Household credit continued its strong growth while business credit continued to contract, in July, but TD Bank economists see signs these trends are turning.

In a research note, TD reports that the latest statistics from the Bank of Canada show continued growth in household credit, offsetting a the fourth straight month of decline for business credit to non-financial firms.

Credit to Canadian households was up 8.6% on a year-over-year basis, although TD says that the monthly pace of consumer credit growth has moderated. Balance sheet mortgages led the way, up 1.0% on a month-over-month basis, and 9.9% on a year-over-year basis, it notes.

“July’s acceleration in household credit growth is likely the last hurrah. Consumer credit growth has already moderated from the rapid pace that characterized the latter half of 2009, consistent with recent evidence of a slackening in consumer spending growth and high levels of indebtedness,” TD says.

“However, the existing home market has already been recording monthly declines in sales and this should eventually bleed into the demand for mortgages,” it adds. “Overall consumer credit growth is likely to moderate in the coming months.”

At the same time, TD observes that credit to non-financial businesses “has consistently contracted since January of 2009 and has suffered a peak-to-trough decline of almost 18%. However, it appears as though it may have bottomed out with total business credit declining by just 0.1% in July on a month-over-month basis.” This slowed the year-over-year decline to 9.4% from 11.6% in June, TD adds.

Business credit has yet to show a marked pick-up, TD says, “though July’s data does lead us to be slightly more optimistic.”

“In the coming months, we expect the overall pace of chartered bank credit to subside, with the slowdown in household credit outweighing any recovery in business credit. Likewise, the slowing in credit extension will translate into a slower pace of deposit growth,” it concludes.

For July, TD reports that overall chartered bank deposits increased by 0.4%. “This was the slowest pace of monthly growth in four months and caused the year-over-year pace to slow to 6.1% from 6.5% in June,” it says, noting that fixed-term personal deposits grew for the first time since March 2009 during the month.

IE