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News yesterday was that the Kagiso PMI – a measure of manufacturing activity – rebounded strongly in July, surprising consensus economists substantially in its strength. The index rebounded from 48.2 in June to 51 in July. Consensus was looking for a decline of the index to 47.5 points. New sales orders rebounded strongly from 46.5 to 52.2. Overall business activity climbed from 47 to 50.8. The employment component was unchanged on the month, while input prices continued to trend lower.
So what does this mean in context of the overall economy?
With the PMI bouncing strongly above 50 again, and with the cumulative trade deficit for h1 2012 coming in 20 times larger than last year at over R50 billion, and with retail sales still growing at levels above 6% y/y, and with manufacturing growth still above 4% y/y, and with the CPI inflation rate still a full percentage point higher than the top of the mid-point of the SARB’s target range, how can the Reserve Bank justify cutting the repurchase interest again in a bid to ‘stimulate’ or ‘support’ economic growth.
This is why I suspect the Reserve Bank is lowering interest rates for other reasons.
Here’s what the additional interest rate cut by the Reserve Bank means: It means that coupled with ongoing strong money capital inflows to SA, the Reserve Bank will fuel another major cyclical credit and hence, business cycle boom in the next 5 to 10 years. This view is being reflected in the equity market, with industrials and the listed property sector well into record high territory, and financials not far behind. These are the sectors that lead in the early phase of the business cycle upswing.
If the Reserve Bank continues down this path of lowering interest rates, aping other global central banks, they are going to destabilize the South African economy in the same way that the Greek, Spanish, and Italian economies are destabilized today.
UPDATE: Following this post, Naamsa vehicle sales data was released that showed total vehicle sales climbed 18.3% y/y in July, up from 15.6% in June. Consensus economists expected a decline in the growth rate of vehicle sales to 14.2% y/y in July, getting it completely wrong again. Like I said, despite all the data on the Reserve Bank’s fingertips, the SARB did not see the developing strength in these numbers, and never mentioned it once at the last MPC. By cutting interest rates again, the Reserve Bank will just fuel the building imbalances in this economy.