Against this fairly benign background, the economic upswing in South Africa continued and completed twenty-four quarters of uninterrupted expansion in the third quarter of 2005. Revisions to the national accounts data, based on comprehensive information which mostly becomes available with a fairly long time lag, resulted in the growth rate of real gross domestic product for 2004 now being estimated at 4,5 per cent, instead of the previously calculated 3,7 per cent. In similar vein, real growth rates in respect of the first two quarters of 2005 were also revised upwards by more than .1/2 a percentage point.
Annualised growth in real gross domestic product reached a peak of 5.1/2 per cent in the second quarter of 2005 but subsequently slowed to 4 per cent in the third quarter. The slowdown was mainly due to a contraction in real mining output on account of disappointing gold and diamond production, and to slower growth in the real value added by the manufacturing sector. This was exacerbated by a decline in electricity production, as the winter was fairly mild and output growth in some energy-intensive subsectors of the economy was subdued.
Growth in real gross domestic expenditure picked up considerably in the third quarter of 2005 as both fixed capital formation and inventory accumulation gained momentum. Growth in real fixed capital formation accelerated mainly on account of higher capital spending by the private sector – within this institutional grouping several sectors, including manufacturing, contributed to the increase. Among public corporations, the main source of the acceleration in real capital formation was higher expenditure on telecommunications infrastructure. Real fixed investment by the general government inched slightly higher in the third quarter.
Real inventory investment accelerated considerably in the third quarter, with the strong pace of inventory accumulation mainly evident in the manufacturing and trade sectors, the latter inclusive of agricultural stock-in-trade.
By contrast, growth in real final consumption expenditure by households moderated slightly in the third quarter of 2005, but still registered a buoyant annualised rate of increase of 6 per cent, similar to the rate of increase in real household disposable income. The lower growth in real household consumption expenditure was essentially a consequence of a slowdown in the growth in demand for durable goods, especially for new motor vehicles. Nevertheless, household indebtedness rose to a record-high level as households continued to finance the acquisition of fixed property as well as consumer goods by incurring debt. This was prompted by rising income levels, favourable borrowing conditions and solid consumer confidence. Servicing the interest on consumer debt proved comparatively easy for most households as the ratio of interest payments to disposable income remained quite low in a historical context, given the current lower level of nominal interest rates.
Real final consumption expenditure by general government also registered a slightly slower pace of increase in the third quarter of 2005 than in the second quarter. While real compensation of employees rose quite modestly in the third quarter, real spending on non-wage goods and services expanded briskly, despite decelerating marginally in comparison with its second-quarter growth rate.
The robust pace of economic growth over the past year was reflected in rising employment levels. Wage settlements remained well contained in the first three quarters of 2005. Increases in average remuneration per worker exceeded increases in consumer prices by a significant margin, signifying higher standards of living of those in gainful employment. Higher labour productivity helped to check the cost of labour per unit of production, which for the latest available quarter registered an increase over four quarters of 4.1/2 per cent. However, industrial action – largely related to wage disputes – picked up in the first three quarters of 2005.
Inflation picked up in the second half of 2005 in response to the increase in the prices of crude oil and its derivative products. However, when crude oil and petrol are excluded from the production price index and consumer price index baskets, the inflation in the prices of the remaining items remained quite subdued, suggesting no firm evidence of second-round inflationary effects arising from the oil price increase. Moreover, the targeted twelve-month CPIX inflation rate – which incorporates petrol price inflation – only accelerated to a high point of 4,8 per cent in August 2005 and subsequently receded to 4,4 per cent in October, partly on account of the somewhat lower levels of international oil prices. So far, the high oil price has therefore not prevented CPIX inflation from remaining comfortably within the target range of 3 to 6 per cent – an outcome which has been maintained for 26 successive months, and which in itself also helps to anchor inflation expectations.
The deficit on the current account of the balance of payments widened further in the third quarter of 2005. Relative to gross domestic product, the deficit reached 4,7 per cent – the highest deficit ratio since the fourth quarter of 1983. Despite an increase in merchandise exports, the trade balance registered a larger deficit in the third quarter as the value of imports expanded strongly, reflecting the needs of a growing economy as well as the record high level of the international price of crude oil. At the same time the shortfall on the services and income account also widened further.
The wider deficit on the current account in the third quarter of 2005 coincided with a substantial surplus on the financial account. Foreign direct investment into South Africa was bolstered by the acquisition of a majority interest in a South African bank by an international banking group, as well as by increased shareholding by a non-resident investor in a domestic telecommunications company. The overall balance of payments remained in surplus in the third quarter, but by a lesser amount than in the second quarter of 2005.
During the first eleven months of 2005 the repurchase rate of the South African Reserve Bank (the Bank) was adjusted only once, namely in April, when it was lowered by .1/2 a percentage point to a level of 7 per cent. But for this change, money-market interest rates were relatively steady during this period. In October 2005 the more expectations-sensitive rates rose somewhat, following indications that the risk of inflation testing the upper limit of the target range might have increased, but in November lower international oil prices, a firm exchange rate of the rand and the release of benign inflation data contributed to a partial reversal of such expectations and money-market rates. At the same time, interest rates in the capital market also receded somewhat.
Given the relatively favourable economic environment and outlook, corporate profits in most sectors recorded healthy gains in 2005 and share prices registered successive record high levels, the latest record being set in mid-November. At the same time real-estate prices continued rising briskly. Although the tempo of house-price increases moderated considerably in the past year, it continued to exceed consumer price inflation by a substantial margin. In response to these price signals, a strong pace of residential property development and construction was maintained.
Bank loans and advances continued to reflect the strength of the economy, the stability of interest rates and the generally favourable lending and borrowing conditions, and expanded briskly during the past year. In the third quarter and in October 2005 the measured growth rate decelerated somewhat, partly on account of securitisation activity. Mortgage advances to the household sector remained the mainstay of bank credit extension over the past year, in alignment with the upward trend in real-estate prices and building activity.
Growth in the M3 money supply was exceptionally strong in the third quarter of 2005, bolstered by robust economic activity, strong confidence levels, somewhat higher inflation, continued increases in asset values and the absorption of funds arising from foreign direct investment transactions. Securitisation activity contributed to lower growth in M3 in September and October 2005. Nevertheless, the income velocity of circulation of M3 reached a new record low in the third quarter.
Consistent with the stronger performance of the South African economy, tax collections have so far in the 2005/06 fiscal year risen at rates well above those anticipated in the February 2005 Budget. Accordingly, in the October 2005 Medium Term Budget Policy Statement the national government deficit projection for the full fiscal year was lowered from approximately 3 per cent to 1 per cent of gross domestic product. At the same time, it was foreseen that the deficit would rise to not much more than 2 per cent of gross domestic product from 2006/07 onward, as more resources would be directed towards infrastructure development and the improvement of service delivery.