Lead indicator points to frail recovery: economist
September 25, 2009
By Ethel Hazelhurst
For a graph breaking down the lead indicators - click here
Confirmation that the recovery in the business cycle would be "slow, fragile and uneven" came on Wednesday from the Reserve Bank's leading economic indicator, Investec group economist Annabel Bishop said.
The indicator, which points to conditions about six months ahead, came in at 109.9 in July, down on an upwardly revised 110.1 in June (originally 109.7).
The economy moved into recession in the fourth quarter of last year and remained there in the two following quarters. The lead indicator first showed signs of recovery in February, fell the following month, and then rose for three consecutive months to June.
Iaan Venter, a Reserve Bank economist, described the July outcome as "a pause rather than a reversal". He said: "We had three nice increases in the previous months and only a slight drop in July."
However Bishop sees the latest data as discouraging and is forecasting a third-quarter contraction of 1.2 percent, growth of only 0.2 percent in the last quarter of the year, and "a weak 2.4 percent" in the following quarter. The figures are quarterly changes which have been adjusted for inflation and seasonal factors and annualised.
Bishop saw the July data as "a strong argument" for a half percentage point cut in the Reserve Bank's repo rate at next month's meeting of the monetary policy committee (MPC).
The MPC held the repo rate at 7 percent on Tuesday after 5 percentage points of cuts since December. But prospects of a further rate cut are not good.
Azola Lowan, a senior research analyst at Advantage Asset Managers, said forward rate agreements (FRAs) showed the market "largely believes that this rate cutting cycle has come to an end". FRAs are three-month contracts that run from some time in the future.
Lowan said: "The rate that one can secure in three months' time stands at 6.86 percent, implying less than a 10 percent probability of further interest rate cuts. Rates are expected to remain on hold for at least the next nine months."
Venter pointed out that figures on the lead indicator had been upwardly revised, as far back as November last year, both because of new information available and because of revisions in underlying components of the indicator.
Revisions to the lead index are routine because data on the 12 components are not all available at the time the first figure is published. Venter said the only item missing in July was "gross operating surplus as a percentage of gross domestic product".
Of the remaining components six were negative and five were positive - among them average hours worked per factory worker in manufacturing and volume of orders in manufacturing.
He said the factors responsible for upward revisions to the original figures over the past eight months, were largely revisions to the commodity prices index and the lead indicators of South Africa's major trading partner countries.
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