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South African Reserve Bank
 
 
     
 
 

Publication Detail 

Title:
Full Quarterly Bulletin - No 265 - September 2012
Publish Date:
2012-09-11
Category:
Quarterly Bulletins

Introduction

Global economic growth decelerated in the second quarter of 2012 with activity slowing across a wide range of advanced and emerging-market countries after having surprised on the upside in the first quarter of the year. Concerns around debt sustainability and austerity programmes in the euro area continued to weigh on projections for global growth. This contributed to a moderation in a wide range of international commodity prices, assisting in the containment of global inflation. Under these circumstances, monetary policy continued to be expansionary in most parts of the world, with expectations that the easy monetary policy stance would be maintained for a considerable period.

Economic activity in South Africa expanded at a firmer pace in the second quarter of 2012 with real gross domestic product rising at an annualised rate of 3,2 per cent, a half percentage point higher than in the first quarter of the year. The acceleration was mostly due to a brisk recovery in mining output as conditions normalised, following the substantial decline in the preceding quarter that had been brought about mainly by a protracted labour unrest-related shutdown of operations at a major platinum mine. Production of nickel and iron ore also registered firm increases in the second quarter, alongside higher coal output following the opening of a new coal mining shaft by a domestic petrochemicals group. Agricultural output growth also accelerated somewhat in the second quarter.

However, if the more volatile primary sector is excluded, real value added increased at a significantly slower pace in the second quarter of 2012. The main negatives were the manufacturing sector, with contractions in production across several subsectors, and the electricity sector, with lower output on account of fairly mild temperatures in the first half of the winter and power buy-back arrangements between Eskom and large industrial customers. By contrast, growth in the construction sector picked up over the period as civil construction activity gained momentum, countering subdued conditions in the residential and non-residential building subsectors. Tertiary sector output growth also lost some momentum in the second quarter, mainly reflecting a slackening in the real value added by the banking sector.

Real gross domestic expenditure maintained strong momentum and accelerated somewhat further in the second quarter of 2012, led by capital expenditure. As has been the case since the beginning of 2012, fixed capital formation recorded the strongest real growth rate among the components of domestic final demand. Real gross fixed capital expenditure by general government accelerated to a double-digit pace of increase in the quarter concerned, driven by spending at all three levels of government as the Presidential Infrastructure Co-ordinating Commission facilitated stronger efforts in this area. In similar vein public corporations, led by Eskom and Transnet, raised their real capital expenditure notably further during the period. Growth in real gross fixed capital formation by private business enterprises remained fairly low but picked up marginally in the second quarter of 2012 with notable contributions from the mining and communication sectors. Real inventory investment rose notably in the mining and trade sectors over the period. The trade sector recorded a firm build-up of inventories, not least due to the early harvesting and storage of a large part of the 2012 maize crop.

In contrast to the strengthening capital spending, growth in real final consumption expenditure by the household sector decelerated marginally in the second quarter of 2012, mirroring the slightly lower quarterly growth in household disposable income. Expenditure on durable and semi-durable goods recorded strong growth over the period, supported by favourable prices and financing costs. Spending on non-durable goods also rose steadily, but real expenditure on services recorded a modest contraction in the second quarter. While consumption expenditure remained closely aligned with disposable income over this period, an increase in the ratio of household debt to disposable income was registered in the second quarter, while the debt service cost ratio also inched higher.

Real final consumption expenditure by general government increased further in the second quarter of 2012 as real spending on compensation of government employees continued to rise.

Import volumes held up fairly well in the second quarter of 2012, supported by the rising level of domestic expenditure. Despite a depreciation in the exchange value of the rand, export volumes declined notably, influenced by the general moderation in global demand. With South Africa’s terms of trade also registering a modest further deterioration, the deficit on the current account of the balance of payments widened to 6,4 per cent of gross domestic product, the highest deficit ratio since the third quarter of 2008. The shortfall on the current account was broadly matched by the surplus on the financial account of the balance of payments, with inward portfolio investment in the form of bonds making the largest contribution to the inflow. However, inward direct investment and other investment also contributed to the inflow of capital, the latter mainly in the form of foreign long-term loans to domestic non-bank private-sector companies.

The hesitant recovery in real economic activity was accompanied by modest increases in employment and a decrease in the unemployment rate over the year to June 2012. Wage settlement rates continued to exceed inflation in the first half of 2012, while in July government and the public-sector trade unions reached agreement on an increase of 7 per cent in the salaries of government employees. 

Increases in productivity moderated the impact of higher salaries and wages on production cost, thereby helping to curb inflation. A welcome development in the first part of 2012 was a notable deceleration in inflation, with the targeted rate of consumer price inflation receding to 4,9 per cent in July 2012. This deceleration was essentially driven by lower rates of food and transport price inflation. Given the sizeable output gap and with targeted inflation decelerating, underlying measures of inflation hovering around the midpoint of the target range, and the projected future path for inflation comfortably within the target range, the Monetary Policy Committee (MPC) of the South African Reserve Bank (the Bank) in July 2012 decided to provide further support to the economic recovery by reducing the repurchase rate from 5,5 per cent to 5,0 per cent – the first change in the policy rate in 20 months. Other money-market interest rates followed the repurchase rate downwards. 

Twelve-month growth in the broadly defined money supply, M3, and in overall bank loans and advances to the domestic private sector remained at single-digit levels in the first seven months of 2012, consistent with the sluggish domestic economic environment. Subdued conditions in the real-estate market continued to dampen growth in mortgage advances, whereas a number of smaller categories of advances, such as general loans to the household sector, credit card advances and instalment sale credit, registered brisk rates of increase over the period.

Long-term bond yields continued to ease in the first eight months of 2012, reflecting the improved outlook for inflation, expectations that low policy interest rates would be maintained for longer, approaching inclusion of South African bonds in a benchmark global government bond index, and comparatively subdued returns on alternative asset classes. On the JSE Limited (JSE) share prices reached new record highs, aided by rising company profits and higher international equity prices.

The borrowing requirement of the non-financial public sector remained well contained in the April–June 2012 quarter, as national government registered strong revenue collections while public corporations managed to fund a large part of their capital expenditure through operating surpluses. Import duty collections, income tax payments by individuals, value-added tax collections and income tax payments by companies all registered brisk increases, consistent with the firm pace of domestic expenditure. With government expenditure well under control the fiscal deficit for the quarter was modest and, while the level of the national government’s outstanding gross debt edged higher, it remained below 40 per cent of annual gross domestic product.

 
 
     
 
 
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