At the same time, global inflation remained subdued, partly on account of the deflationary forces arising from exceptionally large output gaps and partly due to international commodity prices – despite a significant recovery – nevertheless remaining well below the peak levels recorded towards the middle of 2008. The vast majority of countries therefore maintained a stimulatory macroeconomic policy stance. In a handful of countries, however, the authorities felt that the recovery had progressed far enough to take the first steps towards normalisation of policy settings, and started to increase interest rates.
Following three consecutive quarters of contraction, South Africa’s real gross domestic product resumed positive growth in the third quarter of 2009. Agricultural production declined further, reflecting somewhat smaller field crops, while mining output also receded in the third quarter, partly on account of strike action and temporary shaft closures following accidents. By contrast, real value added in manufacturing increased briskly, albeit from a low base, alongside rising electricity and construction output. Within manufacturing the production of basic iron and steel, vehicles, food, and petroleum recorded notable increases. The real production of services also expanded in the third quarter, as moderate contractions in the trade and finance sectors were more than fully compensated for by increases in the production of transport and communication, general government, and personal services.
Real domestic expenditure recorded a moderate decline in the third quarter of 2009. Whereas real final consumption expenditure by households contracted most forcefully at the height of the recessionary conditions and uncertainty in the first half of 2009, only a marginal decline was registered in the third quarter of the year. With inflation decelerating and monetary policy having been eased considerably, real expenditure on durable consumer goods, in fact, rose marginally in the third quarter of 2009 following five successive quarters of contraction. Real expenditure on services also rose somewhat in the third quarter. By contrast, purchases of semi-durable and non-durable goods by households declined slightly further in the quarter concerned.
Real final consumption expenditure by government rose strongly in the third quarter as the staff complement was expanded to improve service delivery, while military aircraft were acquired simultaneously.
By contrast, real fixed capital formation declined in the third quarter on account of lower capital spending by the private sector. The declines were widespread throughout the private sector, but were most pronounced in agriculture, mining and manufacturing. The contraction in the private sector overshadowed the increase in capital spending by the 2 public corporations and general government, aligned with the programme to improve the country’s infrastructure.
Inventories declined apace in the third quarter of 2009. This was the sixth successive quarterly reduction in stock levels, with the decline concentrated in the mining and manufacturing sectors.
The weakness in economic activity was reflected in employment levels, which contracted significantly during the year to the third quarter of 2009. Formal job losses were concentrated in the private sector, whereas employment in the public sector continued to rise, thereby moderating the impact of cyclical forces. The tempo of increase in average nominal remuneration per worker decelerated and wage settlements moderated, following earlier peak values in the second and third quarters of 2008. Industrial action intensified in 2009, despite the rising level of unemployment.
Price inflation slowed significantly against the background of an economy operating significantly below capacity, with greater price discipline further reinforced by subdued credit extension and a significant appreciation of the external value of the rand. In October 2009 the targeted rate of consumer price inflation slowed to 5,9 per cent – the first time it fell within the target range of 3 to 6 per cent after a period of 30 months in which it continuously exceeded the target. Inflation in the prices of consumer goods moderated significantly, whereas services price inflation was relatively sticky and largely retained its momentum. At the producer level, the year-on-year rate of goods price inflation has been negative for several months. Although the international prices of most commodities trended higher from early 2009, key prices were still lower than their peak levels recorded around mid-2008.
With the global economy showing signs of recovery, South African export volumes edged higher while the upward trend in the international prices of gold, platinum and other export commodities gave further support to export revenues in the third quarter of 2009. At the same time, the volume of merchandise imports declined slightly as real gross domestic expenditure inched lower. A moderate increase in net service, income and current transfer payments to the rest of the world and a marginal deterioration in the terms of trade were recorded simultaneously. Reflecting these offsetting forces, the deficit on the current account of the balance of payments remained broadly unchanged from the second to the third quarter of 2009 at levels slightly above 3 per cent of gross domestic product.
With international investors’ appetite for investment in emerging-market economies improving further, the financial account of the balance of payments registered a further sizeable surplus in the third quarter of 2009. Foreign portfolio investors significantly raised their holdings of South African equities during the quarter concerned. Overall, the balance of payments recorded a further surplus in the third quarter, with the official gold and foreign-exchange holdings also benefiting when the International Monetary Fund (IMF) allocated Special Drawing Rights (SDRs) to all its member countries in August and September 2009 as part of the international response to the global economic crisis.
The overall size of the banking sector’s balance sheet stagnated over the past year, reflecting subdued economic conditions, low business and consumer confidence, and increased caution on the side of the banks in the extension of loans. Over the twelve months to October 2009, bank loans and advances to the domestic private sector contracted slightly in nominal terms, while the twelve-month rate of growth in the M3 money supply was barely positive. However, in recent months a number of banks have adopted less stringent criteria than before in the evaluation of certain types of loan applications.
The Monetary Policy Committee (MPC) of the South African Reserve Bank (the Bank) started reducing the repurchase rate in December 2008 and by mid-2009 had reduced the policy rate by a cumulative total of 450 basis points. In August 2009 the MPC, mindful of the large output gap that reinforced the view that inflation would moderate further, reduced the repurchase rate by a further 50 basis points to 7 per cent per annum – the same level established at the trough of the previous interest rate cycle. Other money-market interest rates followed suit, while money-market liquidity conditions remained stable.
Capital market interest rates receded during most of the third quarter of 2009 in response to the appreciation in the exchange value of the rand and the decline in inflation. Yields picked up again from mid-September to the end of November as the issuance and projected future supply of bonds expanded further. Share prices fluctuated higher from a recent low on 3 March 2009 and, on balance, rose by 48 per cent over the subsequent period to the end of November. Positive wealth effects were reinforced by recent trends in the real-estate market, which suggested the start of a modest recovery in house prices.
Government’s strong anti-cyclical fiscal stance was reconfirmed in the October 2009 Medium Term Budget Policy Statement with the announcement of a projected 2009/10 budget deficit of 7,6 per cent of gross domestic product, roughly double the estimate of the deficit contained in the February Budget Review. The intensity of the recession and resultant contraction in tax revenue gave rise to the larger deficit, which could be afforded for a while because the government had worked down its indebtedness during the preceding economic upswing, thereby creating fiscal room for manoeuvre to be used in difficult times. At the same time, government indicated its intention to reduce the deficit gradually over the course of the forthcoming three fiscal years as economic conditions and tax revenue improved, thereby containing the increase in the level of government debt and debt-service cost.