Global inflation remained benign during the period under review, although marked increases in international grain prices and occasional upward pressures on the oil price had an adverse impact on the inflation trajectory. The large output gaps, contained rates of inflation and ongoing fiscal consolidation in key overindebted nations provided room for monetary policy to remain accommodative in most parts of the world. 

The growth outlook for Africa south of the Sahara remained strong, supported by improved policy frameworks, modest spillovers from Europe, export diversification away from weak-growing advanced economies, and firm commodity prices. 

In South Africa economic activity suffered a setback in the third quarter of 2012 as the pace of growth in real gross domestic product more than halved to an annualised rate of 1,2 per cent. This mainly reflected a pronounced contraction in the real output of the mining sector, which was severely impacted by prolonged and violent labour unrest at a major platinum mine. The unrest also spilled over to some other platinum mines, and to a number of gold, iron ore, coal and diamond mines, thereby weighing on production volumes.

The lower growth rate also reflected a modest slowdown in agricultural production. By contrast, the real value added by manufacturing expanded in the third quarter of 2012, responding to an increase in domestic final demand and stronger exports in a number of manufacturing categories. Electricity production increased somewhat over the period, supported by a number of cold spells, higher exports to neighbouring countries, and the discontinuation of power buyback arrangements between Eskom and some of its industrial customers. 

In the services sector real output growth decelerated in the third quarter as real value added lost momentum in most subsectors, impacted by factors such as a slowdown in household consumption expenditure and disruptions to road freight transport services due to industrial action. However, growth in real value added by general government and by the personal services subsector edged higher over the period.

Real gross domestic expenditure growth slackened notably in the third quarter of 2012, mainly reflecting a sharp slowdown in inventory accumulation. In turn this was largely brought about by the production disruptions noted above which resulted in producers, especially in the mining sector, having to fall back on inventories in order to satisfy demand. Growth in real domestic final demand, however, inched higher in the third quarter, led by government consumption which was temporarily boosted by the acquisition of military aircraft. Fixed capital spending also gained further momentum over the period.

Real final consumption expenditure by households continued to rise in the third quarter but at a diminishing pace when compared with preceding quarters. Expenditure on durable and semi-durable goods, while losing some momentum, continued rising at a fair pace, having benefited from the reduction in interest rates in July 2012. While households incurred further debt during this period, their disposable income expanded at a more or less similar pace, resulting in an unchanged household debt-to-income ratio. Simultaneously, the July 2012 reduction in the repurchase rate contributed to a further decline in the household debt-service ratio. 

Growth in real fixed capital expenditure accelerated somewhat in the third quarter of 2012 as the pace of capital spending by public corporations picked up further, led by Eskom and Transnet. General government maintained a brisk pace of increase in capital expenditure, with provincial governments stepping up spending on road works and local government focusing on water infrastructure, the upgrading of informal settlements and the provision of social housing. While both public corporations and general government achieved robust annualised rates of increase in real capital formation over the period, private business enterprises increased their capital expenditure at a comparatively slow pace, consistent with the surplus capacity experienced in many parts of the economy. The increase in capital spending in the private sector could mainly be attributed to the finance sector, where expenditure on business information systems and computer-related equipment drove the increase, and to the construction sector, where the focus fell on the acquisition of machinery and equipment.

Employment in the formal sector rose further in the second quarter of 2012, with an indication that this increase was sustained into the third quarter. The net job creation registered in the second quarter occurred more in the public than in the private sector, with provincial and national government departments recording sturdy increases. Wage settlements in the first three quarters of the year remained contained and were reasonably aligned with developments in inflation and labour productivity. However, looking ahead, the wage outcomes arising from the recent bouts of confrontational industrial action could present some risks in this regard. 

Consumer price inflation, having registered a recent low twelve-month rate of 4,9 per cent in July 2012, regained momentum in the subsequent months, driven by the prices of petrol, electricity, education and food. Food inflation, which moderated in the first half of 2012, started accelerating again as international grain prices spiralled higher in the wake of climate-related setbacks to production.

The deficit on the current account of South Africa’s balance of payments with the rest of the world moved broadly sideways from the second to the third quarter of 2012 and amounted to 6,4 per cent of gross domestic product in both quarters. Resilient gross domestic final demand was reflected in firm imports, with import volumes rising marginally in the quarter concerned as, among others, military aircraft were imported in terms of the government’s arms procurement deal. The volume of merchandise exports also inched higher, reflecting higher agricultural and manufacturing exports despite a tough international trade environment. Simultaneously, the shortfall on the services, income and current transfer account narrowed somewhat, mainly on account of lower dividend payments to non-resident investors. 

Net financial inflows more than fully covered the shortfall on the current account in the third quarter as South Africa attracted a combination of portfolio, direct and other investment flows. The share of government debt securities in South Africa’s total foreign debt continued to rise over time as government issued more debt instruments and favourable interest rate differentials continued to attract non-resident attention. Despite the ease with which the deficit on the current account was financed and the modest increase in the country’s gross gold and other foreign reserves recorded in recent months, the effective exchange rate of the rand depreciated notably in October 2012, following a moderate depreciation in the third quarter. The depreciation in October followed on the heels of severe labour unrest and the downgrading of South Africa’s sovereign rating.

Growth in banks’ overall loans and advances to the domestic private sector continued along a path of gradual, but somewhat hesitant, acceleration in the course of 2012, as has been the case for the past three years. Mortgage lending activity remained very slow, reflecting the subdued state of the real-estate market and caution among both lenders and borrowers to raise their exposure in this area. Growth in the other lending categories was more buoyant, with instalment sale credit, credit card advances, and general loans and advances registering double-digit rates of increase over twelve months. While the general loans and advances component extended to households (sometimes referred to as ‘unsecured lending’) constitutes only a moderate proportion of total credit extension, it continued to record high rates of increase.

While depository investments continued to yield low returns and the housing market remained in the doldrums, South African share prices rose to record levels in 2012 with the latest all-time high recorded in November. Bond yields trended lower, particularly from around April, with demand for bonds strengthened by factors such as lower inflation and announcements regarding the inclusion of South African government bonds in the Citi World Government Bond Index (WGBI) from 1 October 2012; some investors increased their holdings of South African government bonds in anticipation of this event. From late September 2012, however, yields increased somewhat following sovereign ratings downgrades, the release of higher-than-expected inflation data, the depreciation in the exchange value of the rand and the moderate upward revision of the expected fiscal deficit in the Medium Term Budget Policy Statement (MTBPS).

The MTBPS was released in October 2012 and projected a somewhat slower pace of economic growth going forward, and with that a set of marginally higher budget deficits over the period up to 2014/15 than had been foreseen in the February 2012 Budget. The size of the deficits were forecast to narrow in the outer years of the planning period, which now extended to 2015/16, and it was estimated that national government’s gross loan debt would continue to rise at a moderate pace to level off at 42,7 per cent of gross domestic product from 2015. Actual national government revenue and expenditure from the beginning of the current fiscal year to October 2012 remained closely aligned with the path projected at the time of the Budget. At the same time, the non-financial public-sector borrowing requirement remained well contained and readily financed in the first half of the fiscal year.

Monetary policy was eased in July 2012 when the Monetary Policy Committee (MPC) reduced the repurchase rate from 5,5 per cent to 5,0 per cent, mindful of the deceleration in actual and projected inflation and of the considerable slack in the economy. Other short-term interest rates followed the repurchase rate downwards. At its subsequent meetings in September and November 2012, the MPC held the repurchase rate unchanged at its three-decade-low level, with considerations relating to a projected further weakening in economic growth balanced by the risks to the domestic inflation outlook arising from factors such as rising international food prices and exchange rate depreciation.