Global growth seemed to have lost momentum in the final quarter of 2007, but was nevertheless buoyed by the performance of emerging-market economies. In fact, economic growth projections for the African continent also provided for further acceleration in both 2007 and 2008. However, global energy and food price inflation continued apace, presenting a challenge to monetary policy-makers in most parts of the world.
In South Africa real economic growth in 2007 came to around 5 per cent for the fourth year in succession. Growth picked up somewhat in the fourth quarter of the year as manufacturing output, in particular, recovered following a decline in the third quarter. Real production in the construction sector also rose briskly in the fourth quarter, reflecting strong civil construction and non-residential building activity. Agricultural output expanded rapidly, partly on account of higher livestock production, while real value added in the finance sector also retained firm upward momentum. By contrast, mining output was held back in the quarter by the temporary closure of some mining shafts. In the trade sector the real value added also reflected slower growth in sales volumes in the fourth quarter of 2007.
Viewed from the expenditure side, growth in real final consumption expenditure by households continued its deceleration in the fourth quarter of 2007, moderated by the effect of cumulatively higher interest rates. The slowdown was broad-based, with only expenditure on semi-durable goods – particularly clothing and footwear and vehicle tyres, parts and accessories – recording strong growth during the quarter concerned. Real final consumption expenditure by government also rose at a much slower pace in the fourth quarter compared to the third quarter.
Real fixed capital formation continued rising briskly in the fourth quarter of 2007. Public corporations vigorously stepped up their capital expenditure, underpinned by lively investment activity in the electricity, transport and communication sectors. Robust increases in real capital formation were also recorded by the private sector – in particular in mining and manufacturing. On account of the strength of fixed capital formation, the pace of increase in real domestic final demand broadly matched that of real gross domestic product in the fourth quarter of 2007.
Real inventory investment, by contrast, turned negative in the fourth quarter of 2007 following an uninterrupted 25 quarters during which inventories had continued to rise. Reductions in inventories were recorded in most sectors, with mining being the most prominent. Manufacturing inventories also contracted somewhat, but in the trade sector stocks edged higher, probably due to unexpectedly subdued domestic demand.
Export volumes rose strongly in the final quarter of 2007, led by mining products where inventories were run down in order to satisfy export demand, while export prices benefited from a revival of commodity prices. Real imports remained high but essentially moved sideways in the fourth quarter, while average import prices rose somewhat, reflecting the higher price of crude oil and rising prices in South Africa’s trading-partner countries. These developments resulted in a significant narrowing of the country’s trade deficit in the fourth quarter of 2007. This was only partly countered by a further increase in dividend and interest payments to non-residents, resulting in a moderation in the fourth-quarter deficit on the current account of the balance of payments. For 2007 as a whole, the said deficit amounted to 7,3 per cent of gross domestic product – the highest annual level since 1971.
Since 2004 the current-account deficit has been largely financed by inward portfolio investment. While on an annual basis this remained true in 2007, inward portfolio investment slowed abruptly in the final quarter of the year, and the dominant form of foreign finance during that quarter was the repatriation of some of the South African banking sector’s foreign-currency deposits, possibly encouraged by the prevailing uncertainties in the global financial markets and interest rate differentials in favour of South Africa. Direct investment outflows during the fourth quarter of 2007 included the acquisition of foreign entities by a South African media company and a medical group. Nevertheless, the net inflow of funds from abroad was again sufficient to enable the South African Reserve Bank (the Bank) to accumulate more foreign exchange. Despite fairly significant short-term fluctuations, the nominal effective exchange rate of the rand depreciated only slightly during the final quarter of 2007, and by less than 4 per cent during the year as a whole.
However, the sentiments regarding the prospects of economic growth for export volumes arising from electricity shortages in early 2008 weighed noticeably on the exchange value of the rand. Against a basket of currencies the rand, on balance, depreciated by nearly 14 per cent over the two months to the end of February. Alongside rising international prices of petroleum and food, this continued to cloud inflation prospects.
CPIX inflation accelerated further in recent months, and in January 2008 reached a twelve-month rate of 8,8 per cent – the highest rate since early 2003. Food prices recorded double-digit rates of increase, with the price of petrol also stoking the inflation fire. While the underlying CPIX measure which excludes food and petrol continued to record twelve-month inflation of less than 6 per cent, this measure has been accelerating most recently. Production price inflation added to the unsatisfactory picture, recording rates of increase well above those of consumer prices. Wage settlements also drifted higher during 2007, although not to the extent of being entirely irreconcilable with the inflation target of 3 to 6 per cent.
Observing the continuous deterioration in a number of exogenous drivers of inflation, and mindful of the need to brake any endogenous inflationary spiral which might be ignited by these forces, the Bank’s Monetary Policy Committee raised the repurchase rate by 50 basis points at each of its meetings in June, August, October and December 2007. This followed an identical pattern in 2006, and brought the cumulative increase in the repurchase rate since early June 2006 to 400 basis points. Other short-term interest rates rose in conformity with the policy rate.
Banks’ loans and advances to the domestic private sector gradually started to respond to the tighter monetary policy stance. Growth in most credit categories moderated significantly in the second half of 2007, with the pace of increase in mortgage advances, for example, losing momentum alongside slower house price inflation and a lengthening of the average period that a house remained in the market before being sold. Growth in the broad M3 monetary aggregate similarly decelerated in the second half of 2007. The income velocity of circulation of M3 nevertheless remained at a record low in the final quarter of 2007.
Turnover in the financial markets remained buoyant, and domestic longer-term interest rates trended higher during the four months to the end of February 2008, probably reflecting greater caution regarding prospects for inflation. The share market remained very lively. Share prices reached a peak in October 2007 and subsequently fell back as global share markets receded and domestic prospects were reassessed critically. However, record high commodity prices in early 2008 bolstered the prices of resources shares – partly on account of an expected curtailment of precious metals production in South Africa due to electricity rationing – and contributed to a significant recovery in South African share prices.
The Budget which was presented to Parliament in February 2008 provided for substantial increases in government expenditure to enhance growth and overcome key infrastructure bottlenecks, while at the same time further extending social security. The corporate income tax rate was also reduced. It was projected that the national government would continue to run modest financial surpluses over the next three years, but that the broader public sector would revert to financial deficits as infrastructure spending gained further momentum.