A recent paper by Karsten Müller and Emil Verner fuels the debate. Using a novel database of private credit in 116 countries since 1940, and drawing on more than 600 sources, it analyzes how the sectoral allocation of credit impacts financial stability in recipient countries. The findings suggest that credit to the non-tradeable sector (where goods cannot be sold internationally, such as construction, repairs, food services, and real estate) predicts lower medium-run growth, while tradable sector credit leads to higher growth in the medium-run.
From the text:
"Why does credit to households and non-tradable sectors, but not to the tradable sector, foreshadow lower future economic growth? First, credit growth to non-tradables and households may reflect that credit finances a demand boom, which may sow the seeds of a future bust. Consistent with this prediction, we find that household and non-tradable credit expansions are associated with a relative expansion in consumption relative to GDP, increasing shares of the non-tradable sector in output and employment, an appreciation of the real exchange rate, and an increase in house prices.
Second, lending to non-tradables and households can increase financial fragility if these sectors face tighter (ex-ante) financing constraints or are more sensitive to changes in credit supply. We document that non-tradable sector firms are, on average, smaller and more reliant on loans collateralized by real estate compared to tradable sector firms. Credit expansions to the non-tradable sector are associated with a considerably higher likelihood of future systemic banking crises. In contrast, lending to the tradable sector has essentially no relationship with banking crises and also falls less after the onset of crises. Third, credit booms may lead to a misallocation of resources away from more productive sectors. Because the level and growth rate of productivity is generally higher in tradable industries, a reallocation away from tradables can cause lower aggregate productivity growth in the medium run. Taken together, the patterns we document suggest that credit expansions are not created equal. They highlight that “good” and “bad” booms can be differentiated based on what the borrowed money is used for along dimensions emphasized by economic theory."