Consumers under pressure as private sector credit growth moderates

South African consumers remain under pressure, as private sector credit growth continues to moderate due to a diminished outlook for the domestic economy. Previous interest rate increases have not filtered through to the real economy yet and monetary policy easing is still some way off.

According to the South African Reserve Bank (Sarb), household appetite for unsecured credit which has been fanned by surging living costs is unlikely to dissipate, but changes in credit and financial conditions mean banks are adopting a more conservative approach to lending.

Economic research group, Oxford Economics Africa, says there will be no meaningful improvement for the domestic economy in the near term as structural constraints and a high-cost environment weigh on growth prospects.

The impact of tight monetary policy is also weighing on households, while the depressed economic situation is dampening business confidence. These conditions lead to less employment, as businesses are disinclined to undertake expansion projects in the current economic climate.

The Sarb’s latest report on credit extension shows that private sector credit extension growth moderated to 6.3% in June compared to June last year, while the nominal increase in credit extended to the private sector in June was R48.1 billion compared to a decline of R5.1 billion during the previous month.

Although corporate sector credit growth eased to 6.1% compared to a year ago, credit extension to the corporate sector increased in nominal terms compared to 6.9% in May. Meanwhile, growth in credit extended to households came in at 6.5% compared to a year ago and 6.7% in May. Mortgage advances were higher on a monthly basis in June, while other credit components were mostly flat.

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Drop in consumer confidence leads to drop in credit

Data for the second quarter shows that South African consumer confidence dropped to the second-lowest reading since 1994, with the majority of consumers expecting a weaker national economic performance over the next 12 months while they think it is a bad time to buy durable goods and the outlook for their household finances has taken a further knock.

High-income households are the most pessimistic, with rand volatility and higher interest rates weighing on their financial positions, including financial security, while lower-income households are arguably the worst off in the current high-cost environment.

Financial conditions are tight and the Sarb has hiked interest rates by a cumulative 475 basis points during the current cycle since November 2021. The group says its baseline assumes that the cycle has peaked and that consumers can look forward to a pivot in the policy stance by the third quarter of 2024.

“We forecast real disposable income growth will slow to 0.5% in 2023, from 1.5% in 2022, with consumption growth set to moderate to just 0.5% in 2023 compared to 2.5% in 2022. What’s more, we expect an economic contraction in the second quarter and forecast real gross domestic product (GDP) to grow by 0.2% in 2023.”

The group says little to no near-term growth, mounting downside risks and policy inaction weigh on business confidence illustrated by the dop in business confidence in the second quarter to its lowest levels since 2020, undermining corporate credit demand.

“Load shedding, logistic infrastructure constraints and high interest rates together with the impact of being greylisted, make for a more onerous business environment and increase the cost of doing business.”