Parallel to the anaemic growth in the advanced economies, economic activity in the developing economies also registered a slower pace of increase in the second quarter of 2011. Growth moderated across a broad spectrum of countries, including China, India, Brazil and Russia. In sub-Saharan Africa most countries continued on a path of recovery, with the speed of the recovery varying between countries but with economic activity in general buoyed by strong export commodity prices. Commodity prices remained relatively high notwithstanding the moderation in global growth, partly because of the high commodity intensity and projected robustness of the growth process in China. At the same time, the international price of gold was bolstered as general uncertainty reinforced the precious metal’s attractiveness as a safe-haven investment that has the benefit that it is not the liability of any institution.
Global inflation accelerated further in the second quarter of 2011 mainly due to further increases in certain commodity prices, with price pressures more pronounced in emerging-market than in advanced economies. Central banks in many emerging-market economies accordingly tightened monetary policy by raising interest rates and, in some instances, reserve requirements. Most advanced economies did not tighten monetary policy during the period under review, although the European Central Bank (ECB) raised its policy interest rate in April and July 2011.
Following the brisk pace of economic expansion recorded in the first quarter of 2011, real growth in the South African economy slowed substantially in the second quarter to an annualised rate of only 1,3 per cent. While activity in the tertiary sector expanded further, real value added in the main goods-producing sectors contracted notably in the second quarter. Agricultural output declined in the face of a smaller maize crop than that yielded in 2010 and the impact of heavy rainfall which impacted negatively on field crop and livestock production. Despite attractive international prices of mining commodities, mining activity receded as safety-related production stoppages and technical problems at certain mines contributed to a pronounced contraction in the real output of platinum group metals, while the production of coal, diamonds and gold also declined. Activity in the manufacturing sector recorded a substantial contraction in the second quarter of 2011. This was spread across several subsectors, including the manufacturing of motor vehicles, parts and accessories, which was adversely affected by supply constraints originating from disaster-stricken Japan.
In the tertiary sector the pace of real growth accelerated marginally in the second quarter, buoyed by an increase in value added by the general government sector and higher growth in the transport sector, underpinned by increases in the volume of imports and exports. By contrast, growth in the finance sector decelerated significantly in the quarter under review, while a slight deceleration was recorded in the trade sector.
The real disposable income of households continued to rise in the second quarter of 2011, but at a slower pace. This was reflected in a significant slowdown in the rate of growth in real final consumption expenditure of the household sector, as expenditure on services came close to stagnation and growth in spending on durable goods lost some of its earlier vigour. While households continued to incur more debt, this was proportionately less than the increase in their disposable income, thus resulting in a further decline in the household debt ratio.
Real final consumption expenditure by government contracted marginally in the second quarter of 2011, essentially because the high spending on armaments in the first quarter was not repeated in the second. Excluding military equipment, the underlying trend in government spending remained firmly upward in the first half of the year.
Growth in real fixed capital formation accelerated further in the second quarter to an annualised rate of increase in excess of 4 per cent. All three of the main institutional sectors recorded broadly similar rates of increase in capital formation. In the case of the general government sector, real capital spending rose for the first time after nine quarters of contraction as provincial and local governments stepped up expenditure on housing and construction works. Public corporations continued to invest more in the areas of electricity and transport in order to alleviate bottlenecks and facilitate growth. Capital formation by private business enterprises gathered momentum, propelled by the agricultural and mining sectors, which faced relatively attractive product prices, and the communication sector, driven by technology and competition. Inventory investment slowed somewhat from the first to the second quarter of 2011, alongside the slower growth in aggregate domestic production and expenditure.
With economic growth slowing, household-based survey information shows that employment increased very little in the second quarter of 2011; because the labour force expanded significantly at the same time, the unemployment rate rose further over the period. Average wage settlements moderated somewhat in the first half of 2011 if compared with the same period in 2010. Consumer price inflation, which had hovered around 6 per cent in the opening months of 2010, decelerated to twelve-month rates of less than 4 per cent in late 2010 and early 2011 as the significant output gap and relatively strong exchange value of the rand impacted on inflation. However, as 2011 progressed consumer price inflation picked up renewed momentum, fuelled especially by the prices of food, petrol and electricity. It has, nevertheless, remained within the target range.
While overall real gross domestic expenditure recorded a subdued pace of increase in the second quarter, it was nevertheless accompanied by a further increase in the volume of imports. At the same time, export volumes also rose moderately. Combined with a marginally larger shortfall on the services, income and current transfer account with the rest of the world, these developments resulted in a slightly larger second-quarter deficit on the current account of the balance of payments, amounting to 3,3 per cent of gross domestic product.
The deficit on the current account in the second quarter of 2011 was sufficiently financed by an inflow of capital on the financial account of the balance of payments. Net purchases of South African debt securities by non-residents constituted the largest single source of financing, followed by direct investment inflows mainly directed to the domestic trade, mining and manufacturing sectors. At the same time, South African entities acquired more assets abroad. Turnover in the domestic market for foreign currency receded moderately but still remained elevated in the second quarter, while the effective exchange value of he rand declined marginally over the period and declined further in July and August.
Following a reduction in November 2010, the repurchase rate of the South African Reserve Bank (the Bank) has subsequently remained at 5,5 per cent. In the relatively low interest rate environment, the pace of increase in bank loans and advances to the domestic private sector rose moderately in the first seven months of 2011. The earlier contractions in bank lending to the corporate sector made way for increases, albeit muted, while growth in instalment sale credit and “other” loans and advances picked up notably.
Money-market conditions remained stable in the first eight months of 2011. In the capital market strong non-resident demand for South African bonds, moderate inflation and a somewhat smaller projected public-sector borrowing requirement contributed to a decline in bond yields. South African share prices registered a recent high in mid-February 2011 but subsequently fluctuated lower alongside declining prices on international share markets, reflecting renewed concerns regarding prospects for the US, euro area and global economy in general. South African house price increases remained hesitant in the first eight months of 2011 as employment gains remained muted, reinforcing the subdued property market turnover and slow pace of increase in mortgage lending. Housing construction activity also remained in the doldrums.
The non-financial public-sector borrowing requirement was marginally higher in the April–June quarter of 2011 than in the corresponding period in 2010, largely on account of a larger national government deficit. While income tax paid by companies picked up significantly in the period concerned, value-added tax collections fell below earlier projections, consistent with the slowdown in domestic expenditure during the quarter. The sizeable deficit was partly shaped by countercyclical considerations, and was readily financed through the issuance of domestic government bonds. As a result, in June 2011 the national government’s gross loan debt rose above R1,0 trillion for the first time ever.