A changing investment narrative requires a careful reader
Business investment is now in the driver’s seat on growth, implying credit growth is a less reliable guide to financial conditions more broadly.
Strong business investment, autonomous from government or central bank policy, has filled the gap left by slower growth in public demand, and changed the narrative around the growth cycle. This has implications for how we should think about financial conditions, and specifically business credit growth.
- Typically, business investment is only loosely correlated with interest rates, and business credit growth is in turn only loosely correlated with new investment. Business balance sheets strengthened in the wake of the pandemic, so there might be scope for further increases in leverage. The pre-pandemic period of low growth, inflation and interest rates is in any case not the relevant period of comparison for where we are now.
- If something is essentially impervious to interest rates, then it cannot be an indicator of financial conditions more broadly. There is a difference between a claim that policy is restrictive but needs to be even tighter because of a positive shock, and a claim that policy is not tight at all. These are important considerations for how we should interpret developments in business credit.
Historically, much of the commentary on the growth cycle in Australia has been policy-driven. The RBA sets the cash rate, which affects housing and mortgage markets, and so consumer spending. Business investment was seen as largely downstream of a consumer-driven domestic demand cycle, on the logic that businesses will not invest if demand is not there.
There were exceptions to this, most notably the rise of China and associated mining investment boom. The pervasive effects of this boom and its unwind were systematically underestimated. Also not fully appreciated at the time was the deadening effect of risk aversion and weak investment appetite in the wake of the GFC. But these factors mostly played out over a longer horizon, and the shorter-run rates–consumer nexus tended to be more in focus.
Another policy-driven narrative became more prominent in recent years, with public demand as the swing variable. Government infrastructure projects and the growth in the care economy were driving growth in domestic demand. Initially we worried that when the infrastructure projects ended and the expansion in the care economy matured, the handover would be ‘shaky’ and growth momentum would weaken further.
Fortunately, that did not happen. Developments in the private sector, autonomous from domestic policy, have recently become a key driver and filled the gap as public sector demand growth slowed. In many respects, the data centre boom and associated renewables spend is rewriting the narrative, and our recent forecast revisions reflect this.
This shift has several implications for how we should think about financial conditions and specifically how business credit growth fits into any assessment of financial conditions.
First, business investment is not that correlated with short-term interest rates. This was true in the post-GFC period of slow growth, when hurdle rates stayed high even though interest rates were unusually low. It will also be true in the upswing. The hyperscalers and other funders that are driving the data centre boom are essentially indifferent to cost. They do not seem to care that they are funding themselves at much wider spreads than similarly rated non-tech firms. Nor do they seem to care about cost to build. They just want to get it done as fast as possible. But if their activities are impervious to interest rates and spreads, they cannot guide views on how the economy is responding to interest rates.
Second, business investment is only loosely correlated with business credit quarter to quarter or year to year. A stylised description of many businesses’ strategies is to use debt funding to acquire assets or other companies, but use retained earnings to fund new investment. Short-run fluctuations in business credit growth might therefore provide weak or misleading signals about investment or activity more broadly. Moreover, if businesses’ funding mix changes, even medium-term shifts in business credit growth might have little implication for underlying activity.
Third, balance sheets matter. Businesses came out of COVID cashed up, in part because of the fiscal support they received during the pandemic. Business leverage – whether measured as debt relative to financial assets broadly or debt to cash plus deposits – dipped below even the low post-GFC average. It has since returned to that average but might have scope to increase further. This would not necessarily mean credit supply has eased. Rather, the population of borrowers has effectively changed and become stronger.
Fourth, and related to the previous point, the comparison period matters. We must recall that the period between the GFC and the pandemic was the anomaly – low growth, low inflation, low investment – and extremely low interest rates. The global structure of interest rates is likely to be higher now and into the future, because of the AI boom, the US fiscal situation and the end of the post-GFC inflation undershoot. But this is not news, and it is not necessarily a sign of a change in financial conditions more recently.
This point is particularly salient for total credit growth as an indicator of financial conditions. Even a return to inflation around or above target, rather than consistently below as in the 2010s, means that average nominal credit growth rates from that period are not representative of “normal”. Nominal growth in the economy was slower, and nominal credit growth is downstream from that. Moreover, many of the factors that made the post-GFC period unusual – the weak risk appetite, regulatory adjustments and balance sheet repair – would be expected to weigh on credit growth especially heavily. There is also a cyclical element here: more (real) credit growth might not be saying anything about credit supply, and so “financial conditions”. Rather, stronger growth makes for stronger borrowers that are more willing to demand credit and more qualified to access it.
All of this suggests that observers should be cautious in how they interpret business credit conditions. If something is essentially impervious to interest rates, then it cannot be an indicator of financial conditions more broadly. To be fair, the hyperscalers are issuing bonds, not borrowing from the domestic banking system and being recorded in business credit. To the extent that current business investment and credit growth are being driven by the data centre boom’s broader spillovers to other sectors, though, that provides almost no signal about the tightness of monetary policy.
This is important given the apparent tendency of some recent RBA and other commentary to conflate a shock with a reason to revise the neutral rate higher. For example, in one recent speech, it was argued that, because AI was a smaller shock for Australia than some other countries (debateable), long yields would rise by less than elsewhere. This in turn would result in a lower exchange rate than otherwise, necessitating higher interest rates. But the exchange rate depreciation is part of the transmission of that differential response to different-sized shocks. It is not an independent outcome requiring that interest rates need to be higher, actually. In the face of a positive shock, yes, policy rates would need to be higher than if the shock had not occurred. But being a lesser beneficiary of that shock is not a heads-I-hike-tails-your-rates-go-up double-whammy.
This framing is even more curious, when one considers that the RBA never took any signal from the USD selloff earlier in the year. That selloff had nothing to do with conditions in Australia, but it surely lifted the AUD exchange rate at the margin – at least against some trading partners – and therefore was slightly disinflationary.
The broader lesson here is not that this time is different, but rather “last time” – the period between the GFC and the pandemic – was different. It has also taken a while to normalise from the pandemic itself, especially where balance sheets and financial behaviour are concerned. If we fail to understand this recovery away from the post-GFC era, or the implications of more fleeting shocks for financial behaviour, we risk misconstruing where the economy might be headed and where policy settings need to be to achieve desired outcomes. The strength of business credit does not have the same implications as similarly strong household credit would.
The boom in data centres and renewables is reshaping Australia’s economic narrative and needs to be a consideration in policy settings. But care must be taken to avoid overstating its implications for financial conditions. There are many good reasons to think that the long-run average for the global structure of interest rates (and so neutral rates) will be higher in future than pre-pandemic. Current strong growth in business credit is not necessarily one of them.
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Australia and NZ Weekly 14 September 2026
Australia and NZ Weekly 14 September 2026
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