Data released on Monday by the South African Reserve Bank (SARB) is flashing red with regards to the prospects for the South African economy, as money supply growth has slowed precipitously and the leading indicator peaked in May 2002.
The slowing in both the narrow M1 and broad M3 money supply growth rate in South Africa points to low growth in gross domestic product, as money is the lifeblood of the economy. This relationship is captured in the so-called “income
velocity of circulation of money”.
Broad money supply growth slowed to only 5,73% y/y — the slowest y/y growth
since August 1999 — from 8,90% y/y in February and the recent peak of 20,59% y/y in May 2002. The median forecast for March M3 money supply growth was 7,7% y/y.
The seasonally adjusted annualised q/q growth rate for M3 was only 1,2% in the first quarter 2003 compared with 6% in the fourth quarter 2002.
Narrow M1 money supply, which tends to be less volatile than the broad measure, eased to a 2,48% y/y growth rate in March — the slowest since November 2000 — from 2,79% y/y in February.
Adding to the money supply warning signal is the sharp 8% drop in the leading indicator between October 2002 and February 2003. The leading indicator generally signals the expected outcome 12 months ahead, although in South Africa
there has been a case where the leading indicator turned 22 months before the
actual economy did.
In May 2003, South Africa’s economy entered its longest “upward phase” as the previous record economic expansion in the post-1945 period only lasted 44
months — from September 1961 to April 1965. That expansion took place at a time when South Africa’s major export — gold — was fixed at $35 an ounce and exchange rates were fixed in terms of the 1944 Bretton Woods system. The current
“upward phase” in the South African economy started in September 1999.
The leading indicator peaked at 142,3 in May 2002 and has since dropped steadily to only 123,5 in February 2003, which is the latest available data. The downturn has accelerated recently as there was only a 5,6% decline in the five months between May 2002 and October 2002, but this accelerated to a 8% drop in the five months October 2002 to February 2003. – I-Net-Bridge