The SA leading economic indicator for September 2010 was released today by the Reserve Bank, and recorded a month-on-month increase of 0.8%m/m. This follows a decrease of 0.1%m/m in August 2010. The improvement in September was much better than expected. On an annual basis the rate of change remains impressive at 17.0%y/y, but down from 18.7%y/y in August 2010 and 20.3%y/y in July 2010.
The improvement in the leading indicator during September was due to a broad range of factors including the forward looking components of the manufacturing data, building plans passed (especially residential, off a low base), the steeper yield curve, increased international commodity prices and a higher equity market. On the downside, lower vehicle sales, less job advertisements and a slowdown in some of the key international leading indicators hurt the monthly performance.
The annual rate of change in the leading indicator is still expected to moderate in the months ahead. This is mostly due to 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 2010/2011, despite the strong Rand.
The SA leading indicator also 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 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 2 months currently.
The fact that the OECD leading indicator (and the US leading indicator) has continued to moderate on an annual basis, suggests that SA’s leading indicator is also likely 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 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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