Updating the state of the SA economy to February 2015 with our Hard Number Index (HNI). Economic activity continues to show slow and steady growth, with no obvious speed wobble.
The two very up to date hard numbers, unit vehicle sales in SA and the value of notes in circulation, have been released for February 2015. We deflate the money series with the CPI and seasonally adjust, smooth and extrapolate both series using a time series forecasting method. Both series continue to point higher, with unit vehicle sales continuing their recovery from the blip in early 2014.
It should be recognised that new unit vehicle deliveries to the SA buyer have maintained a robust pace, comparable with peak sales of 2006-07. Much improved exports of built up vehicles have also been helpful lately to the motor assemblers and their component suppliers, who account for the largest share of all manufacturing activity. The money base, adjusted for the CPI, had declined in 2008-09 but the demand for and supply of real cash has grown consistently since in line with economic growth generally.
When both series are converted into annual growth rates, it shows that the growth cycle remains in a recovery phase but that the current growth rates are predicted to slow down in 2015. Vehicle sales may be regarded as a very good proxy for capital expenditure undertaken by households and firms, while the demand for cash supplied by the Reserve Bank on demands for notes from the banks that are having to meet their customers’ demands for cash on hand rather than a deposit in the bank. These demands reveal spending intentions by households and may be regarded as a good coinciding indicator of spending decisions.
We combine these two hard numbers, vehicle sales and notes in circulation to establish our Hard Number Index of Economic Activity in SA (HNI). As we show below, the HNI for February 2015 has held its level and is forecast to continue to do so over the next 12 months. In other words, the growth in economic activity in SA is modestly positive but is not expected to gain or lose forward momentum. The HNI may be compared in this figure to the Coincident Business Cycle Indicator of the SA Reserve Bank that was still rising in November 2014, the latest month measured. We show in the further figure that the rate of change of the HNI, what may be regarded as the second derivative of the business cycle, that the rate of change of economic activity is predicted to remain barely in positive territory. That is to say, more of the same slow growth in economic activity in SA should be expected. The catalyst that would stimulate a stronger upswing in the business cycle remains very hard to identify.
The demand for and supply of cash in the economy has proved very helpful in predicting the state of economic activity in SA over many years. We include cash in our HNI for this reason and also because data on cash in circulation is so up to date and turns what may be coincident economic action, spending and cash determined simultaneously, into a leading indicator.
It may be of interest to recognise that despite all the innovations banks have made in the electronic transfers of deposits and encouraging the use of these convenient means of payment, the importance of the ratio of cash in the economy has not declined over the years. As we show below, the cash intensity of the economy (compared to estimated retail trade volumes) appears to have risen steadily between 1980 and 2000. It then stabilised at a higher level: it declined until 2010 and now appears to be rising again.
Part of the decline in demands for notes after 2003 was from the deposit taking banks themselves. The retail banks reduced their own demands for notes when the Reserve Bank stopped accepting notes in the bank tills and ATMs as part of required cash reserves. Only reserves held as deposits with the Reserve Bank qualified thereafter. But while this influence on the demand for cash seems to have worked its way through the system in the form of a decline in the cash to retail ratio, the ratio of cash to economic activity (represented here by officially measured retail volumes) seems inexplicably high. It does suggest that the statisticians may well be underestimating retail volumes and economic activity conducted informally. The informal economy has a much higher propensity to use cash rather than electronics to close deals. Hence the particular usefulness of cash as a leading indicator because it incorporates informal unrecorded economic activity that may well contribute significantly more to the economy than is officially recognised.
