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Strong growth in China and India continued to provide impetus to global economic activity, international trade and commodity prices. The world economy nevertheless still operated well below capacity and global inflation remained low. However, as inflationary forces intensified in some parts of the world, a number of countries started to raise interest rates, with the Bank of Canada becoming the first central bank among the Group of Seven (G-7) countries to increase its key policy rate since the onset of the global recession.


African economies continued to benefit from rising demand for exports and generally buoyant commodity prices, resulting in a notable acceleration in economic activity on the continent. The South African economy was no exception as its growth rate, which turned positive in the third quarter of 2009, increased further in the first quarter of 2010. The acceleration to a brisk annualised rate of 4,6 per cent was widespread among the major economic sectors, with manufacturing playing a strong role alongside mining and commerce. Capacity utilisation nevertheless remained at low levels.


Real gross domestic expenditure supported the stronger growth in the first quarter, with all the major expenditure components registering improvements. Real final consumption expenditure by households picked up strongly, with purchases of semi-durable and durable goods progressing at double-digit rates. This was facilitated by an acceleration in the growth rate of real disposable income, relatively low interest rates and inflation, positive wealth effects, and an improvement in household confidence. With the increase in consumption expenditure well aligned with the growth in personal disposable income, the ratio of household debt to disposable income declined in the first quarter of 2010.


The general government’s real final consumption expenditure accelerated strongly in the first quarter, reflecting purchases of military aircraft and an increase in staff numbers in the public sector.


Real gross fixed capital formation by general government contracted somewhat in the first quarter of 2010 as decreases were recorded by all levels of government. In the private sector real capital outlays also edged lower, although at a slower pace than the contractions observed during 2009. Capital expenditure by the private sector increased in areas such as construction, telecommunications and accommodation, partly related to the expected influx of tourists during the 2010 FIFA World Cup™ tournament. However, this was offset by lower capital outlays in agriculture, mining and manufacturing.


Real fixed capital expenditure by public corporations rose further in the first quarter as the transport subsector geared itself for the expected influx of sports-loving tourists. Outlays on the electricity and telecommunications infrastructure also continued apace. The increase in capital expenditure by public corporations more than offset the declines recorded by the general government and private sectors, resulting in marginally higher real capital formation for the economy as a whole in the first quarter of 2010.


While real holdings of inventory declined further in the first quarter of 2010, the pace of depletion was much slower than in the final three quarters of 2009, suggesting that the downward cycle in inventories was approaching its end. This was consistent with the recovery in production and expenditure, and the less onerous interest cost of carrying inventories.


The recovery in economic activity had not yet been reflected in rising aggregate employment numbers and the unemployment rate in the first quarter of 2010 rose further to 25,2 per cent. Enterprise-surveyed employment data for the formal sector are available up to the final quarter of 2009 and indicate that the increase in public-sector employment in the fourth quarter of the year fell short of the reduction in private-sector employment over the period. This also holds for the year 2009 as a whole. Against the background of high unemployment, average wage settlements edged lower in the course of 2009 and in the first quarter of 2010, but remained above 8 per cent.


Consumer price inflation receded to within the target range, falling below 6 per cent at first only fleetingly in October and November 2009, but then on a more sustainable basis from February 2010. By April 2010 inflation amounted to 4,8 per cent, reflecting the impact, inter alia, of substantial surplus capacity in the economy, an appreciation in the exchange rate of the rand and lower food prices. Lower inflation outcomes also contributed to a moderation in inflation expectations.


Both the nominal and real effective exchange rate of the rand trended higher from around March 2009 alongside firm prices of South African export commodities, smaller deficits on the current account of the balance of payments and a return of investor interest in emerging markets. The appreciation of the rand against a basket of currencies continued in the first quarter of 2010.


The increase in gross domestic expenditure in the first quarter of 2010 was reflected in a notable increase in imports over the period. Export proceeds receded somewhat during the quarter from a high base set in the final quarter of 2009, resulting in a significantly wider deficit on the current account of the balance of payments. However, a strong inflow of portfolio investment into South Africa was recorded in the first quarter, mainly in the form of debt securities, enabling the overall balance of payments to remain in surplus. As risk aversion set in among international investors in the wake of concerns regarding fiscal sustainability in Greece and a number of other European countries, portfolio investment flows into South Africa weakened in May 2010.


While the recovery in real production and expenditure gained momentum in the early part of 2010, this was not reflected in banks’ credit extension and monetary liabilities. The nominal level of bank loans and advances to the domestic private sector and the broadly defined money supply (M3) both moved broadly sideways over the twelve months to April 2010. Credit extension to companies contracted somewhat, while that to households expanded with mortgage advances registering a modest positive growth rate.


House prices trended moderately upwards, while activity in the financial markets picked up in the first five months of 2010. The prices of shares on the JSE Limited (JSE) reached a recent peak in mid-April, before subsiding somewhat in the subsequent period. Against a background of decelerating inflation bond yields, on balance, moved lower from a peak in mid-January 2010, despite a fairly large public-sector borrowing requirement.


Acting in a broadly countercyclical way, the government maintained its expenditure levels, allowing the budget deficit to widen further in fiscal 2009/10 as tax revenue receded on account of the comparatively subdued levels of economic activity. Most recently there were signs of a moderate increase in tax collections, consistent with the economic recovery starting to gain traction.


The progress made in combating inflation, an improved forecast for inflation and a reduction in the uncertainty regarding the inflation outlook were recognised by the Monetary Policy Committee (MPC) when it decided to reduce the repurchase rate by 50 basis points to 6,5 per cent at its March 2010 meeting. Other money-market interest rates followed the repurchase rate, with the banks, for example, reducing their prime overdraft rate to 10 per cent per annum – a rate that was last achieved in January 1981.