UBS Calls It: "The Global Credit Impulse Suddenly Collapsed To Negative"

One month ago, a skeptical Deutsche Bank warned that just as global macro surprises and economic momentum had hit 6 year highs, the bullish story was set to rollover from its current elevated levels...


... primarily as a result of a series of disappointing data points out of China...

... which would be manifest in commodity prices first then across the entire risk spectrum: "Lower macro surprises would be consistent with a tactical pull-back for equities (especially against the backdrop of still-elevated readings on our market sentiment indicators) as well as a roll-over in cyclicals versus defensives."

While it may not have known at the time, what Deutsche Bank was really saying is that the primary driver behind global growth in the past decade - China's credit creation, or rather its first derivative, the credit Impulse out of Beijing - was about to turn negative.

One month later, that is what UBS' Arend Kapteyn discovered when in a report published overnight, the Swiss bank economist reported that the most important variable when it comes to global economic expansion (and alternatively, contraction) has just turned negative for the first time in three years.

In the note, UBS writes that "Our global credit impulse (covering 77% of global GDP) has suddenly collapsed" and explains that "as the chart below shows the 'global' credit impulse over the last 18 months is essentially mainly China (the green shaded bit), which even now is still creating new credit at an annualized rate of around 30pp of (Chinese) GDP. But the credit impulse is the 'change in the change' in credit and even the Chinese banks could not sustain the recent extraordinary pace of credit acceleration. As a result: whereas back in Jan '16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China's contribution is -0.3% of global GDP).

There was some good news, namely credit creation everywhere else but China as the credit impulse in advanced economies (DM) is running at its 5y avg pace, "that is to say, DM's contribution to the global credit impulse is about ½ pp of global GDP, exactly equal to the average of the last 5 years but a few tenths below the pace back in Q3. Within DM, positive contributions are mainly coming from the US (0.2pp), UK (0.3pp) and France (0.1pp). For the US that's largely reflecting its large GDP weight, but for France there is a clear turnaround (2 ½ pp of GDP) from a negative credit impulse mid last year to a positive one now (coinciding to some extent with the strong improvement in PMI data), and the UK is sustaining a credit acceleration that started last May. The only DM economies where the credit impulse is currently negative are Italy, Canada and Australia (combined 12% of our DM aggregate)."

Unfortunately, as we have explained for years, starting back in 2010, when it comes to the global credit impulse, it was, is and will be all about China: without a massive surge in debt creation over and above the prior year, and thus a boost to annual impulse, the global economy virtually always rolls over.  As UBS calculates, credit impulse has a strong correlation with global domestic demand growth: the average DM correlation with domestic demand is 0.67 (and as high as 0.75 for the US) whereas for EM it's only 0.23. The correlations for Poland (0.67), Turkey (0.66), Brazil (0.6) and South Africa (0.55) are all decent but India (0.15) and China (0.1) are very low, possibly because of problems with the GDP data."

The bottom line: absent a new, and even more gargantuan credit expansion by Beijing - which is not likely to happen at a time when every single day China warns about cutting back on shadow banking and loan growth - the so-called recovery is now assured of fading. It is just a matter of time.