The State of the Global Credit Cycle

The credit impulse – by looking at the quarterly change in the flow of credit – is thus comparable to GDP growth in that it is also a second derivative.

The State of the Global Credit Cycle

The global credit picture is quite different from the global financial crisis over a decade ago. Unlike 2008, US credit growth rose sharply during the early stages of the COVID pandemic and continues to run at a strong pace even now (Exhibit 1).

In contrast, while credit growth in China picked up sharply in 2009, there is little sign of a similar boom now (Exhibit 2).

"Because we are interested in the link of credit to growth, we look at the credit impulse, which is the quarterly change in the flow of credit.

"We do this because GDP growth is already the second derivative, measuring the growth rate of the quarterly value added in the economy. The credit impulse – by looking at the quarterly change in the flow of credit – is thus comparable to GDP growth in that it is also a second derivative.

Credit impulse in percent of GDP

"We calculate the credit impulse in percent of GDP at the country level and then aggregate up to the global level using PPP weights. At a global level, the credit impulse was positive during the early stages of the pandemic, but has turned negative more recently, pulled down mainly by China (Exhibit 3). Given its size, China dominates our EM credit impulse (Exhibit 4)," says the International Institute of Finance.

The link from credit to GDP growth is far from straightforward. We use two polar opposites – China (Exhibit 5) and Turkey (Exhibit 6) – to show this. There is little sign of a link in China, with GDP growth quite stable in the run-up to COVID, even as the credit impulse went all over the place.

The opposite is true in Turkey, where credit is hi ghly correlated with GDP growth. Turkey is so different from other countries because the repeated series of credit expansions was truly exogenous and not demand -driven, giving a true bump to growth.

Coming Global Macro Views will review cross-country evidence on the credit-growth nexus and tease out the role of the credit channel for global activity.