Credit data reflect subdued economy
bdlive.co.za - Feb 3rd 2015, 09:37
Credit growth data released on Friday painted a picture of a subdued economy, with broad M3 money supply growing only an annual 7.38% in December from 8.31% the previous month.
Growth in private sector credit extension, a crucial indicator for credit uptake by households and the private sector, was 8.52% in December from 9.13% in November.
Just a decade ago, money supply and credit extension often topped double-digit figures, even reaching above 20% at times. What is even more remarkable, low credit extension is now in an environment where interest rates are the lowest in more than two decades.
No wonder economists are rewriting economic theory, or at least try to explain these anomalies against a new background where deflation, or an actual decline in prices, has become the big global challenge.
The US has pumped trillions of dollars into its economy since 2008, and consumer inflation is threatening to fall below 1%. Hence the hesitation globally to hike interest rates, which could aggravate the deflation conundrum.
Reserve Bank governor Lesetja Kganyago’s statement touched on the new realities last week after it kept the repo rate at 5.75%.
Interest rates affect every sector of the economy, which is why there was more than the usual interest in interpreting the first MPC statement of the year, which will affect economic data.
Initially analysts and investors got it wrong, viewing the unchanged stance as dovish. What was puzzling was that the rand actually started strengthening after the announcement. As Barclays Research analysts pointed out, the last paragraph of the statement held the key, "The MPC is aware that the moderation in inflation could raise expectations of lower interest rates. The MPC is of the view that the bar for further accommodation remains high and would require a sustained decline in the inflation rate and inflation expectations."
This clearly more hawkish stance has been criticised by some analysts, saying the Bank has missed an excellent opportunity to cut rates in favourable circumstances. More so as interest rates are now in real, positive territory and the petrol price is set to fall by a further 93c/l next month.
A rate cut would surely boost spending patterns in the coming months, and support low economic growth.
The Bank based its reluctance to cut rates on an expected rebound in inflation in the second half of the year, mainly due to a probable uptick in oil prices and off a low base.
The Bank also had to preserve its credibility from possibly premature utterances from previous governor Gill Marcus that the economy is in a rate-hiking cycle.
Mr Kganyago’s stance is that the economy is in a normalisation cycle, which, as Rand Merchant Bank (RMB) analysts have pointed out, extends further hikes, if any, to later in the year.
"In our view it makes further hikes very much dependent on external factors, such as Fed (US Federal Reserve) hikes and rand weakness," RMB said.
Data set to be released next week will be on the thin side. Today will see the release of vehicle sales for January from the National Association of Automobile Manufacturers of SA, as well as the Kagiso purchasing managers index (PMI) for January, which will give an indication if conditions in the manufacturing sector are improving.
Vehicle sales ended 2014 on a high note, with total sales up 10.7%. Nevertheless, Naamsa projects only modest domestic sales volume growth of 666,500 vehicles for this year.
The PMI fell to 50.2 points in December from 53.3 in November and economists do not expect much movement last month, with a reading above 50 points indicating positive activity.
On Friday, the Bank will release the gold and foreign exchange reserves for last month. December saw a modest improvement in gross reserves of $239m to $49.58bn, mainly due to movements in the dollar.From DFM Publishers (Pty) Ltd
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