International commodity prices trended higher, supported by strong growth in the developing countries and, in some instances, propelled by logistical and geopolitical concerns arising from the upheaval in the political order in a number of countries in the Middle East and North Africa (MENA). The spot price of crude oil rose as high as US$118 a barrel in late February and early March 2011, while international food prices also continued their rising trajectory, recently reaching their highest level since January 1990. Under these circumstances consumer price inflation trended higher, which resulted in a general trend towards monetary policy tightening – the major advanced economies being the exception so far, as noted above.
In sub-Saharan Africa growth prospects were bolstered by the buoyant prices of key export commodities, the recovery in global demand, the improvement in macroeconomic stability in general and, more structurally, the increase in the proportion of national resources devoted to capital formation.
In South Africa annualised growth in real gross domestic product accelerated to 4,4 per cent in the final quarter of 2010, lifting the economy’s growth rate for the year as a whole to 2,8 per cent. The improvement in the growth momentum in the final quarter of 2010 partly reflected the normalisation of production in manufacturing and government services, which rebounded following strike action in the third quarter. Mining output rose at a strong pace in the fourth quarter against the background of high commodity prices and strong export demand, with platinum and coal making the largest contributions to the higher production levels. Real value added by agriculture also expanded at a double-digit rate in the final quarter of the year, buoyed by horticultural and livestock production. Over the period higher growth was posted by all the
subsectors in the tertiary sector. However, the economy continued to be characterised by a significant degree of underutilisation of production capacity.
Among the domestic expenditure components, household consumption expenditure provided the major and most consistent part of the growth momentum throughout 2010. This was driven by rising real income levels, lower interest rates, a modest reduction in the household debt ratio and fairly high levels of consumer confidence. In the final quarter of 2010 growth in real final consumption expenditure by households moderated somewhat alongside a slower pace of increase in households’ real disposable income. The moderation made itself felt especially in expenditure on durable goods, where pre-emptive buying of vehicles ahead of the introduction of a carbon emissions tax from 1 September 2010 had established a relatively high base in the third quarter, and on non-durable goods.
Real final consumption expenditure by government rebounded in the fourth quarter of 2010 as the real expenditure on public servants’ salaries and wages normalised, having been pulled down in the third quarter by a public-sector strike.
Real fixed capital spending inched higher in the final quarter of 2010, the third successive quarter of very slow but positive growth in this aggregate, following five quarters of contraction. In the final quarter of 2010 public corporations raised their capital outlays, particularly in the electricity and transport subsectors. Private business enterprises also increased their real fixed capital formation marginally, notably in the mining and communication sectors. By contrast, there was a slight contraction in real capital expenditure by general government over the period.
Having declined for ten successive quarters, the aggregate level of real inventories increased marginally in the fourth quarter of 2010. Restocking started from a very low base and was prompted by rising sales volumes and facilitated by low interest rates.
Employment increased moderately in the final quarter of 2010, although this was probably largely for seasonal reasons. Simultaneously, the number of discouraged work-seekers also rose somewhat, culminating in a reduction in the unemployment rate. The average wage settlement rate in 2010 amounted to 8,2 per cent – lower than in 2009 – while increases in unit labour cost also decelerated somewhat. Labour productivity continued rising, although it lost some of its earlier momentum in the third quarter when industrial action had a negative impact on output.
Consumer price inflation remained in the lower half of the target range during the second half of 2010 and in early 2011, held in check by the strength of the exchange rate, moderate domestic food price increases, surplus capacity in the economy and, in some instances, overhead costs being spread across rising sales volumes.
The buoyant prices of key export commodities were reflected in a further improvement in the terms of trade in the fourth quarter of 2010. In combination with sluggish imports and a recovery in export volumes of especially mining products, and vehicles and transport equipment, this led to a significant narrowing of the deficit on the current account of the balance of payments. At the same time, the surplus on the financial account of the balance of payments fell steeply as inward portfolio investment, having recorded sizeable inflows in 2009 and the first three quarters of 2010, switched to an outflow.
Both the effective exchange value of the rand and the international liquidity position of the South African Reserve Bank (the Bank) trended higher in 2010. While the international liquidity position continued rising in the first two months of 2011, the exchange rate of the rand depreciated somewhat over the period, not least on account of net sales by non-residents of South African equity and debt securities.
As the economic recovery progressed growth in the M3 money supply accelerated in the course of 2010, although remaining far below the levels recorded from 2005 to 2008. In the fourth quarter the pace of M3 growth was, however, exceeded by that of the nominal gross domestic product, resulting in a renewed increase in the velocity of circulation of the money supply. Bank loans and advances to the private sector also picked up in 2010. Whereas previously mortgage advances to the household sector had been the only area of consistently rising credit extension, advances to the corporate sector started recovering in the third quarter of 2010 but lost momentum in the final months of the year.
Money-market interest rates declined in response to the reduction in the repurchase rate on 19 November 2010 and subsequently remained at or around 30-year lows; adjusted for expected inflation, real money-market rates were quite low during this period. Fears of rising global inflationary pressures and geopolitical pressures resulted in a marked increase in rates on forward rate agreements from January 2011, while yields on bonds also rose significantly from their lows in November 2010.
South African share prices approached their record levels of early 2008 towards the end of 2010 and in early 2011, and turnover in major financial markets was brisk. However, activity in the real-estate market remained subdued and house prices lustreless.
The February 2011 National Budget provided support for the New Growth Path through actions to bolster employment creation, consistent with government’s countercyclical approach within the context of fiscal sustainability. The Budget estimates displayed a slightly slower pace of narrowing of the fiscal deficit and a somewhat higher government debt trajectory than in earlier official projections.