Updating the Hard Number Index
We have updated our indicator of the current state of the economy we call the Hard Number Index. It is based on hard numbers, namely vehicle sales and the Reserve Bank note issue adjusted for the Consumer Prices Index extrapolated for an extra month. The advantage in applying these hard numbers is that they are updated within a week of month end. All other published indicators of the state of the economy are as much as three or more months behind the times. Moreover the numbers that make up our very up-to-date Hard Number Index of Economic Conditions are actual accurate numbers not estimates based on sample surveys.
We have demonstrated that the Index tracks the business cycle represented by the coinciding business cycle indicator of the SA Reserve Bank very closely and the relationship has been an especially close one recently, as we show below. The Reserve Bank business cycle indicator however is only updated to June 2009 as is also shown.
Hard Number Index: Compared with the Reserve Bank Coinciding Business Cycle Indicator (2000=100)
Source: I-Net Bridge, SA Reserve Bank and Investec Private Client Securities
A closer inspection of the Hard Number Index and its annual rate of change (which should be regarded as the second derivative of the business cycle) indicate that the SA economy is now finally showing signs of a bottoming out. The Index itself, while still in decline, is now falling less rapidly. If present trends continue we can look to an actual increase in economic activity within the next month or two.
The Hard Number Index: The first and second derivates of economic activity
Source: I-Net Bridge, SA Reserve Bank and Investec Private Client Securities
A recovery despite further declines in the growth in Reserve Bank cash
This promised revival in economic activity owes little to the supplies of cash provided by the Reserve Bank to the system. No such assistance of the kind offered by many central banks has been made available to SA banks. The growth in the SA money base defined as the supply of notes issued by the Reserve Bank plus cash reserves banks held with the Reserve Bank, less required reserves, continues to slow down as we show below. But as we also show, the growth in the Real Money Base has stopped declining because the inflation rate has slowed down; and promises to slow further. Less inflation to come will add impetus to household spending in the months to come.
Real and nominal money supply growth
Source: I-Net Bridge, SA Reserve Bank and Investec Private Client Securities
The vehicle cycle has reached a deep bottom
Vehicle sales, having first turned negative in early 2007, now also appear to have bottomed out as we show below. What higher interest rates took away from vehicle sales, lower interest rates are very slowing adding something back, though if recent trends are to be extrapolated until year end 2010 the revival in sales will be a modest one (See below).
New Vehicle sales
Source: I-Net Bridge, SA Reserve Bank and Investec Private Client Securities
The sources of recovery are to be found outside of the Reserve Bank
The long awaited recovery in the SA economy will have little to thank monetary policy for, especially if the impulse of monetary policy is measured by the growth in money supply or bank credit rather than policy determined interest rates themselves. These have declined by 500bps since December 2008 but as yet lower interest rates, in the absence of quantitative easing, have not revived bank lending or the money supply. The economy has suffered a deep recession and the recovery prospects are for at best a slow recovery.
The recovery will be encouraged by the confidence that comes with the knowledge that the global credit crisis is over and the global economy is recovering. Relief of this kind also percolates through to SA business and their investment decisions while also encouraging the foreign demand for goods and services from SA. The improved global tolerance for risk has boosted values on emerging equity markets and the JSE, realising positive wealth effects. By boosting the value of the rand these improving trends have also helped lower inflation in SA and will continue to do so. We can look to lower inflation to boost the real money supply even if the Reserve Bank, unfortunately in our opinion, continues to resist doing so.