Output in the advanced economies declined in the fourth quarter of 2012 – the first contraction since the severe recessionary phase of the global crisis in 2008 and 2009. By contrast, the pace of economic expansion in emerging and developing markets accelerated in the final three months of last year as a result of faster growth in all regions, especially emerging Asia. Although real output growth moderated somewhat in the sub-Saharan Africa region, it still remained robust at around 4,5 per cent in 2012. The strong growth performance was underpinned by robust domestic demand, high commodity prices and rising export volumes.

International financial market conditions have improved in recent months, partly due to accommodative monetary policies by most central banks aimed at supporting economic growth. However, these easy monetary policy conditions in advanced economies in many instances resulted in depreciating exchange rates of the currencies concerned, thereby putting upward pressure on emerging-market currencies, and making the exports of the latter group of countries more expensive and less competitive.

The United States (US) avoided the so-called fiscal cliff at the beginning of 2013, but only addressed the revenue side of the fiscal problems. The US sequester (or automatic spending cuts), which became effective at the beginning of March 2013, seems set to result in a reduction of US$85 billion in federal government expenditure in the final seven months of this fiscal year, which could impact negatively on domestic demand in a fragile stage of the US recovery.

Global inflation moderated from around mid-2011 and moved broadly sideways in the second half of 2012. Despite high levels of the oil price, inflation pressures remained limited, especially in the advanced economies where large output gaps moderated price and wage behaviour. International prices of a number of food-related commodities softened somewhat in the final months of 2012.

In South Africa real economic growth picked up moderately in the final quarter of 2012 to an annualised rate of 2,1 per cent, roughly double the pace recorded in the third quarter when severe unrest in the mining sector had taken its toll. In the mining sector real value added contracted further in the fourth quarter of 2012 as a number of gold and platinum mines continued to be adversely affected by strike activity. By contrast, agricultural output rose further as livestock production held up fairly well over the period. The manufacturing sector recorded a firm increase in real output in the final quarter, supported by the expansion in activity in emerging-market economies and improved competitiveness arising from the depreciation of the external value of the rand. However, construction activity slowed in the fourth quarter of 2012, while the sector producing electricity registered a contraction in output on account of planned and unplanned shutdowns of operations at some mining and manufacturing establishments, alongside a further round of power buy-back arrangements.

In the services sectors real value added expanded at a somewhat firmer pace in the final quarter of 2012, led by an acceleration in banking and financial market activity. The transport and communication sector also registered stronger growth over the period as freight transport activity increased. By contrast, fourth-quarter retail activity was disappointing, resulting in a slowdown in real output growth in the trade sector, while real output growth of the general government sector also decelerated marginally.

The lacklustre economic growth in 2012 was accompanied by subdued job creation. While the number of workers in the public sector continued to rise, this was not always the case in the private sector, with a significant number of jobs, for instance, lost in the mining sector in the third quarter of 2012. Labour productivity continued rising at a pedestrian pace, while wage settlements averaged 7,6 per cent in 2012.

All the main domestic expenditure components weakened in the fourth quarter of 2012, culminating in a slight contraction in real gross domestic expenditure. Growth in household real final consumption expenditure slowed somewhat over the period, constrained by slower growth in disposable income and rising inflation. While moderating somewhat, the pace of increase in real spending on durable and semi-durable goods remained sturdy, led by demand for furniture, household appliances, vehicle parts and recreational goods. Real expenditure on non-durable goods and services increased at a considerably slower pace than on durables and semi-durables. Household consumption expenditure growth continued to match growth in household disposable income in the final quarter of 2012, and although household debt rose further, its pace of increase did not match that of disposable income. Accordingly, the household debt-to-income ratio edged slightly lower.

Real final consumption expenditure by general government contracted slightly in the fourth quarter of 2012 as the high level of spending on armaments in the third quarter was not repeated in the final quarter.

Real fixed capital formation rose at a notably slower pace in the fourth quarter of 2012. The rate of increase in real fixed capital spending by both general government and public corporations slowed significantly over the period. By contrast, real fixed capital formation by the private sector accelerated further in the final quarter of the year led by the mining, manufacturing and trade sectors. A number of gold and coal mines stepped up capital expenditure against the background of favourable output prices, while manufacturing firms increased their capital outlays alongside rising production and capacity utilisation.

After nine consecutive quarters in which aggregate inventory holdings increased, real inventory investment turned negative in the fourth quarter of 2012. Notable decreases in inventories were registered in the mining and manufacturing sectors, with production setbacks partly met by running down stock levels. This contributed to a broadly unchanged volume of exports in the final quarter of the year, with a recovery in mining exports – especially iron ore and coal – countered by a decline in exports of manufactured goods.

The volume of imports receded moderately in the final quarter of 2012, weighed down largely by lower imports of vehicles and transport equipment. The value of merchandise imports, however, increased over the period, predominantly owing to a significant depreciation in the external value of the rand. This also underpinned an increase in the rand value of exports. Despite a moderate deterioration in the terms of trade, these developments resulted in a slight narrowing of the deficit on the trade account from the third to the fourth quarter. Simultaneously, the deficit on the services, income and current transfer account contracted marginally, causing the deficit on current account of the balance of payments to decrease to 6,5 per cent of gross domestic product.

Financial inflows were again sufficient to finance the deficit on current account in the final quarter of 2012. The largest inflows were recorded in the form of an increase in short-term loans extended to the domestic banking sector, supplemented by an increase in non-resident deposits with South African banks. Net portfolio investment made a small positive contribution, whereas net direct investment registered an outflow of capital during the quarter concerned.

The nominal effective exchange rate of the rand on balance depreciated in the final quarter of 2012 as domestic constraints and labour unrest continued to weigh on international investor sentiment. With inflation already gradually accelerating in the second half of 2012, driven by higher prices of food and petrol, the weakening of the exchange rate of the rand imparted a further upward bias to a wide range of prices and costs. The twelve-month rate of consumer price inflation nevertheless remained below the upper limit of the inflation target range, and continued to do so in January 2013 when a rebased and reweighted consumer price index was adopted.

Underlying inflation pressures remained contained, whereas administered price inflation remained higher than headline inflation and has consistently exceeded 6 per cent over the past three years. In a step which has a bearing on administered prices and inflation expectations, the course of electricity prices was moderated in late February 2013 with the determination by the National Energy Regulator of South Africa (Nersa) that the electricity prices charged by Eskom would be increased by 8 per cent per annum over the next five years rather than the 16 per cent as requested by Eskom.

The lacklustre growth in income and expenditure was reflected in a subdued pace of increase in money supply and in overall bank loans and advances to the domestic private sector in the final months of 2012. Mortgage advances displayed little increase, consistent with the directionless state of the real-estate market. Instalment sale credit and leasing finance continued to expand firmly, in pace with sales of motor vehicles and other durable goods, while other loans and advances recorded the strongest growth with both general loans to companies and unsecured lending to households posting brisk increases.

Money-market interest rates remained stable with the policy rate unchanged at 5,0 per cent since July 2012. Orderly conditions and adequate liquidity continued to prevail in the money market. In the bond market lower bond yields and rising net issuance supported turnover, while in the share market local share prices reached new record highs.

Subdued international and domestic economic activity culminated in lower-than-projected tax collections in the first ten months of fiscal 2012/13. The National Budget presented in February 2013 provided for marginally larger fiscal deficits over the next three fiscal years than earlier projections, recognising the present need for further countercyclical support to the economy, but steering towards a significantly smaller deficit and stabilisation of the ratio of government debt to gross domestic product in the outer years. To this end, expenditure plans were trimmed over the medium term. A process has started to align government’s budget priorities firmly with the National Development Plan and gain traction in its implementation, building on the country’s substantial strengths and tackling its weaknesses to propel development onto a vibrant trajectory.