Throughout 2011 growth in the emerging-market economies remained considerably more robust than in the mature economies. Real output growth in emerging-market economies in general nevertheless moderated in the fourth quarter of 2011, while global trade volumes remained relatively flat. While global uncertainty eased somewhat in early 2012 with progress apparently being made with the resolution of the crisis in the euro area, serious concerns continued to cloud the economic landscape. Nevertheless, real output growth in the United States (US), the world’s largest economy, accelerated notably in the final quarter of 2011, and a number of economic indicators suggested that the US recovery was gaining further traction in the beginning months of 2012.
Most international commodity prices remained high in 2011, supported by the generally stronger growth outcomes in emerging-market economies, supply constraints and geopolitical tensions. This was reflected in food and energy prices which, in turn, contributed to upward pressure on inflation in 2011. In early 2012 oil prices surged further as tensions around Iran flared higher. Looking ahead, however, global consumer price inflation seemed likely to slow in the medium term, with an easing of demand in both advanced and emerging-market economies and stabilisation of commodity prices.
In sub-Saharan Africa growth was generally robust, supported by firm prices of export commodities and, in some instances, rising production volumes as additional capacity was brought on stream. However, in most countries the picture was clouded by inflation, which in several instances picked up to fairly high double-digit rates.
In South Africa growth in real gross domestic product accelerated to an annualised rate of 3,2 per cent in the final quarter of 2011 as activity in the mining and manufacturing sectors recovered, following two quarters of decline induced by factors such as industrial action, mining fatalities and safety inspection shutdowns. Gold and coal made the largest contributions to the higher mining output in the fourth quarter, while the improvement in manufacturing was widespread but most prominent in the manufacturing of wood and wood products, paper, publishing and printing, and basic iron and steel. Real value added by the agricultural sector contracted further in the fourth quarter. By contrast, the tertiary sector maintained relatively strong growth throughout 2011, although the pace of increase moderated somewhat in the fourth quarter. The real value added by government recorded strong growth in the fourth quarter of the year, partly on account of the population census. Growth in the trade sector moderated somewhat although it remained relatively high, while the finance, insurance, real-estate and business services sector also recorded slower growth over the period. Overall utilisation of production capacity in the economy remained fairly low, although bottlenecks were encountered in areas such as electricity generation and the transport of bulk mining products.
Among the domestic expenditure components, real household consumption expenditure continued to expand briskly. After a slight hesitation in the middle quarters of 2011 its pace of increase picked up in the final quarter as consumption expenditure continued to track growth in real disposable income. The lower interest rate environment was supportive of household consumption expenditure, along with the gradually declining level of household indebtedness which had receded from more than 82 per cent of annual disposable income in 2008 to less than 76 per cent at the end of 2011. Spending on durable goods remained the strongest-growing category within overall household consumption expenditure, recording double-digit rates of increase throughout 2011.
Real final consumption expenditure by government picked up in the fourth quarter of 2011 as government purchased military equipment alongside rising real expenditure on public servants’ salaries and wages.
Growth in real fixed capital formation gained momentum in each successive quarter of 2011. This pattern of acceleration was observed across all three main institutional groupings, but with the most significant turnaround recorded by general government which had moved from a contraction in the first quarter of 2011 to a brisk rate of expansion in the final quarter of the year as progress was made with housing, construction works and water projects. Capital spending by public corporations increased apace in the final quarter of 2011, led by Eskom’s power station projects and Transnet’s debottlenecking of its pipeline, port and rail capacity. In the private sector real fixed capital formation rose over a broad front in the fourth quarter of 2011. Manufacturers expanded their warehouse and transport capacity, mining companies continued responding to favourable commodity prices, and telecommunications companies invested more in information technology-related products. Following a long period of stagnation, a marginal increase in real spending on residential buildings was recorded in the final quarter of 2011.
The aggregate level of real inventories continued to rise in the final quarter of 2011, reflecting rising stocks in the wholesale and retail trade subsectors as sales volumes trended higher. This was partly countered by a decline in motor trade inventories and in the maize component of agricultural stocks-in-trade.
Aggregate employment trended higher over 2011 as the economy continued to expand, while the number of discouraged work-seekers also rose somewhat, culminating in a reduction in the unemployment rate. The average wage settlement rate in 2011 amounted to 7,7 per cent, lower than in 2010, while the pace of increase in unit labour cost also decelerated somewhat.
After having remained within the target range for 21 consecutive months, consumer price inflation breached the upper limit of the target range from November 2011. The acceleration to levels in excess of 6 per cent was mainly driven by the prices of food, petrol and electricity. Excluding these components, the rate of underlying consumer price inflation also picked up notably over the past year but still remained marginally below the midpoint of the inflation target range.
The favourable prices of key export commodities were reflected in an overall improvement in the terms of trade in 2011, although this measure weakened moderately in the final quarter of the year. Reflecting brisk domestic expenditure, imports rose more strongly than exports in 2011, culminating in a deterioration in the trade balance. The trade balance switched from surpluses earlier in the year to a deficit in the final quarter. By contrast, the deficit on the services, income and current transfer account narrowed significantly in the fourth quarter of 2011 as dividend payments to non-residents declined following exceptionally large payments in the third quarter. This offsetting effect was large enough to result in a modest narrowing of the deficit on the current account to 3,6 per cent of gross domestic product in the fourth quarter of 2011. The deficit for the full year 2011 nevertheless widened by half a percentage point to 3,3 per cent of gross domestic product. This was again more than fully financed by a net inflow on the financial account of the balance of payments. All the inward investment categories recorded inflows in the final quarter of 2011, with foreign direct investment making the largest contribution. The direct investment inflows emanated mainly from the United Kingdom (UK) and China, and were largely directed towards the mining, communication and financial intermediation sectors.
Swings in international risk appetite continued to feed through to the exchange value of the rand and other emerging-market currencies, with rising uncertainty regarding the prospects for the euro area and other developed economies perversely being reflected in a withdrawal of funds from developing markets by international investors – the so-called flight to familiarity. From an already low level, the effective exchange value of the rand depreciated further in October and November 2011 but recovered in December as international investors found some consolation in major central banks’ co-ordinated injection of liquidity into the global financial system, and in positive economic data released by some developed countries. The rand appreciated further in January and February 2012 as the International Monetary Fund (IMF) announced its intention to raise its lending capacity to countries in need and as tentative progress was made in resolving the sovereign debt crisis in Europe.
Growth in the M3 money supply accelerated in the second half of 2011, while the pace of increase in banks’ loans and advances to the domestic private sector also trended somewhat higher. A strong uptake of general loans by both the corporate and the household sectors was observed over the period, partly reflecting the active promotion of these types of loans by a number of banks. Growth in instalment sale credit benefitted from robust consumer demand for motor vehicles. By contrast, mortgage lending waned further in 2011 and was quite weak in the final quarter of the year, consistent with the subdued conditions in the real-estate market. This was mirrored in the poor performance of house prices in 2011 and early 2012, with the luxury segment of the market the most under siege.
Nominal money-market interest rates have since late November 2010 been quite stable at 30-year lows, anchored by the repurchase rate which has been maintained at 5,5 per cent by the South African Reserve Bank (the Bank). Adjusting nominal rates for expected inflation, real money-market interest rates have also been quite low during this extended period. Rates on forward rate agreements seem to suggest that since late 2011 market participants have seen the likelihood of any further reduction in policy rates as quite remote, not least because inflation accelerated to levels above the target range.
The South African President committed government to a coordinated drive to improve South Africa’s infrastructure in his State of the Nation address early in 2012. This commitment forms a key component of the strategy to raise the country’s growth rate and reduce unemployment, and found expression in the National Budget tabled in February 2012. Allocations to public-sector capital formation were raised, with due emphasis on the need for efficiency and prompt execution of capital projects, and on the imperative to restrain government’s wage bill. Indications were that government revenue would be somewhat stronger in 2011/12 than the projections made in the October 2011 Medium Term Budget Policy Statement (MTBPS). Government would continue to support the economic recovery, following a countercyclical fiscal path within the context of fiscal sustainability. Deficits would be reduced gradually to ensure stabilisation of the national government debt ratio at prudent levels towards the end of the three-year planning period. The budget estimates provided for marginally smaller fiscal deficits than in earlier official projections.
South African share prices, buoyed by positive trends in share prices on major international bourses, relatively high commodity prices, firm domestic expenditure and the infrastructure drive, increased notably towards the end of 2011 and soared to all-time-high levels in early 2012. Share market turnover also reached a record high in 2011. Turnover in the secondary bond market picked up considerably in 2011, while bond yields fluctuated lower in late 2011 and early 2012, first discounting the impact of slower economic growth and later the effects of rand appreciation on inflation.
While liquidity conditions in some of the developed economies remained strained, requiring exceptional support from central banks, conditions in the South African money market remained orderly in 2011 and early 2012, as had been the case throughout the international financial crisis. In January 2012 the Bank announced further refinements to its monetary policy operational procedures, effective from 1 March 2012. These refinements are of a technical nature and are designed to eliminate minor frictions which were sometimes encountered in the Bank’s extension of repurchase finance to the money market. The range of maturities on the Bank’s reverse repurchase transactions and debenture issues would also be expanded.