The SA economy, according to our Hard Number Indicator (HNI) continued to move ahead in August 2013. Growth in economic activity remained positive in August. However the forward motion of the economy appears to be losing rather than gaining speed. Our very up to date business cycle indicator is based on two equally weighted hard numbers that are released very soon after the end of the previous month, unit vehicle sales and the note issue.
This Indicator, the HNI, has proved to be very relaible in recognising the turning points in the offcial business cycle, the coinciding business cycle indicator published by the S.A Reserve Bank, that is based on a larger number of economic indicators derived mostly based on sample surveys, not hard numbers, and therefore is only published at best two or three months later than the HNI.
As we show the HNI appears to have reached a plateau suggesting that the forward momentum of the economy that has picked up speed strongly since the recession of 2008-09 has now stabilised. The forecast also suggests that the economy may not grow any faster over the next twelve months. (See below)
The Hard Number Indicator of the Current State of the SA economy.
The components of the HNI are shown below. As may be seen the supply of and demand for cash continued to grow at a rapid rate in August 2013 in both nominal and inflation adjusted terms. The trend in the extra cash supplied by the Reserve Bank to the economy remains above a 10% p.a. rate though the trend appears to be declining. Adjusted for rising inflation the real growth rates remain above 4% p.a as may be seen. This growth must be attributed in good measure to underestimated informal economic activity that is cash intensive.
The cash cycle- rowth in the supply of Reserve Bank Notes
New unit vehicle sales, that have been such a source of strength for the economy over the past two years, appears to be losing momentum, as we show below. On a seasonally adjusted basis August unit vehicle sales on the domestic market were well down on July sales and suggest that new vehicle sales are unlikely to increase over the next twelve months. Yet if sales volumes can be maintained at current seasonally adjusted levels, such outcomes, in the light of the history of the sector would be regarded as satisfactory. Significant increases in exports of new vehicles, labour relations permitting, could add to motor manufacturing activity.
Growth in new unit vehicle sales to the SA market.
SA Unit Vehicle Sales. Annualised and Forecast.
The National Income Accounts released on August 27th estimated that GDP grew at an improved seasonally adjusted 3% rate in Q2 2013. However GDP in Q2 2013 was only 2% higher than year before. These growth rates must be regarded as highly unsatisfactory given the potential for faster growth. Such GDP outcomes would ordinarily call for lower interest rates. Unfortunately the times cannot be regarded as ordinary with the foreign exchange value of the rand, in company with other foreign capital dependent economies, under so much pressure form higher long term interest rates in the US.
The inflationary implications of a weaker rand therefore make lower short term interest rates less likely. Lower rates would be very helpful for not only vehicle sales but housing prices and employment creating residential construction activity. Were mortgage rates closer to five per cent than ten per cent a lively housing market and many more new houses would surrely follow.
Higher short term interest rates, incluinding the rates charged for mortgage or car loans would further slow down the SA economy and hopefully will be avoided. The weaker rand and the higher prices to be charged domestuic consumers will anayway be taking their toll of domestic spending. Already subdued domestic spending will be under enough additional downward from higher prices, particularly from higher petrol and diesel prices. Spending does not need further discouragement from still higher interest rates.
Higher rand prices for exported goods should however encourage the mining and agricultural sectors to produce more. Manufacturing activity should also benefit from incentives to export more and also as domestic producers compete with now more expensive imported goods for space on the shelves of retailers. But extra output and incomes can only be realised if the mines and factories stay open for business.
The rand is not only a play on US interest rates. It is a play on SA labour relations that deteriorated so badly a year and more ago at the Marikana platinum mine that saw the ZAR perform so poorly not only against the USD but also against other Emerging Market currencies.
An unexpected recent degree of realism about wage demands appears now to be influencing the SA labour market. The outlook for mining and manufacturing output has improved accordingly and the rand has benefitted to a degree from this. In recent weeks and days the ZAR has been a relatively strong EM currency and the Indian Rupee particularly weak, as we show below.
The foreign currency cost of a rand
This small degree of rand strength has been accompanied by some relief for long term interest rates in South Africa. These rates as they did throughout the EM world followed higher yields in the US higher after warnings of the tapering of Quantitative Easing entered the global financial markets in late May 2013. In recent days the gap between RSA and USA yields has also narrowed indicating a lower cost of forward cover and somewhat less rand depreciation expected over the next ten years. (See below)
Long term interest rates; RSA and USA
The interest rate yield premium. (RSA-USA ten year bond yields)
More of the same – that is SA specific reasons for a stronger rand linked to more production on the mines and in the factories –especially if accompanied by lower rather than higher US bond yields – would be especially welcome news for the SA economy. It would improve the outlook for inflation and perhaps allow for lower rather than higher short term interest.
But in the absence of such favourable forces the right monetary policy response to higher US rates and a stronger dollar would be to continue to leave the adjustment process to a fully market determined ZAR and to keep short term interest rates where they are .
