The South African Reserve Bank's leading business cycle indicator retreated for the second consecutive month in July, recording a 0.9% decrease. This decline was primarily attributed to the negative contributions from six out of the 10 available components. The Reserve Bank announced this information on Tuesday, highlighting the factors that influenced the indicator's performance.
The largest negative contributors to the indicator's decline included a deceleration in the six-month smoothed growth rate in money supply and a decrease in the number of residential building plans approved for flats, townhouses, and houses larger than 80m². Additionally, the US dollar-based commodity price index for South Africa's main export commodities, which comprises 21 weighted commodities, also made a negative contribution. This index includes precious metals like gold, platinum, and ruthenium, alongside base metals and coal.
Other components that dragged the indicator down included the volume of domestic orders in manufacturing, as measured by the Bureau for Economic Research (BER), the number of new passenger vehicles sold, and the BER's business confidence index (BCI). The BCI report revealed that business confidence remained subdued in the third quarter of the year, largely due to geopolitical and global trade uncertainty. This uncertainty continues to affect the private sector, with many companies facing weak demand for their products.
The BER's business confidence index edged one point lower to 38, with 62% of respondents surveyed expressing dissatisfaction with prevailing operating conditions. The index remains slightly below its long-term average of 40 and well below the recent high of 47 reached in the first quarter of the year. The survey also highlighted concerns around municipal service delivery, poor infrastructure, and policy uncertainty.
According to Annabel Bishop, an Investec economist, the July negative reading of the Reserve Bank's leading business cycle reflected the impact of the oil price shock due to the Middle East war. This shock continued to suppress new orders for manufacturing production and other industries. However, there were some positive contributors to the leading indicator during the month, including an acceleration in the growth rate in job advertisements and a widening of the interest rate spread between South Africa's 10-year government bonds and 91-day Treasury bills.
The leading indicator is one of three composite indices that the Reserve Bank analyzes to determine whether there has been a turning point in the business cycle. The composite coincident business cycle indicator decreased marginally by 0.1% in June, primarily due to the lower real value of wholesale, retail, and motor trade sales. In contrast, the composite lagging indicator edged up 0.2% during the same month.
The Reserve Bank's analysis also noted that other positives came from the average hours worked per factory worker in manufacturing and the composite leading business cycle indicator for South Africa's major trading partner countries. The local government elections, set for November 4, are expected to be key to boosting sentiment for the rest of the year.
Key points
- The South African Reserve Bank's leading business cycle indicator decreased by 0.9% in July.
- Weaknesses in six out of 10 components contributed to the decline.
- Business confidence remains subdued due to geopolitical and global trade uncertainty.
