Publication Details

The discussion of most recent economic developments in South Africa, for this Quarterly Bulletin, focuses on the second quarter of 2011. My remarks today will be limited, but hopefully pointed to a handful of key observations, with the experts on the panel thoughtfully dealing with the material on hand in more detail. 

In many aspects economic activity in the second quarter was disappointing to say the least, both internationally and in the domestic arena. Real growth on the global front slowed dramatically as confidence deteriorated due largely to the persistent fiscal credibility crisis in the euro area and uncertainty about the raising of the federal debt ceiling in the United States. Production was also held back by supply-chain disruptions in the wake of the earthquake and tsunami that struck Japan in the first quarter of this year. This moderation in global growth filtered through to the emerging market economies.

Closer to home, the strong pace of economic growth recorded in the first quarter of the year made way for a pedestrian rate of growth in the second quarter as real value added in the agricultural, mining and manufacturing sectors contracted notably.  This loss of economic growth momentum was especially regrettable in light of the high and rising rate of unemployment in the country.  On a net basis very few jobs were created during the quarter, and the unemployment rate had increased further.   The latest short-term indicators for these sectors seem to suggest that the third quarter of the year was not off to a good start.

Of some importance is that growth in real final consumption expenditure by the household sector also slowed markedly in the second quarter, alongside slower growth in households’ real disposable income. This follows two years during which growth in household consumption expenditure has been the mainstay of the revival in the overall domestic expenditure. As inflation picked up during the second quarter, not least due to the higher prices of fuel, food and electricity, wage settlements moderated somewhat and growth in economic activity slowed.

On the positive side, while growth in consumption expenditure decelerated, growth in real fixed capital formation accelerated further in the second quarter.  Provincial and local governments stepped up expenditure on housing and construction works, and public corporations continued to invest more in productive sectors of the economy, namely electricity and transport. In the private sector, capital formation accelerated notably as agricultural, mining and communication businesses added to their capital stock in the face of attractive product prices and technological considerations.  While the stronger pace of capital formation bodes very well for the future, it must be remembered that it comes off a low base, and should therefore not leave anyone with a sense of complacency. A more aggressive approach to productive investment spend, both in the public and private arena, is a must if the economy has to achieve its job-creating target and sustain it. On a sombre note, activity in the construction of residential dwellings remains frustratingly subdued.

I have already highlighted the acceleration in consumer price inflation and the  steering role played by food, petrol and electricity.  And recent statements of the Monetary Policy Committee have made it crystal clear that the committee expected inflation to pick up further and move above the upper limit of the target range towards the end of the year, before returning to within the target range towards the middle of next year. Backward-looking price inflation data trends seem to confirm the inflation outlook of the MPC.

The balance of payments situation remains one of fairly moderate current-account deficits financed comfortably by capital inflows on the financial account. Data show that in the second quarter, the capital inflows occurred mainly through net purchases of debt securities by non-residents, followed by direct investment inflows. The latter financed the sectors that have been identified as critical for achieving the ideals of the New Growth Path, namely, manufacturing, mining and trade.

The nominal effective exchange rate of the rand declined somewhat over the period and receded slightly further in the months of July and August.

Given the relatively low and/or accommodative interest rate environment, the pace of growth in bank loans and advances to the domestic private sector has risen moderately in the first seven months of 2011, but still remained subdued. While households incurred somewhat more debt, the increase in debt was, to some extent, outstripped by the increase in their disposable income, resulting in a further decline in the household debt ratio. The ratio nevertheless remains at relatively elevated levels.


Money-market conditions remained stable in the first eight months of 2011, while the share market has been volatile recently, taking the cue from the international share markets, and the real-estate market has remained subdued.

Finally, it is worthwhile noting that in June 2011 the national government’s gross loan debt rose above R1,0 trillion for the first time ever; this is a one and twelve zeros! The ratio of government debt to gross domestic product at 36,3 per cent remains well-contained, however, and (not complacent) far below the limit of 60 per cent set by the SADC Finance and Investment Protocol. The sizeable government deficit during the period was partly shaped by countercyclical considerations. Sluggish value-added tax collections were consistent with the weaker pace of economic activity in the period to the second quarter.