Members of the Press
On behalf of the South African Reserve Bank let me welcome you to the release of the South African Reserve Bank’s March 2011 Quarterly Bulletin which covers mainly the assessment of South Africa’s macroeconomic situation up to the end of the fourth quarter of 2010.
Needless to say, the Quarterly Bulletin released today is the first of this year. However, this issue is special in at least three respects: First, readers will note that it has a new, modern, lighter outside cover and that the appearance on the inside has also been modernised.
Second, this year marks the 90th anniversary of the South African Reserve Bank, which humbly started its operations in 1921. To celebrate this milestone, during the year two thousand and eleven (2011) all the official publications of the Bank will carry a special commemorative design on the front cover.
Third, this publication, coincidentally, is launched on the same day as the start of the deliberations of the Monetary Policy Committee (MPC), which will culminate on Thursday afternoon in the release of the MPC statement by the Governor of the South African Reserve Bank, Ms Gill Marcus.
This coincidence creates an opportunity for me to remind all present that the Quarterly Bulletin is the vehicle through which the Bank disseminates factual information and analysis about the South African economy. It is not a policy document, but is a document that in part, supports monetary policy formulation.
The biannual Monetary Policy Review and the MPC statement every two months are the main avenues through which monetary policy and the rationale behind it are communicated. That said, policy has to be informed by solid factual information and therefore the Quarterly Bulletin released today is timely, indicating to the public key datasets that will also be scrutinised by the members of the MPC.
In my verbal remarks made today I will briefly touch on the events in recent days that have had a significant bearing on the underlying factual macroeconomic situation in both the global and local economy. Although the copy of my remarks posted on the Bank’s website contains a summary of highlights from the Bulletin, I will not talk you through them today so as not to steal the thunder of the presenters who have been closely involved in the writing of this publication.
Having studied in Japan for two years at an earlier stage of my academic life, I have a soft spot for that country which has recently suffered the destructive forces of a severe earthquake and an accompanying tsunami, in the Eastern part of the Honshu Island, the biggest of the four islands in Japan (the other three being; Hokkaido, Shikoku and Kyushu).
Allow me to express my heartfelt sympathy to the Japanese people, and particularly to those who have lost loved ones in the days of disaster.
It is evident that these tragic events are far from over, with for instance, many issues around the affected Japanese nuclear power plants still unresolved and the full scale of the loss of life and damage still to be established. However, it may be asked and has been in some forums, including ours here at the Bank, as to how likely this is to affect the South African economy.
Preliminary investigations and analysis show that, while Japan is a very important trade partner of South Africa and one of the countries with which we run a significant trade surplus, the near-term negative impact through foreign trade flows and supply chain linkages is likely to be limited. Inventory holdings together with the spatial dispersion of economic activity in Japan will lessen the impact. The worst-stricken areas are not the areas of greatest industrial importance.
This observation should be qualified by noting that, should the situation around the nuclear power plants deteriorate further to trigger further large-scale evacuation of people and interruptions to electricity supply in the economic heartland of the Honshu and Hokkaido Islands in particular, the negative economic fallout for South Africa and other trade partners would be amplified considerably.
A very different series of events of geopolitical significance created by humans is currently unfolding in the Middle East and North Africa (MENA). It has caused disruptions to the supply of crude oil to world markets and has raised fears that matters may deteriorate further in the near future, resulting in sky-high oil prices at a time when the global economy needs nurturing rather than a negative supply-side shock.
While any views on the likely near-term movements and longer-term trend in oil prices would be highly speculative, this Quarterly Bulletin includes a box depicting the likely impact of a sustained increase of US$10 per barrel in the oil price on consumer price inflation in South Africa. Based on simulations with the Bank’s Core Model, a quarterly econometric model of the South African economy, it shows that in such a scenario year-on-year consumer price inflation immediately rises by around 0,3 percentage points. Furthermore, after two years the inflation rate would be around 0,6 percentage points higher than otherwise. This simulation assumes that there is no tightening of monetary policy to counter the inflationary impact of such an oil price shock. In real life this assumption may of course be invalid.
The March 2011 Quarterly Bulletin concentrates on the fourth quarter of 2010, completing the picture in areas such as the quarterly domestic expenditure, productivity growth, monetary aggregates, balance of payments, capital markets and public finance flows. From the picture that emerges, it has been argued and estimated that there remain serious imbalances that should be our preoccupation, as we attempt to figure out the implications of the current global uncertainties, and to arrive at the practical solutions to our structural problems in the real economy. Part of this bulletin review also also goes beyond the fourth quarter by analysing the current year’s higher-frequency data in areas such as prices and financial markets.
The momentum of the global economic recovery surprised on the upside in the final quarter of 2010 and in the early months of 2011. Developing countries maintained strong growth rates and, mindful of the dangers of overheating and inflation, tightened their monetary policies. In the major advanced economies monetary policies remained unchanged in order to support growth, with fiscal policies, however, being tightened in the interest of fiscal sustainability.
An ongoing feature of the global recovery has been rising international commodity prices, underpinned by strong economic growth in developing countries, and in the case of oil, fears of supply disruptions on account of political upheaval in some of the MENA countries. With international prices of food and oil rising, consumer price inflation trended higher in most parts of the world resulting in a general monetary policy tightening. The United States, euro area, United Kingdom and Japan have remained exceptions to this rule, maintaining ultra-low interest rates.
In sub-Saharan Africa growth prospects were bolstered by buoyant prices of export commodities, the recovery in global demand, greater macro-economic stability and increased capital formation.
It is already well known that South Africa’s real economic growth rate accelerated to 4,4 per cent in the final quarter of 2010. Notably this is a growth rate that is 1,2 percentage points higher than the long-term average of 3,2 per cent between 1960 and 2010, as recently pointed out by the Bank’s Senior Deputy Governor, Dr X.P. Guma, in his exposition of South Africa’s economic reality.
The fourth quarter’s robust acceleration was mainly helped by rising mining production, a rebound in output of manufacturing and government services following strike action in the third quarter, and higher growth in the tertiary sector. Regardless, the economy has continued to be characterised by a significant degree of surplus capacity.
In this Bulletin, fourth quarter 2010 estimates for the various domestic expenditure components are also released. In the final quarter of 2010, household consumption spending continued to constitute the strongest and most consistent part of the growth in expenditure, as it had done throughout the year. Nevertheless, the tempo of growth in consumption spending by households moderated slightly over the period alongside a slower pace of increase in households’ real disposable income.
Following the widespread public-sector strike in the third quarter of 2010, which reduced the real expenditure on government services, real final consumption expenditure by government rebounded in the fourth quarter of 2010 as matters returned to normal. At the same time there was a modest increase in real fixed capital spending, making the final quarter of 2010 the third successive quarter of very slow, but positive, growth in this aggregate. In the final quarter of 2010 public corporations raised their capital spending somewhat as electricity and transport infrastructure was improved. Private business enterprises also increased their real fixed capital expenditure marginally, notably in the mining and communications sectors. However, there was a slight reduction in real capital formation by general government over the period.
A notable reversal was recorded in real inventory investment, which turned positive in the fourth quarter of 2010 following ten successive quarters of contraction. Restocking started from a very low base and was prompted by rising sales volumes and facilitated by low interest rates.
Employment increased moderately in the final quarter of 2010 although probably largely for seasonal reasons. At the same time, the number of discouraged work-seekers also rose somewhat, resulting in a reduction in the unemployment rate to 24 per cent. The average wage settlement rate in 2010 was marginally above 8 per cent, lower than in 2009, while increases in unit labour cost also decelerated somewhat. Labour productivity continued rising, although it lost some of its momentum in the third quarter when industrial action had a negative impact on output.
Consumer price inflation remained in the lower half of the target range during the second half of 2010 and in early 2011, held in check by the strength of the exchange rate, moderate domestic food price increases and surplus capacity in the economy.
The buoyant prices of key export commodities were reflected in a further improvement in the terms of trade in the fourth quarter of 2010. In combination with sluggish imports and a recovery in export volumes of especially mining products and vehicles, this resulted in a significant narrowing of the deficit on the current account of the balance of payments to only 0,6 per cent of gross domestic product in the final quarter of the year. At the same time, the surplus on the financial account of the balance of payments fell steeply as inward portfolio investment switched to an outflow, having recorded sizeable inflows in 2009 and the first three quarters of 2010.
The effective exchange value of the rand, the gross gold and foreign-exchange reserves, and the international liquidity position of the South African Reserve Bank trended higher in 2010 as the authorities continued accumulating of reserves. While the gross reserves kept rising in the first two months of 2011, the exchange rate of the rand depreciated somewhat over the period, not least on account of net sales by non-residents of South African equity and debt securities.
Growth in the M3 money supply, and in bank loans and advances to the private sector, accelerated in the course of 2010, although it remains far below the levels recorded from 2005 to 2008. Whereas previously mortgage advances to the household sector had been the only area of consistently rising credit extension, advances more broadly started recovering in the second half of 2010.
In response to the reduction in the repurchase rate on 19 November 2010, other short-term interest rates declined and thereafter remained at or around 30-year lows. Recently, real money-market rates have been quite low, particularly if, rather than historical inflation, survey data on forward estimates of inflation are used to adjust nominal interest rates. Fears of rising inflationary pressures resulted in a marked increase in rates on forward rate agreements from January 2011, while yields on bonds also rose significantly from their lows in November 2010.
South African share prices approached their record levels of early 2008 towards the end of 2010 and in early 2011, although the domestic share market (along with those in other parts of the world) experienced a setback in the wake of the earthquake and tsunami in Japan. Turnover in major South African financial markets was brisk. However, activity in the real-estate market remained weak and house prices were also subdued despite the low interest rate environment.
The February 2011 National Budget provided support for the New Growth Path through appropriate actions to boost employment creation. The Budget estimates displayed a slightly slower pace of narrowing of the fiscal deficit and a somewhat higher government debt trajectory than in earlier official projections. It remained consistent with government’s countercyclical approach within the context of fiscal sustainability, and provided for stronger economic growth going forward.
With these remarks let me simply say that the recovery in the South African economy is continuing and leave it to our team of presenters to fill in the details.