Johannesburg — THE leading business cycle indicator, which predicts trends six to 12 months in advance, is backing evidence that higher interest rates are starting to take a toll on economic growth.

Reserve Bank figures released yesterday showed the annual rise in the indicator slowed to 0,5% in both September and August - its lowest since November 2003, when it fell 1,4%.

The leading indicator aims to provide an early warning of changes in the business cycle, and its pace of growth has steadily subsided since late last year, when it rose at an annual rate of more than 5%.

"It's a bit early to say there is a turning point in the growth cycle but the economy is showing signs of a bit of a slowdown," an official at the Bank said.

The leading indicator fell in September, August and June this year, compared with the previous month, but the Bank says the trend would have to hold for about six months to point to a downturn in the economy.

Reasons for the slowdown this year have varied, but in September vehicle sales, residential building plans and the narrow measure of money supply were the main components which curbed growth in the indicator. It also covers labour productivity, share performance and output in manufacturing.

"There is accumulating evidence of things looking weaker in the economy," Nedbank chief economist Dennis Dykes said.

"The signal has filtered through to the consumer."

Consumer demand, the main engine of the economy, was initially resilient but has started to subside in response to higher interest rates. They have climbed by 3,5 percentage points since June last year.

Governor Tito Mboweni has warned that if he gets his way, the Bank will lift its key repo rate by another 50 basis points to 10,5% at its policy meeting next week to quash rising inflation -- which has breached its official 3%-6% target range for six months running this year.

It takes between one and two years for changes in interest rates to make themselves fully felt and there is concern that further increases would hit consumers without curbing price pressures, ignited mainly by the rising global cost of fuel and food.

Figures from Statistics SA due today are likely to show that growth in gross domestic product slowed to 4,2% in the third quarter of this year from 4,5% in the second, its lowest pace in nearly four years.

Some analysts predict that the pace of expansion will abate to less than 4%, which would help to dent the case for another rate increase .

Retail sales, which account for about 14% of the economy, have visibly slowed in response to tighter credit, while new vehicle sales have fallen for seven months in a row so far this year, heading for the first annual decline in several years.

Manufacturing has also been affected, with factory output likely to have contracted in the third quarter for the first time since 2003.

The sector comprises more than 16% of the economy, making it the second-biggest after financial services.

Many analysts have revised their growth forecasts for next year down to between 4% and 4,3%, well below the average annual pace of 5% clocked up during the past three years.

Yet the government's R482bn infrastructure spending drive in the next three years will take up some of the slack from consumers, pumping money into construction, transport, and other key sectors of the economy.

"The leading indicator shows that momentum in growth is slowing and will argue in favour of the Bank doing nothing on interest rates," said Brait economist Colen Garrow.

"However, the overall trend is still positive and spending on infrastructure is a monster engine which is just now starting to move," Garrow said.