In South Africa, output growth fell significantly behind growth in real domestic expenditure during the course of 2003. Despite the acceleration in global economic activity, South African export volumes remained subdued. This was partly a consequence of the usual time delay before stronger global activity spills over into higher domestic exports. Furthermore, in some of South Africa's important export markets on the European continent the stagnation in income and production continued throughout last year. The significant recovery of the exchange rate of the rand in 2002 and 2003 also reduced South Africa's price competitiveness in the world market, dampening exports and boosting imports.

Under these circumstances the goods-producing sector in South Africa performed poorly, with production volumes in manufacturing contracting during all four quarters of 2003. Real value added in agriculture also declined, suppressed by adverse climatic conditions and lower product prices. In mining real production rose somewhat in 2003, while the services sector, and especially communication services, recorded firm growth.

In 2003 as a whole real gross domestic product rose by roughly 2 per cent, while on a quarter-to-quarter basis the lowest annualised growth rate recorded was 1⁄2 a per cent in the second quarter, picking up to 1 per cent in the third quarter and 11⁄2 per cent in the final quarter of 2003. Against this lacklustre production performance, real domestic expenditure rose considerably in 2003. For the year as a whole real expenditure advanced by around 4 per cent, while in the fourth quarter of 2003 its annualised growth rate amounted to 7 per cent. If the effect of the surge in real expenditure on account of the delivery of a new vessel, the SAS Amatola, to the South African Navy is excluded from the final quarter's expenditure total, the annualised rate of growth in the remaining real expenditure total amounted to 6 per cent. In the fourth quarter of 2003 real final consumption expenditure by general government recorded its highest rate of increase in 13 years due to the purchase of the new naval vessel. Excluding the purchase of this item, underlying growth in real consumption expenditure by government still accelerated slightly further from the third to the fourth quarter. Real final consumption expenditure by households continued to grow at a brisk pace in the fourth quarter, shored up by advances in real disposable income and lower interest rates.

Real fixed capital formation also recorded a brisk increase in the final quarter of 2003, led by public corporations which, inter alia, acquired new aircraft during the quarter. Fixed capital formation in both the private sector and the government sector also expanded somewhat in the fourth quarter, with private business enterprises in the mining sector responsible for the highest rate of increase. Real inventory levels continued to rise in the fourth quarter of 2003, possibly in response to the continued strong increases in real final sales in the economy. The higher growth in domestic expenditure than in production was reflected in the deficit on the current account of the balance of payments, which rose to almost 2 per cent of gross domestic product in the final quarter of 2003. While import volumes rose significantly during the course of 2003, export volumes remained essentially unchanged.

Favourable prices for export commodities to some extent helped to contain the current-account deficit in the fourth quarter. The deficit on the current account was easily financed by financial-account inflows, which made it possible for South Africa's gross gold and other foreign reserves to rise by a record amount in the fourth quarter of 2003. While the significant recovery in the exchange rate made South African exports less competitive, it was nonetheless an important force in bringing down the inflation rate through heightened competition from imports. Over the twelve months to January 2004 the production prices of imported goods in rand terms declined by almost 9 per cent. Production prices of domestically produced goods rose at a subdued pace, reflecting stiffer competition from abroad but also the effect of prudent monetary and fiscal policies. Developments in production prices were also reflected in consumer prices, as twelve-month CPIX inflation receded to 4,0 per cent in December 2003 – its lowest since CPIX data became available in 1997 – before accelerating marginally to 4,2 per cent in January 2004. Simultaneously, headline inflation reached 0,2 per cent in January 2004, its lowest twelve-month value since August 1954. Being less susceptible to the forces of international competition, however, inflation in most services prices remained well above inflation in the prices of goods.

Growth in the broad monetary aggregate M3 and in bank loans and advances converged recently, each recording twelve-month rates of increase of around 12 per cent in most of 2003 and January 2004. This partly reflected the influence of brisk growth in domestic expenditure and lower nominal interest rates. The income velocity of circulation of M3 reached a record low value in the third quarter and fourth quarter of 2003, suggesting ample underlying liquidity in the economy. Following an extended bull run in the bond market, long-term interest rates edged marginally higher in the early months of 2004 as inflation declined to the point where most market participants expected it to bottom out while the public sector also started to borrow more funds in the domestic capital market. Short-term interest rates also edged up somewhat since mid-December 2003, following the less-than-expected 50-basis-point reduction in the repurchase rate of the South African Reserve Bank announced after the December meeting of the Monetary Policy Committee.

Nevertheless, most short-term interest rates were at their lowest levels since the early 1980s because of the cumulative 550-basis-point reduction in the repurchase rate from early June 2003. In step with equity markets in most other parts of the world, share prices on the JSE Securities Exchange SA recovered significantly from the low levels that they had reached during the second quarter of 2003 despite the fact that the exchange rate of the rand, with its important bearing on exporters and import-competing firms, remained relatively firm. Sustained strong increases in house prices had positive wealth effects and were also reflected in the increased use by households of credit facilities, particularly mortgage advances.

The national Budget, announced in February 2004, continued to be formulated within a framework of fiscal discipline. Projecting a more expansionary fiscal stance, with higher growth in expenditure than in revenue, it is expected that the national government’s deficit before borrowing will rise to a level fractionally above 3 per cent of estimated gross domestic product in the fiscal year 2004/05. However, a sustained primary surplus is expected and the ratio of government debt to gross domestic product is projected to remain fairly low.

Apart from driving CPIX inflation down into the target range from September 2003, another monetary policy milestone was reached in February 2004 when the South African Reserve Bank closed out its oversold forward foreign exchange book, by so doing no longer exposing the taxpayer to exchange rate risk through running a large position in such contracts. With this book having been reduced from more than US$25 billion in 1998, perceptions of vulnerability in this area have finally been put to rest. Going forward the Bank is now focusing on gradually strengthening its gold and foreign exchange reserves.