When credit keeps growing but investment slows
Economic expansions are often sustained by the steady expansion of credit. As banks lend and businesses borrow, investment rises, construction activity increases, and productive capacity expands. For long periods, this relationship between credit and investment can appear stable and self-reinforcing.
But there are moments when the pattern begins to shift. Credit may continue to expand even as investment activity slows, which raises an important question about how borrowing is being used within the economy.
One of the most influential explanations comes from economist Hyman Minsky, who developed the Financial Instability Hypothesis. According to Minsky, borrowing largely finances productive investment in the early phase of the cycle. Businesses take loans to build factories and expand operations. But as the expansion matures, borrowing increasingly shifts toward less productive uses. Credit may be used to refinance existing debts or finance consumption rather than new investment.
Minsky argued that this transition often occurs quietly, without obvious warning signs, until the structure of borrowing becomes increasingly detached from productive economic activity.
Research from the Bank for International Settlements supports this observation. Economist Claudio Borio has documented how, in many countries, lending continues to expand in the later stages of credit cycles even as investment growth begins to slow.
When this happens, economic growth may increasingly rely on debt-financed spending rather than productivity-enhancing capital formation.
The warning sign, therefore, is not simply rapid credit growth. It is credit growth that continues even when investment no longer follows it.
If we look at how bank lending has evolved over the past decade based on data from the Bangko Sentral ng Pilipinas, the same dynamic may be beginning to appear.
During the period of strong investment-driven growth from 2014 to 2019, bank production loans rose from P4.05 trillion to P8.08 trillion, nearly doubling in five years.
Credit expansion during this period translated directly into investment and construction. Gross capital formation increased by 86 percent from P2.76 trillion to P5.15 trillion, while construction output rose by 96 percent from P1.68 trillion to P3.29 trillion. In economic terms, this was a classic credit-supported investment cycle.
The pandemic interrupted this expansion between 2019 and 2021. Bank production loans grew only modestly from P8.08 trillion to P8.52 trillion, or about 5 percent over two years, while investment activity contracted sharply. Gross capital formation fell 20 percent from P5.15 trillion to P4.10 trillion, and construction output declined 18 percent from P3.29 trillion to P2.68 trillion.
When the economy reopened, both credit and investment rebounded. Production loans rose 18.7 percent from P8.52 trillion in 2021 to P10.12 trillion in 2023, while gross capital formation increased 38.8 percent to P5.69 trillion and construction output 36.2 percent to P3.65 trillion.
The pattern remained visible in 2024, with production loans rising 10.8 percent to P11.22 trillion, gross capital formation 10.1 percent to P6.26 trillion, and construction output 11.7 percent to P4.07 trillion.
For nearly a decade, credit and investment moved in tandem.
The most recent data for 2025, however, reveals an important change. Production loans grew 8.4 percent to P12.16 trillion, but investment stopped expanding. Gross capital formation edged lower from P6.26 trillion to P6.25 trillion, while construction output slipped from P4.07 trillion to P4.06 trillion.
For the first time in many years, credit continued to expand even as investment and construction activity stalled. If credit continues to grow while investment slows, the natural question becomes where the borrowing is flowing.
One possibility is household consumption. Consumer spending continued to rise steadily in 2025, which suggests that banks may have extended more credit through housing loans, personal loans and credit cards.
Another possibility is refinancing. In an environment of rising costs and elevated interest rates, companies sometimes borrow not to invest but to refinance existing obligations or strengthen their balance sheets.
In effect, borrowing may have been directed more toward consumption or balance sheet adjustments rather than new productive investment.
Historically, this kind of shift in credit allocation has often preceded periods of financial stress. Similar patterns have appeared in several economies before major financial disruptions.
In Japan during the late 1980s, credit increasingly flowed into property and equity markets rather than productive investment. Much of the borrowing supported rising asset prices rather than new economic capacity, which helped fuel the asset bubble that eventually collapsed in the early 1990s.
A somewhat similar pattern also appeared in China during the late 2010s. Credit growth remained strong, but the productivity of investment began to decline as borrowing increasingly financed refinancing activities rather than new productive projects.
These episodes illustrate a recurring pattern that when credit expands faster than productive investment for extended periods, financial vulnerabilities can gradually accumulate.
While the Philippine economy remains resilient for now, the data suggests the relationship between credit and investment may be beginning to change.
If this divergence persists, amid rising global risks and geopolitical tensions, it may signal the early stage of a more fragile phase of the credit cycle, which is reminiscent of conditions often seen during the winter phase of long economic waves.
Henry Ong is a Registered Financial Planner of RFP Philippines. To learn more about investment planning, attend the 116th batch of the RFP Program this May. To register, e-mail at info@rfp.ph
******
Get real-time news updates: inqnews.net/inqviber
