A combination of vehicle sales and the money base (adjusted for inflation) provides a good and up to date leading indicator for the SA Business Cycle. New unit vehicle sales in November on a seasonally adjusted basis were 2 081 units down on October 2013 and were weak enough to turn the vehicle cycle in a Southerly direction. If current sales volumes are extrapolated, the industry is heading for an 8% decline in sales in 2014.
The demand for and supply of cash (adjusted for inflation) were also lower on a seasonally adjusted basis in November 2013 than in October 2013 and the outlook is for persistently slower growth in the money base in the year ahead.
Strike action in the motor sector and the consequent supply side constraints (rather than a lack of demand) may have been responsible for some of the lost sales in the show rooms that could be made up in December. The demand for cash in November is typically robust, given spending intentions for the holiday month of December that lead households and firms to hold more cash. The recent slowdown in demands for cash, adjusted for inflation, therefore does not suggest a buoyant season is in prospect for SA retailers.
It also indicates – when combined with vehicle sales that forms our Hard Number Index of the state of the economy – that the pace of growth in economic activity has stalled at a regrettably very modest pace.
The SA economy is running below its rather modest potential growth rate of about 3%. It is moreover very difficult to see where the impetus for growth can come from. The weaker foreign exchange value of the rand has added pressure on the prices of goods and services and is reducing the purchasing power of households. This ability to spend is also being undermined by higher administered prices; that is by what should be called higher taxes, in the form of tolls for roads and higher charges for electricity and other municipal services.
But the weaker rand not only inhibits the adoption of lower interest rates from which household budgets would benefit – especially in the form of lower mortgage payments. It has raised the possibility of higher interest rates – and so even more subdued household spending on which the economy is so dependent. So any stimulus from household spending for retailers or the local manufacturers seems a distant prospect.
This leaves higher export prices and volumes as the only possible source of faster growth over the next year or two. The weaker rand could be helpful to this purpose. It does make exporting more profitable and importing less profitable, at least until higher inflation erodes the benefits of a weaker rand. But raising exports does require fully productive mines and factories and the co-operation of trade unions, cooperation that was conspicuously absent in the third quarter, hence the weaker trade balance and slow GDP growth, both of which contributed to a weaker rand. Slow growth means low returns for investors and so discourages capital inflows that might support the rand.
The most conspicuous beneficiaries of the weaker rand would appear to be the service providers to foreign and perhaps also domestic tourists persuaded to holiday at home by expensive travel plans. Tourism after all contributes significantly more to the economy than mining and employs far more people. Farmers, provided the weather proves co-operative are also well placed to benefit from and respond to higher rand prices now available on foreign markets and also in the domestic market, where higher import parity prices might prevail.
The other hope is that a stronger global economy, while it has lead to higher interest rates in the US and elsewhere, and so (for now) pressure on the rand, will in due course help raise demand for as well as the prices of goods produced in SA. A combination of stronger exports and faster growth that encourages capital inflows and so a stronger rand, followed by lower interest rates, is the way out of the slow growth path upon which the SA economy is now set. The best monetary policy can do for the economy in these circumstances is nothing at all to interest rates. Higher interest rates can only further damage domestic spending and discourage the case for investing in South African assets. It could also very easily lead to a weaker rather than firmer rand. Slower growth with still more inflation should not be a policy option.