SA credit demand fell very sharply in May as South Africa deleverages. Latest data points to a very weak Q2 GDP estimate

In May 2009, SA growth in broad money supply (M3) was recorded at a mere 7.31%y/y, down from a revised 8.49%y/y in April. The market was forecasting M3 growth at 8.25%y/y. The overall trend in money supply growth is very clearly to the downside, which is expected to continue in the months ahead as the economy slows further.

Private sector credit FELL by a very significant 1.3%m/m in May 2009, or R27.0bn.

On an annual basis, the rate of growth in private sector credit fell to 5.7%y/y from a revised 8.47%y/y in April 2009. The market was expecting growth to slow to 8.05%y/y. Importantly, excluding the investments category private sector credit fell by 1.5%m/m or R27.7bn, which points to extremely weak credit activity levels.

Excluding the investments category, the slowdown in private sector credit was due to a further fall-off in most categories of credit including asset based finance as well as consumer credit. On an annual basis, asset based finance is now growing by only 7.1%, well down from 28.1%y/y as recently as June 2008 (see chart attached). In particular leasing and instalment sales finance actually contracted further in the month by 0.6%m/m or R1.5bn. In fact leasing and instalment sales finance has fallen in each of the last 6 months.

Mortgage credit rose by a mere R207 million in the month, or 0.21%m/m. This follows growth of only 0.7% in April. While April was plagued by many public holidays the slowdown in mortgage finance in May is breathtaking; and looks set to continue over the next few months.

Growth in consumer credit has continued to ease, and is now down at a mere 5.3%y/y, compared with a recent peak of 24.7%y/y a year-ago. Credit card growth has actually turned negative on an annual basis, declining by 0.4%y/y in April. This compares with growth of well over 35%y/y throughout most of 2007 (see chart attached).

In real terms (adjusting for inflation), the growth in private sector credit (excluding investments) has obviously slowed noticeably and is now in-fact sharply negative, which is obviously well down from the peak of 20.8%y/y in February 2007. This clearly reflects the sharp fall-off in the volume of business activity in Q2 2009.

As mentioned last month, on a trend basis, credit demand is slowing very rapidly. The prior increases in interest rates, the introduction of the NCA, a slump in disposable income growth, tighter lending criteria within the banking system, a slowdown in housing price growth, increased job-losses and worsening consumer confidence have all had a measurable impact on overall demand for credit as well as on consumer and housing activity. This is expected to continue throughout 2009. In fact, I expect household credit to slow further to well below 5%y/y over the coming months, and may approach 0%y/y. This is partly due to base effects, but also reflects the sluggish general economic conditions and the fact that much of the current growth in household credit is reflecting a draw-down of existing facilities rather than the granting of new credit.

The fall-off credit demand combined with the general weakness in the economy, and rising unemployment should-have allowed the Reserve Bank to continue to cut interest rates last week. In that respect the Reserve Bank is clearly very concerned about the sticky consumer inflation data and rise in inflation expectations.