Statistics recently released for new vehicle sales and the note issue of the Reserve Bank in October 2009 do not indicate that any recovery of the SA economy is under way. The data suggest if anything that the SA economy has continued to shrink at a faster rate.
These two very up to date economic series, vehicle sales and the note issue, both actual numbers rather than estimates derived from sample surveys, make up our Hard Number Indicator (HNI) of the state of the economy (we adjust the note issue for consumer prices). As may be seen below our Hard Number Index (HNI) tracks the coinciding business cycle indicator of the Reserve Bank very closely. As may also be seen the HNI calculated to October 2009 is still falling while the Reserve Bank Coinciding Business Cycle Indicator, available only to July 2009, has levelled off.
The Hard Number Index and the Reserve Bank Coinciding Indicator
Source: I-Net Bridge and Investec Private Client Securities
Two measures of the State of the SA economy 2007-2009
Source: I-Net Bridge and Investec Private Client Securities
The HNI and the Coinciding Indicator may be regarded as representing the rate of change of the economy or the first difference of the level of economic activity. When the economy is picking up momentum or accelerating, the indexes should point higher and when the economy is decelerating the indexes should point lower.
The second derivative – that is to say the rate of change of the rate of change – may provide a further indicator of the direction of the economy. However when we review the second derivative of the HNI, it does not suggest that the economy has begun to decelerate at a slower rate. In fact the economy, according to the HNI, appears now to be decelerating even faster than it was. We provide two measures of the direction of the HNI. One is the annual year-on-year change in the HNI and the other the monthly change in the HNI annualised. The monthly move in the index raised to the power of twelve suggests that the economy was deteriorating at a faster rate between August and October.
The HNI – The second derivative
Source: I-Net Bridge and Investec Private Client Securities
While vehicle sales are now declining at a slower rate (see below) the Real Note Cycle or what can be described as the real money base of the system, having tentatively recovered in September, turned down again in October (See below).
New vehicle cycle
Source: I-Net Bridge and Investec Private Client Securities
The real money base cycle
Source: I-Net Bridge and Investec Private Client Securities
The evidence suggests that domestic spending remains very weak. While GDP in the third quarter may have benefited from a less severe run down of inventories and an improvement in net exports, SA households and firms remain highly reluctant to spend more. And while they retain these inhibitions the economy will not be able to make much progress.
The Monetary Policy Committee of the Reserve Bank will be updating its evidence on the state of the economy next Monday and Tuesday under the direction of the newly appointed governor Gill Marcus. The weakness in domestic spending revealed by vehicle sales and the demand for and supply of cash, as well as the slow pace of revenue collected by the Treasury reported on recently, should ordinarily provide every reason for cutting interest rates and quantitative easing, as should the strength of the rand and the lower inflation accompanying the stronger rand.
A newly appointed governor might however prefer to wait and see how the economy evolves before taking any bold action. However any complacency about the ability of a global economic revival to lift the SA out of its current severe recession mire should be actively discouraged by the latest data.