The recent SA business cycle trends may have become friendlier

The SA economy appears to have gone through something of a cyclical trough, judged by the latest statistics for December 2016 (note issue, vehicle sales and CPI) and for retail sales for November 2016. Encouragingly, Reserve Bank notes in circulation at December month-end increased on a seasonally adjusted basis, enough to raise the annual year on year growth to 11.3%. If these trends continue, the note cycle, having pointed lower since Q3 2015, may well turn higher in Q2 2017.

As we show below, the note issue has proved a reliable indicator of retail sales, though the sales cycle may well lead rather than follow the money cycle. This is because the Reserve Bank accommodates the demand for cash that the economy exercises – via the banking system. It has no target for the supply of either cash (so called high powered money) or broader measures of money. Thus, the more households intend to spend and borrow from banks and the more cash that they will wish to hold, the more cash will be automatically supplied to them as the banks borrow the extra cash from the Reserve Bank.

The information supplied by the Reserve Bank on the note issue (available within a week of the month end) however precedes that of the retail values and volumes, so making it a useful leading indicator of retail activity. Retail volumes picked up in November and it is likely (judged by the demand for cash in December) that the better retail trend was sustained by the year end. The retailers themselves, through their trading updates, appear to support this contention of a marginally improved trend in sales under way.

When adjusted for consumer prices, the real money base cycle also appears to support the view that a cyclical trough in the money supply has been reached, or is about to be reached in the near future. If the past cyclical regularities can be relied upon, then the latest trends in the demand for and supply of cash indicate that real retail sales volumes may well increase from a very subdued pace of about 1% p.a. to a still subdued, but faster pace of about a real 2% p.a. by mid-2017. No reason to break out the Cap Classique nor for a stiff brandy and Coke.

 

As we reported earlier, the new vehicle cycle looks a lot happier if December 2016 unit sales (down over 15% on a year on year basis) are seasonally adjusted. On a seasonally adjusted basis, sales volumes, having declined sharply by mid-year, picked up by year end. Extrapolating these recent trends suggests that vehicle unit sales in SA could be growing (slowly) again by mid-year.

We combine the vehicle sales cycle with the cash cycle to establish our Hard Number Index (HNI) of the immediate state of the SA economy. Given the better news about both the cash and vehicle cycle, the HNI has picked up, reversing to some extent the declines in economic activity registered earlier, as may be seen in the figure below.

We also compare the HNI to the Reserve Bank coinciding business cycle indicator, updated only to September 2016. The HNI and the Reserve Bank may be regarded as well related over the long run. Therefore the HNI, which can be updated very soon after any month end, should be regarded as a good leading indicator of the SA business cycle; and one that appears to be turning up marginally rather than down. The HNI indicates that economic activity in SA in 2017 will show slow but positive growth, perhaps slightly improved on recent slow growth rates.

The HNI also appears to be doing a much better job of predicting the state of the SA economy than the Reserve Bank’s own leading indicator (updated to October 2016). This indicator has continued to turn down, until very recently, even as the economy made some progress. The role the JSE plays in accurately predicting the business cycle (included as a leading indicator by the Reserve Bank) may have changed as the JSE itself has become much less exposed to the SA economy and much more directly affected by global rather than SA economic forces.

The direction of commodity prices will remain important for the state of the SA economy. As may be seen below, the commodity price cycle, as reported by the Commodity Research Bureau in Chicago has recovered, when measured in US dollars, but has largely moved sideways when converted into rand, thanks to rand weakness and then a degree of rand strength enjoyed in 2016. As may also be seen, industrial metals have had a stronger recent run than commodities in general that include a large weighting (over 20%) in oil.

Higher commodity prices – the result of faster global growth – would translate into a stronger rand and inflows into emerging market equity and bond markets, as they have done in 2016. Less inflation and lower interest rates also become more likely with a stronger rand, a force clearly helpful for the SA economy plays, such as the banks and retailers listed on the JSE. Without lower interest rates, leading to a strong recovery in money supply and bank credit, a meaningful cyclical recovery – with GDP growth rates trending higher to above 4% p.a. – will not be possible.

It needs to be appreciated however that the JSE, when seen from offshore, has provided excellent recent US dollar returns since early 2016 – as have emerging equity markets generally.

The stronger rand has yet to lift the SA economy and the SA economy plays listed on the JSE. It will take a changed view on the interest outlook and stable commodity prices to lift the JSE meaningfully. For now however, the market still believes short rates are more likely to increase than decline. Further rand stability and lower food prices will reverse such expectations and in turn the direction the interest rate cycle itself. 24 January 2017

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