In South Africa real output growth decelerated further in the first quarter of 2005. Having peaked at 5.1⁄2 per cent in the third quarter of 2004, quarter-to-quarter growth in gross domestic product receded to 3.1⁄2 per cent in the first quarter of 2005, still broadly consistent with the long-run growth capacity of the economy. Primary-sector growth picked up in the first quarter, mainly on account of increases in platinum and diamond mining output. Real output originating in the secondary sector recorded a marginal contraction in the first quarter, partly on account of competition from foreign producers that was intensified by the relatively strong international exchange value of the rand. In the tertiary sector growth in real value added remained brisk, but was marginally slower than before.

The rate of increase in real household consumption slowed down somewhat in the first quarter of 2005, but remained buoyant. Inflation-adjusted household disposable income continued to rise, with solid consumer confidence and relatively low nominal interest rates also encouraging household consumption expenditure. Real government consumption expenditure growth slowed abruptly in the first quarter of 2005, essentially because the acquisition of a corvette by the South African Navy in the fourth quarter of 2004 was not repeated in the first quarter of 2005. Growth in real fixed capital formation slightly accelerated further in the first quarter of 2005, led by a pick-up in capital spending by public corporations. Overall, the rate of increase in aggregate real final demand in the first quarter of 2005 exceeded the rate of growth in real gross domestic product.

The tempo of real inventory accumulation decelerated considerably in the first quarter of 2005; accordingly, the ratio of inventories to production declined somewhat. The deceleration in inventory accumulation alongside the slower growth in domestic final demand reduced the growth in real gross domestic expenditure to a subdued rate of just 1.1⁄2 per cent in the first quarter of 2005.

As inventory build-ups usually contain an appreciable portion of imported goods, it is not surprising that the slower pace of inventory build-up coincided with a contraction in the volume of imports in the first quarter of 2005. Real merchandise exports also declined in the first quarter, albeit marginally, whereas the physical quantity of gold exported fell back noticeably as the industry continued to encounter rising costs and declining revenues. The international terms of trade of the country weakened slightly in the first quarter of 2005. However, the decline in import volumes was so large that it produced a slightly smaller seasonally adjusted deficit on the trade account of the balance of payments. The deficit on the service, income and current transfer account also narrowed slightly. As a result the current-account deficit receded to 3,8 per cent of gross domestic product in the first quarter of 2005 from 4,0 per cent in the preceding quarter. The deficit on the current account continued to be financed comfortably by inflows of foreign funds. Both portfolio and other investment (such as loan finance) significantly contributed to the inflows of financial capital experienced in the first quarter of 2005. Under these circumstances the South African Reserve Bank continued increasing its gross gold and other foreign reserves; these came to US$17,2 billion at the end of May 2005. Further opportunities to improve the country’s international liquidity position could arise from the planned acquisition of a controlling interest in Absa by Barclays Bank plc, for which regulatory approval was granted in May 2005.

Despite sustained large deficits on the current account of the United States’balance of payments and on the federal government budget, the US dollar appreciated, on balance, against other key international currencies. The steadily rising money-market interest rate brought about by the Federal Reserve, and indications that United States’ economic growth is likely to continue to exceed growth in other mature economies, might have contributed to the recent appreciation of the US dollar against major currencies. The strengthening of the US dollar was also an important contributory factor in the recent depreciation of the rand. From the end of 2004 to mid-June 2005 the rand, on balance, depreciated by 17 per cent against the US dollar and by 10,8 per cent against a basket of currencies.

Enterprise-surveyed employment in the formal non-agricultural sectors of the economy recorded uninterrupted increases in each of the six quarters to December 2004, resulting in a cumulative increase of 339 000 employment opportunities over this period. While jobs were lost in some subsectors such as gold mining, there was, on balance, a considerable increase in private-sector employment alongside a moderate increase in public-sector employment. This expansion in job opportunities was also corroborated by a moderate decrease in the unemployment rate as reflected by the results of the latest Labour Force Survey.

Alongside the strong increase in formal non-agricultural employment, real output per worker only rose marginally during the year to the fourth quarter of 2004. Nominal compensation per worker rose strongly, boosted by the payment of performance bonuses to staff, and early estimates accordingly show that the cost of labour per unit of output rose by 10,5 per cent in the year to the fourth quarter of 2004. Wage settlements in the first quarter of 2005, however, averaged only 6 per cent.

Inflation in the prices of goods remained low, contributing to a moderation of the inflation process in general. The production prices of imported goods rose by 1,4 per cent in the year to April 2005, largely because of the relative stability in the exchange rate of the rand. At the production level domestically produced goods prices recorded a year-on-year rate of price inflation of 1,9 per cent in April 2005. CPIX goods price inflation similarly recorded a twelve-month rate of increase of only 2,7 per cent in April 2005, with the prices of clothing, footwear and vehicles actually declining marginally. However, mainly as a consequence of an increase in petrol prices, twelve-month CPIX inflation rose from its most recent low of 3,1 per cent in February 2005 to 3,8 per cent in April. CPIX inflation has remained in the 3-to-6-per-cent target range since September 2003, i.e. for 20 successive months. The prices of services contained in the CPIX basket rose consistently faster than goods prices throughout this 20-month period.

The M3 money supply continued to increase at a brisk rate in 2004 and the first four months of 2005, consistent with the strength of domestic production and final demand. Positive wealth effects following rising prices of real-estate and financial assets also supported the demand for money. Banks’loans and advances to the domestic non-blank private sector gained further momentum in recent months and reached a twelvemonth rate of increase of more than 19 per cent in April 2005. Mortgage advances displayed the highest rate of increase among the various types of loans and advances. With rising real income levels, rising house prices, confident consumers and relatively low nominal interest rates reinforcing one another, the strong growth in loans and advances was not surprising. It was also reflected in an increase in the household debt ratio from 58 per cent of disposable income in the fourth quarter of 2004 to 60 per cent in the first quarter of 2005.

At its meeting in April 2005 the Reserve Bank’s Monetary Policy Committee (MPC) noted, among other things, a slowing of activity in some areas of the economy, and projected that inflation was likely to remain within the target range over the period to the end of 2006. The committee welcomed the evidence of a further material decline in inflation expectations in the latest survey showing a fall by a full percentage point from the final quarter of 2004 to the first quarter of 2005. The committee decided to reduce the repurchase rate by 50 basis points. Other money-market interest rates followed, declining to nominal levels previously encountered more or less a quarter of a century ago. At the June 2005 meeting of the MPC the repurchase rate was kept unchanged at 7,0 per cent.

From 25 May 2005 the South African Reserve Bank introduced a number of modifications to its refinancing operations. Among other things, the Reserve Bank started announcing an estimate of the average liquidity requirement for the forthcoming week prior to the main repurchase tender on Wednesdays – in future it would normally allot the full amount tendered by each bank to the bank concerned – and implemented standing facilities through a repurchase mechanism which enabled banks to deposit surplus funds overnight with the Reserve Bank at 50 basis points below the main repurchase rate, or to borrow overnight at 50 basis points above the main repurchase rate. The central feature of the Reserve Bank’s system of monetary policy implementation – control over short-term interest rates through a repurchase rate set by the Monetary Policy Committee and made effective by ensuring that the banks jointly have a cash deficit which has to be refinanced through weekly tenders at that rate – remained unchanged.

Against the background of fewer and smaller decreases in mortgage interest rates since late 2003, the rate of increase in real-estate prices – at times exceeding 35 per cent on a year-on-year basis – started decelerating during the course of 2004 and continued doing so in the first five months of 2005.

Having increased by more than a third from mid-2004 to March 2005, share prices hesitated in April and the first part of May 2005. However, the recent depreciation in the exchange value of the rand had a favourable impact on share prices, which again reached an all-time high on 13 June 2005. By contrast the prices of longer-term

bonds declined somewhat in recent months, partly on account of fears that exchange

rate depreciation might increase the risk of a temporary setback to the process of

disinflation.

Fiscal 2004/05 ended with buoyant government revenue collections in March 2005. The

national government deficit before borrowing and debt repayment amounted to 1,5 per

cent of gross domestic product in fiscal 2004/05, compared with an originally budgeted ratio of 3,1 per cent. The deficit was eventually predominantly financed by issues of domestic government bonds. For fiscal 2005/06 a deficit of 3,1 per cent of gross domestic product has been budgeted for, again to be financed primarily through domestic bond issues.