22 Aug 2017

Business cycle: leading indicator stagnates at a lower level in Q2.17, pointing to a slowdown in economic growth in Q4.17

Annabel Bishop

Chief Economist

Leading indicator stagnates at a lower level in Q2.17, pointing to a slowdown in economic growth in Q4.17

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After contracting by two quarters over the turn of this year, successfully signalled by the leading indicator last year, GDP is likely to lift in Q2.17, by around 2.0% qqsaa (quarter on quarter, seasonally adjusted, annualised), as industrial production and wholesale and retail trade sales rose significantly. This lift was signalled by the marked rise in the leading indicator six months previously.

Indeed, the leading indicator (which tends to predict six months out) rose further in Q1.17, signalling further economic growth in Q3.17, which ties in with our forecasts.  However, the leading indicator then shows Q4.17 is likely to see a slip back towards stagnation, meaning the year as a whole is still not expected to record economic growth of more than 0.5% y/y.

Clearly the strength of the expected GDP outcome in Q2.17 will be due to a rebound from the recession, without this statistical base effect Q2.17 GDP growth would likely be weak, around 1.0% qqsaa. With a systemic global economic recovery under way since the second half of 2016, South Africa’s economy has been out of kilter with the global cycle.

The Reserve Bank has taken the opportunity recently of pushing through a small interest rate cut, and SA has likely entered a shallow interest rate cutting cycle. September is expected to see a further easing in interest rates, as CPI inflation, and hence inflation expectations, moderate further. However, interest rate cuts will not lift SA out of its weak growth path.

Moody’s recently highlighted South Africa’s “low growth and high unemployment reflecting persistent structural bottlenecks” as challenges to retaining its investment grade credit ratings, along with the “gradual erosion of the institutional framework” and the “accumulation of public debt and government contingent liabilities”.

In particular, the agency states that “(t)he negative outlook reflects Moody’s view that the risks to growth and fiscal strength arising from the political outlook are tilted to the downside. It is unlikely that a political consensus will emerge which supports investment in the economy and reinvigorates the reform effort sufficiently quickly to reverse the expected negative impact on growth and on the government’s balance sheet.”

Today’s release of June 2017’s leading indicator shows that two of the nine available sub-components fell, namely the number of building plans passed and the twelve-month percentage change in job advertisement space, with the BER’s business confidence index and gross operating surplus as % GDP unavailable for the calculation.

Commodity prices have lifted, as defined by the US$ based commodity price index, while the composite leading business indicator of SA’s main trading partner countries increased (proving to be the largest positive contribution to the movement in June’s leading indicator), resulting in a rise in the number of orders received by SA manufacturing sector (the second largest positive contribution to the movement in June’s leading indicator). This all follows from the strengthening of the global cycle.

While the global cycle is strengthening systemically, this does not necessarily mean SA will follow suit, due to structural rigidities in its industrial sector, and decades of deindustrialisation of its economy.

Instead, secular stagnation where low confidence levels translate into low fixed investment growth and employment, has dampened incomes and personal expenditure and inflation, leading to stagnant growth outcomes (growth of 0.5% y/y or below is very weak, essentially a stagnation of SA’s economy, like last year’s outcome of 0.3% y/y).

South Africa needs substantially faster economic growth of 5-7%, but this acceleration requires effective, efficient and timely institution of business friendly policies and plans (i.e. ones that sustainably raise business and consumer confidence, and so economic growth) in a cost effective manner.

The longer SA experiences very weak economic growth, the longer confidence levels will also be suppressed.

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