The first indicators on the state of the SA economy at the end of December 2013 are now available in the form of unit vehicle sales and the currency issued. These two hard numbers provide a very accurate and up to date estimate of spending by households and firms.
The news on spending in December is mildly encouraging when account is taken of seasonal influences on the sales of vehicles and the demand for notes. December, for obvious holiday reasons, is a very strong month for the notes held in wallets, purses and ATMs. It is also a weak month for vehicle sales, as holiday makers do not typically visit motor show rooms.
Yet while actual new vehicle sales fell from 50 806 units in November 2013 to 46 501 units in December, on a seasonally adjusted basis unit vehicle sales in December were well up on November sales, by some 3 605 units, or a monthly gain of some 6.9%. If the latest trends in new vehicle sales are extrapolated forward, using a time series forecast, the sector could be looking for sales in 2014 of 626 000 units. This would represent a minimal annual decline in sales volumes of some 2.36%, an outcome the industry would gladly settle for.
The manufacturing arm of the sector can hope to benefit further from much higher levels of exported units in 2014, after the disruptions caused by strike action in 2013. The National Association of Automobile Manufacturers in SA (Naamsa) indicated that exports of 275 822 units, though a record number, were some 61 000 units fewer than expected.
The money supply numbers at end December showed a somewhat similar improvement compared to November when seasonal influences are factored in. In the figure below we adjust the nominal note issue for the CPI and show that, on a seasonally adjusted basis, the real money base (supply of cash) picked up momentum in December 2013. When the latest statistics are used for a time series forecast, the real money base is predicted to have increased by 2.7% by year end 2014 – equivalent to nominal growth in the note issue of some 8% and consistent with an estimated inflation rate of about 6% in 2014. This is consistent with a predicted modest aggregate spending growth of about the same magnitude, of less than 3%.
What can be concluded from the latest economic news is that the SA economy has not, as may have been feared by some, fallen on its face. Rather, it seems able to sustain a modest forward momentum that, in the circumstances of disrupted production and a depreciated exchange rate that helps sustain high rates of inflation, may perhaps be consoling.
We combine the two hard numbers, unit vehicle sales and the real supply of cash in equal weights to form our Hard Number Index (HNI) of economic activity. We have previously shown that the turning points in the HNI – pointing to a pick up or slow down in the mostly forward pace of economic activity – track the Reserve Bank’s Coinciding Business Cycle Indicator Index very well. The distinct advantage of the HNI is that it is available within a week of the end of the previous month, rather than only three or more months later (as the Reserve Bank indicator is). The updated HNI is shown below. It shows that the SA economy is still growing and can be expected to continue to move forward at the current slow speed. The December data has helped to keep the HNI on this modestly faster track.
The opportunity for the economy to pick up momentum in 2014 will have to be led by exports and replacement of imported goods and services by domestic suppliers. The weaker rand can help promote exports and discourage imports, provided that the mines and factories stay open as do the restaurants, shops, hotels and B&Bs catering to foreign tourists.
A stronger pick up in the global economy, led by the US, will be helpful for exporters and the US dollar prices they receive. The scope for a domestic demand led stimulus for the economy is limited, given the state of global capital markets that are revealing a greater preference for developed rather than emerging market assets. The danger to the economy is not that domestic spending will pick up – but that it can slow down further under the pressures of higher prices and higher interest rates.
We must hope that the Reserve Bank does not attempt to fight higher inflation, since it has no influence whatsoever over inflation given the sources of higher prices: the exchange rate, a possible drought in the maize producing areas, as well as relentlessly higher taxes in the form of higher municipal charges for electricity and toll roads.
Higher interest rates can only reduce domestic demand without influencing prices very much, so slowing down growth and, by doing so, probably frightening away rather than attracting foreign capital. Slower growth may well mean even more rand weakness and more inflation.