The industrialised economies of the world succeeded in maintaining relatively firm output growth. The United States economy is in its longest expansion phase in a century and widely held expectations are that any imminent slowdown will be more of a "soft" landing than an abrupt end to a period of prosperity. The world economy was further helped by the continued recovery in the east Asian economies, an improvement in some Latin American countries and exceptionally favourable conditions in certain of the transitional east European economies.
The sharp increase in international petroleum prices has had a negative impact on the prospects for containing global inflation. But, quite paradoxically, the transfer of real income from oil-importing countries to oil-exporting countries contributed in great measure to the stabilisation of the economies in some countries, particularly in the Russian Federation where the economy is booming because of oil export earnings. Although there is a risk of higher inflation everywhere, there are still no signs of any sustained price and cost increases in the oil-importing industrial countries. However, the longer the price pressures from petroleum prices persist, the greater the danger of second-round price and wage increases and a pick-up in endogenously generated inflation.
The South African economy gathered considerable momentum in the third quarter of 2000. The strong growth in the second half of 1999, which slowed down somewhat in the first half of 2000, was largely restored in the third quarter. Stronger growth in manufacturing production resumed and real income in the agricultural sector rose vigorously as the bulk of a bumper maize crop was harvested in the third quarter. Growth in real gross domestic product approached 4 per cent in the third quarter of 2000 — about the same as where it had been in the fourth quarter of 1999 and considerably firmer than the average annualised growth of about 2½ per cent in the first half of 2000.
In the third quarter of 2000 the composition of growth in expenditure shifted. A decline in the pace of export growth was offset by an increase in the growth in real gross domestic expenditure. The depreciation of the rand has not yet resulted in sustainably higher export volumes.
The national accounts showed continued growth in real final household spending in the third quarter. Increased spending on new motor cars and other durable goods more than offset the slower increases in spending on semi-durable goods.
Growth in household disposable income has supported personal consumption expenditure. Incomes were boosted by the tax reductions earlier in the year, a solid increase in farm and other property income which was buoyed by higher dividend payments. Asset price increases, especially that of real-estate and equities also encouraged consumer sentiment and added momentum to household spending.
On the other side of the household balance sheet, the debt of the household sector grew faster than its income, shifting the debt-income ratio slightly higher over the past quarter. The decline in bank lending rates over the past two years or so encouraged households to start borrowing again. The interest payment burden is now substantially lower than in 1998, allowing households some extra latitude for raising their discretionary spending.
A favourable external environment, continued growth in domestic final demand, rising profitability and the availability of investable funds provided the incentives for the business sector to raise its capital expenditure further in the third quarter. The improved outlook for the business sector was also reflected in firms' willingness to accumulate inventories ahead of an expected demand expansion.
Despite the recovery in income generation and aggregate spending, the formal labour market recorded further declines in employment numbers in the first half of 2000. Labour paring in the private sector was swelled by job losses at all levels of the public sector. Unemployment remained high, and may have contributed to some moderation in the growth of wages and salaries. The potential effect of rising labour costs on input costs was further checked by significant increases in productivity. For example, in the manufacturing sector the growth in nominal unit labour costs was flat when comparing the first half of 2000 with the first half of 1999.
The rates of increase in the broader measures of prices moved up in the course of 2000, despite the slow growth in unit labour costs. The pass-through of the steep rise in the cost of imported petroleum and the decline in the exchange rate of the rand since the beginning of the year, were the principal factors in the acceleration of production price increases. In the first half of the year, higher food prices added to the upward pressure on consumer prices.
Apart from the effects of rising petrol and food prices, little indication of endogenously generated inflation could be seen in the changes in consumer prices. However, the recent rise in production prices, excluding exogenous cost-push pressures, gives evidence of some second-round price pressures and may be seen more fully in the consumer price index in coming months.
Reflecting the rise in final household expenditure and gross investment by firms, imports increased sharply in the third quarter. Although the value of gold exports rose impressively, the rise in merchandise exports failed to match the rise in merchandise imports, partly an indication of the long time delays between depreciations of the rand and their impact on export volumes. These developments were aggravated by a high level of dividend and interest payments to the rest of the world whereas income received from foreign sources actually declined. As a consequence, the surplus on the current account of the balance of payments was transformed into a deficit in the third quarter equal to about 0,6 per cent of gross domestic product.
The deterioration of the current account of the balance of payments in the third quarter of 2000 coincided with a reversal of international capital flows to the country: net outflows of capital in the second quarter were followed by a strong inward movement in the third quarter. This flow reversal emanated mostly from the changing pattern of securities purchases by non-resident investors. Equities, in particular, became quite popular among non-resident investors in the third quarter and net sales of fixed-income assets diminished. Foreign direct investment in real-sector job-creating projects remained low.
The surplus on the financial account of the balance of payments exceeded by a considerable margin the absolute value of the deficit on the current account, raising the country's international reserve holdings to their highest level ever. In the first two months of the third quarter, the excess supply of liquidity in the domestic foreign exchange market moved the external value of the rand higher, but from September the exchange rate of the rand came under downward pressure again when the inflows of portfolio capital subsided noticeably. From the end of 1999 the rand has depreciated on a weighted basis by some 10½ per cent to the middle of November 2000. The implicit real depreciation of the rand over this period is, of course, an approximate indication of the improved competitiveness of South African producers in export markets.
By the third quarter there were signs of a rebound in aggregate monetary growth and a return of stronger growth in banks' claims on the domestic private sector. Considering that inflation is ultimately determined by excessive monetary growth, the recent acceleration in the growth in M3 has the potential of fuelling inflation expectations and eventually the momentum of increase in the overall price level. These changes in the conditions underlying future inflation prompted the Reserve Bank to shift to a slightly more cautious policy stance in the fourth quarter of 2000.
Money market conditions tightened in the early months of 2000, but from about the beginning of the second quarter the daily liquidity requirements of the private banks fluctuated within a relatively narrow range. The Reserve Bank actively intervened in the money market to ensure such an outcome, in the process keeping the interest rate on repurchase transactions unchanged from January to October. Concerns about possible second-round price responses to the high crude oil prices and the depreciation of the rand, led to steps being taken by the Bank to raise the repurchase rate on 17 October by some 25 basis points. This was an unambiguous signal that the monetary policy stance has shifted towards greater caution. The private banks correctly interpreted the Bank's monetary policy statement as a precautionary measure and did not raise their prevailing lending rates as a result.
As the year began with concerns about the millennium date change out of the way, participants in the fixed-income market turned their attention to signs of possible changes in the domestic monetary policy stance and heightened uncertainty about future inflation movements in South Africa. At the international level there was also some increased aversion to risk taking in emerging markets. The investment mood changed quite dramatically and yields on long-term government bonds retraced part of their declines in 1999 over the period from January to May 2000.
Sentiment once again changed for the better in the second quarter. It became clear by then that developments in other parts of Africa would only have a limited impact on economic stability in South Africa. Non-resident investors returned as net buyers of fixed-income securities, contributing to a downward movement of bond yields up to August. Since about the end of August the bond market has been without clear direction, fluctuating around a fairly flat trend with an upward bias. Movements in equity prices almost perfectly mirrored developments in the fixed-income market, but non-residents maintained a presence as net buyers of shares throughout most of the first ten months of the year.
Activity was subdued in the primary market for long-term capital in the first nine months of 2000. The relatively small public-sector borrowing requirement, together with national government's preference for funding through the issuance of short-term Treasury bills, led to a decline in the net issuance of bonds. Companies listed on the Johannesburg Securities Exchange partly filled this void and stepped up their capital-raising activities. This was predominantly done for purposes of mergers and acquisitions, and less so for the financing of new investment projects.
Trading in the derivatives markets continued to grow strongly as these financial instruments are increasingly being used to hedge the positions taken in the underlying securities markets. Activity in the real-estate market remained at a high level from about the first quarter of the year, following a period of strong recovery in the wake of the interest-rate declines of late 1998 and 1999.
The declining budget deficit of national government in recent years has been an important factor in containing the decline in domestic saving. The decline in dissaving by general government was sufficient to offset the decline in personal saving. A deeper pool of national saving, along with the willingness of foreign investors to augment domestic saving, will make a major contribution to containing increases in the cost of capital and for financing the expansion of real fixed capital formation. The future involvement of multilateral financial institutions in providing project finance is expected to make a significant contribution towards accelerating the development of infrastructure in the country.