Households more prudent about credit

Private-sector credit fell by a “surprising and substantial” 0.4% in May, according to Stanlib economist Kevin Lings, although consumer credit increased by 0.5% (R5.1-billion) in the same month. During the first five months of the year, consumer credit has risen by a total of R29.15-billion, compared with R26.6-billion during the same period last year.

But Lings says this growth is very modest, considering interest rates are at their lowest level since 1974, which indicates that household credit growth is being well contained — probably thanks to the NCA and the fact that banks have been conservative in terms of their lending.

What does this mean for the economy?
Private-sector credit growth is muted and Lings says it has lagged the overall economic recovery. During economic upswings, the initial part of recovery is driven by a rise in incomes, not a rise in credit. But credit demand emerges a little later in the recovery, especially if inflation starts to rise.

This delay in credit growth suggests that the banking sector is still digesting bad debts; also, banks are no longer offering the “two-below-prime” deals they did a couple of years ago.

Lings says he expects credit growth to move a bit higher during the next 12 years — he feels that the still low interest rates, improved income growth, reduced debt-servicing costs and easier lending criteria on the part of banks will start to have a positive effect on the economy.

Broad money supply growth was recorded at 6.1% (from May 2010 to May 2011), slightly above the 6% recorded in April, and above market expectations.

Unlike previous economic cycles, when growth in household credit played a fairly important role in driving economic activity, households have become more circumspect and prudent about the use of credit, while banks are maintaining a relatively cautious approach in terms of granting new credit facilities.

This implies that South Africa’s economic growth is more dependent than ever on job creation, says Lings. South Africa desperately needs to create “new” consumers in the form of increased formal sector employment. That way, economic activity will be boosted without a dramatic increase in household debt.

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