Leading indicator signals slow growth ahead

SA's leading economic indicator, released on Tuesday by the SA Reserve Bank, suggests that growth in the local economy will be under pressure over the next few months.

The indicator provides a guideline for economic growth for at least six months ahead.

The leading indicator decreased by 0.9% in July compared with a month on month growth of 1.8% in June. On a year on year basis, the indicator however continued growth, registering a 3.8% increase from a revised 5.0% in June. It reached an index level of 134.3 in July from a revised 135.5 (133.8) in June.

The Reserve Bank reported that six of the ten component time series that were available for June for the compilation of the indicator decreased, while four increased.

The major negative contributors were the twelve-month percentage change in job advertisement space and the business confidence index as measured by the Bureau for Economic Research.

Other negative contributors were the fall in manufacturing order volumes and the average hours worked per factory worker in the sector, and a deterioration in the composite leading business cycle indicators of SA's major trading partner countries.

The latest leading indicator figures would "no doubt" get the Reserve Bank's Monetary Policy Committee (MPC) meeting "off to a relatively sombre start", said Jeff Schultz, economist at Absa Capital. The committee began its 3-day meeting on Tuesday.

Schultz added that this, coupled with heightened concerns on market and economic spillover from the deteriorating environment in Europe, was likely to culminate into "a relatively dovish" MPC statement on Thursday.

The largest positive contribution came from the six-month smoothed growth rate in the real M1 money supply, followed by the prices of all classes of shares traded on the JSE.

Other positive contributors were the commodity price index for SA's main export commodities, and the interest rate spread (10- year government bonds minus 91-day Treasury bills).

John Loos, property leader strategist at FNB, said they interpreted the interest rate spread to point to an increased market expectation of possible interest rate cuts in July.

Loos noted that as the direction of mortgage loans granted tracked the direction of the leading indicator, the flat-to-negative growth direction in the indicator suggested ongoing weakness in mortgage market growth.

Significant positive growth in new mortgage loans was unlikely in the near term given the performance of the leading indicator, Loos said.

The SARB also reported that the composite coincident business cycle indicator, which moves in line with economic activity, increased by 0.5% in June compared with the preceding month, resuming an upward trend.

The composite lagging business cycle indicator increased by 1.5% in June compared with the preceding month.