The Bank for International Settlements (BIS) now publishes a data set on the credit to GDP gap for 43 countries, including Australia. The credit-to-GDP gap is designed to identify the build-up of excessive credit and is calculated as the difference between the ratio of private non-financial credit to GDP and its long-run trend.
" We still view China’s rapid credit growth as a downside risk to Australia’s outlook."
Kieran Davies, Economist, ANZ
The gap provides an early warning signal for financial crises, which is why it is used by authorities in setting countercyclical capital buffers for banks under the Basel III framework.
In Australia the gap reached a record high of 19 per cent when the global financial crisis hit in 2007, but aggressive action by the Reserve bank of Australia avoided further trouble The gap slumped to a record low of -12 per cent in 2012 before recovering to a modest 5 per cent in early 2016.
China’s gap recently reached an extreme of 30 per cent, which is the highest level in the 21-year history of the series and the highest current reading of any of the countries monitored by the BIS.