Gill Marcus is overseeing a bronco-ride in money supply growth. In May 2012 I warned of looming cyclical downside risks to the economy in the second half of 2012. Price inflation was in the process of accelerating, while broad money growth was slowing, which is a brutal combination for especially low income workers in the capital goods sectors (i.e. mining, manufacturing, logistics, farming).
No wonder workers in these industries lost their cool in the last few months.
True Money Supply (TMS), ETM Analytics’ proprietary (and more accurate) calculation of actual money circulating in the economy, after accelerating from May to June, has slowed right down again. From June to October TMS only expanded by 0.4%.
The capital structure of the economy built on strong money growth can not be sustained in such a slow money growth environment. If this trend of stagnant money growth continues in coming months, businesses in the capital goods sectors will face liquidation risks and unemployment may spike.
Which way the economy, stock market, and interest rates go from here, is dependent on marginal demand for Rand financial assets from foreigners. If foreigners continue to pile their savings into local bond and equity markets, the distorted capital structure can be sustained, interest rates can remain depressed, and local asset prices supported. If not, watch out for higher interest rates, a lower stock market, weaker Rand, and also a recession.