In assessing this high reading, we are mindful some analysts have questioned whether the credit-to-GDP measure is a good early warning indicator for emerging markets, particularly when a developing economy is undergoing a period of financial deepening.
However, we think this criticism is tempered by an expanded BIS analysis of both advanced and emerging economies that shows the gap is still a useful and robust indicator for emerging markets, albeit with not quite the same performance as for advanced economies.
More importantly, it is worth noting a high reading for the credit to GDP gap does not always correctly foreshadow a crisis.
With these caveats in mind, we still view China’s rapid credit growth as a downside risk to Australia’s outlook given China’s credit-to-GDP reading is comparable to the peaks seen in other countries in the years before their respective financial crises.
Kieran Davies is an economist at ANZ