The SA economy is looking up again, judged by December data releases.
The SA economy in December continued on a modest recovery path that we had identified in November 2014. Growth in economic activity would appear to be gaining rather than losing momentum, as appeared to be the somber case in mid-year.
Vehicle sales and notes in circulation in December, two hard numbers about the state of the SA economy with a very early release, reveal some more encouraging trends. Vehicle sales were particularly robust and the note issue, when adjusted for lower inflation, also maintained its helpful upward trajectory.
We combine these two series with equal weights to calculate our Hard Number Index (HNI) of the immediate state of the SA economy. It may be seen that the HNI, having dipped lower earlier in 2014, has risen to higher levels again and is extrapolated to sustain this forward momentum in 2015. Numbers above 100 for the HNI indicate that the economy is moving forward, that is growing at a positive rate. Such forward momentum is also confirmed by the Reserve Bank Coinciding Business Cycle Indicator with very similar turning points but which has only been updated to the September month end.
This forward momentum may be established by looking at the second derivative of the business cycle, that is the rate of change of the HNI itself. As may be seen below, the rate of change of the rate of change in economic activity, the forward speed of the economy, reached a top in 2010 as the economy recovered from the recession of 2009. But this speed slowed down consistently until late in 2014 when it appears to have turned up again. It must be hoped that these more favourable activity growth trends will be sustained in 2015.
It was a very good month for sales of new vehicles in December 2014. 51 461 units were delivered to the local market and 21 833 units were exported. Local sales were marginally up on November but December, with its holidays, is typically a well below average month for the motor dealers. On a seasonally adjusted (SA) basis therefore, unit sales were strongly ahead of November as we show below.
Sales on a seasonally adjusted basis have recovered strongly from what appears as something of a slow down after September 2014 that was also a very a strong month. September sales may well have been boosted by improved availability of vehicles after the strike in the manufacturing sector and perhaps was also influenced by some pre-emptive buying in the light of rand weakness. We show below that the new vehicle sales cycle has turned distinctly higher, following the slowdown in mid year. If current trends were to be maintained, the industry would realise a 10% growth rate in 2015 or sales of over 700 000 units, an outcome that would be regarded as highly satisfactory for the industry, especially if it were accompanied by good export volumes. Exports can run at about 50% of local volumes.
Particularly encouraging from the perspective of the wider economy and its longer term growth prospects, was the willingness of businesses to invest in new vehicles. Light commercial vehicle sales were 14.7% up on a year before while sales of the expensive, extra heavy commercial vehicles were up buy an especially robust 29.9% on December 2013.
The demand for and supply of notes also continued to grow faster at year end. Such demands indicate spending intentions and holiday sales reports from the major retailers – due in late January are likely to reveal a similar trend to those of the real note issue cycle. Significantly lower rates inflation realised over the past three months would also have helped the real money supply cycle.
As is well observed, faster or slower growth in economic activity tends to reinforce itself as economic actors react to the more or less favourable spending trends. Interest rate developments in 2015 will play a crucial role in adding reinforcement to growth prospects or detracting from them. In this regard global deflation and generally lower than expected interest rates have made any immediate rise in local interest rates much less likely than they were. The money and bond markets have revised their expectations of interest rate increases sharply lower in recent days and weeks. The money market appears now to expect a 50 basis point increase in short term interest rates over the next 12 months, in place of the earlier expectations that rates would rise by more than 1% by year end 2015. We would argue that even this revised expectation of higher interest rates will not be realised, and that interest rates in SA will stay on hold until domestic spending has gathered more strength than our modest growth forecasts suggest may be the case over the next 12 months. The case for lower interest rates, should inflation maintain its much slower recent pace, while spending growth rates remain positive but subdued, may well present itself for serious Reserve Bank attention by year end.
