The pros and cons of credit growth


Economic recovery is generally characterised by a rise in incomes, not a rise in credit, so it’s perhaps not entirely surprising that credit growth has lagged and annual growth in credit demand has not risen above 2%.

According to Stanlib economist Kevin Lings, this delay in credit growth is compounded by the fact that the banking sector is still digesting bad debts relating to previous credit excesses. They are extending credit cautiously.

“We still expect credit growth, especially consumer credit, to move steadily higher during the remainder of 2010, and a little more meaningfully higher in 2011,” says Lings. A combination of 30-year-low interest rates, improved real income growth and banks’ easing of lending criteria should drive this.

Private-sector credit rose by a robust 1,1% in July — the largest monthly increase since 2007. Annual growth is above market expectations. Meanwhile, consumer credit rose by an encouraging 0,6% in July and annual growth was 5,3%. Lings says that consumer credit rose by a respectable R36,5-billion in the first seven months of the year (mostly in the form of mortgage finance).

But given the risks to economic and disposable income growth, FNB home loans property strategist John Loos feels that slower credit growth might be better from a longer-term property market health point of view, as the household sector is not in the healthiest financial state at present. “As long as its finances remain as fragile as they do, the residential property sector, too, will remain at risk,” says Loos.

Household sector credit growth is probably still slow enough to allow for a much-needed decline in the household debt-to-disposable income ratio (still very high at 78,4% in the first quarter). But any further significant acceleration may stall the declining trend in the debt ratio, which would be undesirable, says Loos.

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