The Global Credit Impulse has plunged. Should we be worried?

After every economic shock you will read about the people who predicted it. These are usually people who predict a crash every year, so once in a while they are right. On Monday, I read the usual mix of bull and bear. The four letter word ending in -it wasn't appended to either term, but easily could have been. The one that struck me as most dodgy was by Alex Brummer, City Editor of the Daily Mail, under a headline that proclaimed the world economy was on the brink of a boom and the UK was perfectly placed to benefit. In a facts light piece he noted that the government had failed to project an uplifting vision of what a post Brexit Britain, open to world markets, would look like and there was a need for it to reach out to business and the City and to reassure the whole country that free market trade will deliver benefits to households. Reading it again it looks like the bullish headline writer didn't actually read Brummer's piece.

The report that gave me more pause for thought was in the Telegraph business section, under a headline saying that the global credit bubble was at risk of bursting. A key tracking indicator, the Global Credit Impulse, has fallen as dramatically in recent months as it did during the onset of the Lehman crisis. So what is this measure? It is known to specialists as the "second derivative". As I was reading this in the business pages I had financial products (you know, the kind they bundled up dodgy sub-prime debt into) in mind. But then I realised they were talking about, rather than the volume of credit, the "change in the change". Ah, right - we're talking maths then and the second order differential equations beloved by engineering students - the rate of change in the rate of change!

Fortunately they showed some graphs and I could see that, in 2008, the global credit impulse fell from about 0% of GDP to -6%. In recent months it has, indeed, also fallen by 6% but from 4% to -2% and not as sharply. Moreover, the correlation between the credit impulse and the trajectory of domestic demand in the US is only 0.73, which sounds like a pretty weak correlation to me, though I am happy to stand corrected by any mathematicians out there.

So I don't personally think there's anything much in either of these snippets. What I found more concerning was the UK credit impulse, which the Telegraph said was the highest it has been since 1982, at about 12%. Mind, the graph showed it was nearly as high in 2012 and in 1982, where the graph started, it was about 5% so I don't think much of their business journalist's grasp of maths and numbers, even if he is grandly named Ambrose Evans-Pritchard.

Nevertheless, the Bank of England is concerned and has launched a review into credit quality. Britain's credit impulse, though high, has turned down recently as lenders tighten standards. UBS says the credit impulse will fall by 8% of GDP in the next 12 months. Plummet might be a better word. If so, says Ambrose, "batten down the hatches". Now that did sound a bit worrying.....