business cycle image

21 Aug 2018

Business cycle: First leading indicator of 2018 lifts slightly compared to December 2017

Annabel Bishop

Chief Economist

Showing a hesitant rise in activity as the year kicks-off

Figure 1: Summary of the composite business cycle indicators for 2017*
  • The January 2018 leading indicator reading came out at 106.1, well up on a year ago, but slightly higher than December’s 105.8. The reading points six months out, giving the first indication on the business cycle in Q3.18 (and so GDP growth), which is indicated to strengthen slightly.
  • Sentiment has improved in Q1.18, with the SACCI business confidence readings for 2018 so far higher than the same two months in 2017, while the BER business confidence reading jumped up materially (see “Business confidence update: sharp rise mirrors the perceived substantial reduction in political uncertainty in South Africa”, 15th March 2018, see website address below).
  • Indeed, the BER business confidence index is one of the components of the leading indicator that contributed positively to the index’s rise, along with the US$ based commodity price index, job advertisements the leading indicator for SA’s major trading partners and the volume of orders in manufacturing.
  • Market euphoria on Ramaphosa’s election to President of the ANC, and then President of SA, has since faded somewhat, with sentiment wobbling on the fast approach of SA’s country review from Moody’s (23rd March), given fears that SA might tip into sub-investment grade on Friday (the other key agencies, Fitch and S&P, already have SA on sub-investment grade), despite consensus that it will not.
  • Moody’s has said political developments so far in SA are credit positive along with steps to improve some SOE governance, and Finance Minister Nene has said the Budget was not likely seen as credit negative. However, our view is that while the Budget does not necessarily argue for a Moody’s downgrade, on its own, the fiscal consolidation is not enough to fully counterbalance the other key issues, such as financial concerns in SOEs and lack of a marked lift in GDP growth and incomes per capita.
  • We expect Moody’s will not downgrade SA to sub-investment grade on Friday, instead reviewing SA’s credit ratings again later this year to see if GDP growth has lifted, the SOEs financial concerns will likely be resolved and the MTBPS (mini-budget in October) shows a better path of fiscal consolidation. So a reprieve.
Figure 2: GDP vs the leading indicator
Figure 3: GDP vs Industrial Production
  • Should SA receive a downgrade from Moody’s this week (not the expected case) the rand is likely to weaken sharply, moving through R12.35/USD, R15.00/EUR and R17.00/GBP towards R13.50/USD, R16.30/EUR and R20.50/GBP. We would then expect interest rate hikes, as the likelihood of any cuts diminishes.
  • A Moody’s downgrade would see SA fall out of the all-important Citibank WIGBI index and SA’s ten year bond yield would likely rise towards 10%, with higher inflation (see “CPI outlook: tax increases to boost inflation in an environment of structurally high inflation, with economy sluggish despite previous fiscal stimulus”, 19th March 2018) and GDP weaken materially, as confidence falls (see also “Credit rating downgrades: from investment grade to sub-investment grade”, 21st November 2017).
  • Five of the SARB’s ten available leading indicator sub-components fell – the average hours worked per factory worker in manufacturing, the number of building plans passed, real M1 (money supply), the number of new passenger vehicles sold and the interest rate spread.
Figure 4: Business cycle phases of South Africa since 1945