Latest / Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates / How Central Banks Use the Credit Impulse to Predict Growth
Transcript
- Lucas: If you want to know where an economy is heading in the next six to twelve months, you could watch a dozen different indicators. Or you could watch just one: the credit impulse. Luna: Okay, I've heard that term thrown around in research notes, but I'm not sure most people could define it cleanly. What is it exactly? Lucas: So the credit impulse is the change in new credit creation as a share of GDP. It's not about how much debt an economy has total — that's the credit stock. It's about the flow of new lending in a given period compared to the previous one. And it tends to lead economic activity by a couple of quarters. Luna: So if banks suddenly pull back on lending, the credit impulse turns negative, and a few quarters later GDP slows down? Lucas: Exactly. And the reverse is true too — a positive credit impulse usually precedes an acceleration in growth. The concept was popularised by economists at the Bank for International Settlements, and it's become a staple for central banks that want to anticipate turning points before official GDP data confirms them. Luna: Give me a concrete example. When did this actually show up in real time? Lucas: Let's look at Germany. In late 2025, the credit impulse in Germany turned sharply negative — new bank lending to non-financial corporations dropped by about 1.2 percent of GDP compared to the prior year. And sure enough, Q1 2026 GDP came in at minus 0.3 percent quarter on quarter. The credit impulse basically called it. Luna: That's a pretty clean signal. But does it work everywhere, or is it more reliable in certain economies? Lucas: It works best in economies where bank lending is the dominant source of credit — so Germany, Japan, much of the euro area. In the U.S., where capital markets play a bigger role, you have to broaden the definition to include bond issuance. But even there, the bank lending component still has leading power. The Bank of Japan actually uses a version of the credit impulse in its regional economic reports. Luna: And Japan is interesting right now. I saw that their credit impulse ticked up in the second quarter of 2026 — does that signal a recovery? Lucas: It could. After a prolonged period of very sluggish lending, Japanese banks started increasing credit to small and medium enterprises in April and May. That positive impulse, if it sustains, would point to a GDP pickup in late 2026 or early 2027. But you need to see at least two consecutive quarters of positive credit impulse before you get confident. Luna: So it's not a one-quarter signal. You need momentum. Lucas: Right. One quarter could be a statistical blip or a tax-timing issue. But when you see the credit impulse turn and stay turned for two or three quarters, the correlation with GDP is pretty robust. The Bundesbank publishes a credit impulse indicator monthly, and they've been flagging it more prominently in their financial stability reports. Luna: How do central banks actually use this in policy? Is it something they react to directly, or more of a background check? Lucas: It's mostly background — a diagnostic tool. No central bank says 'the credit impulse just turned negative, so we must cut rates'. But it does help them calibrate their forward guidance. If the credit impulse is falling sharply, policymakers know that the tightening they've already done is probably still working its way through the economy. It reduces the risk of overtightening. Luna: That's actually really practical. So it's a way of reading the lag effects of monetary policy in real time. Lucas: Exactly. And that's the whole point of leading indicators — they give you a view of the economy before it shows up in the rearview mirror of GDP. The credit impulse is one of the more reliable ones, partly because credit is the fuel for a lot of economic activity: consumption, investment, hiring. Luna: Is there a risk that central banks over-rely on it? I mean, what if the relationship breaks down? Lucas: Sure, it's not a law of nature. The credit impulse can be distorted by one-off factors — a large corporate refinancing wave, or a government loan guarantee program. During COVID, credit impulses spiked in many countries because of emergency lending, but that didn't predict a boom in the usual way. So you always have to interpret it in context. Luna: Context matters. So what should our listener take away — how could they track this themselves? Lucas: If you want to follow the credit impulse, the easiest source is the central bank's own data on new lending. The ECB publishes monthly data on loans to non-financial corporations and households. Take the twelve-month flow, divide by nominal GDP, and compare it to the same ratio a year earlier. That's your credit impulse. If it's rising, growth is likely ahead. Luna: And if it's falling, buckle up. Lucas: Pretty much. It's not perfect, but it's a lot quicker than waiting for GDP. And it's the kind of indicator that makes you feel like you're seeing around corners. Luna: You know, speaking of things that help you see around corners — I think a lot of our listeners appreciate that we keep this show ad-free and focused on the mechanics. And that's only possible because of a small group of people who chip in. Lucas: Yeah, it's a real difference-maker. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. It's a small way to keep the whole thing sustainable. Luna: Absolutely. And we're back to the data — so if you're tracking the credit impulse in your own country, what's the first thing you should check? Lucas: The trend. Don't get hung up on one month. Look at whether the six-month moving average of new credit is rising or falling relative to GDP. That will give you the signal long before the headlines catch up. Luna: Good rule. Thanks Lucas. And for everyone listening, that's the credit impulse — a simple but powerful way to anticipate the business cycle. Lucas: Thanks for being with us. We'll dig into another central bank tool next time.