Rate cut unlikely as business indicator perks up
PUBLISHED: 2010/01/26 06:38:07 AM


Picture: Reuters
MARIAM ISA
SA’s leading indicator for the business cycle jumped 11,6% in November — its biggest rise in more than five years — sending a strong signal that the economy’s recovery is on track.
The official data yesterday add to evidence suggesting the Reserve Bank will keep interest rates steady when its first policy meeting of the year ends today.
“What the indicator is saying is that the business cycle could be in a strong upward phase by June, which coincides with the Soccer World Cup,” Investec analyst Annabel Bishop said.
“It is information which does not support a rate cut.”
The Bank is expected to keep its repo rate steady at 7% when its monetary policy committee ends its meeting today, although a few analysts say a cut is warranted due to weak domestic demand.
The composite leading indicator, compiled by the Bank with data from surveys, share prices and SA’s trade partners, predicts trends in the economy in six to 12 months. The index itself rose to 119,8 in November from 116,5 in October — its highest level since June 2008. It notched up a monthly rise of 2,9%.
On a year-earlier comparison, the index has been climbing since April last year. It rose 5,9% year on year in October.
“The indicator is sending a strong signal of recovery, but not of a strong recovery,” said Ian Venter, an economist at the Bank.
Other official data yesterday sent a worrying message, highlighting how severely SA’s first recession in 17 years has affected business.
Company failures soared by 25,2%, up from 4,7% in 2008 and the biggest jump since 1994, Statistics SA data showed.
Personal bankruptcies rose 12,6% in November after five months of falling.
Investec economist Kgotso Radira said: “Today’s data confirm that last year’s recession was among the worst on record and that the economy will take a number of years to return to trend growth.
“We expect the number of liquidations and insolvencies to slow this year compared with 2009 as economic conditions slowly improve.”
The leading indicator signals changes in the business cycle, not in economic output, which is likely to remain sluggish in the months ahead.
But analysts said the figure backed the view that growth accelerated in the fourth quarter of last year, after expanding by 0,9% during the third quarter.
“I think there’s enough evidence for the Reserve Bank to sit back and keep rates on hold today … the leading indicator shows we are likely to see improved growth prospects,” Absa Capital economist Jeffrey Schultz said.
He believes growth quickened to 1,5% in the fourth quarter of last year.
All but one component of the leading indicator were positive, including hours worked in manufacturing, factory orders, job advertisements, business confidence, building plans and new vehicle sales.
The only negative component was the spread between yields on 10-year government bonds minus the yield on 91-day Treasury bills.
A pick-up in manufacturing, spurred by demand for local exports, has helped propel SA’s economy out of recession.
However, both consumer spending and private sector investment, the main growth engines, are waning. Retail sales are still shrinking faster than expected, while credit demand from both households and businesses is falling for the first time in more than four decades.
Radira said he did not expect further interest rate cuts unless the Bank wanted to curb strength in the rand, which many see as a threat to SA’s recovery.
Former Rand Merchant Bank chief economist Rudolf Gouws said yesterday that the unit had merely clawed back most of its losses in 2008, when commodity prices crashed. It would be a mistake to intervene to weaken the rand as none of the policy options would lead to a certain outcome, he said at a conference at the Gordon Institute of Business Science.
“We can talk a lot about what we should do but the big issue is the constraints that are not allowing the economy to grow,” he said.
These included a skills shortage, the electricity crisis, state capacity, an over- regulated labour market, and low savings rate, he said. Business confidence had turned the corner, but social and economic improvements were needed.
“Additionally, more clarity is needed on the government’s economic policy, as well as increased efficiency,” he said.