Amid a backdrop of buoyant consumer and government spending, higher international commodity prices, lower inflation and stable interest rates in 2004, the South African Reserve Bank (SARB)’s quarterly bulletin reviewing macroeconomic activity in 2004 paints a very positive picture of an economy experiencing accelerating growth.
In its bulletin for the first quarter of 2005 released on Wednesday, the SARB says that although accelerating global economic growth and higher international commodity prices did support South Africa’s economic growth in 2004, it was robust real domestic spending in particular that acted as the growth engine for the year.
“Within an environment characterised by rising income and the lowest inflation and nominal interest rate levels encountered in more than 20 years, all the major components of real domestic final demand rose strongly in 2004,” the SARB notes.
Real household spending increased by 6%, real government spending grew by 7% and real fixed capital formation was up a strong 9.5%, lifted by higher private sector investment in the face of slower investment by government and public corporations.
These combined to raise growth in gross domestic product (GDP) to 3,7% year-on-year (y/y) in 2004, a level that “compares favourably” with the 2.8% y/y increase recorded in 2003.
Importantly, the pick-up in economic activity experienced in 2004 was accompanied by significant gains in employment, the SARB adds. Enterprise surveyed employment numbers rose by approximately 215Â 000 over the five quarters to September 2004, with 58Â 000 employment opportunities created in the third quarter of 2004 alone.
According to the SARB, the major part of the increase in employment was recorded in the private sector. At the same time, wage increases moderated further during the year, with the average level of wage settlements in collective bargaining agreements receding from 8,9% in 2003 to 6,8% in 2004.
Lower wage hikes were influenced by slower historical inflation, with CPIX inflation (headline consumer inflation less mortgage costs) slowing to 4,3% y/y in 2004 as a whole, and slowing further to 3,6% y/y in January 2005, its lowest level since the first calculations of CPIX in 1997.
“By January 2005 CPIX inflation had been in the target range of 3% to 6% for 17 consecutive months, thereby contributing to the moderation of inflation expectations,” writes the Bank. “Inflation at the production level also remained low, with the strengthening in the rand contributing to the containment of the prices of both imported and domestically produced goods.”
The upgrades in South Africa’s sovereign credit rating in October 2004 and January 2005, together with the acceleration in economic growth, decelerating inflation, a generalised depreciation of the US dollar and favourable international prices of South African export commodities have all contributed to an increase of 11,7% in the trade-weighted exchange rate of the rand during the course of 2004, the SARB noted.
Although the deficit on the current account of the balance of payments rose to 3,2% of GDP in 2004 — the highest deficit ratio since 1982 — net financial inflows had more than offset this and enabled the SARB to accumulate international reserves. Net inflows of portfolio capital (especially into the equity market) constituted the most significant component of 2004’s financial inflows. — I-Net Bridge