The economy is on the mend. This is according to the South African Reserve Bank (Sarb) composite business cycle indicator released on Tuesday.
The composite leading business cycle indicator, which is composed of 10 available time series components, saw eight of them improve on a month-to-month basis in July.
“The largest positive contributions to the movement in the composite leading business cycle indicator in July were increases in the number of residential building plans approved and in the RMB/BER Business Confidence Index,” the Sarb said in a statement.
It said its composite coincident business cycle indicator increased 3.7% on a month-to-month basis in June. It was supported by increases in retail and new vehicle sales, and industrial production to a lesser extent, following improved economic activity as lockdown restrictions were gradually lifted.
For its part, the composite lagging business cycle indicator increased 2.1% on a month-to-month basis in June.
It was not, however, all good news, as seen in a pair of measures making up a part of the composite business cycle indicators.
“The two negative contributors were a deceleration in the six-month smoothed growth rate in the real M1 money supply and in the 12-month percentage change in job advertisement space.”
Though the regression in these two indicators is disappointing, the overall positive direction is good news for an economy which has taken a pounding after the Covid-19 crisis saw the government implement an almost complete lockdown in late March and has seen it steadily open parts of it over the following months.
Although the country only went to Alert Level 1 on Monday (September 21), there were already signs that the economy was starting to get traction before the move to the current alert level, which allows the most economic activity within the country’s Covid-19 risk adjustment strategy.
Even so, it should not be seen as an indication that things are already back to where they were before the lockdown.
“While the leading indicator shows expectations for economic activity in six to 12 months’ time and it is showing improvement, one must be wary in concluding that this implies a full recovery from the lockdown,” says Sarb economic analyst Adri Wolhuter.
She adds: “As the leading indicator has a good track record in predicting turning points in the economic cycle ahead of time, a continued increase in the indicator does suggest a recovery from the lockdown.”
Nevertheless, other than indicating that the recovery has started, the indicators cannot scale it.
“One cannot deduct the pace of the recovery from this, only the direction – in the sense that activity should continue to improve. One could perhaps say that there is evidence of a normalisation of economic activity, especially now that Level 1 lockdown measures have been instated,” Wolhuter says.
For now, the Sarb does not want to speculate on the strength of the recovery.
“At the bank we make use of the three Ds – Depth, Duration and Diffusion – of the composite indicator components in order to evaluate the strength of a certain signal i.e. an improvement or deterioration.
“These measures, while continuously improving over the past two months, remain well below long-term averages and therefore we remain cautious as to the timing of a full recovery to pre-lockdown levels of output.”