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South African Reserve Bank
 
 
     
 
 

Publication Detail 

Title:
Full Quarterly Bulletin – No 275 – March 2015
Publish Date:
2015-03-17
Category:
Quarterly Bulletins

The global economic recovery remained hesitant in 2014, with growth moderating in the final quarter of the year as activity slowed sharply in emerging-market economies. International crude oil prices, which declined considerably from the middle of 2014, continued to trend lower in the final quarter of 2014, reinforced by the stronger United States (US) dollar, weak demand and the decision by oil producers to refrain from cutting back on production. This marked decline in international crude oil prices occurred alongside a moderation in a wide range of other international commodity prices in the final quarter of 2014, thereby not only assisting in the containment of global price inflation but also raising the spectre of deflation in some economies and detracting from commodity-producing countries’ export earnings. In January 2015, the price of Brent crude oil sank to a six-year low of US$45 per barrel before recovering somewhat thereafter.

In line with the lustreless global growth performance, the International Monetary Fund (IMF) lowered its forecast of world growth for both 2015 and 2016 in January 2015, weighed down largely by the weaker medium-term growth outlook for especially China, Russia, the euro area, Japan and a number of major oil-exporting countries. Under these circumstances, monetary policy remained expansionary in most parts of the world, with central banks in major advanced economies signalling that policy normalisation would not be hastened and would be gradual. A number of central banks in emerging-market economies have also eased monetary policy in recent months. The European Central Bank (ECB) in late January 2015 announced details of its long-awaited quantitative easing programme. A week earlier the Swiss National Bank after three years abandoned its policy of intervention in the market for foreign exchange to cap the external value of the Swiss franc at 1,2 franc per euro. Immediately thereafter the Swiss franc appreciated significantly.

Economic activity in South Africa expanded at a significantly firmer pace in the fourth quarter of 2014, with real gross domestic product increasing at an annualised rate of 4,1 per cent – almost double the rate of increase recorded in the preceding quarter. This acceleration largely reflected a rebound in the goods-producing sectors of the economy as conditions normalised after severe strike-induced labour disruptions earlier in 2014. Mining production, which contracted notably in the first half of 2014 due to prolonged industrial action in especially the platinum-mining sector, increased at a moderate rate in the third quarter of 2014 before picking up pace in the fourth quarter as pronounced increases in the production of platinum group metals and diamonds more than offset decreases in the production of coal and other mining commodities. At the same time, the pace of increase in the real value added by the agricultural sector slowed somewhat, mainly as a result of lower growth in field crop production.

In the manufacturing sector, growth in real value added rebounded strongly in the fourth quarter of 2014, following strike-induced contractions earlier in the year. Growth in the construction sector also picked up in the quarter concerned as civil construction activity maintained its underlying momentum, underpinned by increased activity in the residential and non-residential building subsectors. By contrast, growth in the services sector moderated following a marginal contraction in the real value added by the commerce sector, offsetting a steady pickup in the output of the transport and finance sectors.

Real domestic final demand maintained its upward momentum in the final quarter of 2014, led by higher growth in both household consumption expenditure and aggregate capital spending. Growth in real final consumption expenditure by the household sector accelerated in the quarter concerned, consistent with the higher growth in household disposable income. Expenditure on durable and semi-durable goods increased notably over the period, partly encouraged by relatively favourable prices, while higher spending on non-durable goods probably partly reflected the benefit of some windfall gains following lower domestic petrol prices.

Fixed capital formation increased at a somewhat faster pace in the fourth quarter of 2014 as higher real capital outlays were recorded by all three institutional sectors. Growth in fixed capital spending by private business enterprises accelerated moderately over the period, buoyed mainly by increased spending in the mining, manufacturing, trade, and finance sectors. Simultaneously, fixed capital formation by public corporations maintained its underlying momentum, dominated by spending in the transport and electricity-generating sectors. By contrast, growth in real gross fixed capital outlays by general government slowed over the period.

Consistent with the low growth trajectory of the South African economy, enterprise-surveyed employment in the formal non-agricultural sector expanded by only 1 per cent over the four quarters to the third quarter of 2014. However, with year-on-year remuneration growth per worker accelerating briskly and output growth slowing, growth in nominal unit labour cost in the formal non-agricultural sector of the economy exceeded the upper limit of the inflation target range. The official unemployment rate was marginally higher in the fourth quarter of 2014 compared with a year earlier, with youth unemployment remaining elevated.

Inflationary pressures moderated notably from mid-2014. As a result, headline consumer price inflation slowed to around the midpoint of the inflation target range in January 2015 – its fifth consecutive month of being within the target range. The recent moderation was mainly driven by a deceleration in non-durable goods price inflation, primarily of petrol and food. Underlying consumer price inflation, however, remained sticky at just below the upper limit of the inflation target range, while the outlook for the prices of fuel and some categories of food has recently deteriorated somewhat.

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With real domestic expenditure increasing at a slower pace than real domestic production in the final quarter of 2014, the volume of merchandise imports advanced at a notably slower pace than the volume of merchandise exports. Export volumes benefited from the normalisation of production in the mining and manufacturing sectors, a marginal improvement in the country’s terms of trade, and the more competitive exchange value of the rand. While the trade deficit with the rest of the world narrowed markedly, this was partly offset by higher net dividend payments to non-resident investors. As a result of these developments, the current-account deficit narrowed from 5,8 per cent of gross domestic product in the third quarter of 2014 to 5,1 per cent in the fourth quarter. This negative imbalance was largely financed by a net inflow of other investment capital, which consisted mainly of foreign currency-denominated loans extended to the South African banking sector.

Growth in overall bank credit extension remained pedestrian in 2014, consistent with the subdued performance of the economy. While credit extension to the household sector remained quite weak, resulting in a modest reduction in the ratio of household debt to disposable income, bank loans and advances to companies gained some momentum over the period, facilitating expansion and capital formation, providing working capital and buffering erratic cash flows. Growth in the money supply also remained in single-digit territory, broadly replicating the sideways trend observed over the preceding three years and measuring slightly below the comparable growth in nominal gross domestic product over the same period. Money-supply growth ticked moderately higher during the second half of 2014 as households and non-financial companies raised their deposit holdings.

South African bond yields moved generally lower from early 2014, in line with US bond yields. Local yields receded further in January 2015, supported by an improved inflation outlook and abundant international liquidity following the announcement of an expanded asset-purchase programme by the ECB and continued quantitative easing out of Japan. Bond yields edged higher in early March 2015 as a reversal in the oil price, the announcement of higher levies on fuel and rand depreciation impacted on inflation expectations. Most money-market interest rates have displayed little movement since the middle of 2014, remaining well-aligned with the repurchase rate of the South African Reserve Bank (the Bank) that had been held steady over this period.

Despite the subdued growth in the economy over the past year, domestic share price entered 2015 on a positive note, recovering from the losses incurred in the second half of 2014 to reach all-time-high levels in March 2015. The domestic share market benefited from sustained accommodative monetary policies in the advanced economies, while lower international oil prices and the depreciation of the rand also boosted some share prices. Corporate funding through the issuance of shares in the primary share market rose considerably in 2014, consistent with the high level of share prices and rising number of companies listed on the JSE Limited.
The residential property market continued to display signs of gradual improvement in the second half of 2014, as the rate of increase in house prices stayed slightly ahead of consumer price inflation and as sale-in-execution notices declined.

The public-sector borrowing requirement amounted to about 6 per cent of gross domestic product in the period April to December 2014, with both general government and the non- financial public corporations incurring deficits. Capital expenditure by the public sector continued to exceed the sector’s borrowing requirement over this period.

Delivered in February 2015, the Budget for fiscal 2015/16 incorporated measures to narrow the fiscal deficit and arrest the unsustainable upward trend in government’s debt ratio. Government expenditure growth would be capped, while additional revenue would be raised by, inter alia, increasing the fuel levy, taxes on tobacco and alcohol, and personal income tax payable by persons in the middle- and higher-income groups. The budget pledged to address economic constraints, improve growth performance and broaden economic participation as envisaged by the National Development Plan.
 
 
     
 
 
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