Reserve Bank indicator points to recession

January 27, 2016, 5:08am

By Ntsakisi Maswanganyi, Business Day Live
Photo: on BDLive

THE case for the Reserve Bank’s monetary policy committee to hike interest rates when it meets on Thursday to curb inflation was strengthened on Tuesday when its own leading business cycle indicator showed that SA would be fortunate if it avoided a recession this year.

SA would be lucky to grow by more than 1% this year, a far cry from the 5% and more needed to make inroads into poverty and unemployment, the Bank’s indicator showed on Tuesday.

It plunged 5% in November to 93.7 points after declining 4.7% in October. This is its 26th consecutive fall, showing the extent to which the economy is struggling.

The Bank’s indicator is considered an important gauge of SA’s growth trajectory.

Lefika Securities economist Colen Garrow said the fact the Bank’s indicator has been in negative terrain for a sustained time is a "strong indication" that the economy is in recession.

The indicator showed that the broad picture of economic stagnation was continuing, First National Bank home loans household-sector strategist John Loos said.

"Given (the) 1% ... real gross domestic product growth as at the third quarter of last year, the risk of recession is high," Mr Loos said.

Stanlib projected on Tuesday that the economy would grow 0.5% this year, chief economist Kevin Lings said. Stanlib’s forecast, which is less optimistic than the Treasury’s 1.7% growth projection and the Bank’s 1.5%, is in line with that of several other economists.

Data indicate a struggling economy and the National Development Plan’s objectives should be revised to reflect challenges including weak commodity prices, as well as slow growth in mining and manufacturing, said Mr Garrow.

The Bank’s indicator declined on an annual basis, but rose marginally on a monthly basis in November. Six of the 11 indicators surveyed rose, while the rest fell.

The largest positive contribution came from the opinion survey measuring the average number of hours worked in manufacturing, followed by a rise in new passenger vehicles sold.

The biggest negative contributions came from a drop in the US-dollar-based export commodity price index and a deceleration in the composite leading business cycle indicators of SA’s major trading partner countries.

These showed that although domestic factors such as low business confidence were also to blame for the country’s woes, the global economy remains a key player as well, said Mr Loos.

SA’s economy has been weighed down by lower commodity prices, a weak rand, poor inflation outlook and rising interest rates.

The prices of all major commodities are expected to fall this year because of large supplies and slowing demand in emerging market economies, the World Bank forecast in its Commodities Markets Outlook report released on Tuesday. SA will also be affected as a major commodities exporter.

Metal prices are expected to drop 10% this year after a 21% plunge last year.