In June 2011, SA growth in broad money supply (M3) was recorded at 6.0% y/y, which is slightly below the 6.2% y/y recorded in May 2011, and below market expectations for a rise of 6.35% y/y. The overall trend in money supply growth is still soft, but given the extremely low base that has been established, the annual rate of change is still expected to trend slightly higher during the remainder 2011 and into 2012.
Private sector credit rose by a relatively modest 0.5% m/m (R10.119bn) in June, after falling by a surprising and substantial 0.4% m/m (-R8.7bn) in May 2011. Consequently, on an annual basis, the rate of change in private sector credit was recorded unchanged at a mere +5.2% y/y. This was slightly below market expectations for a rise of 5.3% y/y. The increase in credit was driven mostly by a R4.8bn increase in household debt (+0.4% m/m), while corporate credit increased by R3.7bn (0.4% m/m).
Mortgage credit, which is the largest component of private sector credit, rose by a relatively subdued 0.3% m/m or R2.86bn. On an annual basis, mortgage credit is still up only 3.2%, which is consistent with the sluggish levels of activity in the residential and commercial property sectors. More encouragingly, over the past three months mortgage debt is up a combined R10.35bn, which is perhaps indicative of a more engaging approach by the banking sector.
As mentioned above, consumer credit increased by 0.4% m/m in June or R4.8bn (+7.0% y/y). During the first six months of 2011, consumer credit has risen by a total of R33.9bn, which compares with R30.3bn during the corresponding period in 2010. Despite the rise in June, the rate of growth in consumer credit can still be considered very modest, especially for this phase of the business cycle and the fact that interest rates are at their lowest level since 1974. Clearly, the NCA coupled with conservatism on the part of banks, retailers and consumers have combined to keep household credit growth well contained. Credit card debt is up a paltry 2.4% over the past year. Consumer’s are showing fiscal restraint in the face of rising household expenses (eg fuel, education, medical, electricity, food).
It is clear that the rate of expansion in private sector credit remains relatively muted and has lagged the overall economic recovery. During most economic upswings, the initial part of the recovery is driven by a rise in incomes (cash sales) and not a rise in credit. Credit demand, typically, emerges a little later in the recovery (especially if inflation starts to rise). However, during this cycle, the delay in credit growth has also been compounded by the fact that the banking sector has been digesting a surge in bad debts relating to the previous credit excesses, the ongoing impact of the NCA and the fact the banks are no longer offering the ‘two-below-prime” deals they did a couple of years-ago.
We still expect credit growth, especially consumer credit, to move modestly higher during the next 12 months, as the combination of 30-year low interest rates, improved income growth, reduced debt servicing costs and the slightly easier lending criteria out of banks start to have a more positive effect.
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