Publication Details

As strong demand from emerging-market economies continued to bolster international commodity prices, global inflation accelerated somewhat. Against this backdrop, monetary policy was tightened in several emerging-market countries, while the euro area was the first of the major mature economies to raise policy interest rates, albeit from a very low starting level. 

Economic activity in South Africa gained further traction in the first quarter of 2011 when real gross domestic product expanded at an annualised rate of almost 5 per cent. Manufacturing output rose considerably over the period, led by higher production of petroleum and chemical products but with the expansion spread across most of the subsectors of manufacturing. Despite this improvement, aggregate production in manufacturing remained well below pre-crisis levels and capacity utilisation rose only marginally. Growth in the tertiary sectors accelerated somewhat as the commerce sector registered rising sales volumes while the finance sector facilitated more transactions. By contrast, growth in the primary sector lost momentum in the first quarter as lower field crop production due to flooding resulted in a moderate contraction in agricultural output. This was exacerbated by a slower pace of increase in mining activity as production of gold and coal contracted noticeably. Technical problems at some mines and lower grades of ore milled held back gold production, while excessive rainfall and logistical problems resulted in a reduction in coal output.

Strongly rising real consumption expenditure by the household sector continued to provide the main impetus to domestic final demand in the first quarter of 2011. The brisk consumption spending mirrored a further increase in real disposable income as property income and compensation of employees trended higher. Household debt rose moderately in the first quarter, but the increase in disposable income was strong enough to reduce the household indebtedness ratio. Among the broad types of consumer items, expenditure on durable goods recorded the strongest increase over the period.

At the same time, final consumption expenditure by government rebounded in the first quarter, mainly due to the acquisition of a number of military aircraft. Excluding these lumpy purchases, government maintained a fairly smooth path of expenditure increases.

Real fixed capital formation advanced at a stronger pace in the first quarter of 2011, with both the public corporations and the private sector contributing to this acceleration. Public corporations involved in the electricity and transport sectors increased their real capital outlays, while the private-sector producers of agricultural and mining products and transport and communication services stepped up their capital spending. The overall level of capital formation, however, still remained low, consistent with the surplus capacity prevailing in most sectors. 

Inventory investment turned positive in the final quarter of 2010 and rose further in the period under review, supporting the rising volumes of sales and production in the economy. The increase in inventories in the first quarter of 2011 was mainly evident in the manufacturing sector.

Rising levels of domestic expenditure were reflected in an increase in the volume of imports in the first quarter of 2011. At the same time, export volumes were lustreless, influenced by the comparatively subdued growth performance of South Africa’s traditional export destinations. A moderate deterioration in the terms of trade contributed further to a widening of the deficit on the current account to 3,1 per cent of gross domestic product in the first quarter of 2011.


The notably larger deficit on the current account was more than fully financed by capital inflows. Despite sizeable net secondary-market sales of portfolio assets by non-residents in South Africa, primary issues of international bonds ensured that overall portfolio investment into South Africa was positive during the first quarter of 2011. Along with inflows of direct and other investment capital, this allowed the South African Reserve Bank (the Bank) to step up its accumulation of foreign reserves in the quarter, for the first time lifting South Africa’s official gold and foreign-exchange reserves to a level in excess of US$50 billion.

While the effective exchange rate of the rand depreciated in the first quarter of the year alongside a moderate deterioration in the terms of trade, the currency movements were well contained as were the price movements of most categories of imported goods. However, the prices of fuel and food picked up notably and contributed to an acceleration in inflation, although the twelve-month rate of consumer price inflation remained below the midpoint of the target range throughout the first four months of 2011. 

Wage settlements remained fairly high in the first quarter of 2011, matching the average levels recorded in 2010. At the same time the unemployment rate rose to 25 per cent in the first quarter, although this was largely on account of seasonal factors. As the economic recovery progressed, formal-sector employment recorded its third successive quarterly increase in the final quarter of 2010 with employment increases in the public sector outpacing that in the private sector. 

Banks’ loans and advances to the private sector and the broadly defined money supply (M3) recorded pedestrian rates of growth in the first four months of 2011. Caution on the side of both borrowers and lenders restrained credit extension notwithstanding the low interest rate environment. Rising household consumption spending seemed to be supported by rising disposable income levels rather than by a recourse to credit. Mortgage credit extension continued to rise slowly while at the same time house prices remained subdued, housing construction activity slowed and property transaction volumes remained fairly weak. 

Long-term bond yields rose somewhat in the first quarter of 2011, reflecting higher issuance of bonds, stronger economic growth and the impact of a depreciation in the exchange value of the rand on inflation expectations. Yields subsequently receded in April and May, influenced by favourable fiscal and inflation data.

On the JSE Limited (JSE) share prices, on balance, moved somewhat higher in the first five months of 2011, although concerns in the wake of the natural disasters that struck Japan and lower commodity prices temporarily interrupted the upward trend in March and April. Listed companies stepped up the amount of capital raised through new issues of shares in the early part of 2011.

The borrowing requirement of the non-financial public sector narrowed significantly in fiscal 2010/11 if compared with the previous fiscal year. This partly reflected an improvement in government revenue, led by strong increases in value-added tax and import duty collections as the economic upswing, which commenced in October 2009, gained some momentum. At the same time, the capital expenditure by public corporations was below earlier expectations, reducing their need to borrow funds. On a gross basis national government increased its issues of bonds in fiscal 2010/11, partly to finance expenditure but also, to some extent, to facilitate the orderly accumulation of official foreign reserves. The government raised the level of deposits with the Bank as one of the main means to sterilise the money-market effect of reserves purchases by the authorities.