SA leading economic indicator recorded positive growth in June 2011
The SA leading economic indicator for June 2011 was released yesterday by the Reserve Bank, and recorded a rise of 1.8%m/m, after declining for three consecutive months. Overall, despite the rise in June, the SA leading indicator has clearly lost momentum and is signaling a meaningful slowdown in domestic economic activity.
The increase in June was broad-based, with 7 out of the 10 data series measured during the month improving, while the other 3 declined. Out of the indicators that rose during the month, the largest contribution came from residential building plans passed, particularly for flats and townhouses. There was also a marked increase in the twelve-month percentage change in job advertisement space, largely due to the low base that was created in June 2010 as a result of the hosting of the FIFA World Cup. The major negative contributors were the prices of all classes of shares traded on the JSE, as well as the interest rate spread.
On an annual basis the rate of change in the leading indicator improved to +3.6%y/y; up from -0.2%m/m in May 2011. Overall, the annual rate of change 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 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 activity levels in most major economies (hence a downward revision to the global growth outlook, see previous notes), as well as 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 slow meaningfully 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 for an extended period, despite higher inflation.
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 gotten 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:
The increase in June was broad-based, with 7 out of the 10 data series measured during the month improving, while the other 3 declined. Out of the indicators that rose during the month, the largest contribution came from residential building plans passed, particularly for flats and townhouses. There was also a marked increase in the twelve-month percentage change in job advertisement space, largely due to the low base that was created in June 2010 as a result of the hosting of the FIFA World Cup. The major negative contributors were the prices of all classes of shares traded on the JSE, as well as the interest rate spread.
On an annual basis the rate of change in the leading indicator improved to +3.6%y/y; up from -0.2%m/m in May 2011. Overall, the annual rate of change 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 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 activity levels in most major economies (hence a downward revision to the global growth outlook, see previous notes), as well as 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 slow meaningfully 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 for an extended period, despite higher inflation.
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 gotten 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
