By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Household credit: A tale of two markets
The South African Reserve Bank (SARB) is set to release Private Sector Credit Extension (PSCE) data for June next week, providing a complete picture of bank lending activity in the second quarter of 2024. In the first quarter, credit extended to households slowed to 3.9% y/y, down from 4.8% in the previous quarter, falling short of the 5.4% headline inflation average. This moderation reflects affordability challenges amid higher interest rates and stricter lending criteria imposed by banks due to rising non-performing loans and the number of customers entering debt review. Despite this, overall debt levels accelerated, suggesting an increase in non-bank borrowing. To delve deeper into this trend, we analyse the latest National Credit Regulator data on non-bank lending.
Since interest rates began rising, the volume of new credit in the non-bank lending sector has expanded rapidly, surpassing traditional banking channels (Figure 1). The sector's share of new credit granted has surged from 16.3% in 3Q21 to 20.5% in 1Q24, a testament to its increasing prominence. However, while overall non-bank lending has increased, average loan sizes have contracted1 (Figure 2) across all non-bank industries, suggesting a shift towards smaller, short-term loans, in part to manage day-to-day expenses, rather than larger, longer-term credit facilities. This trend might also reflect tightening lending standards in the sector, amid affordability concerns. Still, this expansion reflects a growing number of consumers seeking alternative financial solutions as they navigate elevated living costs.
In 1Q24, retailers emerged as key drivers of this growth (Figure 3), with furniture stores likely leading the charge. Retail sales data has indicated a resurgence in household furniture and equipment sales in recent months, contrasting with declining clothing and footwear sales. In the previous quarter, however, the "other credit providers" category, predominantly micro-lenders, dominated non-bank lending.
While the non-bank sector offers a valuable financing alternative for consumers, it is important to monitor its growth and impact closely as this is key to assessing monetary policy transmission and ensuring macroeconomic stability. Enhancing financial literacy,across the board, is also crucial in empowering consumers to make informed credit decisions. That said, bank or non-bank, indebted consumers are looking forward to the imminent interest rate cutting cycle.
Week in review
The leading business cycle indicator fell to 111.9 index points in May, from 113.0 in April. While this was a 1.0% m/m decrease, the indicator remained 2.0% higher than a year ago. Seven out of the ten constituent variables decreased, with the largest negative contributions from a decline in residential building plans approved and slower trend growth in job advertisement space. Nevertheless, we should see improvement in this indicator going forward as stable energy supply and easing political uncertaintysupport confidence and activity.
Headline inflation was 5.1% y/y in June, down slightly from 5.2% in May, with monthly pressure of 0.1%. Core inflation slowed to 4.5% y/y, from 4.6% previously, but had monthly pressure of 0.4% that was driven by housing and household services. Average fuel prices fell by 4.6% m/m and were up by 7.6% when compared to June 2023, down from 9.3% previously. Food and non-alcoholic beverages inflation was 4.6% y/y, a slight decrease from 4.7% previously, but monthly pressure lifted to 0.5%. Monthly headline inflation should lift in July due to utility cost increases and intensifying food price pressures. Nevertheless, fuel deflation, following the R1 per litre reduction in petrol prices, should once again mitigate these pressures. Positively, annual inflation forecasts for 2024 and 2025 are being scaled down, reflecting slowing global inflation, stable oil prices, a less depreciated rand, and subdued domestic demand. However, upside risks are material and the road ahead should still be bumpy.
Producer inflation remained steady at 4.6% y/y in June, unchanged from May's print. Monthly pressure was -0.3% after averaging 0.5% in the first five months of the year. Excluding petroleum-related products, producer inflation showed a modest increase to 4.0% y/y (0.2% m/m) from 3.9% y/y (0.1% m/m) in May. Intermediate producer inflation rose to 2.3% from 0.4%, with monthly pressure holding steady at 0.6% between May and June.
The underlying data reflected divergent outcomes, with petrol and diesel price inflation moderating to 5.8% and 7.9%, respectively, from 9.2% and 8.2%. Meanwhile, food inflation increased slightly to 4.0% from 3.7%, as meat prices rose to 4.9% from 4.1% and other food products, particularly bakery items, to 3.1% from 1.2%. Inflation for metals, machinery, equipment, and computing equipment edged up to 5.7% from 5.5%. Textile, clothing, and footwear inflation was 6.3%, down slightly from 6.4% in May. Transport equipment prices deflated by 0.5%, similar to May's print, driven by a decline in transport equipment parts, while motor vehicle inflation moderated to 2.9% from 3.1% over the same period.
Week ahead
On Monday, data on Private Sector Credit Extension (PSCE) for June will be released. PSCE increased by 4.3% y/y in May, faster than the 3.9% increase in April. The acceleration in PSCE was largely driven by corporate credit, which expanded by 5.0%, up from 4.3% in April. Meanwhile, household credit growth remained steady at 3.4% y/y in May, unchanged from the previous month's figure. This is the slowest pace of increase since March 2021 when household credit growth was 3.3% y/y, highlighting the impact of tighter monetary policy.
On Wednesday, the trade balance for June will be published. The trade balance recorded a surplus of R20.1 billion in May, up from a downwardly revised surplus of R9.7 billion (previously R10.5 billion) in April. In May, exports increased by 5.7% m/m to R178.4 billion, while imports declined by 0.5% to R158.3 billion. Year-to-date (January to May), the trade surplus has exceeded expectations, recording R45.2 billion compared to R18.2 billion in the corresponding period last year. This is attributed to imports weakening faster than exports amid weak domestic demand. Consequently, recent current account projections show a modest widening to around 2.0% of GDP this year from projections of around 2.5% of GDP at the start of the year.
On Thursday, the Absa manufacturing PMI for July will be published. The PMI increased to 45.7 index points in June, from 43.8 points in May, but remained in contractionary territory. Weak demand has weighed on the sector in 2Q24, outweighing the improvement in electricity supply. In addition, supplier performance worsened, indicating that port issues remain a drag on the sector. New sales orders were sideways at 37.9 points from 37.8 points previously, while the business activity index declined further to 36.3 from 38.1 points in May. On a quarterly basis, business activity showed limited improvement from 1Q24 and suggested a weak contribution to GDP growth by the manufacturing sector. On the positive end, purchasing prices eased and expectations for near-term business conditions were upbeat, likely reflecting easing political uncertainty as well as an anticipated improvement in global activity as monetary policy eases.
Also on Thursday, data on new vehicle sales for July will be released. New vehicle sales declined by another 6 531 units to record 40 072 units in June. This reflected a 14.0% y/y decrease, highlighting consumer constraints as well as weak business sentiment. Passenger car sales fell by 9.0% y/y, light commercial vehicles by 24.3% y/y, medium commercial vehicles by 27.7% y/y, and heavy trucks and busses by 11.7% y/y. Year- to-date, new vehicle sales were lower by 7.6% relative to the same period last year. As cost-of-living pressures ease, and business confidence improves following easing political uncertainty, the purchase of big-ticket items and investments should follow. Additionally, continued recovery in sectors such as tourism should support vehicle sales.
Lastly on Thursday, data on electricity generated and available for distribution for June will be released. Electricity production (not seasonally adjusted) increased by 5.6% y/y in May following a 5.7% lift previously. On a seasonally adjusted basis, electricity production decreased by 0.5% m/m after lifting by 1.2% in April. Consumption increased by 4.8% y/y, from 6.2% previously, and fell by 0.6% m/m. Early indications of the 2Q24 performance suggest that the electricity sector will contribute positively to GDP growth. This will be in line with a higher Energy Availability Factor and the cessation of load-shedding.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 23 Jul | SA | Leading business cycle indicator | May | 111.9 | 113.0 |
| 24 Jul | SA | CPI % m/m | Jun | 0.1 | 0.2 |
| 24 Jul | SA | CPI % y/y | Jun | 5.1 | 5.2 |
| 25 Jul | SA | PPI % m/m | Jun | -0.3 | 0.1 |
| 25 Jul | SA | PPI % y/y | Jun | 4.6 | 4.0 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 29 Jul | SA | Private sector credit % y/y | Jun | 4.0 | 4.3 |
| 31 Jul | SA | Trade balance R billion | Jun | 22.3 | 20.1 |
| 1 Aug | SA | Manufacturing PMI | Jul | -- | 45.7 |
| 1 Aug | SA | Naamsa New vehicle sales % y/y | Jul | -- | -14.0 |
| 1 Aug | SA | Electricity production | Jun | -- | 5.6 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 80,678.20 | 0.4% | 1.4% | 4.0% |
| USD/ZAR | 18.35 | 0.5% | 0.7% | 4.2% |
| EUR/ZAR | 19.88 | -0.1% | 1.8% | 1.9% |
| GBP/ZAR | 23.66 | 0.2% | 2.3% | 3.8% |
| Platinum US$/oz. | 933.01 | -3.6% | -5.0% | -2.9% |
| Gold US$/oz. | 2,364.50 | -3.3% | 2.0% | 19.9% |
| Brent US$/oz. | 82.37 | -3.2% | -3.1% | -0.7% |
| SA 10 year bond yield | 10.23 | -1.0% | -3.1% | -6.2% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.9 | 1.6 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.1 | 5.0 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.0 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.6 | 4.7 | 4.7 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.30 | 17.50 | 18.30 |
