By Brian Kantor
Hard Number Index updated – economy still growing but at a slower pace
We have updated our SA economic activity indicator, the Hard Number Index (HNI) for May 2013 with the release of vehicle sales and notes in circulation data. The HNI indicates that economic activity in May was still growing at an improved rate. The forward momentum however (the speed of the economy) is slowing down and is predicted to slow down further over the next 12 months. The change in the HNI may be regarded as the second derivative of the economy with the HNI or the business cycle as its rate of change – positive or sometimes negative when the economy shrinks.
The HNI and the Reserve Bank Indicator are both well above the 100 level
Our index is an equally weighted combination of new unit vehicle sales and the notes in circulation issued by the Reserve Bank – adjusted for the CPI – that we call the Real Money Base (RMB). These two hard numbers provide a very up to date view of the state of the economy, being released within a week of any month end. We show a comparison of the Coinciding Indicator of the Business Cycle as calculated by the Reserve Bank. This indicator is based upon seven or more time series mostly using sample surveys rather than hard numbers that are released with variable time lags. The latest estimate made by the Reserve Bank is only for February 2013.
As the chart shows, our HNI has identified rather accurately recent turning points in the Reserve Bank indicator. The Reserve Bank recently rebased this indicator to December 2010 and we have done the same. Numbers above 100 in these diffusion indexes indicate that the economy is growing and numbers below that the economy is shrinking. Both the HNI and the Coinciding Business Cycle Indicator are recording numbers well above the 100 of December 2010, implying still strong growth momentum. Our indicator predicts that this forward speed has slowed and will slow further in the months to come.
Vehicle Sales remain a strong feature of the economy – real money base growth slowing
The most encouraging feature of the SA economy is the strength of new vehicles sold domestically. Export volumes have also gathered momentum, accounting for about half of domestic sales volumes. While the growth in unit vehicle sales has slowed down it has remained close to an 8% annual rate and is predicted, via a time series forecast, to maintain this rate. The supply of central bank cash, adjusted for higher consumer prices, peaked recently at about an 8% real rate and is currently growing at about a 4% rate – held back by more inflation and a slowdown in the growth in cash held by the public and banks. It is forecast to slow further.
Money supply (M3) and Bank Credit Growth have picked up
The bank credit and broader measures of the money supply have been updated to April 2013. As we show, the growth in M3 and in credit supplied to the private sector has gathered momentum despite consistent weakness in demands for mortgage finance. Bank credit could not be regarded as a drag on growth.
The drag on the economy is coming from the rand
The drag on growth in domestic spending is now coming from offshore. The limits to this growth are set by the willingness of foreign suppliers of capital in one form or another to fund our spending. This willingness is revealed in the foreign exchange value of the rand. This has deteriorated significantly in recent months, putting upward pressure on the prices consumers and firms have to pay for their goods and services, especially those with high import content. These higher prices might also be accompanied by higher interest rates.
Our view is that, given the weaker predicted state of the economy, the Reserve Bank will wisely resist increasing short term interest rates. Relief for the economy will however not come from lower interest rates. The source of recovery will have to come from increased exports, especially of metals and minerals. The rand is weaker because it is expected that the mining sector, which accounts for 60% of exports, will be further disrupted by strike action. Were the mines able to operate at a better than expected rate, the rand would benefit and the chances of lower interest rates, well justified by slower growth in domestic demand, would greatly improve.