Canadian household credit growth remained strong in May, but is expected to slow in the second half and into next year, according to TD Economics.

In a new research note, TD says that the Bank of Canada’s latest monthly financial statistics for chartered banks show that household credit and deposits continued to grow at a robust pace, whereas business credit for non-financial firms has not yet rebounded.

Households credit was up 9.3% in May from the previous year. Consumer credit was up 13.1% year over year, but TD notes the monthly pace of growth in this area is decelerating. Whereas mortgage credit growth is accelerating, rising to 9.8% annual growth in May compared with 8.7% in April.

“The continued strong expansion of household credit owes to the ongoing robustness of Canadian housing through the months before May. While Canadian housing shows clear signs of moderation, with housing sales falling steeply in May, household credit growth for May likely benefited from month-end closings following the near record pace of home sales activity in the previous months,” TD says.

On the business side, short-term business credit continued to contract, albeit at a slower pace, with the contraction easing to 12.7% year over year in May from 15.1% in April. However, it was business deposit growth driving overall bank deposit growth, which also accelerated in May, TD said, rising to a 5.3% pace from 4.5% in April.

“Looking ahead, the moving-forward of homebuying and the level of household debt relative to personal incomes imply that household credit growth will slow during late 2010 and stagnate during 2011,” TD concludes. “As interest rates rise, inducing a relative shift toward traditional fixed-term mortgages, consumer credit growth will be the focus of the slowdown.”

“We expect overall credit from banks to moderate over the coming year, owing mainly to the downdraft from slower household lending. Correspondingly, we expect overall deposit growth to ebb, consistent with slower ‘money creation’ as chartered banks’ balance sheets expand at a more moderate pace,” it adds.

IE