Composite leading business cycle indicator slightly decelerates in February

THE main shift between the January and February surveys was that the number of residential building plans approved turned from a positive contributor to the largest detractor in February. | Reuters.

THE main shift between the January and February surveys was that the number of residential building plans approved turned from a positive contributor to the largest detractor in February. | Reuters.

Published Apr 28, 2022

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BUSINESS activity in South Africa decelerated slightly in February amid interest rate hikes and heightened inflation expectations, the composite leading business cycle indicator showed on Tuesday.

Economists flagged that it indicated growth was slowing in South Africa.

The SA Reserve Bank (SARB) yesterday said that the composite leading business cycle indicator fell slightly by 0.1 percent to 127.2 index points from 127.3 in January.

The SARB said decreases in six of the 10 available component time series outweighed increases in the remaining four.

The largest detractors were a decrease in the number of residential building plans approved and a deceleration in the six-month smoothed growth rate of job advertisement space. The largest positive contributors were an increase in the US dollar-denominated export commodity price index and a widening in the interest rate spread, SARB said.

Jones Gondo, a senior research analyst: credit, Nedbank Corporate and Investment Banking, said the index was still up 3 percent compared to the same period last year, but the trend was one of deceleration.

“The main shift between the January and February surveys was that the number of residential building plans approved turned from a positive contributor to the largest detractor in February,” he said.

Gondo said between surveys, the largest positive contributor to the business cycle remained the commodity price index for South Africa’s main export commodities, but this would not be fully met by increased production and export volumes, which had backward linkages to job creation and other positive benefits for the economy.

“The leading index is a robust signal for business cycle recoveries (and downturns) over the next six months. We think that the latest print shows the balance of risks weighing on expectations in the economy and that the bias is now tilting towards the downside in terms of domestic economic activity,” he said.

This was consistent with the fact that South Africa was currently in an interest rate hiking cycle at home and abroad amid heightened inflation expectations due to persisting supply-side shocks, he said.

“Moreover, the usual structural bottlenecks to investment-led growth (such as energy supply constraints and inefficient port and logistics infrastructure) limit any upside potential in this cycle. Consequently, we expect a further deceleration in the index in coming surveys,” Godo said.

Annabel Bishop, the chief economist at Investec, said the indicator showed that South Africa’s growth was slowing, hit by KwaZulu-Natal floods, slower global growth and larger South African interest rate hikes.

The composite leading business cycle indicator for South Africa’s major trading-partner countries returned a negative contribution to South Africa’s leading indicator reading, she said.

Bishop said South Africa’s key trading partners remained Germany, the US, China, Japan and the UK from an export perspective, with China in first place and Germany in third place from an import perspective.

Bishop said the overall leading indicator reading of future economic activity decelerated by -0.1 percent month per month after January’s strong reading and began to reflect the effects of the Russian-Ukraine.

The second quarter of 2022 would be afflicted by the effects of the KwaZulu-Natal floods on the trade balance and economic activity, with supply chains disrupted domestically, and this could prove to shave potentially 0.1 percent to 0.2 percent off 2022’s gross domestic product growth, along with a very severe interest rate hike cycle from the SARB - the latter was a risk currently, she said.

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