Economic Growth Could Spring a Surprise

Cape Times (South Africa), November 16, 2017 | Go to article overview

Economic Growth Could Spring a Surprise


ACCORDING to Finance Minister Malusi Gigaba's medium-term budget policy statement, the Treasury's economic growth projection for 2017 is 0.7 percent - slap bang on the consensus forecasts of economists.

While the Treasury expects growth of 1.9 percent in 2020, the consensus forecast of economists for 2018 is 1.2 percent. Are they too pessimistic?

The Economic Cycle Research Institute (Ecri) in the US is the leading authority on business cycles.

The components of their Weekly Leading Index (WLI) are proprietary but are rumoured to consist of various economic pointers such as unemployment, money supply, industrial materials prices, mortgage loan applications, bond yields and stock price indices.

The Ecri WLI (www.businesscycle.com) is designed to anticipate the turns in the business cycle. In essence, if WLI growth enters a cyclical downturn, US economic growth is likely to do the same.

The WLI growth rate is a very good indicator in regard to the global economic environment due to the impact of the US economy on the rest of the world. It is therefore not surprising that global stock markets, including the FTSE/JSE All Share index - as measured by their smoothed annualised growth rates - closely track the WLI growth rate.

The meltdown in Chinese asset prices and oil price in 2015 and 2016 caused a major divergence between the weekly smoothed annualised growth rates of emerging market equities, including South Africa, and the WLI growth rate. While other emerging markets rebounded strongly in line with the WLI, the rebound of the JSE was mooted as it was bogged down by rising interest rates and political uncertainty affecting business and consumer confidence.

Since August this year the weekly smoothed annualised growth rate of the FTSE/JSE All Share Index rose strongly despite continued political uncertainty, a grim economic outlook, despair and warnings by credit agencies.

Yes, the bond and currency markets are already pricing in further credit downgrades but what is the stock exchange telling us about the local economy?

The weekly smoothed annualised growth rate of the stock market is a relatively good indicator of the current state of the economy and currently points to the economy growing at approximately 2 percent quarter-on-quarter annualised in real terms. …

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