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South African Reserve Bank (SARB) business cycle indicators (for end of June 2018)
Date: 21 August 2018 Category: Economics |
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In this article we take a look at the business cycle indicators (BCI) as published by the South African Reserve Bank and we question their usefulness since none of the indicators, be it leading, coincident or lagging indicators follow similar trends or patters, making us wonder about their effectiveness in measuring economic activity or predicting South Africa's economic direction, bringing the decisions made by the SARB, in particular the monetary policy committee (MPC) who decides on South Africa's interest rates into question.
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South African Reserve Bank (SARB)
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So just how useful are the business cycle indicators published by SARB?
The reason we ask the above question is due to the fact that SARB and their MPC look at various indicators before deciding on South Africa's monetary policy (I.e South African Interest Rates). Now if the indicators they look at are not very useful or accurate, the question is why use it, or even publish it for that matter? Why not improve the indicators so that they all tell a similar story? Currently the indicators published by SARB do not tell a similar story and due to this we are questioning its usefulness.
There are three main indicators published by SARB: They are
There are three main indicators published by SARB: They are
- Leading Indicators: This indicator aims to provide foresight into where the economy is heading (trying to predict economic direction)
- Coincident indicators: This is an indicator that measures economic activity as is it happens and as latest data becomes available
- Lagging indicators: This is similar to a post mortem, what happened to the economy after all data has become available and revisions has been made, so this to a large extent shows what actually happened.
As the line chart above shows, none of these indicators speaks to any of the other indicators. The coincident indicator is far different to the leading and the lagging indicators. Showing the coincident indicator is not a good forecaster or predictor of the actual economic direction the South African economy actually takes. In fact it tends to be far more negative than the other two indicators. One has to wonder if this is due to the BMR/RMB business confidence index which has shown business confidence in South Africa has been in the dumps for years (click here to read more about the BER/RMB business confidence index).
And why is it that the coincident indicator is far more positive than both the leading and lagging indicators? The coincident indicator has shown growth of 18.8% from January 2011, while the leading indicator showed growth of - 1% and the lagging indicator showed negative growth of -3.1%
Perhaps it is time for the SARB team to revisit how the coincident indicator is calculated as its clear far to optimistic compared to the other indicators and it brings its usefulness into question as it contradicts the story being told by its two siblings, the leading and lagging indicators. On a slightly more positive note, the leading indicator seems to show South Africa's economic fortunes are picking up, even if it is ever so slightly.
The current year on year growth in the smoothed out indicators are as follows:
But in saying that these business cycle indicators do remain a mixed bag. and lets hope its not used for for setting monetary policy. Maybe thats why so many economists get it wrong when predicting what SARB will do with interest rates at MPC meetings. As the data used as inputs into setting monetary policy provides no clear signal or guidance. And we know SARB's forecasting of inflation is horribly poor and the worry for South African citizens is the fact that monetary policy is set using indicators such as the above ones and SARB's internal inflation forecasts.
And why is it that the coincident indicator is far more positive than both the leading and lagging indicators? The coincident indicator has shown growth of 18.8% from January 2011, while the leading indicator showed growth of - 1% and the lagging indicator showed negative growth of -3.1%
Perhaps it is time for the SARB team to revisit how the coincident indicator is calculated as its clear far to optimistic compared to the other indicators and it brings its usefulness into question as it contradicts the story being told by its two siblings, the leading and lagging indicators. On a slightly more positive note, the leading indicator seems to show South Africa's economic fortunes are picking up, even if it is ever so slightly.
The current year on year growth in the smoothed out indicators are as follows:
- Leading indicator: 3.9%
- Coincident indicator: 0.94%
- Lagging indicator: -1.59%
But in saying that these business cycle indicators do remain a mixed bag. and lets hope its not used for for setting monetary policy. Maybe thats why so many economists get it wrong when predicting what SARB will do with interest rates at MPC meetings. As the data used as inputs into setting monetary policy provides no clear signal or guidance. And we know SARB's forecasting of inflation is horribly poor and the worry for South African citizens is the fact that monetary policy is set using indicators such as the above ones and SARB's internal inflation forecasts.