The bank credit statistics updated by the Reserve Bank to March 2011 indicate that weak growth in the supply of bank credit to the SA economy may be slowing down rather than gaining momentum. As we show below, our calculation of the underlying trend in the supply of extra bank credit to the private sector, suggests as much. Year on year growth appears to have stabilised at just over 5% (about a very modest 1% after adjusting for inflation) while the underlying trend growth has declined to a just over a 4% rate.
Behind this weakness in the supply of and demand for bank credit is the housing market and so the demand for mortgage loans. Mortgage loans have become an ever more important asset of the SA banks and now account for about 50% of all bank lending to the private sector.
House price inflation understandably leads mortgage lending as we also show below. The more valuable the house the larger the mortgage loan provided to secure it. Moreover house price inflation encourages home ownership. House prices are however not providing much encouragement to home owners, potential home owners or the banks. Clearly bank lending and money supply growth are not contributing any impetus to the SA economy. By implication therefore interest rates in SA are too high rather than too low: a point that will be taken account of when the Monetary Policy Committee (MPC) of the Reserve Bank meets next week.
The market for new and by implication used vehicles in South Africa has been the most conspicuous benefactor of lower interest rates and a stronger rand. However sales statistics for new units sold in April indicate that the growth momentum has slowed down. April with its many public holidays is typically a very slow month for vehicle sales, as slow as December for similar holiday reasons. April 2011 saw more than the usual numbers of days off and so April vehicle sales will need to be treated with more than usual caution. For the record, unit sales adjusted for seasonal factors (as far as we can measure them accurately) declined from 49 003 units in March 2011 to 42 830 units in April.
Furthermore the ripples from the Japanese Tsunami are still to be felt in the supply chains (including SA plants). In the months ahead new vehicle sales may well be inhibited by a want of supply rather than a lack of demand, making this leading indicator temporarily less helpful than usual.
The recent credit and vehicle sales statistics justify the caution expressed at the last MPC meeting about the state of the SA economy and the risks to the growth outlook. The credit and money numbers state very clearly that there is no pressure from the demand side of the economy on output, employment or prices.
The food and energy prices that have risen have their sources well beyond the influence of monetary policy in SA. They nevertheless help slow down rather than speed up the local economy.
These facts of economic life in SA should continue to give the MPC pause. There is no case for higher interest rates in SA. Indeed there is a much better case for lower rather than higher interest rates to add momentum to money supply and credit growth, which are too slow rather than too rapid for the good of the economy.
To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View:Bank credit and vehicle sales: No room for complacency