This Quarterly Bulletin focuses on economic developments in the first quarter of 2011. With the Bank being the institution responsible for identifying turning points in the business cycle, it also contains an article identifying the most recent lower turning point. Furthermore it includes a note presenting South Africa’s national financial account for 2010, including the flows on a quarterly basis.
To start with the international scene: Despite being uneven, with emerging-market economies outpacing the developed economies, the global economic recovery continued in the first quarter of 2011, defying concerns of a possible double-dip outcome in activity. In most developed economies stimulatory monetary policies remained in place, combined with fiscal consolidation alongside fragile confidence and a lack of job creation. Political turmoil and conflict in a number of countries in the Middle East and North Africa continued to disrupt economic activity, contributing to upward pressure on international crude oil prices. Following the occurrence of a massive earthquake and tsunami that devastated a large area of Japan on 11 March 2011, global supply chains were disrupted by the discontinuation of production in those areas.
Global inflation accelerated as a result of continued high international commodity prices due to strong demand from emerging-market economies. A rise in inflation prompted several emerging-market countries to tighten their monetary policies. The European Central Bank was the first of the mature economies’ monetary authorities to increase policy interest rates, albeit to a level that was still very low.
Moving on to the domestic economy: The upward phase in the South African business cycle continued in the first quarter of 2011, with real gross domestic product increasing at an annualised rate of almost 5 per cent. Most prominent output gains were recorded in the manufacturing sector, with the expansion occurring in most subsectors. Aggregate production in the manufacturing sector, however, remained below its level prior to the financial crisis and capacity utilisation rose only slightly in the first quarter.
Growth in the tertiary sector accelerated somewhat in the first quarter of 2011, not least on account of rising sales volumes in the commerce sector. A loss in momentum, however, occurred in the primary sector during this period following lower field crop production as a result of flooding which suppressed agricultural production. A slower pace of increase in mining activity due to lower production volumes of gold and coal contributed to the slowing of output by the primary sector.
Final demand in the first quarter of 2011 was boosted by a continued strong rise in real consumption expenditure by households, facilitated by further increases in real disposable income as income from property and compensation of employees trended higher. Expenditure on durable goods recorded the strongest increase over the period. Despite the moderate rise in household debt in the first quarter, the household indebtedness ratio declined as a result of the sturdy increase in disposable income. Mainly as a result of the purchase of a number of military aircraft, final consumption expenditure by government picked up noticeably in the first quarter. When these purchases are excluded, expenditure increases by government occurred along a fairly smooth path.
The rate of increase in real fixed capital formation picked up somewhat in the first quarter, following stronger increases in outlays by both public corporations and the private sector. Real capital outlays by public corporations involved in the electricity and transport sectors, and by private-sector producers of agricultural and mining products as well as transport and communication services increased. Notwithstanding these increases, the overall level of capital formation remained low, in line with the existence of surplus capacity in most sectors.
Rising volumes of sales and production in the economy was supported by inventory accumulation since the final quarter of 2010, with the increase in inventories in the first quarter of 2011 mainly evident in the manufacturing sector.
The increase in the volume of imports in the first quarter of 2011 resulted in the main from higher levels of domestic expenditure. As opposed to this increase, export volumes lacked vigour, not least due to relatively subdued growth in South Africa’s traditional export destinations. A deterioration in the terms of trade contributed further to a widening in the deficit on the current account of the balance of payments in the first quarter of 2011, to 3,1 per cent of gross domestic product.
The increased deficit was fully financed by capital inflows. The primary issuance of bonds by the South African government and public corporations compensated for the sizeable net secondary-market sales of portfolio assets by non-residents in South Africa, ensuring that overall portfolio investment into South Africa was positive during the first quarter of 2011. Assisted by inflows of direct and other investment capital, the Bank was in a position to increase its holdings of gold and foreign exchange reserves to a new record in excess of US$50 billion in the quarter.
Despite the depreciation in the effective exchange rate of the rand and the slight deterioration in the terms of trade, volatility in the movement of the currency and prices of most categories of imported goods were well contained. Inflation accelerated, following increases in the prices of food and fuel, but still remained below the midpoint of the target range throughout the first four months of 2011.
Notwithstanding employment advances occurring at a pedestrian pace, and the unemployment rate rising to 25 per cent in the first quarter of 2011, wage settlements remained high in that quarter, on a par with those in the preceding year as a whole. Formal-sector employment increased for the third consecutive quarter in the fourth quarter of 2011 as the economic recovery gained traction.
Notwithstanding the low interest rate environment, caution by both borrowers and lenders restrained credit extension to the private sector during the first four months of 2011. The rate of increase in the broadly defined money supply, M3, also remained subdued. Increases in household consumption expenditure seem to be supported by rising disposable income levels instead of the higher uptake of credit. The housing market remained in the doldrums, as evidenced by a slow rise in mortgage credit extension, house prices remaining subdued, slowing housing construction activity and property transaction volumes remaining fairly weak.
The issuance of more bonds, alongside higher economic growth and the depreciation in the exchange rate of the rand, resulting in higher inflation expectations, led to a rise in long-term bond yields in the first quarter of 2011. Long-term bond yields however edged lower in the subsequent two months.
Share prices on the JSE Limited, on balance, rose somewhat during the first five months of 2011, but the upward trend was temporarily interrupted in March and April by concerns associated with the natural disasters that struck Japan and lower commodity prices.
The borrowing requirement of the non-financial public sector narrowed meaningfully in 2010/11 when compared with the previous fiscal year. This was partly due to an improvement in government revenue mainly as a result of strong increases in value-added tax and import duty collections as the economic upswing that commenced in the second half of 2009 gained some momentum. It was also due to the capital expenditure by public corporations being lower than earlier projections.
In order to finance government expenditure (and to some extent to facilitate the orderly accumulation of official foreign reserves), national government increased its issues of bonds on a gross basis in 2010/11. To aid with the sterilisation of the money-market effect of reserve purchases by the authorities, the government raised the level of its deposits with the Bank.
In short then, an economy characterised by rising levels of activity and expenditure but with employment lagging; by fairly subdued inflation but with energy and food prices moving upward; by relatively low interest rates but with credit extension well contained; by sluggish export volumes but a favourable terms of trade and manageable current-account deficit; by notably higher foreign reserve levels and brisk expenditure on infrastructure in order to address binding constraints.