22 Jan 2018

Business cycle note: Leading indicator should improve in 2018

Annabel Bishop

Chief Economist

An outlook for stronger growth argues against credit rating downgrades, the latest reading (November 2017) maintains October's recent high.

business cycle indicators
  • November 2017’s leading indicator came out at 105.4, unchanged on the previous outcome. This is a high reading though, and was last reached in 2012 where the leading indicator also averaged 105 for the year, and lagged GDP growth was above 2.0%. This time though, the leading indicator is likely on an ascent, while in 2012 it came off 2011 and 2010’s readings above 106.
  • The six month lag between the leading indicator and GDP growth seems intact - April 2016 saw the leading indicator trough (97.4), then rise to 102.6 in Q4.16 and 103.9 in Q1.17 as economic growth of 2.0% to 3.0% y/y was recorded in Q2.17 and Q3.17 respectively. Q4.17 is clearly on track for an even higher reading, around 105, which signals economic growth could be above 2.0% for Q2.18.
  • In the interim however, Q2.17 showed a dip to 101.5 which signals slower growth in Q4.17, and we expect Q4.17 GDP will yield economic growth of only just above 1.0 % qqsaa, versus the middle two quarters of 2017 which yielded economic growth of 2.8% qqsaa and 2.0% qqsaa. 
  • Sentiment has improved as political uncertainty has reduced post the ANC elective conference, which has cheered financial market indicators. This is expected to feed through into business confidence and other sentiment readings, bolstering the economic outlook, and so improving economic activity, as fixed investment and employment are driven to a large extent by expectations of future economic activity. 
  • Specifically, the leading indicator returned to the territory of 103.7 in Q3.17, signaling a pick-up in economic growth in Q1.18, with Q4.17’s average continuing this upward trend on November’s figure published today. We expect GDP growth of 1.3% in 2018 versus 0.9% y/y in 2017. However, the economic growth outlook for 2018 could improve above 1.5% y/y on higher confidence levels. 
  • The IMF says in its latest World Economic Outlook Update that “(g)lobal economic activity continues to firm up. … The pickup in growth has been broad based, with notable upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 have been revised upward by 0.2 percentage point to 3.9 percent. The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes.” 
  • As global economic growth picks up so too it should feed through into faster economic growth in SA as confidence levels improve domestically, which is very positive for SA’s economic growth outlook and could lead us to revise up our GDP forecasts for 2018 and 2019.
  • Faster economic growth would argue against credit rating downgrades for SA, as would repair of SOE governance and alleviation of public finance expenditure pressures on its revenue. On the latter, monies recouped from corruption, if substantial enough, could see South Arica’s public finances recover to such a significant degree that credit rating downgrades are avoided (provided economic growth quickens), if additional spending pressures are not then added immediately.
  • The SARB shows that the business cycle entered a downward phase in December 2013, defined as occurring when the actual pace of aggregate economic activity is slower than the long-term rate of aggregate economic activity (the latter was estimated around 1.5% y/y). With the improvement in the leading indicator since April 2016, continuation of the trend could see the SARB eventually revise this view to an upward phase in the business cycle.
  • Six of the SARB’s ten available leading indicator sub-components increased - the average hours worked per factory worker in manufacturing and the volume of orders in manufacturing, the US$ based commodity price index, new passenger vehicle sales, leading indicator for SA’s major trading partners and the interest rate spread.
  • Lastly, it should be noted that the SARB’s leading indicator has been rebased to 2015, while annual revisions to “underlying component times series” were also made, which has resulted in new figures for the series, although the values essentially remain the same in comparison. 
gdp vs the leading indicator