Publication Details

In South Africa the economy also exhibited exceptional momentum with real gross domestic product increasing at a rate of 5 per cent in 2006, broadly in keeping with the growth rates in the preceding two years. Average growth over three successive years at this pace was previously observed from 1979 to 1981. Annualised growth accelerated from 4.1⁄2 per cent in the third quarter of 2006 to 5.1⁄2 per cent in the final quarter on account of an improvement in growth in all the main sectors of the economy.


In the fourth quarter of 2006 agricultural production contracted at a slower pace than before. At the same time growth in the real value added by the mining sector was bolstered by the strongly rising production of platinum group metals and, to a lesser extent, diamonds. Manufacturing recorded vibrant growth in the fourth quarter, with most subsectors expanding output. Production of petroleum, chemicals, rubber and plastic products in particular rebounded, following a contraction in the preceding quarter. The construction sector experienced a surge in non-residential building activity and a further increase in residential construction in the fourth quarter of 2006. In the tertiary sector most subsectors posted sturdy growth over this period.


The robust growth in domestic production in the fourth quarter of 2006 was accompanied by exceptionally buoyant domestic expenditure. All the expenditure components contributed to a marked acceleration of real domestic expenditure in the final quarter of 2006, but the main growth impetus was provided by a turnaround in real final consumption expenditure by general government and a surge in inventory accumulation which partly reflected high oil imports during the quarter. Nevertheless, real gross fixed capital formation also gained further momentum in the fourth quarter of 2006 due to continued growth in real capital outlays across all institutional sectors – private business enterprises, public corporations and general government.


Growth in real consumption expenditure by households accelerated marginally in the fourth quarter of 2006, supported by a further increase in real household income. Along with households’ acquisition of residences which pushed up mortgage borrowing, this was reflected in yet further increases in the ratio of household debt to disposable income. With both a higher level of indebtedness and higher interest rates, the ratio of household debt service cost to disposable income also rose significantly in the second half of 2006, but nevertheless remained far below its record levels of 1998 in view of the generally much lower level of nominal interest rates which has been established in recent years.


Throughout 2006 imports continued to exceed exports by a considerable margin. This brought the deficit for the year to 6,4 per cent of gross domestic product – a magnitude previously observed in 1981. However, the imports of capital goods contributed to the expansion of capacity and easing of bottlenecks which in time will support export growth, while the financial inflows on the balance of payments again exceeded the shortfall on the current account throughout 2006. The ease with which the current-account deficit was financed extended to the final quarter of the year, when strong capital formation and exceptionally high oil imports led to a deficit on the current account of the balance of payments equal to 7,8 per cent of gross domestic product. Had oil imports in the fourth quarter of 2006 progressed at their normal pace, the deficit ratio would have been reduced by more than 2 percentage points.


Portfolio flows into South Africa constituted the most important component of these financing transactions, with share investment significantly ahead of bond investment in the first half of the year and broadly equal contributions from these two sources in the second half. Despite a sizeable foreign direct investment outflow in the fourth quarter of 2006 as a non-resident direct investor sold its equity stake in a domestic gold-mining company to a South African entity, inflows dominated the financial account of the balance of payments throughout the year. This allowed the South African Reserve Bank (the Bank) to accumulate net foreign reserves in each quarter of 2006, a process which continued in the first 2.1⁄2 months of 2007.


Reflecting the improved growth picture, employment rose during the year to September 2006. Adjusted for productivity gains, increases in average salaries and wages per worker as well as wage settlements in 2006 remained consistent with the inflation target. The significant depreciation of the external value of the rand from May 2006 and the vicissitude of the prices of oil and food nevertheless, on balance, added to the inflation momentum in the course of the past year. Twelve-month inflation in production prices rose as high as
10 per cent towards the end of 2006. The targeted CPIX measure of inflation also accelerated significantly during the past year but remained within the target range, its highest level of 5,3 per cent being recorded in January 2007. The curbing of inflation benefited from the action taken by the Monetary Policy Committee which, mindful of the increased inflation risks which were weighed to the upside, raised the repurchase rate by 50 basis points at each of its four successive meetings from June to December 2006.


Money supply growth maintained strong momentum throughout 2006 and in January 2007, reflecting vigorous expenditure, strong income growth, buoyant turnover in the financial markets and positive wealth effects. Corporate-sector deposits with the banking system continued to rise considerably more briskly than those of the household sector during this period. Banks’ loans and advances extended to the private sector also rose at a robust pace throughout the past year despite the increases in lending rates from June 2006. The sluggishness of the response to higher interest rates partly reflected the relatively low level of debt servicing costs, rising income and employment, high consumer and business confidence, and strong balance sheets. Mortgage advances accounted for roughly half of the increase in bank loans and advances over the past year. During 2006 bank advances to the corporate sector rose more strongly than those to the household sector, possibly reflecting the acceleration in capital expenditure by the former sector.


In the bond market the yield curve became downward sloping during the fourth quarter of 2006 as short-term rates were influenced by the successive increases in the repurchase rate. The inversion of the yield curve was also characterised by declining yields for longer maturities, related to a projected lower overall supply of bonds and expectations that inflation would remain well contained over the longer term. The subdued supply of bonds originated in the public sector, reflecting the strong fiscal position of the national government. At the same time the private sector expanded its issues of bonds, partly in the form of securitisation by banks.

Share prices, on balance, again recorded strong gains in 2006, despite a setback in May and June. The upward momentum of the South African share market was sustained in early 2007, but prices receded somewhat from 27 February in sympathy with developments in international equity markets. With global share prices at relatively high levels, a retraction was triggered by a sharp decline in Chinese share prices.

In the past year house prices continued to rise at a rate well above that of consumer prices, strengthening household balance sheets and adding to consumer confidence. There were tentative indications of a moderate reacceleration of house prices in recent months.


The 2007 Budget, which was presented to Parliament on 21 February, provided for the first main budget surplus ever in South African history – in fact, budget surpluses are anticipated in both fiscal 2006/07 and 2007/08, reverting to small deficits in the subsequent two years. Lower inflation and lower interest rates contributed to lower debt service cost, and along with briskly rising tax revenue created room for increased spending on health, education, economic infrastructure and other growth-enhancing areas. At the same time the government’s social safety net already involved regular payments benefiting almost 12 million recipients.


The tax proposals in the 2007 Budget were aimed at encouraging long-term saving, and included the abolishment of the tax on interest and rental income of retirement funds. The introduction of a broad-based social security framework over the period 2007 to 2010 was also proposed to enhance households’ income security, reduce their vulnerability and contribute towards savings.