Economic growth continued to be more robust in the emerging-market and developing economies, led by China and India. Commodity prices remained strong, providing support to economic activity in resource-rich countries geared to make use of the favourable export opportunities, including many countries on the African continent.

Frail private consumption expenditure, excess capacity and continued high unemployment in a number of advanced economies helped to contain global inflationary pressures in the second quarter of 2010.

In South Africa a further increase in economic activity was registered in the second quarter of 2010, although the pace of expansion decelerated somewhat compared with the first quarter. Lower production of platinum and coal, related to largely temporary factors, mainly contributed to a significant contraction in the real value added by the mining sector. Although growth in the real value added by the manufacturing sector moderated slightly in the second quarter, the utilisation of production capacity showed an increase compared with the previous quarter. Output in the services sector was supported by expenditure related to the 2010 FIFA World CupTM tournament.

The rate of growth in real gross domestic expenditure slowed in the second quarter of 2010. The pace of increase in real consumption expenditure by households moderated somewhat but remained brisk, especially as far as purchases of durable goods are concerned. The level of real fixed capital formation essentially moved sideways in the second quarter, while the pace of inventory depletion slowed marginally. Real consumption expenditure by government continued to rise firmly, reflecting improved service delivery and the acquisition of military aircraft.

Employment contracted further in the first quarter of 2010, but at a slower pace than before. While the private sector continued to shed jobs, employment numbers in the public sector increased somewhat. Wage settlements continued to moderate in the first half of 2010, while in the third quarter a salary dispute in the public service resulted in strike action.

During the first seven months of 2010 producer price inflation accelerated apace due to base effects and global price developments. By contrast, the targeted consumer price measure of inflation decelerated to below the 6 per cent mark from February and remained within the inflation target band in the six months to July 2010 as the appreciation of the exchange value of the rand and low food price inflation partially offset high administered price inflation.

Export volumes remained lustreless in the second quarter of the year, partly due to setbacks to mining output, whereas import volumes increased. However, the terms of trade improved further and net service receipts were boosted by foreign visitors attending the football tournament, which resulted in the deficit on the current account remaining well contained. Foreign investors maintained strong interest in portfolio investment in emerging-market economies, given interest rate differentials and risk perceptions. They keenly invested in South African bonds, contributing to a sizeable inflow of funds being recorded in the financial account of the balance of payments. Under these circumstances the exchange value of the rand appreciated further while the South African Reserve Bank (the Bank) continued to add to its foreign-exchange reserves.

The sustained accumulation of foreign currency by the Bank had to be offset by liquidity-draining mechanisms in order to maintain orderly liquidity conditions in the money market. Apart from the instruments routinely used so far, to this end the Bank also started using longer-term foreign currency swaps from August 2010. As a consequence the Bank started to reflect on overbought forward position as part of its international liquidity position.

The spread of the Bank’s standing facility rates above and below the repurchase rate was increased from 50 to 100 basis points with effect from the end of August. Money-market interest rates continued to reflect the level of, and expectations regarding, the repurchase rate. The repurchase rate was lowered by 50 basis points on each occasion in March and in September 2010, reflecting assessments by the Monetary Policy Committee (MPC) of an increasingly favourable inflation outlook. The reduction in September brought the repurchase rate to 6 per cent and the banks’ prime lending rate to 9,5 per cent per annum, the first time since 1980 that the prime lending rate stood at less than 10 per cent.

Growth in the broadly defined money supply (M3) recorded a turnaround from a contraction in the first quarter of 2010 to a modest positive growth rate in the second quarter, with both the household and corporate sectors contributing to the increase in M3 deposits. Growth in the banks’ loans and advances to the private sector also picked up moderately, reflecting not only demand from the household sector, but also an uptick in the reliance of the corporate sector on bank credit. The fairly subdued growth in the monetary and credit aggregates in the first seven months of 2010 continued to be affected by high debt levels, elevated impaired advances, weak employment prospects and uncertainty caused by the fragile global economic recovery.

Reflecting lower inflation and an appreciating exchange value of the rand, government bond yields have trended lower from recent highs recorded at the beginning of the year. After a notable recovery up to April 2010, share prices receded somewhat and subsequently fluctuated broadly sideways. House price inflation gained some momentum in the first half of 2010, but subsequently started to decelerate.

Fiscal policy remained expansionary during the past year, continuing to play a strongly counter-cyclical role. Government expenditure levels have remained high, supporting further economic recovery. In recent months the economic recovery has had a favourable impact on government revenue, with the result that tax collections have moderately exceeded earlier projections and the deficit, while large, has started to narrow. This is consistent with government’s aim gradually to reduce the deficit, broaden the tax base and improve tax compliance.