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During the course of 2005 inflation edged higher in many parts of the world in the wake of rising oil and high commodity prices generally. However, the overall inflation picture remained well contained as global competition continued to discipline price and wage behaviour.


Exchange rate adjustment, as one of the mechanisms to address imbalances, was brought into play by Botswana, where a 12-per-cent devaluation of the pula was announced on 30 May 2005, and by China, where the yuan, having been pegged to the US dollar for a period of eight years, was revalued by 2,1 per cent on 21 July 2005 as an important step towards greater exchange rate flexibility.


Economic activity in South Africa regained momentum in the second quarter of 2005, with real growth accelerating to an annualised rate of 5 per cent. A thorough investigation of business cycle developments in the recent past furthermore confirmed that this was the twenty-third quarter of uninterrupted economic expansion. Episodes of hesitation which have been encountered since a lower turning point was reached in the third quarter of 1999 were too limited in length, intensity and scope to qualify as downward phases of the business cycle.


The improvement in growth in the second quarter of 2005 was mainly brought about by a sharp increase in real value added in manufacturing, which reflected rising domestic final demand and stronger export demand for certain categories of goods, alongside a somewhat more competitive level of the exchange value of the rand. Real output of the agricultural sector was bolstered by a bumper maize crop which was predominantly harvested in the second quarter, while almost all the other main sectors of the economy simultaneously displayed solid growth.


Having decelerated somewhat in the first quarter of 2005, growth in real final consumption expenditure by households picked up in the second quarter. This was led by a surge in real outlays on durable goods as expenditure on new motor vehicles, in particular, scaled new heights. Apart from sustained strong increases in households’ real disposable income, more intensive use of bank credit facilities also underpinned the robust growth in household final consumption expenditure – especially as far as durable and semi-durable goods purchases were concerned.


Government’s real final consumption expenditure exhibited a significantly higher growth rate in the second quarter of 2005 than in the first quarter. However, growth in real gross fixed capital formation slowed noticeably in the second quarter, mainly due to less buoyant increases in the public corporations’ capital expenditure.


Inventory accumulation picked up somewhat in the second quarter of 2005, following very sluggish inventory investment in the first quarter. The inventory build-up in the first two quarters of 2005 occurred at a considerably slower pace than in the preceding two years, with most of the adjustment to the lower interest cost of holding inventories already having taken place.


Growth in real gross domestic expenditure picked up to broadly match the growth in real gross domestic product in the second quarter of 2005. The level of expenditure nevertheless continued to exceed that of production, as had been the case since the beginning of 2003.


Enterprise-surveyed employment outside the agricultural sector recorded successive increases in each of the five quarters to September 2004. Private-sector job opportunities benefited most from the economic recovery, but there was also a moderate increase in public-sector employment. The pick-up in enterprise-surveyed employment was, however, not sustained in the last quarter of 2004 and the first quarter of 2005. The decline in employment, in turn, contributed to an acceleration in labour productivity growth in the year to the first quarter of 2005.


Nominal remuneration per worker rose by 8,7 per cent in the year to March 2005, notably slower than previously. Allowing for productivity changes, unit labour cost increased by 5,9 per cent in the year to March 2005 – almost 1.1?2 percentage points lower than the average rate of increase in 2004. Wage settlements averaged 6 per cent in the first half of 2005. Workers were more inclined to engage in strike action in the recent past: Man-days lost to industrial action more than tripled from the first half of 2004 to the first half of 2005.


In July 2005 CPIX inflation registered its 23rd successive month inside the inflation target range of 3 to 6 per cent, and its 8th successive month below the 4.1?2-per-cent midpoint of the target range. However, both consumer and production price increases started to accelerate in recent months, mainly on account of steep increases in fuel prices.


With strong increases displayed by the most import-intensive components of gross domestic expenditure, such as spending on machinery and equipment, the current account of the balance of payments recorded a deficit during each of the past ten completed quarters. The volume of imports of goods and services generally rose faster than the volume of exports of goods and services over this period. Export volumes rose slightly more than import volumes in the second quarter of 2005, buoyed by strong international demand for mining products and a shift in the destination of exports in favour of Asia, where some of the highest growth countries in the world are located. This accordingly contributed to a modest reduction in South Africa’s deficit on the current account of the balance of payments, from 3,8 per cent of gross domestic product in the first quarter of 2005 to 3,4 per cent in the second quarter.


The successive deficits on the current account were more than fully balanced by surpluses on the financial account of the balance of payments, leading to uninterrupted quarterly surpluses on the overall balance of payments and increases in reserves since early 2003. In the second quarter of 2005 the South African Reserve Bank (the Bank) utilised the opportunities arising from a large foreign direct investment transaction to further step up its holdings of gold and foreign exchange reserves to a level exceeding 13 weeks’ worth of imports. While the nominal effective exchange rate of the rand continued to fluctuate and, on balance, depreciated by 7 per cent during the first eight months of 2005, the amplitude of these movements remained moderate.


Consistent with the zestful performance of the economy, growth in the broadly defined money supply accelerated further to reach a twelve-month rate of increase just a touch short of 20 per cent in July 2005. Banking institutions’ loans and advances extended to the private sector also displayed vigorous increases and recorded a twelve-month growth rate of some 23 per cent in July 2005, supported by rising levels of income and expenditure, strong business and consumer confidence, the buoyancy of the fixed property and securities markets, and lower interest rates. Mortgage advances in particular displayed rapid growth. The greater part of banks’ credit extension over the past year flowed to the household sector, and was reflected in an increase in household debt to 62 per cent of annualised disposable income by mid-2005 – its highest level in six years.


Having reduced the repurchase rate by 50 basis points in April 2005, the Bank’s Monetary Policy Committee decided to keep its key policy interest rate unchanged at its meetings in June and August 2005. Money-market interest rates remained aligned with the repurchase rate.


Yields on domestic long-term government bonds, which reached a record low of 7,69 per cent on 28 February 2005, picked up to 8,77 per cent on 5 April 2005, coinciding with fluctuations in the exchange value of the rand and rising bond yields in the major international financial centres. In the ensuing period bond yields resumed their generally declining tendency and by early August, when a prominent credit-rating agency upgraded South Africa’s sovereign credit rating, reached levels quite close to their low point at the end of February. Towards the end of August yields on long-term bonds rose materially as crude oil prices surged and worse-than-expected data on domestic inflation and money supply growth were released.


The upward trend in share prices on the JSE Limited was interrupted from the second half of March to late April 2005, but subsequently resumed, successively setting new record highs from the end of May. Accelerating growth in economic activity, the relatively low interest rate environment, robust commodity prices and the moderate depreciation of the exchange value of the rand since the beginning of 2005 counted among the factors supporting the share market. The all-time peak in the JSE all-share price index that was reached on 12 September represented an increase of 29 per cent from late April 2005.


The real-estate market remained buoyant during the past year. Whereas the tempo of increase in house prices decelerated significantly over this period, it continued to exceed the pace of consumer price inflation and the level of nominal interest rates on mortgage advances by a considerable margin.


Tax collections remained robust in the first four months of the 2005/06 fiscal year, consistent with the underlying strength of the economy. Even allowing for the projected increase in the deficit later in the fiscal year, its magnitude is set to remain well contained, demonstrating government’s continued commitment to the pursuit of sound fiscal policies.