The SA leading economic indicator for April 2011 was released yesterday by the Reserve Bank, and recorded a further month-on-month decline of 0.4%. This follows a fall of 0.8%m/m in March.
The decline in April was relatively broad-based, with 6 out of 11 data series measured deteriorating, including building plans approved, key international leading indicators, business confidence, average hours worked, interest rate spread and volume of orders in manufacturing. On an annual basis, the rate of change was recorded at a mere 1.3%y/y, which is well down from a recent peak of 24.2%y/y in April 2010 (see chart attached).
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 established in the early part of 2010, but also a general moderation in the main global leading economic indicators (and hence a downward revision to the global growth outlook), as well as a lack of investment spending and job creation locally.
SA’s GDP growth rate is, therefore, expected to slow somewhat 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.
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 only by 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 shortened 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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