That moveable feast, Easter, is always a complicating factor for economists relying on monthly updates, coming as it often does at different times in either March or April.
Easter is late this year, and this can cause problems for economists, forecasters and policymakers. The President of the European Central Bank, Mario Draghi, informed an interrogator accordingly at his most recent press conference last week of Easter effects – when discussing the of the timing of ECB quantitative easing, an all important issue for the market place.
Question: Can you describe a little bit more what kind of information you are looking for on whether or not these latest inflation figures are changing your medium-term outlook? If you’re not going to act when its 0.5%, what does it take to get you to act on some of these things? And my second question is: you clearly changed the rhetoric a little bit in terms of your willingness to act swiftly – being resolute – but do your rhetoric and your easing bias lose credibility each passing month that you do nothing in the face of these very low inflation rates?
Draghi: On the first point: there are a couple of factors that somehow clouded the analysis of whether this latest inflation data would actually be a material change in our medium-term outlook or not. One has to do with the volatility of services prices and the fact that Easter time this year comes remarkably later than last year. The explanation is that, around Easter time, services expenditure usually goes up – demand for services goes up – especially travel, and this affected last year’s prices and it’s going to affect this year’s prices. So you have a base effect which produced much lower inflation data in March and may well produce higher inflation data next month.
Easter holidays always have an impact on spending in South Africa and flows through shops and show rooms. With Easter coming later this year, economic statistics for March 2014, especially when compared to March last year need to be treated with particular caution. Perhaps the best approach to reading the state of the economy around Easter time would be to take an average of March and April activity.
Our Hard Number Index (HNI) of the state of the SA economy at March month end combines these two very up to date releases – vehicle sales and the notes issued by the Reserve Bank (adjusted for CPI). Both are hard numbers not compromised in any way by the vagaries of sample surveys.
The HNI, as the chart below shows, captures the turning points in the Reserve Bank Coinciding Business Cycle Indicator. This indicator has only been updated to December 2013, making it not very useful as a measure of the current state of the economy. Two months can be a long time in economics as well as politics. The HNI for March is barely changed from the February reading, indicating that the economy has neither picked up nor lost momentum. It remains as it was on course for slower growth.
The HNI turned lower in the third quarter of 2013 while the Reserve Bank Indicator for December was still pointing higher. Numbers above 100 for either Index indicate that the economy is growing, but the HNI suggests that the forward momentum of the economy has slowed down. If present trends continue, the growth rate of the economy will slow down further in the months ahead.
As we also show below, the HNI does a good job approximating the growth trends in real Household Consumption Spending and Gross Domestic Spending (GDE). These add spending by the government sector and spending on capital goods and inventories to the all important household spending category, which accounts for over 60% of all spending. Both growth rates appear to be tracking lower in line with the HNI.
The rand however, as the past weeks have demonstrated, will not have to wait for smaller trade and current account deficits on the balance of payments – it will respond to movements of capital in and out of emerging markets. The best hope for the SA economy over the next two years will be a revival in emerging bond and equity markets that leads to a stronger rand and less inflation. Less inflation, accompanied by (at worst) stable short term interest rates and accompanied by lower rates further along the yield curve, could revive household spending, an essential ingredient if the economy is to grow faster in a sustained way.
A reprise of a rand recovery, accompanied by lower interest rates and less inflation, which led to the boom of 2003-2008, may seem as unlikely now as it did then. Such a scenario may be improbable, but it is not impossible. We must hope for such a fertile egg from the Easter Bunny.
Hi Ari,A friend foawrrded your blog posting to me and I was delighted to see your kind words and sentiments (that’s me in today’s photo). It’s nice to hear that “classic Easter Parade” is still appreciated. Each year, it seems, fewer and fewer folks dress in the traditional “high style” that was what the whole parade was about from its inception in the 1880’s. The “nabobs” would parade up and down Fifth Avenue after leaving Easter morning services and show off their finery. No judgment here–there’s room for all styles at the parade–but it can be a bit dismaying to see this tradition increasingly watered down and seeing classic fashion sort of left in the lurch. It’s always heartwarming to have people (most of them, in the “Advanced” category) thank me for keeping the tradition of classic, vintage dress represented on Easter (and beyond). And it was especially nice to see your taking notice, too…as well as your lovely commenters. Er…for the record, to the commenter who suggested I may be John Galliano’s father…I looked it up..and he’s actually older than I am…but no offense taken. If you want to put me in the “Advanced” category….I’ll take it! So, again, thanks, and I look forward to following your blog…and especially to seeing your documentary. It looks to be fantastic! Best of luck to you! And feel free (anyone) to friend me on Facebook. I’m a singer/bandleader here in NYC and am always looking for new friends…especially stylish ones like yourselves!Best always,Gregory MooreNYC