chrislbecker.com

In July 2012 when the Monetary Policy Committee of the Reserve Bank decided to lower the repurchase interest rate by another 50bps to the lowest ever – 5% – Reserve Bank governor Gill Marcus read the following to the audience from a prepared statement [my emphasis]:

Final consumption expenditure by households, which grew by 5,0 per cent in 2011, also appears to be slowing somewhat, with growth having moderated to 3,1 per cent in the first quarter of 2012.

While real retail sales increased by 6,4 per cent on a year-on-year basis, the momentum appears weaker, with sales declining by 0,8 per cent on a month-on-month basis in May, while in the three months to May compared with the previous three months, sales increased by 0,4 per cent.

The FNB/BER Consumer Confidence Index deteriorated in the second quarter, with the index declining from 5 to -3, the lowest level of the index since 2008. According to the RMB/BER Business Confidence Index, confidence of retailers declined markedly during the same period to its lowest level in two years.

Somewhat anomalously, new vehicle sales have remained relatively buoyant.

Since then,

• Naamsa vehicle sales growth has accelerated further, from 15% y/y growth to 18% in June. Consensus economists expected a decline.
• The Kagiso PMI has jumped back above to 50, to 51 in July. Consensus economists expected a decline below 48.
• The JSE All Share Index as well as the Top 40 index have both rallied to all time record highs in the month of July and August.
• Retail sales growth accelerated from 6.4% y/y in May to 8.3%, data yesterday showed. Consensus economists expected a decline to 4.7% y/y. The May figure was also revised higher to 7.1% y/y.

You got that? The Reserve Bank incorrectly diagnosed the “buoyant” vehicle sales growth as the anomaly, instead of the apparent slowdown of retail sales and consumption spending growth. The Reserve Bank completely missed the developing strength of the wholesale and consumer sectors in the economy even after it was happening.

Vehicle sales, including passenger vehicle sales, are an indication of activity of in the capital goods sectors, because vehicles are long-term assets that are used in all stages of the production structure. They are supposed to climb in the early stages of a business cycle upswing, before retail sales strength manifests. The strength of vehicle sales are by no means an “anomaly” following the accelerating money growth the Reserve Bank pushed into the economy since mid-2011.

The members that sit on the Reserve Bank’s Monetary Policy Committee, who predict developments in the economy, before they decide at what level to fix short-term interest rates, do not have a sound theory of economics to understand the drivers of the business cycle. This is why both the Reserve Bank, as well as consensus economists, have gotten the cyclical dynamics of this economy so hopelessly wrong in the last few months.

The Reserve Bank is leading the South African economy into another cyclical boom phase, that will be certain to bust in spectacular fashion as soon as they slow money growth. We’re all Greeks now.