August leading indicator the best in six months, confirming economy is still growing, albeit modestly

The Reserve Bank's leading indicator improved substantially in August, to its best level since February. In addition, positive y-o-y growth was recorded for the first time in a year.

This positive outcome for the leading indicator confirms that the economy is resuming modest growth in the aftermath of all the debilitating industrial action in the first seven months of the year. What was especially encouraging is the fact that the main drivers of the improvement in the indicator related to developments in domestic real economic activity rather than financial indicators or global economic growth indicators.

The inferences to draw are that economic growth should see some improvement to well over 2% in 2015 off a very low base for 2014, other things equal. Unfortunately, there is one huge cloud on this horizon, viz. the possibility of a strike in the public sector in the face of exorbitant wage demands at a time when government is trying to restrict the growth in its expenditure in order to meet its fiscal targets and avoid further credit rating downgrades.

From a monetary policy perspective, the positive outcome for the leading indicator in August keeps alive the possibility that interest rates may be ratcheted upwards again at the November MPC meeting.

First positive growth in the leading indicator in a year

Some encouragement about the economic outlook can be gleaned from the August Reserve Bank composite leading business cycle indicator. Admittedly, many of the data relating to the past few months have been revised downwards, enabling the August leading indicator to reflect a fairly sharp improvement. The fact is that the 0.8 increase in the leading indicator in August, to 100.5, from 99.7 in July, is the best improvement in the indicator in almost 2 years. Furthermore, the August reading was the first above 100.0 since February, i.e. in six months. In addition, the y-o-y growth in the leading indicator rose to 0.1% in August, from 0.0% in July and negative growth rates in the preceding 12 months. In other words, on a y-o-y basis, the leading indicator grew for the first time in a year. The inference to be drawn from this is that now that the debilitating industrial action in the platinum mining and metal industries seen in the first seven months of the year is over, the economy can look forward to modest growth through the coming year. It also means that the broad sideways movement in the leading indicator which has prevailed for the last 4 ½ years, remains intact. This indicates that the economy should maintain at least some positive growth and shows little sign of collapsing any time soon. 

Indicators relating to real activity the drivers of improvement

Possibly one of the more encouraging features of the August leading indicator is the fact that the drivers for the substantial improvement were drawn from developments in domestic real economic activity rather than financial indicators or global developments. Out of the 11 indicators measured, 6 were positive and 5 negative. However, the positive ones all related to domestic economic conditions. These included the improvement in the number of residential building plans approved, the volume of orders in manufacturing, the Business Confidence Index, the growth in the number of job advertisements in The Sunday Times and the growth in new passenger vehicles sold. In addition, real growth in M1, an indicator of household credit demand, also improved, indicative of a possible uptick in growth of consumer spending.

Indicators relating to real activity the drivers of improvement

Possibly one of the more encouraging features of the August leading indicator is the fact that the drivers for the substantial improvement were drawn from developments in domestic real economic activity rather than financial indicators or global developments. Out of the 11 indicators measured, 6 were positive and 5 negative. However, the positive ones all related to domestic economic conditions. These included the improvement in the number of residential building plans approved, the volume of orders in manufacturing, the Business Confidence Index, the growth in the number of job advertisements in The Sunday Times and the growth in new passenger vehicles sold. In addition, real growth in M1, an indicator of household credit demand, also improved, indicative of a possible uptick in growth of consumer spending.

Source: Econometrix

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