The SA leading economic indicator for April 2010 was released today by the Reserve Bank, and recorded a month-on-month increase of 1.2%m/m. This follows an increase of 1.4%m/m in March, and is the ninth consecutive monthly rise in the leading indicator; which kept the annual rate of change at an impressive 21.1%y/y, compared with 21.2%y/y in March (see chart attached).
Although the leading indicator has been positive on a year-on-year basis for seven consecutive months, the annual rate of change is expected to moderate noticeably in the months ahead given the exceptionally high base that has been established over the past few months.
There is a reasonably good relationship between the SA leading indicator and overall economic activity. This relationship suggests that the SA economy should show solid GDP growth in 2010. As would be expected, there is also a good relationship between the performance of the leading indicator and the equity market (see chart attached); which has also now moderated on an annual rate of change basis.
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 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 2 months currently.
The fact that the OECD leading indicator (and more recently the US leading indicator; see note sent out yesterday) has started to roll-over on an annual basis, suggests that SA’s leading indicator is also about to move lower in the months ahead.
The SA leading economic indicator is compiled by the SA Reserve Bank and released once a month. It consists of 13 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
- Labour productivity in manufacturing: Six-month smoothed growth rate
- 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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