Hard Number Index – ZA Economist

The current state of the SA economy. Updating the Hard Number Indicator

In this report we update our hard number indicator of the current state of the SA economy to September 2018. Following that is the announcement of new vehicle sales by Naamsa and of its notes issued SA Reserve Bank (SARB) note issue. We attach equal weights to new vehicle sales and the note issue adjusted for consumer prices to establish our timely Hard Number Indicator (HNI) The demand for notes can be regarded as an indicator of spending intentions by households while new vehicles sold that include commercial vehicles of all sizes, may be regarded as an up to date indicator of capital formation by firms.

The HNI is compared to the SARB coinciding business cycle below. One that has only been updated to June 2018 making it of limited use as an indicator of the current state of the economy. Estimates of GDP itself in Q2 have been available since early September. Ideally the coinciding indicator would serve as a leading indicator of the state of the economy – to be revealed in due course by updated GDP estimates. As may be seen the HNI is now trending higher at a slow pace, a pace similar to that of the Reserve Bank coinciding indicator to June 2018. A time series extrapolation of both indicators of the current state of the SA economy predicts similar growth rates of the order of 3% per annum over the next twelve months. (See figures 1 and 2 below) Such growth, if it materialized, would be well above consensus estimates of GDP growth in 2019.

Fig. 1; The Investec Hard Number Indicator (to September 2018) and the Reserve Bank Coinciding Business Cycle Indicator (to June 2018) (2015=100)

Source; Stats SA, SA Reserve Bank, Naamsa and Investec Wealth and Investment

Fig.2; Growth in the Hard Number Indicator and the Reserve Bank Business Cycle Indicator

Source; Stats SA, SA Reserve Bank, Naamsa and Investec Wealth and Investment

The SARB coinciding business cycle indicator (provided on a monthly basis) provides a good proxy for GDP, as may be seen below, when converted into a quarterly series to compare with quarterly estimates of GDP. A comparison of the cyclical indicator with the GDP estimates is made in figure 3 below. The Hard Number Indicator is intended to act as a leading indicator of both series and, as may be seen, has succeeded in doing so. The HNI turned lower in 2007- before the peak in the growth rates was reached in 2008, and turned higher in 2009 ahead of the recovery of the economy from the Global Financial Crisis. The HNI fell back relatively to the Reserve Bank indicator in 2016, because of a short lived downturn in new vehicle sales, but is now moving very much in line with the SARB cyclical indicator as is shown in figures 2 and 3.

Fig. 3; A comparison of GDP at constant prices with the Reserve Bank Coinciding Business Cycle Indicator

Source; Stats SA, SA Reserve Bank and Investec Wealth and Investment

The underlying components of the HNI are shown in figure 4 below. As may be seen the new vehicle cycle, having fallen away in 2016, recovered in 2017 and is now on a slightly positive growth trend. Current sales of new vehicles are running at an annual rate of 551,000 new units sold, a rate of sales that is forecast to rise modestly to an annual equivalent of 570,000 units in twelve months. The cash cycle, adjusted for inflation, is recovering consistently and is forecast to grow by about four per cent per annum in 2019. (See figure 4)

Fig.4; The components of the Hard Number Indicator. Smoothed annual growth rates

Source; Stats SA, SA Reserve Bank, Naamsa and Investec Wealth and Investment

The real cash cycle is benefitting from an increase in the demand for and supply of cash from the SARB that is now growing at a 7% annual rate and slightly lower inflation. We may hope for the sake of economic activity in SA that this growth rate continues to run ahead of inflation, as the time series forecast suggests it may. It is forecast to continue to grow at its current pace of about five per cent per annum. (See figure 5) The exchange rate and the global oil price, little influenced by what happens in SA, however will have a big say in how inflation turns out and so how stimulating an increase in the supply of cash will be.

Fig.5: Growth rates in real cash and consumer prices

Source; Stats SA, SA Reserve Bank and Investec Wealth and Investment

A striking feature of current price trends in SA is that price increases at retail level are running well below headline inflation and are forecast to remain so. (See figure 6 below)

Fig.6: Consumer and retail price inflation

Source; Stats SA, SA Reserve Bank and Investec Wealth and Investment

Clearly retailers and their suppliers have had very little pricing power and operating profit margins and remain under pressure given the weak growth in volumes of goods and services sold to households. No doubt the higher charges for petrol and diesel in the wake of a weaker rand and higher oil price in US dollars have contributed further to currently weak demand at retail level and may continue to do so.

The growth in the supply of cash – adjusted for inflation – has proved a very good predictor of retail spending in South Africa. The real cash cycle has consistently led the retail sales cycle as we show below. Though, as should also be noted, these trends parted company in late 2017. They continue to point in an opposite direction- with the cash cycle showing a pick up while retail sales volumes continue on a declining path. These opposing trends may well reverse, given no further shocks to the confidence of households in their income earning prospects- and subdued inflation. Hopefully too, higher interest rates will be avoided that could depress household demands further.

Fig. 7: The real cash and real retail sales volume cycles

Source; Stats SA, SA Reserve Bank and Investec Wealth and Investment

The indicators point to a positive rate of growth in spending and output over the next twelve months. Rand strength and lower interest rates and less inflation would help stimulate the economy further. Rand weakness will do the opposite. The outlook (hopefully an improving one) for emerging market economies and especially the Chinese economy could move emerging market exchange rates and the rand in a direction, helpful to household spending. Less political risk attached to investing in South African assets would be an additional source of stimulus.

New vehicle sales: A closer look

What’s in a (growth) number? Vehicle sales volumes in December 2016 deserve a closer look.

Recently reported new vehicle sales of 41 639 units sold in in December 2016, some 15.35% fewer than sold a year ago, were greeted with general disappointment. The implication drawn was that the decline in sales volumes recorded in 2016 had accelerated.

But is this the right conclusion to be drawn about the most recent data release? A year can be a very long time in economic life and what has happened to vehicle sales in the months between December 2015 and December 2016 can tell a very different story about the underlying trends.

The data, when adjusted for predictable seasonal influences on monthly sales, indicate that while monthly sales volumes took a turn for the worse in the fourth quarter of 2015, by the fourth quarter of 2016, sales were in fact recovering from their lows of midyear 2016, when monthly sales are adjusted for seasonal influences, as we show below.

The important feature of the vehicle market is that unlike for other retailers, December is a typically well below average month for motor dealers. Holidays mean closed dealerships and so are not usually a good time to deal for an expensive new vehicle.

But a year ago in December 2015, with which sales comparisons are being made, was not a typical month for the motor dealers. The rand, it will be remembered, collapsed that month, portending higher vehicle prices, given their import content. And consequently buying ahead of the expected price increases seemed like a good enough idea to lift sales in December 2015 markedly, especially when seasonally adjusted. Actual sales in December 2015 were 49 158 units and had held up very well compared to November 2015 sales volumes of 51 338 – making December 2015 a very high base with which to compare sales a year later.

As we show in our table of seasonal factors below November is an average month for motor dealers, while December sales average about 13% below average monthly sales. By contrast for retailers generally, December sales volumes average as much as 36% above average monthly volumes.

Or in other words, to gain a full impression of trading trends in December 2016, retail volumes when recorded and reported should be scaled down (divided) by a factor of 1.36 while vehicle sales should be scaled up by a factor of approximately (0.87). Hence vehicle sales in December 2016 of 41639 units should be scaled up by (0.866476) to register the 48 055 sales seasonally adjusted indicated in the figures, and so well ahead of the much weaker, seasonally adjusted sales of 42 501 unit sales, recorded in July 2016.

In the figure below we compare growth rates in vehicle sales on an annual basis with growth calculated over consecutive 3 moth periods using seasonally adjusted monthly data. It may be seen that while annual growth rates are negative and in retreat, the quarterly numbers tell a more positive story.

Of interest is that the recent share price performance of two JSE listed motor dealers, Combined Motor Holdings (JSE code – CMH) and Imperial (IPL) seems to accord better with the more encouraging seasonally adjusted sales numbers than with the raw data (see below).

How fares the SA economy? An update to December

With new vehicle sales and the Reserve Bank note issue for December to hand, we can update our Hard Number Indicator (HNI) of the state of the economy at year end. The economy maintained its sedate pace in December. The forecast is for more of the same in the year ahead, that is for slow but not negative growth in 2016. Our HNI serves as a useful leading indicator of the Reserve Bank Business Cycle Indicator updated only to September 2015.

The HNI and the Reserve Bank coinciding business cycle indicator measure the level of economic activity. When these are converted into rates of change, we show below that the growth rate in the HNI has been declining since 2010 and is currently barely positive and is forecast to remain barely so. It is of some consolation to notice that the weak growth outlook has not deteriorated and is forecast no to do so. The consistent way in which growth in the HNI leads the Reserve Bank cycle helps to confirm its usefulness. It has the advantage of being very up to date and based on hard numbers not sample surveys.

Sales of new vehicles of all sizes in the SA market (that make up half of the HNI) are shown below. While sales are 4% down on a year before, sales volumes, which have averaged over 50 000 units a month, must be regarded as very satisfactory, given the state of the overall economy, especially for the SA manufacturers who also delivered 337 748 units to foreign markets in 2015, 20.5% up on a year before.

The other half of the HNI is made up of the growth in the real supply of and demand for cash. These demands for cash have been growing at a real 4% p.a as we show below. However the cash cycle appears to have peaked earlier in 2015, helped by lower inflation. The demands for cash, to spend on holidays and presents, rise strongly in November and December, though growth slowed this December off a very high base established in December 2014. The growth in demands for cash in SA, despite the heavy and growing use of electronic alternatives to cash, speak eloquently of the important role the informal economy plays in SA – a role however that is not reflected in official estimates of the size of the informal sector, as about 5% only of GDP.

The outlook for domestic spending has deteriorated, with the collapse in the exchange value of the rand. Higher rand prices for goods with high import or import replacement content or export potential will further discourage spending by households. That the oil price in dollars has declined by even more than the dollar value of a rand has been a welcome source of relief for households and firms. The inflation outlook has therefore not deteriorated as much as it would ordinarily have done with a rand this heavily damaged.

Hopefully this lesser inflation outlook will help restrain the Reserve Bank from raising interest rates as much as they would otherwise have done. Higher interest rates will do little to help the rand; they have not helped the rand to date that has been driven by global and SA forces well beyond the influence of monetary policy and interest rates. However higher interest rates will be sure to add to the contractionary forces slowing the economy- and undermine further the case for investing in SA. Is it too much to hope for a sanguine Reserve Bank- one that will allow the exchange rate to absorb the economic shocks- and not to add to them? And to happily surprise the market accordingly.

Hard Number Index (HNI): Pulling out of the dip

The State of the SA Economy in October 2014

Two up-to-date indicators of the state of the economy are now to hand. New vehicle sales in October as well as the cash in circulation at the October month end are now known. As we show below, new vehicle sales have held up very well in 2014. It appears that the sales cycle has turned up, indicating that if recent trends continue the industry might look to improved sales in 2015, which would be close to the record ales volumes achieved in 2006.

Hard Number Index: SA looks set fair for growth

The Reserve Bank on Friday 9 April reported the number of its notes circulating at the end of March. This enables us to update our Hard Number Index (HNI) of the SA Business Cycle that combines vehicle sales, also available for March 2010, with the real money base, that is the note issue deflated by the CPI.

The HNI is pointing firmly upwards, confirming very clearly that the SA economy has entered a new upswing phase in the SA business cycle (see below). Higher numbers indicate that the economy is expanding, that is, the economy is delivering positive rates of growth that will be confirmed in due course by a much wider selection of economic time series. First quarter GDP numbers for example will only be released in June 2010.

The second derivative of the business cycle, that is the rate of change of the HNI, is also in positive territory and indicates that growth is accelerating. The economy according to the HNI began to grow again in the fourth quarter of 2009, as confirmed by the National Income statistics for the quarter. It is picking up momentum.

As we reported previously, the new vehicle cycle is demonstrating very strong growth. The growth trend in vehicle sales is pointing sharply higher.

The growth in the note issue picked up in March 2010. However when these numbers are adjusted for the declining trend in the CPI the real money base is indicating positive growth rates at a modest rate (see below).

It should be appreciated that the note issue will grow in line with extra demands for cash that reflect the state of the economy. It is therefore a very good coinciding indicator of the state of the economy rather than a leading indicator. Growth in the supply of cash does not lead the economy but follows it. Nor is it a policy instrument of the Reserve Bank, though we have argued it should be. However the note issue has the great advantage for economic forecasters of being a very up to date indicator of the current state of the economy. Most economic indicators provide only a rear view mirror of the state of the economy.

The HNI overcomes the problem of driving along the economic track through the rear view mirror. The index, as we have shown, tracks the official business cycle indicator of the Reserve Bank very closely. It has the advantage of being very up to date as well as being based on hard numbers – actual vehicle sales and the note issue. The release of the Reserve Bank’s Coinciding Indicator of the SA business cycle by contrast lags behind economic events by three to four months (the latest number is for December).

The HNI therefore estimates the immediate state of the economy and the current estimate leaves little doubt that the economy is in a cyclical upswing and is accelerating.

SA economy: Hard numbers reveal hard times

Statistics recently released for new vehicle sales and the note issue of the Reserve Bank in October 2009 do not indicate that any recovery of the SA economy is under way. The data suggest if anything that the SA economy has continued to shrink at a faster rate.

These two very up to date economic series, vehicle sales and the note issue, both actual numbers rather than estimates derived from sample surveys, make up our Hard Number Indicator (HNI) of the state of the economy (we adjust the note issue for consumer prices). As may be seen below our Hard Number Index (HNI) tracks the coinciding business cycle indicator of the Reserve Bank very closely. As may also be seen the HNI calculated to October 2009 is still falling while the Reserve Bank Coinciding Business Cycle Indicator, available only to July 2009, has levelled off.

The Hard Number Index and the Reserve Bank Coinciding Indicator

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