders such as liberty lending USA. Nonetheless, these assets largely represented the money balances that are held for credit transaction purposes. Therefore, there is a distinct relationship between money holdings and actual intended spending is established, at least in principle and this relation is relatively close to the typical co-movement of economic activity and narrow money.
All these support the notion that developments in money lending process and system are all transaction related.
The underlying driving forces
Accordingly, the current deceleration in the annual growth shows a somewhat slower pace of economic activity and it can be seen with a proper breakdown of the growth process into its underlying driving forces. This provides a lot of information such as:
- It shows the dynamic relationship between growth rate and the GDP
- It breaks down annual real growth down into the offerings stemming from the instabilities to the spending preferences especially in the private sector and
- It shows the productivity as well as disturbances to the opportunity costs.
These disturbances in productivity and spending preferences have contributed to the growth significantly and according to the analysis of this breakdown, changes in the level of opportunity costs is also noticed. This not only contributes to the growth but also has secondary yet significant importance.
Apart from that there is a marked slowdown observed in the recent years which is mostly influenced by several other factors such as shifts in the money demand to name one.
Effects on loans to households
The forces driving developments in money lending has also affected the funding scenario to households. Once again by using the GDP deflator it is seen that lending to households deflated significantly by a considerable mark of co-movement with real GDP growth. This renders a lot of help in assessing the loans to households with regards to the current pace of economic activity.
However, in the past years real household loan growth was found to be significantly lower than the real GDP growth. On an average it was seen that real household loan growth outperformed real GDP growth by a factor of 2.2 in two decades before the financial crisis. As of now, this factor implies an annual growth rate of 4% when it comes to offering real loans to households.
The current growth rate is a mere cross-temporal comparison of growth levels and therefore does not account for the differences in the fruition of the key determinants of credit such as the:
- Bank lending rates
- Credit standards and
- Level of indebtedness of the household sector.
Over the years the lending rates of banks to the households have increased significantly when it is compared with the pre-crisis levels as a whole. This is very interesting and an indicator of the bright future of the money lending market. According to information from the bank lending survey, all the banks have engaged tight credit standards following the Great recession in 2008 to deal with the crisis. Moreover, the debt-to-income ratios have also declined which is also a significant factor and reason for the household indebtedness remaining elevated. As a result, all the factors that could potentially dampen the money lending market are eliminated.