Since When Does an Improvement in the Trade Balance Signal Economic Recovery?

Something is  not quite right with this picture.

There has been somewhat of a celebration lately in the South African press and markets, sparked by news that the external trade balance was moving into positive territory following several months of trade deficit.

The fact that three consecutive months of trade surplus (May-July 2009) were recorded for the first time in 6 years has made it even more special. Market analysts have exulted that “South Africa's economy was likely to recover as the balance of trade improved," [which] "underscores our bullish outlook for the current account deficit." The positive mood further whetted the appetite of foreign investors, who have poured more than $7 billion into the Johannesburg Stock Exchange in 2009 thus far, bolstering the Rand to a one-year high against the US Dollar by end-August. 

The problem is that, as a recent article in the Business Day “Currency free-for-all dashes any hope of recovery in SA” makes clear, the improvement in the trade balance may not be reflecting economic recovery as much as weakening of domestic demand, particularly private investment. This can be seen in the graph below, which shows a steeper decline of imports than of exports. Capital goods fell at an astonish rate of 33% y/y (in nominal Rand terms) in July 2009, perhaps undermining prospects of near-term recovery in manufacturing activity.

Something is  not quite right with this picture.