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Real economic growth in the domestic economy decelerated to 2,7 per cent in the first quarter of 2012, notwithstanding the sustained accommodative monetary policy stance and an improvement in business confidence levels. Production volumes in the mining sector contracted sharply in the first quarter of 2012 due to domestic supply constraints alongside relatively weaker demand from especially Asia. Growth in the real output in the manufacturing sector, however, accelerated in response to a more vibrant domestic economy; export volumes remained fairly subdued over the period. In addition to relatively weak demand from the euro area, domestic producers also experienced a decline in international price competitiveness due to an increase in the real effective exchange rate of the rand. Real value added by the construction sector rose moderately, largely underpinned by civil construction activity. By contrast, the real output of the trade sector displayed slower growth over the period. The finance sector recorded the strongest growth among the tertiary sectors in the first quarter of 2012. 

Consistent with the slower growth in domestic production, real gross domestic expenditure also lost some momentum in the first quarter of 2012. Household consumption expenditure moderated in pace with a slower rate of increase in real disposable income, notwithstanding low interest rates and attractive prices of imported items. Government consumption expenditure increased at a slower pace in the first quarter of 2012, reflecting a decline in the procurement of military equipment and a much slower pace of increase in salaries and wages following the completion of the population census fieldwork conducted in the preceding quarter. Fixed capital formation was supported by the enhanced affordability of imported capital goods, low interest rates and the higher priority assigned to infrastructural development in public-sector investment programmes. Nevertheless, the ratio of fixed investment to gross domestic product in South Africa remained low relative to that of many other developing countries and to investment levels needed to obtain higher growth. Enhanced levels of capital formation, allocated to economically efficient and sustainable projects, would go a long way towards strengthening the job-creating capacity of the economy.

According to the Quarterly Labour Force Survey (QLFS) conducted by Statistics South Africa (Stats SA), South Africa’s official unemployment rate rose from 25 per cent in the first quarter of 2011 to 25,2 per cent in the first quarter of 2012. Even though 304 000 job opportunities were created in the year to the first quarter of 2012, the pace of increase was not sufficient to prevent the number of unemployed people increasing by 164 000; the number of discouraged work-seekers also rose by 112 000 over the same period.

Owing to the sustained strong increases in real gross domestic expenditure, the deficit on the trade account of the balance of payments widened significantly in the first quarter of 2012 as import volumes continued to rise alongside declining export volumes. The size of the trade deficit was exacerbated by a further deterioration in South Africa’s terms of trade, as declining commodity prices adversely affected South Africa’s export earnings. Combined with a meaningfully larger shortfall on the services, income and current transfer account with the rest of the world, the current-account deficit widened further to 4,9 per cent of gross domestic product in the first quarter of 2012. This negative imbalance continued to be financed through a combination of net foreign direct investment, portfolio and other investment-related foreign capital inflows. In fact, the substantially larger net inward movement of capital in the first quarter of 2012 gave rise to an improvement in the overall balance-of-payments position. This contributed to an increase in the nominal effective exchange rate of the rand over the period, assisting in the moderation of inflationary pressures.

Global consumer price inflation remained well contained in early 2012, despite intensifying concerns regarding international oil prices resulting from geopolitical tensions over the period. Against the background of slowing global demand, crude oil prices, however, receded notably in May. In South Africa the acceleration in domestic inflation was arrested during the opening months of 2012 as twelve-month headline consumer price inflation moderated from 6,3 per cent in January 2012 to 6,0 per cent in March before picking up marginally to 6,1 per cent in April. This favourable development primarily resulted from a moderation in food price inflation.

Growth in credit extension picked up its pace during the first quarter of 2012, buoyed mainly by renewed appetite for credit by the corporate sector, which probably reflected the sector’s continued fixed investment activity and inventory accumulation. Although all credit categories contributed towards the overall increase in total loans and advances, the general loans category remained the dominant form of new credit extension in the opening months of 2012, while the asset-backed categories maintained muted growth rates. General loans to the household sector – also referred to as unsecured lending – rose briskly although at a somewhat slower pace than before.

Short-term money-market rates continued to track the sideways movement in the repurchase rate during the first five months of 2012, while forward rate agreements most recently started discounting the possibility of policy easing towards the end of the year. The South African Reserve Bank’s Monetary Policy Committee (MPC) kept the repurchase rate unchanged at its May 2012 meeting. While the inflation forecast appears to be more favourable, the committee emphasised the renewed risks from a possible further weakening of the exchange rate of the rand. However, the MPC noted that countervailing pressures could come from weaker demand and lower commodity prices, particularly those of oil. On balance, the risks to the inflation outlook appear to be somewhat on the upside. The MPC statements discussing developments underlying recent monetary policy decisions are reproduced in full on pages 60 to 67 of this Quarterly Bulletin.

Despite the change of South Africa’s sovereign debt outlook to negative by the rating agency Standard & Poor’s in March 2012, local bond yields continued to fluctuate downwards. This trend occurred alongside the appreciation in the exchange value of the rand up to March, the release of better-than-expected inflation data, strong demand for domestic bonds by non-residents and the announcement of the likely inclusion of South African government bonds in the Citigroup World Government Bond Index (WGBI) in the near future. Citigroup confirmed such inclusion early in June, indicating that it would take effect in October. Domestic share prices reached an all-time high in early May 2012.

National government recorded a smaller deficit in fiscal 2011/12 than originally budgeted, mainly on account of stronger revenue collections. Corporate income tax and customs duty collections exceeded the original projections by a considerable margin, more than offsetting weaker-than-budgeted value-added tax collections. The deficit of 4,9 per cent of gross domestic product was predominantly financed in the domestic bond market. Despite more than three years of significant fiscal stimulation, government’s gross loan debt, while rising, still remained below 39 per cent of annual gross domestic product.