Growth in private sector credit extension moderated further in July, falling to a 14-month low, pointing to the impact of sharply higher interest rates and a weak economy — a signal the Reserve Bank’s rate hiking cycle may have ended.
Data released by the Bank on Wednesday shows private sector credit grew 5.9% in July from 6.3% in June and a recent peak of 9.7% year on year in September 2022.
The reading was worse than the market’s forecast for a slight deceleration to 6.2%.
Bank data shows the performance of the subcategories was mixed. Growth in household credit extension eased to 6.1% year on year from 6.5% due to weaker household finances, higher interest rates and weak consumer confidence, as well as cautious lenders.
Growth in corporate credit slowed further off a higher base, down to 6.8% year on year from 8.3%. Instalment sales and leasing finance continued to rise to a multiyear high of 14.3% on an annual basis. Credit card usage contracted for the first time since March 2021, down 1.3% year on year.
The pressure on consumers can be seen in the FNB/BER consumer confidence index, which fell from -23 in the first quarter of this year to -25 in the second quarter. The Bureau for Economic Research said the index reading indicates tremendous concern among consumers about SA’s economic prospects and their household finances.
Negative sentiment
The survey also shows that most consumers “expect a deterioration in the country’s economic growth over the next 12 months and consider the present time as highly inappropriate to purchase durable goods”.
Many issues are causing negative consumer sentiment, “including a decline in real income and almost daily electricity load-shedding”, PwC chief economist Lullu Krugel said in a note. This has resulted in real, inflation-adjusted retail sales declining 1.4% year on year in the second quarter, she said.
Head of macroeconomic research at Standard Bank Elna Moolman said the small increase in total household credit reflected in the data was not enough to counteract a decline in corporate credit, with total private credit falling R1.2bn month on month. The weakness in credit growth is consistent with the view of Standard Bank and the consensus one that the Reserve Bank will not hike interest rates again in this cycle, she said.
“[The Bank] may even embark on a cutting cycle — albeit a shallow and gradual one — next year,” Moolman said.
She added that the data also underscores their concern that growth lost more momentum in the third quarter, compared with second quarter GDP.
Nedbank senior economist Johannes Khosa expects credit growth to ease further off a higher base and due to an unfavourable economic environment in the coming months. He said the downward pressure will come from weakness in households and companies’ demand.
“On the household side, the cumulative impact of the interest rate hikes since November 2021 will continue to filter through the economy, keeping debt service costs high and causing households to be cautious of incurring additional debt,” Khosa said.
He said SA banks will be cautious of extending loans given the rising chances of payment defaults. “Corporate credit will continue to benefit from renewable energy projects as companies invest in alternative power sources.”
However, he warned that growth in corporate demand will be contained by subdued economic activity and weak business confidence, which will hurt profits and prompt companies to be wary of expanding capacity and embarking on large capital spending in the short term.
Krugel said the repo rate is likely to have peaked alongside a decline in consumer price inflation and that interest rates will not return to the low levels of 2020, given the increase of 475 basis points over nearly two years.
“Instead, two percentage points could likely be shaved off towards the end of 2025. Based on current forecasts, the repo rate would be about 6.25% at the end of 2025, with accompanied headline consumer price inflation of about 4.5%.”
She said this would bring the repo rate back to prepandemic levels and support household spending.
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