Led by China, growth in the developing economies maintained fairly robust momentum. This continued to provide support to a wide range of commodity prices, alongside the impact which the financial turmoil in the euro area and tensions in the Middle East and North Africa had on the price of gold. In sub-Saharan Africa available data suggest that economic growth also continued at a fair pace, supported by favourable prices of export commodities, financial systems that were not overly exposed to the problems of the advanced economies, and improved economic policies.
As attempts at fiscal consolidation continued, central banks in the advanced economies continued to provide support to the economic recovery through expansionary monetary policies. In a number of developing economies, inflation concerns arising from food and energy prices and, in some instances, from a general overheating of the economy prompted policymakers to tighten monetary policy.
The South African economy continued to expand in the third quarter of 2011 but at a lacklustre pace, recording a growth rate broadly similar to that of the second quarter. Third-quarter production was held back by industrial action which especially made itself felt in the mining and manufacturing sectors. Real value added by the mining sector contracted in the quarter under review as strike activity added to the impact of work stoppages related to accidents, logistical problems and plant maintenance. Agricultural output also declined as crops, while large, did not match the bumper crops harvested in the previous year.
In the manufacturing sector industrial action in several subsectors, fragile global demand and strong international competition were reflected in a mild contraction in production in the third quarter of 2011. This also spilled over to the electricity sector where real value added declined somewhat, amplified by significantly higher electricity tariffs. The construction sector experienced a modest increase in real output as civil construction activity expanded, countering weak demand for new residential and non-residential buildings.
The tertiary sectors maintained robust growth in the third quarter, led by the trade sector where retail and motor trade activity performed well. Increased activity in the equity, bond and other financial markets simultaneously bolstered growth in real value added by the finance sector, although conditions in the banking subsector remained subdued.
Domestic expenditure gained momentum in the third quarter, led by fixed capital formation and final consumption expenditure by households.
Households continued to raise their real final consumption expenditure at a rate tuned to the growth in their real disposable income, allowing the ratio of debt to disposable income to inch lower. Growth in household expenditure on durable goods was particularly strong in the third quarter of 2011, as spending on new motor vehicles and on recreational and entertainment goods surged.
Albeit from a low base set in 2009, real fixed capital expenditure accelerated further to reach a brisk rate of growth of 5,6 per cent in the third quarter of 2011. All three main institutional sectors recorded a faster pace of increase in real capital outlays over the period.
Private business enterprises in the agricultural sector stepped up capital spending in the third quarter against the background of favourable product prices and sizeable crops, while those in the communication sector raised their capital outlays in areas such as optic cables. Car manufacturers and the banking industry also raised their capital expenditure. Capital spending by public corporations gained further momentum as Eskom continued with the construction of new power stations, and Transnet with the upgrading of its capital stock and construction of a multi-product pipeline. General government contributed to the growth in real fixed capital formation in the third quarter as local governments stepped up capital expenditure in various areas, including water projects.
Real final consumption expenditure by government increased further in the third quarter of 2011, while the accumulation of inventories continued for the fifth consecutive quarter, led by inventory holdings in the manufacturing, electricity and construction sectors and by agricultural stocks-in-trade.
The relatively strong growth in domestic expenditure in the third quarter was accompanied by briskly rising imports and a narrowing of the trade surplus as export proceeds failed to keep up with rising outlays on imports. At the same time, dividend payments to non-resident investors rose considerably in the third quarter, resulting in a widening of the deficit on the current account of the balance of payments to 3,8 per cent of gross domestic product. This was financed by net capital inflows on the financial account of the balance of payments, although international investors reduced their holdings of South African portfolio assets during the quarter under review.
With international investors becoming more risk-averse and withdrawing funding from emerging markets as they sought the familiarity of their own markets, a significant depreciation in the exchange value of the rand was registered from September 2011. This contributed to upward price pressure, alongside adverse developments in the prices of food, fuel and electricity. Consumer price inflation continued its acceleration and by October 2011 had risen to a twelvemonth rate of 6,0 per cent, matching the upper limit of the inflation target range. However, underlying measures of inflation (which exclude the more volatile items in the consumer price basket) remained fairly subdued compared with the headline rate.
Wage settlements edged slightly higher in the third quarter of 2011. Employment simultaneously rose somewhat, contributing to a moderate reduction in the official unemployment rate. Labour productivity increases were slow in recent quarters, while capacity utilisation in manufacturing remained low.
The Monetary Policy Committee (MPC) has maintained the repurchase rate at 5,5 per cent since December 2010. At its recent meetings, the MPC’s decisions were informed by the absence of demand-driven inflation, as evidenced by well-contained rates of underlying inflation and indications of significant slack in the economy. Furthermore, although inflation was projected to rise above 6 per cent for a number of quarters, it was expected to re-enter the target range within the time horizon over which monetary policy is effective.
Consistent with the unchanged repurchase rate, money-market interest rates were fairly stable over the past five months, although forward rate agreements responded to changes in market expectations triggered among other things by changes in the exchange rate and policy statements. Money-market conditions remained orderly, with the daily liquidity requirement displaying its usual variation and drifting somewhat higher over the period.
Despite the relatively low level of money-market interest rates and firm household consumption and fixed capital spending, bank loans and advances remained generally hesitant. In recent months the demand for credit was restrained by sluggish confidence and prospective borrowers’ fears of becoming overextended, while the supply of credit was held back as lenders maintained conservative lending standards, mindful of the still-high level of impaired advances on their balance sheets and poor risk-adjusted returns on some types of lending. Growth in mortgage advances was slow, confirming the weakness in house prices and real-estate activity. However, unsecured lending activity such as the extension of personal loans gained significant momentum over the past year; its contribution to overall credit extension, though, remained fairly small.
Most South African financial markets recorded strong turnover in the third quarter of 2011. Share prices on the JSE Limited fell back in early August, mirroring share price movements on other international exchanges as investors feared the impact of exposure to peripheral European debt, but staged a partial recovery in the ensuing months.
In the bond market government remained the most important issuer of debt securities in the third quarter of 2011. Government bond yields declined to recent lows in early September, reflecting the appreciation in the exchange value of the rand, firm demand for bonds by non-residents, and expectations that short-term rates may remain low for longer in the face of subdued economic conditions. Bond yields rebounded in September as renewed fears related to the debt problems in the euro area drove non-residents from the domestic bond market, taking their funds to more familiar territory and fuelling depreciation of the rand. Yields continued fluctuating higher to the end of November, not least due to bouts of further depreciation in the exchange rate of the rand accompanied by a worsening of inflation expectations.
The slower-than-expected pace of economic growth was reflected in a shortfall in tax collections and consequently a widening of the fiscal deficit. In the October 2011 Medium Term Budget Policy Statement the fiscal projections were amended to reflect the weaker global and domestic economic environment. Accordingly, government factored in countercyclically larger deficits over the medium term, providing more support to the economy while retaining a sustainable path for the government debt ratio.