The Credit Impulse

Total outstanding credit in an economy — household debt, business loans, mortgages — is a large, slow-moving number, and its level alone doesn't tell you much about where demand is headed next quarter. What matters more, the credit impulse argument says, is whether new borrowing this period is bigger or smaller than new borrowing last period, because it's new credit that funds new spending, and spending is what shows up in GDP.

The insight, most associated with economist Michael Biggs, is that GDP growth tracks the change in the change of credit — the second derivative, in calculus terms — not the level or even the growth rate of credit outstanding. A country can have a huge, still-growing stock of debt and yet be a drag on GDP if the flow of new borrowing each quarter is shrinking relative to the year before; conversely, an economy with modest debt levels can see a demand boom if the pace of new borrowing is accelerating.

$$\text{Credit impulse} = \frac{\Delta \text{Credit}_t - \Delta \text{Credit}_{t-1}}{\text{GDP}}$$

In words: take how much new credit was created this period, subtract how much new credit was created the prior period, and scale the difference by GDP — a positive number means new borrowing is accelerating relative to the size of the economy, which the theory says should show up as stronger demand growth soon after.

Think of the plotted curve's slope as the pace of new borrowing, and its curvature — how fast that slope itself is changing — as the credit impulse. A curve bending upward faster (rising curvature) is a positive impulse; one flattening out, even while still climbing, is a fading impulse — the distinction between the level of credit and its acceleration is exactly this difference between a curve's height and its curvature.

Worked example

Suppose an economy sees new household and business borrowing (net new credit) of $200 billion in one year, then $260 billion the next year, in an economy with $4 trillion of GDP. The credit impulse is $(260 - 200) / 4{,}000 = 0.015$, or about 1.5% of GDP — a meaningfully positive impulse suggesting incremental demand support ahead, even though total debt outstanding barely changed as a share of the economy. If new borrowing then slows to $220 billion the following year, the impulse turns negative — $(220-260)/4{,}000 = -0.01$ — signaling a demand headwind even though the total stock of credit is still, on net, growing.

What this means in practice

China's credit impulse is watched particularly closely by commodity and emerging-market traders, because Chinese growth has historically been credit-driven, and swings in the pace of new lending there have shown up a few quarters later in industrial commodity demand and EM export growth. A slowing credit impulse, even alongside still-rising total credit, has repeatedly preceded slowdowns in commodity prices and EM currencies, which is why the impulse — not the debt level headlines usually quote — is the number desks actually track.