The SA leading economic indicator for May 2011 was released yesterday by the Reserve Bank, and recorded a further month-on-month decline of a massive 1.6%m/m. This follows a fall of 0.4%m/m in April and a drop of 0.7%m/m in March. This is the third consecutive monthly decline in the SA leading indicator, signaling a significant slowdown in domestic economic activity.
The decline in May was extremely broad-based, with 10 out of the 11 data series measured during the month deteriorating, including: residential building plans approved, money supply, job advertising, business confidence, average hours worked, interest rate spread, equity market, commodity prices, car sales and volume of orders in manufacturing. The only component of the index that rose was key international leading indicators.
On an annual basis, the rate of change has declined for the first time since September 2009 at -0.1%y/y, which is well down from a recent peak of 24.2%y/y in April 2010 (see chart attached).
The slowdown in the domestic economy, certainly relative to the surprise GDP growth of 4.8%q/q in Q1 2011, has become very noticeable in the past few months: both in terms of anecdotal comments from domestic businesses, as well as some sector specific economic data.
This weakening in economic activity is partly due to the fall-off in economic activity in most major economies (the so-called ‘soft-patch’) and hence a downward revision to the global growth outlook. We have ascribed the weakness in the global economy to a combination of six key economic factors (see previous eco-minutes).
The weakening in the domestic economy is also as a result of a loss of growth momentum in real household incomes and a lack of investment spending and job creation locally. SA’s GDP growth rate is, therefore, expected to moderate in the quarters ahead, certainly relative to the 4.8%q/q achieved in Q1 2011. This amounts to a loss of momentum in the pace of the economic recovery; but not a return to recession conditions. It will, however, help the Reserve Bank to keep interest rates on hold.
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 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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