Data released last week showed that the South African trade balance with the rest of the world (the amount exported compared with the amount imported) turned into the biggest deficit on record, of R24.5 billion in January.
This means the SA economy imported R25 billion in goods and services more than was exported. Consensus economists expected the deficit in trade to be R7.6 billion. In graph format, the actual deficit in recent years looks like this:
I’ve been predicting this to be one of the consequences of the Reserve Bank manipulating interest rates too low for the SA economy for some time now. On August 23, 2012 I wrote on clb:
By lowering interest rates below levels they would otherwise be in a sound money, free banking economy (where interest rates are determined by the supply and demand of savings, and not by central bank money printing), the Reserve Bank stimulates consumption spending over savings and investment. This is straight out the Keynesian playbook. This results in credit growth and an economy living beyond its means. The first place this reflects is in the trade balance. When you live beyond your means you consume more than you produce. You borrow the money from abroad to pay for present consumption. You don’t produce the products which you exchange for foreign products. Somewhere down the road, foreigners stop lending you money to buy their goods and you are stuck with no productive base to repay the debt. The consumption based economy collapses, and you must live well within your means for several years to make good on your debts. That’s where Greece is today.
Also, just to say, if the Reserve Bank continues to maintain this loose monetary policy and cuts the interest rate even further, it will simply fuel these imbalances further. The trade deficit could widen much more from here.
Looking through this cycle, the Reserve Bank is setting the economy up for a major business cycle crash. What goes up, must come down. The same counts for the import boom in recent months. It will come down, and that will coincide with a nice big ol’ business cycle crash. The Reserve Bank will blame a crash in China or a crash in Europe for the recession (or whatever is wrong somewhere in the world), but it really will be of their own doing.