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Perhaps there is no better precursor to foretell the fortunes of an economy than the Transport sector. To be more specific the transport component of household spending. The South African Reserve Bank (SARB) tends to agree as they have new vehicle sales included as one of their variables in their leading business cycle indicator (BCI). The leading BCI is a variable that is aimed as guiding policy makers as to where the South African economy is heading.
We will take a closer look at the transport related spending from households (new vehicles, used vehicles, car services, fuel purchase etc) in order to see if this acts as a guide as to where the South African economy is heading. Note the data is sourced from Statistics South Africa's newly sourced Gross Domestic Products (using expenditure method). Commonly referred to as GDP(E). |
The graphic above shows the household transport spending (in 2010 constant prices, seasonally adjusted) and the official economic growth figure (GDP). which has been lagged by 6 quarters (or 18 months).
Essentially what we are saying is that spending by households on transport will take 18 months to filter through to the economic growth figure. Thus the trend in household spending on transport now will have a significant impact on our economic growth figure by middle of next year.
This "lag" effect is applied in order to give time for spending on transport to filter through the economy (lower new car sales, less profits for companies, less insurance taken out, less fuel being bought, car dealers struggling and letting staff go, which leads to even less spending by consumers since some are retrenched etc). This is called the "transmission effect".
Essentially what we are saying is that spending by households on transport will take 18 months to filter through to the economic growth figure. Thus the trend in household spending on transport now will have a significant impact on our economic growth figure by middle of next year.
This "lag" effect is applied in order to give time for spending on transport to filter through the economy (lower new car sales, less profits for companies, less insurance taken out, less fuel being bought, car dealers struggling and letting staff go, which leads to even less spending by consumers since some are retrenched etc). This is called the "transmission effect".
The worrying part for South Africa's economy is the fact that household spending on transport has declined extremely sharply and as can be seen from the graph above, if household spending on transport is a pre-cursor of what is to come for the South African economy, South Africa is in for a very very tough time in the next 18 months and beyond.
Currently the correlation between the lagged GDP figure and the spending by households on transport is sitting at 0.959 (what that implies is that 95.9% of the movement of one series can be explained by the movement in the other series). So 95.9% of the movements in GDP can be explained household spending on transport.
Currently the correlation between the lagged GDP figure and the spending by households on transport is sitting at 0.959 (what that implies is that 95.9% of the movement of one series can be explained by the movement in the other series). So 95.9% of the movements in GDP can be explained household spending on transport.
While this makes for pretty worrying reading, what is even more concerning is the spending of households on all durable goods. These are items consumers buy that is supposed to last a long time. It includes vehicles, furniture, expensive electronics such as TV's, Fridges etc. When consumers are optimistic and have money available to spend these would be the typical items they spend money on. Below a bar chart shows the quarter on quarter growth rates (annualised of durable goods) of durable goods since early 2010.
From the bar chart above it is clear that the durable goods sector has been struggling for a while now, and has experienced five consecutive quarters of negative growth/contraction (placing this sector in a deep recession as a recession is defined as two consecutive quarters of negative growth). And looking at the REPO rate (rate at which the Reserve Bank borrows to commercial banks), it has been increasing steadily since first quarter of 2014. An increasing REPO rate leads to increasing interest rates for consumers, which in turn makes buying durable goods (usually financed through debt that carries interest) more expensive. Thereby compounding the troubles of the durable goods sector in South Africa.
Looking at the household spending on transport and durable goods in general, one has to wonder whether the South African Reserve Bank (SARB) has been to aggressive in it's interest rate policy (expecially considering that most of the inflation increases recently have been caused by factors outside consumers control, for example the drought in South Africa).
It leads us back to our earlier suspicion that SARB raised rates recently more to protect the ailing Rand than to curb inflation (see Trade data page). And in doing so it seems to have dealt the South African consumers with a killer blow, as the durable goods sector shows, spending in that sector has fallen of the perverbial cliff (and will continue to do so as interest rate increases take effect in South Africa).
And less spending on durable goods leads to less overall spending, which leads to lower/slower growth which is exactly what South Africa's government doesn't want and need. The fact remains uncoordinated monetary and fiscal policy in South Africa is hurting South Africa's economic growth and future economic growth prospects (See our Monetary Fiscal Policy Mix page).
And it's due to this uncoordinated monetary and fiscal policy mix and deep trouble consumers are in that we believe ratings agencies will find it VERY hard not to downgrade South Africa before the end of 2016. As deputy president Cyril Ramaphosa said, its time for all the main economic players to come together and work together to aviod a ratings downgrade. If this doesn't happen soon South Africa could easily end up in "junk status" before the end of 2016.
Looking at the household spending on transport and durable goods in general, one has to wonder whether the South African Reserve Bank (SARB) has been to aggressive in it's interest rate policy (expecially considering that most of the inflation increases recently have been caused by factors outside consumers control, for example the drought in South Africa).
It leads us back to our earlier suspicion that SARB raised rates recently more to protect the ailing Rand than to curb inflation (see Trade data page). And in doing so it seems to have dealt the South African consumers with a killer blow, as the durable goods sector shows, spending in that sector has fallen of the perverbial cliff (and will continue to do so as interest rate increases take effect in South Africa).
And less spending on durable goods leads to less overall spending, which leads to lower/slower growth which is exactly what South Africa's government doesn't want and need. The fact remains uncoordinated monetary and fiscal policy in South Africa is hurting South Africa's economic growth and future economic growth prospects (See our Monetary Fiscal Policy Mix page).
And it's due to this uncoordinated monetary and fiscal policy mix and deep trouble consumers are in that we believe ratings agencies will find it VERY hard not to downgrade South Africa before the end of 2016. As deputy president Cyril Ramaphosa said, its time for all the main economic players to come together and work together to aviod a ratings downgrade. If this doesn't happen soon South Africa could easily end up in "junk status" before the end of 2016.