Research

SARB Leading Business Cycle Indicator – Slightly better in June, but remains in y/y decline

The SARB (SA Reserve Bank) Leading Business Cycle Indicator showed a month-on-month increase in June 2016, and a less severe year-on-year decline than prior months, potentially pointing to a slightly “less weak” economic and new mortgage lending growth environment in the near term.

In June 2016, the SARB Composite Leading Business Cycle Indicator rose month-on-month by +0.9%. The SARB indicates that it received some support in the month from global economic factors, with the Leading Indicator for SA’s Major Trading Partner Countries being flagged as a positively contributing sub-index. Also contributing positively was the highly volatile Number of Residential Building Plans Passed Excluding Houses Smaller than 80 Square Metres, Job Advertisements (perhaps surprisingly) and growth in New Passenger Vehicles Sold. The latter series may not continue to be a positive contributor in July’s Composite Leading Indicator, given a more severe year-on-year decline in Passenger Vehicle Sales in July compared to June.

Global economic factors were not all positive contributors, however, with Global Commodity Prices for SA Export Commodities being on the list of negative contributors during June.

On a year-on-year basis, the less volatile measure, FNB saw some improvement in the form of a slower pace of decline, to the tune of -3%, compared with May’s -4.4%. This is the 2nd consecutive month of slowing year-on-year decline, pointing to mildly improved economic conditions in the near term.

However, it all still points to a very weak economic growth environment, with this being the 33rd consecutive month of year-on-year decline in the Leading Indicator.

The slight improvement in the Leading Indicator performance may provide some hope that the slowdown in new mortgage lending growth being “contained” in the near term. Trend changes in the Leading Indicator can precede trend change in New Mortgage Lending. After a lengthy period of year-on-year decline in the Leading Indicator, the Value of New Mortgage Loans Paid Out (Residential and Non-Residential) also dipped into negative growth territory in the 1st quarter of 2016, according to SARB mortgage data. A slightly better economic environment may suggest that this mortgage slowdown could be halted in the near term.

Such an expectation of a slightly better mortgage lending environment in the near term is conceivable, given that the Leading Indicator also implicitly supports the case for no further interest rate hiking in the near term. Not only does it point to ongoing weak (albeit slightly improved) economic conditions, but it also points to global commodity price weakness as being a negative contributor economically, which also implies that they are a “suppressor” of inflationary pressures.

Read more here: Property_Barometer_ Leading_Indicator_August_2016