The SA leading economic indicator for August 2011 was released today by the Reserve Bank, and recorded a sharp decline of 2.1%m/m, after dropping by 1.5%m/m in July 2011. The leading indicator has now fallen in 5 out of the past 6 months. Overall, the SA leading indicator has clearly lost momentum and is signaling a meaningful slowdown in domestic economic activity.
The decline in August was extremely broad-based with only 1 out of the 11 data series measured during the month improving. Out of the indicators that fell during the month, the largest contribution came from a fall in the leading indicator of SA’s major trading partners, followed by the weak equity market, lower business confidence, a narrower interest rate spread and less job advertisements. A rise in commodity prices was the only positive component recorded during the month.
On an annual basis, the rate of change in the leading indicator was recorded at +1.1%y/y; down from +3.2%y/y in July and +5.0%y/y in June. Overall the annual rate of change is massively down from a recent peak of 24.2%y/y in April 2010 (see chart attached).
The general slowdown in the domestic economy has become more 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), as well as a loss of growth momentum in real household incomes and a lack of job creation locally. SA’s GDP growth forecast for 2011 and 2012 has been revised systematically lower over the past few months, and the government is expected to revise their own growth GDP forecasts lower today with the release of the MTBPS.
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 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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