Economic recovery gaining traction

SA’s leadin indicator for the business cycle surged in December while the pace of company failures slowed last month, adding to evidence the economic recovery is gathering momentum.

The leading indicator compiled by the Reserve Bank climbed 13,9% compared with December, up from 11,8% in November, its data showed yesterday.

That suggested official figures today may show economic output accelerated more than expected in the final quarter of last year.

Company failures fell 23,7% last month compared with the same month a year earlier, figures from Statistics SA showed yesterday, reinforcing the outlook.

“There is a reasonably good relationship between SA’s leading indicator and overall economic activity,” Stanlib economist Kevin Lings said. “This suggests the economy should show solid growth in the fourth quarter of last year and, more importantly, should continue to recover more fully into 2010.”

The economy emerged from recession in the third quarter of last year, with output expanding just 0,9%.

Consensus forecasts from Reuters predict gross domestic product grew 2,5% in the fourth quarter of last year, seasonally adjusted and annualised.

But the rebound is being driven mainly by global demand for local exports and restocking of inventories — which have together boosted manufacturing, one of the economy’s biggest sectors.

Consumer spending, the main growth engine, is still retreating in the face of heavy job losses last year and punishing debt costs, despite lower interest rates.

Until that turns around, a strong rebound in the overall economy is unlikely.

Retail sales are still retreating, though less sharply than a few months ago.

“Until we see numbers that show the demand side of the economy is also improving, we must be cautious on how to view the recovery,” Thebe Securities economist Monale Ratsoma said. “I think it’s going to be a slow one. On the demand side, things are not as robust as we would like them to be. Job losses are a constraint and the inventory buildup could be short-lived.”

In its budget last week, the Treasury predicted the economy would expand 2,3% this year, after shrinking 1,8% last year.

Key to the equation is job creation, which will boost both consumer and business confidence.

SA shed nearly 900000 jobs last year, with factories, retailers and construction firms hard hit.

Most analysts believe the Bank will keep interest rates steady at its policy meeting next month after cutting them by about five percentage points last year.

Clarifications to the Bank’s inflation targeting mandate in last week’s budget made clear it takes the whole economy into account when setting interest rates.

But this is seen as unlikely to change policy. “Indications from the Bank are that it’s going to be business as usual,” Ratsoma said.

The leading indicator, one of the factors considered by the Bank, is compiled with data from surveys, share prices and SA’s main trading partners.

It predicts trends in the economy in six to 12 months. It has edged higher steadily since March last year, reaching 120,9 in December — its highest since May 2008.

Source: 20100222

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