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Against this backdrop, it is expected that growth on the African continent will remain brisk. However, during the early part of 2007 accelerating food inflation emerged as a problem in many African countries. It was strongly reflected in increases in the cost of living, given the proportionately higher weight of food in the typical expenditure basket in lower-income countries.


In South Africa, further brisk economic growth was registered in the first quarter of 2007, although the pace of expansion decelerated somewhat compared with the fourth quarter of 2006. Real production in mining contracted in the first quarter of 2007 as platinum output receded mainly due to the scheduled maintenance of a smelter and a labour dispute, while the real value added in diamond mining also declined. Growth in the real value added by the manufacturing sector moderated from a blistering pace of increase in the final quarter of 2006, but was still strong enough to push the utilisation of production capacity in manufacturing to a new high.


To the contrary, the services sectors maintained their earlier solid growth momentum in the first quarter of 2007, while agricultural output recovered on account of the drought-induced early harvesting of field crops and a sustained increase in the production of livestock. First-quarter 2007 growth in the construction industry was exceptionally strong, reflecting buoyant non-residential building activity and a significant acceleration in civil construction activities.


Although still exceeding the rate of growth in gross domestic product, the rate of growth in real gross domestic expenditure slowed considerably in the first quarter of 2007. This deceleration was mainly due to a significantly slower pace of inventory accumulation: After oil inventories had been replenished through exceptionally high imports of mineral products in the final quarter of 2006, crude oil imports returned to a normal level in the early months of 2007. Growth in real final consumption expenditure by households edged marginally lower in the first quarter of 2007 but remained strong, supported by rising levels of employment and disposable income.


By contrast, real final consumption expenditure by government picked up strongly as the South African Navy acquired another submarine. At the same time real fixed capital formation steamed ahead, reflecting attractive returns on fixed investment against the background of high levels of capacity utilisation. In the first quarter of 2007 real capital expenditure rose at an annualised rate of more than 21 per cent. Although public corporations, and especially the electricity subsector within that grouping, contributed the most to this acceleration, general government and the private sector also stepped up their real fixed capital formation. This brought the ratio of fixed capital expenditure to gross domestic product in the first quarter of 2007 to more than 20 per cent – the first time since 1989 that such a high value has been registered, and an important milestone in raising the economy’s growth potential on a sustainable basis.

Concurrent with this high fixed capital formation ratio, the share of the gross operating surplus in total value added in the economy reached an all-time high in the first quarter of 2007 as the rate of increase in the operating surplus continued to exceed the pace of increase in compensation of employees.


The strength of domestic final demand in the first quarter of 2007 was reflected in high imports, although the normalisation of crude oil imports helped to moderate the import bill for the quarter concerned. Both the volume and rand price of imported merchandise receded somewhat. Simultaneously, the volume of exported goods – in particular mining and mineral exports – declined, although this was partly countered by a modest increase in the average prices of such goods. Net services, income and current transfer payments to non-residents inched higher during the quarter. The net result of these changes was a noticeable narrowing of the deficits on the trade account and on the current account of the balance of payments in the first quarter of 2007.


As before, the deficit on the current account of the balance of payments was comfortably financed by net financial inflows. In the first quarter of 2007 the most important form of such inflows was foreign portfolio buying of South African shares. At the same time, foreign investment in South African debt securities on the domestic secondary market was more than neutralised by the redemption of a rand-denominated domestic bond as well as the early repayment of part of a Yankee bond by the South African government. Despite these transactions, the official net gold and other foreign reserves of the Bank continued to rise during the quarter concerned.


Non-resident investors’ interest in South African shares was boosted by the continued upward trend in share prices, which was in turn supported by strong growth in company profits. Notwithstanding some temporary setbacks, share prices reached successive record highs in the first five months of 2007. Bond yields fluctuated lower in the early months of 2007 alongside the subdued need for borrowing by the public sector, but picked up significantly towards the end of May with the release of unfavourable data. Amid the dearth of government debt issues, the private sector increasingly turned to the issuing of bonds to finance its activities. Securitisation also gained in importance.


Average house prices continued to rise in the early part of 2007, both supporting and being supported by strong growth in mortgage lending. More generally, banks’ loans and advances continued to rise briskly. At the same time, the ratio of household debt to disposable income rose to a new record high at the end of March 2007. Nevertheless, the strongest increases in bank lending were concentrated in advances to the corporate rather than the household sector, consistent with the exceptional strength of fixed capital formation.


The National Credit Act came into full effect on 1 June 2007 and is set to improve consumer protection in the area of lending.


The government finances continued to reflect strong growth in tax revenue, with the national government registering a fiscal surplus in 2006/07 and projecting another surplus in 2007/08. However, as the public corporations and enterprises stepped up capital expenditure their cash surpluses made way for a significant borrowing requirement, at least for that part of the public sector.


With confidence high, the economy growing briskly, domestic expenditure strong, employment rising, credit extension buoyant and asset prices increasing and being reflected in positive wealth effects, the potential for adverse price shocks to fan the flames of inflation is amplified. The price pressures which built up from 2006 and in which food and energy prices played such an important role, culminated in an acceleration in twelve-month CPIX inflation to 6,3 per cent in April 2007 – the first time since August 2003 that CPIX inflation fell outside the target range of 3 to 6 per cent. At the same time, wage pressures also built up, with workers in the public sector participating in strike action in early June 2007 to support their wage demands.    


At its meeting in early June 2007 the Monetary Policy Committee (MPC) analysed these developments and decided to increase the repurchase rate by 50 basis points to
9,50 per cent. The MPC felt that this increase, together with the four increases of the same magnitude implemented during 2006, would ensure that CPIX inflation returns to within the inflation target range over time.