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A look at the leading business cycle indicator published by the South African Reserve Bank (SARB) shows a worrying decline in the year on year growth rate of this indicator. The aim of the indicator is to provide analysts with an indication of where the economy is heading. It looks at jobs advertised, hours worked in factories, volume of orders received for manufactured goods, number of new vehicle sales, money supply etc.
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The graphic to the right shows the year on year growth rate of the South African Reserve Bank's leading business cycle indicator. This indicator is used as a guide as to future economic performance.
The concern is the fact that the year on year growth rates are at its lowest levels since middle 2008 to middle 2009 when economies the world over were severely hit by the financial crisis set on by the sub prime mortgage crisis in the USA. This indicator does show that South Africa's economy has over recent years basically been moving sideways. It's not gaining any traction and moving forward. In fact it looks like matters are getting worse for South Africa. Question is why? We have seen the UK and USA economies recover strongly. See our Blog post where we compared the BRICS' economies growth rates to that of UK and USA. Is it our economic structure? Or dependence on commodities? Poor policies or implementation of policies? South Africa's economy has not recovered as strongly as the UK and USA due to various reasons. And sadly they not changing anytime soon. Some of the reasons will be discussed below. |
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Reasons for why South Africa's economy is spinning its wheels:
- Lack of labour market flexibility (not easy to move in and out of jobs)
- Lack of skilled labour (skilled labour is scare and hard to come by in South Africa.
- Poor economic policies and implementation. Think affirmative action for one. While transformation is required, letting skilled employees go because of the colour of their skin when they have vast experience and expertise is doing more harm to South Africa than good.
- Poor Monetary and Fiscal Policy Mix (see our Monetary and Fiscal Policy mix page)
- Slumping commodity demand and prices. A large chunk of South Africa's exports are commodities. Slumping prices and demand not helping our trade balances
- Weak exchange rate. The South African currency has been losing ground against major currencies the world over for years now, and there seems little stopping it. Even though we feel that South Africa needs a strong Rand to help boost it's trade balances (as prices of imported goods will be cheaper). See our Trade Data page.
When one looks at this, it becomes clear why the South African Reserve Bank's Monetary Policy Committee (MPC) decided to keep interest rates unchanged (19 May 2016), even though Taylor's Rule (as calculated by us) is suggesting that South Africa's interest rates are too low.
When one looks at this, it becomes clear why the South African Reserve Bank's Monetary Policy Committee (MPC) decided to keep interest rates unchanged (19 May 2016), even though Taylor's Rule (as calculated by us) is suggesting that South Africa's interest rates are too low.