Hard Number Index: Modest momentum

The economy in April maintained a very modest forward momentum – but the outlook is deteriorating, not improving.

Early data releases for vehicle sales and notes in circulation indicate that the economy in April 2014 maintained the modest forward momentum of the previous month. Our updated Hard Number Index (HNI), as we show below, is largely unchanged from the month before and reveals a similar outlook for still slower, but positive, growth rates in the months ahead.

The Index is based upon 2010 values. Index values above 100 indicate forward momentum. As we show, according to the HNI, the economy began a period of positive growth in 2004 that has continued since, but for a brief move backwards after the Global Financial Crisis broke in 2008 when the rand weakened and interest rates rose.

In the figure below we compare the HNI to the Reserve Bank’s coinciding business cycle indicator, also with a 2010 base, that has only been updated to January 2014 (with a value of 118). The Reserve Bank’s Indicator was still pointing higher in January 2014 while the HNI had turned lower in Q3 2013. The HNI has generally been a good timely leading indicator for the broader business cycle.

The performance of unit vehicle sales and the note issue is shown below. The outcomes are better than the raw numbers on a seasonally adjusted basis. But for Easter coming later this year than in 2013, such seasonal adjustments, as well as the raw numbers, need to be treated with caution.

If current trends persist, vehicle sales are heading lower, from a smoothed rate of 52 000 units per month, to about 50 000 units, equivalent to an annual rate of 600 000 units by April 2015. The local industry sold 647 217 units in 2013. Trends in the note issue suggest that the cash cycle may bottom out in Q4 2014. If this turns out to be the case, this modest recovery would be very welcome.

Hopefully for the state of the economy, the recent strength in the rand and a significantly lower maize price will have reduced the Reserve Bank’s forecast inflation rate as well as reduced the danger to the economy of higher short term interest rates that would undermine the prospects of any cyclical recovery.

The Reserve Bank fortunately (in a close call) did not raise interest rates in March when the rand was much weaker and long term interest rates significantly higher. It is therefore difficult to see how the Monetary Policy Committee could argue this week for anything but maintaining interest rates at their current levels for a while longer.