Analysts unimpressed by economy's mixed results

South Africa's imminent inclusion in the Citigroup World Government Bond Index bolstered foreign demand for South African bonds, which has shot up.(Madelene Cronje, M&G)

South Africa's imminent inclusion in the Citigroup World Government Bond Index bolstered foreign demand for South African bonds, which has shot up.(Madelene Cronje, M&G)

On the plus side, foreign purchases of South African government bonds have seen the cost of government borrowing fall, but the current account deficit ramped up to 6.4% of gross domestic product (GDP) from 4.9% in the first quarter. Sufficient foreign capital inflows, which amounted to R48-billion, down from R50.5-billion in the previous quarter, covered the deficit.

South Africa's imminent inclusion in the Citigroup World Government Bond Index bolstered foreign demand for South African bonds, which has shot up.

The Reserve Bank said at the end of August 2012 yields were at their lowest since 1965, at 5.45% for the R157 government bond, down from 7.09% in November 2011. Instead of selling equities, which had been the pattern since early 2011, foreigners purchased R3.9-billion of equities in the second quarter of 2012.

Poor export performance contributed to the growth in the current account deficit, the extent of the increase surprising economists. The chief contributor to the deficit, Reserve Bank figures show, is a steep increase in dividend payments. These make up roughly 25% of outflows.

Lower commodity prices lowered export earnings because the mining exports of gold, coal and iron ore suffered on the global market, having to contend with sharp price falls. Imports – mostly machinery and crude oil – were up by 1%. The trade deficit increased from R42-billion to R75.7-billion in the second quarter.

Reserve Bank economist Johan van den Heever said: "The headlines are pleasing but the details are not so impressive."

Turbulent primary sector
Although GDP increased by 3.2% from the previous year, a half percentage point higher than in the first quarter of the year, the increase stemmed from the normalising of mining output following labour unrest at platinum producer Implats during the first quarter. However, if the turbulent primary sector is discounted, GDP actually slowed, from 3.8% growth in the first quarter to 1.6% in the second.

The manufacturing sector dramatically slowed from the last quarter, contracting by 1% in stark contrast to last quarter's 7.7% increase. The tertiary sector decelerated to 2.3% from the last quarter's 3%.

Jobs in manufacturing marginally increased during the first quarter, but the outlook for future employment gains is bleak because of business confidence in manufacturing falling from 47 points in the first quarter to 29 in the second.

Nonetheless, employment grew faster in the private sector than the public sector during the first quarter, increasing by 3% compared with the latter's 0.3%. A rising employment rate occurred in the electricity, finance, insurance, real-estate and business services, trade, catering and accommodation sectors. Job shedding took place in construction, private transport, storage and communications sectors.

General domestic expenditure rose in the second quarter. Government infrastructural spending at all levels and expenditure by the public corporations of Eskom and Transnet drove this.

Household expenditure received a mixed prognosis, rising in non-durable and semi-durable goods but falling for services and durables. Despite moderate spending, households became increasingly indebted over the past three months and the ratio of household debt to disposable income has risen from 75.6% in the first quarter of 2012 to 76.3% in the second.

The Reserve Bank considered low inflation one of the more pleasing phenomena. Headline consumer price inflation declined from 6.3% to 4.9% in July, largely underpinned by low food and transport costs.

On July 19, optimistic that inflation would remain within target, the Reserve Banks cut its repo rate by 50 basis points.

A decline in interest rates on all money markets resulted and the rate on mortgage loans fell to 8.5%, its lowest since 1974

.But the drought in the United States has resulted in a rise in grain prices, which is a cause for concern. With food price increases on the cards, the future of low inflation is uncertain. This would certainly be discussed at the monetary policy committee's meeting later this month.


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