A rise in mining output, together with further strong increases in the real value added by the non-primary sectors, caused economic growth to pick up again in the third quarter of 1995. Growth then slackened in the fourth quarter primarily because of a decrease in manufacturing output. Production cut-backs in the manufacturing sector were probably motivated by the elimination of delivery backlogs, while the domestic demand remained strong. Export orders for manufactured goods also moved to a lower level.
Despite these fluctuations, real output growth in 1995 came to 3½ per cent - the highest rate since 1988. This increase in production was generally boosted by a robust demand for goods and services. High consumer confidence and a pent-up demand for durable and semi-durable goods led to an increase in real private consumption expenditure, which exceeded the growth in real personal disposable income. Private consumption expenditure was partly financed by means of credit extension, i.e. at the cost of domestic saving. This made the country more dependent on foreign funds to finance domestic investment, although dissaving by the government improved and the saving of the corporate sector increased.
Real gross domestic fixed investment increased by no less than 10 ½ per cent in 1995, but investment outlays slowed down in the fourth quarter with the completion of some major capital projects. Fixed investment became fairly widespread during the course of the economic recovery, with the manufacturing industry showing the strongest growth. The building-up of inventories also continued throughout 1995, but the rate of inventory accumulation slackened slightly in the second half of 1995.
The upturn in economic activity was accompanied by weak employment growth, probably largely due to attempts to contain cost increases and to raise production efficiency. The rate of increase in the nominal wages and salaries per worker was nevertheless relatively inflexible and exceeded the rate of increase in output prices. Fortunately, the inflationary consequences of the increase in labour remuneration were absorbed partially by a strengthening of labour productivity, which brought about lower rates of increase in nominal and real unit labour costs.
The lower labour cost per unit of production was an important contributing factor to a decline in inflation rates in 1995 to levels last experienced in the early 1970s. The pursuance of a monetary policy stance consistently countering inflation was aided further by lower increases and at times even decreases in food prices in the second half of 1995. Developments such as an increase in the supply of livestock for slaughtering, the lowering of import tariffs on agricultural goods, a mild winter and reforms in the marketing of agricultural products, quelled the rise in food prices. In addition, an appreciation in the external value of the rand from May 1995, relatively low price increases in major trading partner countries, a general reduction in import tariffs and the removal of the surcharge on imported goods in October 1995 supported the lower inflation rates. Even excluding food and other special factors, the underlying inflation rate therefore also receded.
As could be expected with the strength in domestic demand, the value and volume of merchandise imports rose steeply in 1995, but showed signs of levelling-off in the last quarter of 1995. Net service and transfer payments also continued to escalate, while the proceeds from international gold sales contracted. Despite a still good performance of merchandise exports, the deficit on the current account of the balance of payments deteriorated substantially in 1995. Moreover, towards the end of the year the demand for South African manufactured products from other countries began to abate.
The large deficit on the current account in 1995 was financed by an even larger net inflow of capital. The cumulative net inflow of capital not related to reserves came to nearly R31 billion from the middle of 1994 to the end of 1995. The bulk of this inflow consisted of foreign loan capital and portfolio equity investments. Foreign direct investment remained relatively small and consisted mainly of investments to buy existing operations, to form joint ventures or to take over South African companies.
These inflows of capital were responsible for a substantial increase in the gold and other foreign reserves and enabled the Reserve Bank to fully redeem all loans that had been entered into previously to supplement the level of the foreign exchange holdings. Under these circumstances, the nominal and real effective exchange rate of the rand increased in the last seven months of 1995. After rising further in January, the external value of the rand depreciated substantially in February 1996.
The high levels of economic activity and domestic expenditure were also responsible for a rapid growth in money supply, which for the second consecutive year exceeded the upper limits of the money supply guidelines in 1995. The private sector's liquidity preference rose over the same period on account of expected interest rate changes and in anticipation of major adjustments in share and bond markets. In a statistical or accounting sense, the main counterpart of the growth in money supply was a substantial increase in bank credit extension to the private sector. However, in the second half of 1995 both the growth in money supply and credit extension to the private sector began to taper off. The quarter-to-quarter growth rates in these two aggregates, in particular, reached lower and more acceptable levels.
The financial markets were characterised by sharp increases in equity prices, which rose to new record levels in January 1996 buoyed by strong corporate profits and increased foreign interest after the dual exchange rate system had been terminated. The upward movement in share prices was led by industrial and financial shares, but in January 1996 the relatively depressed prices of gold-mining shares also reacted vigorously to the rise in the gold price to above $400 per fine ounce on international markets. The value of shares traded on the Johannesburg Stock Exchange continued to recover throughout 1995 from the low level reached at the beginning of the year.
Activity in the domestic primary bond market was dominated by issues of entities in the public sector. As a result of the liquidity of the corporate sector, the relatively high cost of borrowing funds and the availability of capital from abroad, the funds mobilised by private-sector companies through new issues of fixed-interest securities stayed low. Private-sector companies were also reluctant to raise funds in the primary equity market, despite the high level of interest rates and increasing share prices. The number of shares issued as scrip dividends, however, increased substantially because of the high statutory rate of the Secondary Tax on Companies. Activity in the secondary bond market increased markedly in the second half of 1995 as long-term yields began to drop.
Long-term yields were fairly stable in the first six months of 1995, while short-term yields rose further. The yield curve accordingly flattened during this period, but still had a positive slope over the first five years of the maturity spectrum. It subsequently moved rapidly downwards, with long-term rates declining more than shorter-term yields. In January 1996 the yield curve was therefore not only markedly lower than at the beginning of 1995, but also had a slightly inverted though generally horizontal shape.
Money market conditions tightened considerably in the second half of 1995, owing largely to a substantial increase in government deposits with the Reserve Bank. At times increases in the net foreign assets of the Reserve Bank related to an inflow of foreign capital caused these tight conditions to ease somewhat. The Reserve Bank's operations in the money market were concentrated mainly on measures to drain sporadic increases in liquidity and to generally to maintain tight conditions. The Bank engaged in open-market sales from its own portfolio of securities to attain these objectives. In the short term, large fluctuations in the money market shortage were countered by means of adjustments in the asset portfolio of the Corporation for Public Deposits and management of the government's deposits with the Reserve Bank.
The public-sector borrowing requirement, i.e. the deficit before borrowing and debt repayment of the central government and all other levels of the public sector, amounted to only 4,6 per cent of gross domestic product in the first nine months of fiscal 1995/1996. This considerably lower level of the public-sector borrowing requirement than in the preceding year was the net result of a large increase in the revenue of the public sector with only a moderate rise in public-sector expenditure. Problems encountered by some provincial governments in the re-organisation of functions and in the administration of activities prevented them from carrying out expenditure plans. The expected expenditure on reconstruction and development programmes was also not met in the first ten months of fiscal 1995/96. These results, however, do not include any overspending provided for in the Adjustment Budget.