SOUTH Africa’s business cycle index fell for the second month in a row in August as slowing global growth, and higher interest rates suppressed the leading indicator.
The South African Reserve Bank (SARB) said yesterday that the composite leading business cycle indicator declined by 2.3% month-on-month in August following a 1% fall in July.
It was the second consecutive month of decreases in the index and the most in 13 months, as nine of the 10 available component time series were down, while only one component increased.
The SARB said the largest negative contributors were a decline in the number of residential building plans approved and a narrowing of the interest rate spread.
The positive contribution came from an increase in the volume of orders in manufacturing.
Investec chief economist Annabel Bishop said that high inflation had reduced real spending power, along with higher interest rates.
The SARB has raised its benchmark lending rate by a cumulative 275 basis points to 6.25% since November 2021 as inflation kept rising before peaking at 7.8% in July.
Bishop said high inflation and rising interest rates had weakened economic demand, with the SARB having begun its upwards interest rate cycle in November last year.
She also pointed to a worsening power supply in the third quarter, with crippling power cuts implemented by Eskom adding to the slowdown.
“The business confidence index is consequently in negative territory, while the average hours worked per factory worker in manufacturing has slowed and job advertisements have fallen, while higher interest rates have weakened the number of new passenger vehicles sold and the number of building plans approved,” Bishop said.
“There is a two- to three-quarter lag between the lift in interest rates and its most significant impact on economic growth, with South Africa seeing its pace of interest rate hikes quicken over the third quarter, and so likely to have a slowing effect on economic activity into 2023.”
Global growth forecasts continue to be lowered, with the Organisation for Economic Co-operation and Development dropping theirs from 3% in 2022 to 2.3% in 2023, well below the pace foreseen prior to the Russia-Ukraine war.
The data comes ahead of Finance Minister Enoch Godongwana’s Medium-Term Budget Policy Statement (MTBPS) today.
Bianca Botes, a director at Citadel Global, said investors would be looking for a balancing act by the minister as the country’s economic growth remained constrained.
Investors will be keeping a keen eye on how the government follows a path of fiscal consolidation amid challenges such as Eskom and Transnet woes, high inflation, and the public wage bill.
In early trade yesterday the rand weakened against the dollar on lingering concerns over the effect of ongoing power cuts on the domestic economy.
The rand also weakened in line with other emerging markets.
Reuters reports that emerging markets stayed at two-and-a-half-year lows yesterday as Asian shares continued to struggle over policy worries under Xi Jinping’s third presidential term.
However, by 5pm the rand was bid at R18.20 to the dollar, 23c stronger than at the same time the previous day.
BUSINESS REPORT