FNB: September SARB Leading Business Cycle Indicator

The September SARB Leading Indicator continued to pick up downward year-on-year speed, declining year-on-year for the 24th consecutive month, and pointing to likely near term economic and residential mortgage growth weakness.

Unsurprisingly, the year-on-year rate of change in the SARB Leading Business Cycle Indicator picked up further “downhill speed” in September.The FNB Estate Agent Survey Activity Rating, whose growth rate usually leads the direction of the Leading Indicator, had seen its own year-on-year rate of decline pick up some speed.

Year-on-year, the Leading Indicator declined by -5.5% in the month of September. This is worse than the prior month’s -4.7% rate of decline, and is the 24th consecutive month of year-on-year decline, pointing to near term growth weakness for both the national economy as well as for the Residential Mortgage Market.

Of the available indicators that are used in the overall Leading Indicator, only 2 contributed positively. These were the Interest Rate Spread, i.e. 10-year Government Bond Yield minus 3-Month TB Rates, and Residential Building Plans, over 80 square metres in size, passed.

The other 7 negative contributors included a strong Global economy element, in the form of both commodity price weakness and the Leading Indicator of SA’s Major Trading Partners. So help is not forthcoming from the World Economy at this stage.

The Manufacturing Sector’s ongoing weakness (Average hours worked per worker and volume of orders) also remains a drag. And ongoing decline in New Passenger Vehicles sold was a further key negative.

Of most concern, perhaps, was a deterioration in job advertisements, reflecting economic weakness to date and a lack of desire to employ.

The Domestic Wage Bill, expressed as a percentage of GDP, has been rising since around 2009, as wage increases generally beat inflation. This should imply labour shedding in a stagnant growth economy.

The main concern here is that this further fuels already high social tensions, which have reached a point where they have already proved to be periodically disruptive to the economy.

Not only does the Leading Indicator continue to point to the likelihood that South Africa’s multi-year economic growth stagnation is likely to continue in the near term, but it also points to Residential Mortgage Market Weakness in the near term.

On a quarterly basis, the year-on-year rate of decline in the Leading Indicator was -4.6% in the 3rd quarter, the biggest rate of decline since the 2nd quarter of 2009. This broadly tracks the direction of the smoothed year-on-year decline of -6.7% in the FNB Estate Agent Survey Activity Rating, its own worst rate of decline since the final quarter of 2008.

Given that there can be up to a 3-4 quarter lag from the bottom point in the rate of decline of the Estate Agent Activity Rating and the Leading Indicator, even should the 3rd quarter represent the bottom point in the rate of decline for the Residential Activity rating, the Leading Indictor probably has some further broad deterioration still to come in the near term.

The acceleration in the rate of decline in the Leading Indictor should mean that economic growth has to deteriorate further in the near term, along with the pace of growth in new residential mortgage loans granted. Normally, new residential mortgage growth sees the peaks and troughs in its growth fluctuations more or less correlate the Leading Indicator with a lag.

The SARB Co-Incident and Lagging Indicators broadly confirm the economic stagnation. The Co-Incident Business Cycle Indicator recorded a year-on-year rate of change of zero in August ( these 2 indicators run a month behind the Leading Indictor), while the Lagging Indicator showed -0.1% year-on-year decline.

Read more here: SARB_Leading_Indicator_24_Nov_2015