The SA leading economic indicator (LEI) for December 2011 was released yesterday by the Reserve Bank, and recorded a decline of 0.4%m/m, after rising for three consecutive months. On an annual basis the leading indicator remained positive, but only fractionally at +0.2%y/y. The annual rate of change in the LEI has slowed systematically since mid-2010. This was initially mostly due to base effects, but the more recent trends in the monthly data (6-month rate of change) suggests some loss of growth momentum in the economy during 2012.
The decline in December was not emphatic, with only 4 of the 10 components measured during the month falling. The positive contributions came from number of residential building plans passed for flats, townhouses and houses; number of passenger vehicles sold; real M1 money supply (deflated with the CPI); opinion survey of volume of orders in manufacturing; interest rate spread: 10-year bonds less 91-day Treasury bills; and prices of all classes of shares.
The negative contributions came from: job advertisements in the Sunday Times newspaper; composite leading business cycle indicator of major trading-partner countries; opinion survey of the average hours worked per factory worker in the manufacturing sector; and commodity prices in US dollars for a basket of South Africa’s export commodities.
The expected loss of growth momentum in the domestic economy during 2012 is partly due to the ongoing economic weakness in many of the major economies (especially the recession in the Euro-area), but it also reflects the damaging effects of rising domestic inflation, and hence a loss of growth momentum in real household incomes. More positively, there are a couple of encouraging signals emanating from the building industry (we will discuss this further in the coming days), while recent announcements from Transnet regarding additional capex are very encouraging.
SA’s GDP growth forecast for 2012 has been revised systematically lower over the past few months, with the Reserve Bank revising their own growth GDP forecasts lower in early 2012 to 2.8%, compared with earlier estimates of slightly above 3%. It will be interesting to see what National Treasury is forecasting when they release the National Budget tomorrow. (Stanlib is currently forecasting growth of 2.8% in 2012.)
As would be expected, 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 3 months. Importantly, this relationship appears to have got 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 3 months currently.
The SA leading economic indicator is compiled by the SA Reserve Bank and released once a month. It consists of a number of 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
- Number of passenger vehicles sold
- 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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