Currently it is widely acknowledged that the impact of petroleum prices on economic activity and inflation in industrialised countries is less severe than in the past, mainly because the oil intensity of production processes has been reduced over time. Moreover, there is little evidence of any strong wage responses to the rising petroleum prices. Naturally, this would reduce the possibility of a disruptive wage-price spiral towards persistently higher inflation.
In the absence of a serious threat to overall price stability, central banks could respond promptly to the first indications that a downturn in economic activity is imminent. The current easing of monetary policies in many countries raises the prospect that the global economic weakness may eventually turn out to be mild and of relatively short duration.
Very little of the global slowdown was seen in the South African economy during the second half of 2000. On the contrary, economic growth accelerated to 4 per cent in the third quarter of 2000. For the whole of 2000 economic growth came to 3 per cent — the highest growth in any calendar year since 1996.
Admittedly, growth in the real gross domestic product slowed down to 3 per cent in the fourth quarter of 2000. But this slowdown was more a consequence of agricultural output topping out at the high level attained in the third quarter than of emerging recessionary forces. Stronger growth continued in the secondary sectors, more specifically in the manufacturing sector, and real value added by the mining sector picked up despite a fall in gold-mining output.
On the demand side of the economy, there was a sharp reduction in the pace of inventory accumulation in the fourth quarter of 2000. This held back growth in aggregate domestic demand and production. It is not clear why the inventory build-up shrank so suddenly, but it may eventually turn out to be a consequence of the miscalculation by manufacturers and traders of the strength of total final demand.
Aggregate final demand, alongside export demand, grew at a fast pace in the fourth quarter of 2000. Private households, apparently confidently expecting strong future real income growth, stepped up their spending. Some slowdown in the growth in spending on durable goods was noticed but this may be attributed mostly to prospective buyers of new motorcars postponing their purchases until after the beginning of the new registration year. Fixed capital formation, especially in the private business sector, rose further at a brisk rate as producers and other suppliers continued to expand their productive capacities. General government too made a contribution to the higher growth in aggregate final demand, albeit rather modestly.
The long-term downward slide in the national saving ratio apparently bottomed out in 2000 and gross saving relative to gross domestic product rose in the last two quarters of the year. Saving was boosted by the healthier financial position of companies and the return to a positive gross saving situation in the general government sector. Households, however, remained poor savers and their share of saving relative to gross domestic product remained at a low level up to the end of 2000.
The demand for labour in the formal sectors of the economy fell further in the first three quarters of 2000 — contrary to what might have been expected in an economy where growth and activity have been picking up for some time. The declining levels of employment and the rising rates of under-utilisation of labour resources have, however, contributed to some meaningful moderation of nominal wage growth and strong increases in productivity. The growth in unit labour cost was contained at a modest level and there is reason to believe that labour cost may continue to grow fairly moderately. Recent rises in wage costs relative to output prices are likely to encourage employers to resist excessive demands for higher remuneration. Moreover, last year's gains in nominal household income relative to consumer price increases may introduce some restraint in wage demands.
High international petroleum prices have continued to exert upward pressure on the overall level of prices in the economy. Although the international price of crude oil has fallen from its earlier peak in September 2000, it has remained well above the level recorded late in 1999 and the early part of 2000. Other upward pressures on prices have come from the higher prices of imported intermediate and final goods, following the decline in the weighted value of the rand throughout 2000.
These upward pressures on the price level were checked by the slow growth in unit labour cost in virtually all the main sectors of the economy. There are also indications that keener competition in the domestic market, mainly from external suppliers, is preventing domestic manufacturers and retailers from passing forward their cost increases, thus keeping their operating margins tight. It is not clear whether retailers will continue to succeed in absorbing these cost increases. For this reason there is still some risk that the recent high rates of production price inflation might spill over into higher consumer price inflation in the near term.
As could be expected with a strengthening in aggregate final demand, the growth in the volume and value of imports accelerated in the second half of 2000. The typical result of this acceleration would have been a widening deficit on the current account of the balance of payments or a shrinking surplus.
Contrary to expectations, the eventual result was that the balance on the current account changed from a deficit in the third quarter of 2000 to a sizeable surplus in the fourth quarter. A solid rise in merchandise export earnings, having been bolstered by benign international trading conditions and the depreciation of the rand, contributed most to the turnaround in the current-account balance.
International capital flows to and from South Africa during 2000 were dominated by flows of portfolio capital which are known for their volatility. Once again, there was an outflow of portfolio capital in the fourth quarter of 2000 which contributed to the fall into deficit of the balance on the financial account. Overall, the outflow through the financial account was smaller in absolute value than the surplus on the current account of the balance of payments and, as a consequence, the international reserves of the country increased further in the fourth quarter of 2000.
As international investor sentiment towards South Africa turned negative towards the end of 2000 and in the first two weeks or so of 2001, the exchange rate of the rand declined quite steeply. It was only when the news of the proposed restructuring of shareholdings in the De Beers diamond organisation was announced and expectations were raised that a strong inflow of foreign investment capital might follow, that the rand stabilised against other currencies.
Growth in the broadly defined money supply accelerated in the second half of 2000, at first somewhat modestly in the third quarter but later quite vigorously in the fourth quarter. Although this was partly a positive development reflecting the pick-up in overall economic activity, the high growth in money supply would not be consistent with low and stable inflation. This could indicate that the threat of continuously rising prices and expectations of higher inflation might still be lurking and that vigilance should be maintained in the fight against inflation.
Credit extension increased rapidly in the second half of 2000 and was particularly strong in the fourth quarter. Households and private-sector firms were the main recipients of credit extended by banks — bank credit to the government sector actually declined in the fourth quarter. Households were lured back into financing part of their current expenditure by means of debt accumulation while private-sector firms used bank credit for stockbuilding ahead of the festive season and bonus payments to employees. The rise in credit extension to the private sector was also the leading accounting counterpart of the rapid expansion of the broad money supply in the fourth quarter of 2000. The effect of private-sector credit growth on the money supply was only partly offset by a decline in the net foreign assets of banks.
In the primary debt market, the public sector's mobilisation of funds fell back from the levels of the previous year. This was the inevitable result of the steady downward movement in the public-sector borrowing requirement over the past seven years and, what is even more important, of national government's preference for issuing short-term debt instruments at lower interest costs than long-term government bonds. There was some pick-up in capital raising by the private sector, but not nearly enough to fill the void left by the declining public-sector borrowing requirement.
When the supply of new investment instruments declines, the price of fixed-interest securities rises. The yields on bonds, which move inversely to their prices, are expected to decline under these circumstances. The belief among market participants that fiscal policy will remain prudent, that the supply of government securities will be restricted and that inflation will be contained, caused yields on long-term government bonds to decline during most of 2000 and in the early months of 2001. Despite these attractive yields on bonds and the prospect of meaningful capital appreciation, non-resident investors steered clear of the South African bond market, selling bonds on a net basis in 2000 and the early months of 2001 whereas they had been net purchasers in 1999.
Equity capital raised in the primary share market almost doubled from 1999 to 2000, partly reflecting the higher levels of fixed capital formation of private-sector firms. Secondary share market activity was equally buoyant as heightened price volatility encouraged investors and speculators to enter the market.
Share prices fluctuated fairly widely in 2000, but on a net basis there was no gain in the overall share price level from the end of 1999 to the end of 2000. A strong rally in share prices which got under way in December 2000 carried through into 2001 and pushed the all-share price index to a record high in February 2001.
Non-resident investors maintained a presence as net buyers in the South African share market throughout 2000 and early 2001 but their net purchases were well down from the levels of 1999. Warrants on individually listed shares were introduced to the JSE Securities Exchange in 1997 and trading in these instruments continued to grow in popularity during 2000.
Sound management of national government finances ensured that the budgetary projections for fiscal 2000/01 will be approximately realised. The budget deficit relative to gross domestic product is expected to be close to 2,4 per cent, as indicated by the Minister of Finance in February 2000. In the process, the non-financial public-sector borrowing requirement relative to gross domestic product is expected to decline to its lowest level ever. Proceeds from the restructuring of government assets have contributed materially to the reduction in the public-sector borrowing requirement and are expected to do so even more in the year ahead.
Growth in interest payments on public debt was curtailed during the past year and the primary surplus of national government (i.e. the fiscal balance recalculated by excluding interest costs) increased as a portion of gross domestic product. These measures not only released resources for re-allocation towards meeting government's growth, employment and redistribution objectives, but also provided scope for the tax reforms announced by the Minister of Finance when he presented his revenue and expenditure proposals for fiscal 2001/02 to Parliament.