The February 2011 reports on new unit vehicle sales and the Reserve Bank note issue have been released and we are able to update our Hard Number Index (HNI) of the current state of the SA economy. As may be seen below, the economy continued to pick up momentum in February 2011.
The very up to date HNI is proving a reliable leading indicator of both the Coinciding Business Cycle Indicator of the Reserve Bank (updated to November 2010) and the Reserve Bank Leading Indicator of the SA Business cycle (updated to December 2010).
Read this post in the attached PDF to view graphs and tables referred to in the article: Daily View – Hard numbers show the economy is maintaining speed
When we calculate the rate of change of the HNI (the second derivative of the Index and so the Business Cycle) it appears that the satisfactory forward speed of the economy is being maintained, rather than accelerating further.
The main impetus to the HNI has come from surging vehicle sales. Monetary policy could not be considered to be adding much stimulus to the economy. The note issue, that is, the supply of central bank money to the system, continues to grow at a consistent 6% annual rate. Helped by lower inflation the real money base has picked up momentum and is growing at about a 3.3% rate. This growth has added marginally to the upward trend in the Hard Number Index.
The money supply trends, of both broadly and narrowly defined definitions of the money supply continue to indicate that monetary policy has added very little impetus to the improving state of the economy. Money and credit growth remains subdued enough to indicate that lower, rather than higher interest rates are called for.
The rand remains the leading indicator of inflation. Even the currently strong rand, given supply side shocks to global food prices, will not prevent inflation edging higher. These inflation trends will be enough to deter lower interest rates given the modus operandi of the Reserve Bank despite the lack of demand for credit and money.
Our view is that short term rates will remain on hold until it becomes obvious that the economy is fully testing its growth potential of about 5% per annum GDP growth. This full economic recovery will only become apparent when the demand for credit and money is increasing at or above the 10% annual rate.