May 2016 SARB Leading Business Cycle Indicator

The current business cycle downturn started in December 2013, according to the SARB (SA Reserve Bank), and the May 2016 Leading Business Cycle Indicator release suggests little to suggest a meaningful change in economic fortunes in the near term.

Year-on-year, the SARB Leading Indicator declined by -4.4% in the month of May 2016. This is a slightly less extreme decline than the -5.5% year-on-year decline for April, but is the 32nd consecutive month of year-on-year decline and gives little to enthuse about yet.

On a month-on-month basis, too, the Indicator declined, albeit by only a small -0.1% rate.

Interestingly, on the “positive contributors” list, the SARB had the number of job advertisements, one of the contributing sub-indices to the composite indicator, which is perhaps somewhat surprising in the current weak economic environment, and unlikely to be sustained.

The year-on-year rate of change in New Passenger Vehicle sold also made a positive contribution, having declined in May by a slightly lesser rate than in April. Also on the positive contributors list were Dollarised Commodity Prices for SA’s export commodities, along with a slightly higher spread between long bond yields and short term interest rates in South Africa.

But the slight improvement in dollarized commodity prices did not point to any convincing sign that the global economy’s conditions were about to provide significant additional support for the SA economy, because on the Negative Contributors list we see the Composite Leading Indicator for SA’s Major Trading Partner Countries. Added to this, the orders and hours worked data for the Manufacturing Sector were negative contributors, as was very weak Business Confidence.

In short, the Leading Indicator continued its multi-year slide in May, but merely at a slower pace than was the case in April.

The Co-incident and Lagging Business Cycle Indicators also suggested a slightly “less weak” economic period recently. The Co-incident Indicator saw slightly improved year-on-year increase of 1.59% in April, from March’s 0.5%, while the Lagging Indicator saw year-on-year decline diminish to -1.2%, from the prior month’s -1.3%.

In addition to using the SARB Leading Indicator as a potential leading indicator of near term economic direction, it is normally a useful leading indicator of the direction of new residential mortgage lending activity growth or decline, too.

It is normal to see a lag between trend changes in year-on-year growth in the Leading Indicator and that of growth in the value of new mortgage loans granted. On a quarterly basis, back in the 3rd quarter of 2015 we had a noticeable “downward shift” in the Leading Indicator year-on-year rate of decline into the -4 to -5% range. This marked a change from an earlier more mild range in rates of decline.

That more rapid pace of deterioration from the 2nd half of 2015 has seemingly not yet been matched by a similar downward shift in New Mortgage Loans granted just yet. The mortgage slowing may well have started early in 2016, with NCR data for The Value of New Household Mortgage Loans Granted showing year-on-year growth having slowed from 9.3% in the prior quarter to 4.3%.

However, the more severe rate of decline in the SARB Leading Indicator since Q3 2016 suggests that there is still more slowing to come in the rate of new mortgage lending in the near term.

Read more here: SARB_Leading_Indicator_26_July_2016