The global economic recovery continued in the third quarter of 2010, characterised by a considerable degree of divergence in economic performance and policy direction between countries and country groupings. Emerging-market economies continued to record stronger economic growth than developed economies. Monetary policy was tightened in a number of countries in order to obviate the possibility of overheating of the economy with the associated risk of escalating inflation. However, very low interest rates were maintained in the euro area, Japan, the United Kingdom (UK) and the United States (US). The US went further by stepping up quantitative easing. In the euro area concerns about fiscal sustainability and financial stability in Ireland intensified, with a steep increase in yields on Irish bonds being recorded. By late November the Irish authorities had entered into an agreement with the European authorities and the International Monetary Fund (IMF), providing for a large support package alongside a programme of fiscal consolidation.
In South Africa the pace of economic growth decelerated slightly in the third quarter of 2010, held back mainly by a contraction in the secondary sector as industrial action in the automotive and related industries reduced output. In the tertiary sector growth slowed, partly due to a lengthy strike in the public sector. By contrast, growth in the real value added by the primary sector accelerated in the third quarter of 2010 as mining output recovered, having suffered setbacks in the second quarter on account of routine maintenance work on smelters, as well as industrial action. Agricultural production recorded strong increases in both the second and third quarters of 2010, consistent with the bumper maize crop harvested.
Real final consumption expenditure by households maintained a fairly brisk pace of increase in the third quarter of 2010, supported by rising nominal income, subdued inflation and lower interest rates. Household finances improved further as the debt-service ratio continued to edge lower, while household net wealth increased alongside rising prices of financial assets. Purchases of durables were, to some extent, constrained by the non-availability of certain types of new motor vehicles in the wake of the industrial action in the automotive industries referred to above.
Final consumption expenditure by government was held back somewhat by the industrial action in the public sector in the third quarter and by the absence of major armaments purchases during that period.
Aggregate real fixed capital formation rose marginally in both the second and third quarters of 2010, recovering after five consecutive quarters of negative growth in the wake of the global financial crisis. Capital spending by the private sector increased somewhat over the same period. Public corporations continued to play a major role in developing the country’s infrastructure, raising their already-high level of fixed capital formation further in the third quarter. General government, in turn, continued to reduce its fixed capital expenditure.
While inventory reduction continued in the third quarter, its pace slowed considerably compared with previous periods, given an already very low ratio of inventories to production. South Africa’s trade surplus with the rest of the world increased significantly in the third quarter of 2010 as the country’s terms of trade improved further, alongside an increase in the volumes of both exports and imports. However, the deficit on the income, services and current transfer account widened notably in the third quarter, partly because of a contraction in travel receipts from foreign tourists as their expenditure receded after the conclusion of the 2010 FIFA World CupTM tournament. The net result of these two offsetting trends was a slightly wider deficit on the current account of the balance of payments in the third quarter, amounting to 3,0 per cent of gross domestic product.
With large amounts of capital flowing to emerging-market economies, including South Africa, the financial account of the balance of payments has recorded sizable surpluses in recent years. This trend continued into the third quarter of 2010 as portfolio inflows, notably into the bond market, were recorded. Moderate reserve accumulation continued and the overbought forward position in foreign currency of the South African Reserve Bank (the Bank) was increased, while the exchange value of the rand against a basket of currencies essentially moved sideways in October and November 2010. This followed a sizable appreciation of the rand during the first nine months of 2010.
In the labour market a modest increase in formal-sector employment was recorded in the second quarter of 2010, constituting the first increase after six successive quarters of contraction. The increase was the result of jobs created in the public sector. While increases in unit labour cost and wage settlements remained high, wage settlement rates continued to moderate in the course of 2010, partly in response to slowing inflation. However, industrial action intensified considerably during the second and third quarters of 2010 and was related mainly to wage demands.
Inflationary pressures continued to moderate, reflecting the sustained large output gap in the economy, the strengthening exchange value of the rand and the subdued behaviour of food prices. Consumer price inflation decelerated significantly to a twelvemonth rate of only 3,2 per cent in September 2010 before edging slightly higher to 3,4 per cent in October. The Monetary Policy Committee (MPC) projected future inflation to be sufficiently contained to allow for reductions in the repurchase rate of the Bank at its meetings in September and November 2010. The repurchase rate had previously been reduced by 50 basis points in March 2010 to a level of
6,5 per cent; in September it was lowered to 6,0 per cent and in November to
5,5 per cent – its lowest level in 30 years. Banks adjusted their benchmark interest rates in accordance with the reductions in the repurchase rate, bringing the prime lending rate to a level of 9,0 per cent following the November MPC decision.
The lower interest rate environment and rising levels of income and expenditure were reflected in an expansion of the banking sector’s balance sheet. The pace of increase in both the broadly defined money supply (M3), and bank loans and advances to the domestic private sector gained some momentum in the third quarter of 2010. The earlier contractions in bank lending to the corporate sector started to make way for renewed increases, albeit at muted levels.
Financial asset prices rose further in recent months as share prices trended higher and bond yields declined, reflecting profit expectations, lower inflation and indications of a smaller government deficit to be financed. However, despite the lowering of policy interest rates, house price increases lost traction from around mid-2010.
Government tax revenue trended higher in the first half of fiscal 2010/11 alongside rising levels of income and household consumption expenditure. The Medium Term Budget Policy Statement (MTBPS) released in October 2010 projected smaller deficits and a lower trajectory for government debt over the period to 2013/14, with the debt ratio expected to peak at less than 41 per cent of gross domestic product. A slightly quicker pace of withdrawal of fiscal stimulus was therefore foreseen in the October 2010 MTBPS than in the February 2010 Budget. Government remained committed to stability, and sound and sustainable fiscal policies.
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