The SA leading economic indicator for March 2011 was released on Tuesday, 24th May by the Reserve Bank and recorded a month-on-month decline of 0.9%m/m. This follows a respectable increase of 1.2%m/m in both February and January. This is the first monthly decline in the indicator since August 2010.
The decline in March was relatively broad-based, with 7 of the 10 data series measured deteriorating. On an annual basis, the rate of change was recorded at 3.7%y/y, which is well down from a recent peak of 24.2%y/y in April 2010 (see chart attached).
The decline in the leading indicator during March was due to a broad range of factors including: hours worked, job advertising space, volume of manufacturing orders, passenger vehicle sales, local equity prices, commodity prices and a moderation in key international leading indicators.
On the positive side, building plans approved increased, as did the yield gap and M1 money supply. The latest data on business confidence and the gross operating surplus was not available for this month’s release.
The SA leading indicator has a good correlation with the OECD leading indicator (with a short lag). SA’s leading indicator tends to lag the global economic cycle, both into a slowdown/recession as well as into a recovery, but by only about 1 to 2 months. Importantly, this relationship appears to have become stronger over the years (mainly due to the increased globalisation of South Africa) and the lag has tended to shorten from around 6 months a decade ago to around 1 to 2 months currently.
As mentioned over the past few months, the annual rate of change in the leading indicator has slowed noticeably since the middle of 2010, and is expected to slow further in the coming months. This is partly due to the exceptionally high base that was established in the early part of 2010, but also as a result of a general moderation in the main global leading economic indicators (and hence a downward revision to the global growth outlook), and a lack of investment spending and job creation locally.
Overall, the leading indicator suggests that the SA economy should still show reasonable, but somewhat unexciting GDP growth in 2011; and that there has been a loss of momentum in the pace of the economic recovery.
The SA leading economic indicator is compiled by the SA Reserve Bank and released once a month. It consists of 12 sub-indicators, namely:
- Opinion survey of volume of orders in manufacturing
- Opinion survey of stocks in relation to demand: Manufacturing and trade
- Opinion survey of business confidence: Manufacturing, construction and trade
- Composite leading business cycle indicator of major trading-partner countries: Percentage change over twelve months
- Commodity prices in US dollars for a basket of South Africa’s export commodities: Six-month smoothed growth rate
- Real M1 money supply (deflated with the CPI): Six-month smoothed growth rate
- Prices of all classes of shares: Six-month smoothed growth rate
- Number of residential building plans passed for flats, townhouses and houses larger than 80m2
- Interest rate spread: 10-year bonds less 91-day Treasury bills
- Gross operating surplus as a percentage of gross domestic product
- Job advertisements in the Sunday Times newspaper: Six-month smoothed growth rate
- Opinion survey of the average hours worked per factory worker in the manufacturing sector
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