The global economy continued on a subdued path and recorded a disappointingly slow pace of growth in the first quarter of 2015, with cold weather resulting in a temporary setback to activity in the United States (US), and China registering the slowest pace of expansion in more than six years. While the pace of growth in India rebounded and activity in Europe firmed somewhat in the first quarter of the year, the global recovery remained uneven with many developing countries facing lower export proceeds and setbacks to income on account of declining international commodity prices. This was certainly the case in many countries in Africa, with declining export revenues translating into a weakening of the fiscal and external accounts and deteriorating growth prospects.
In the mature economies, monetary policy remained accommodative with policy rates held at ultra-low levels and the European Central Bank (ECB) launching its expanded asset purchase programme in March 2015. The continuation of expansionary monetary policies was consistent with the slack in growth momentum and the absence of inflationary pressures in those economies. Among the developing economies, however, policies diverged in the first half of 2015, with some countries – where lower export prices and reduced international investor risk appetite had, for instance, translated into currency depreciation and surging inflation – raising interest rates, but others, such as China, adopting more accommodative monetary policies in the wake of decelerating economic activity, favourable import prices and well-contained inflation.
In South Africa, growth in real gross domestic production moderated significantly in the first quarter of 2015 following a rebound in activity in the final quarter of 2014. Real output in the manufacturing sector contracted in the first quarter affected by, among other factors, relatively weak domestic demand and electricity supply constraints. Agricultural output also fell back in the first quarter of 2015 as the most severe drought in 22 years in the Free State and North West provinces started to take its toll. However, mining production recorded a pronounced increase on account of higher coal and platinum output, while the services sector continued to expand, albeit at a slightly slower pace than in the preceding quarter.
Whereas growth in real domestic production slowed to an annualised rate of 1,3 per cent in the first quarter of 2015, the pace of expansion in real gross domestic expenditure gained momentum. This was underpinned by a faster pace of consumption spending by households – most notably the real purchases of non-durable goods such as petrol and food, which were bolstered by favourable price developments over the period. Real spending on semi-durable goods such as clothes also rose at a firm pace in the first quarter, but households’ real expenditure on durable goods lost momentum, consistent with the subdued level of consumer confidence. Both the household debt-to-disposable income and debt-service cost ratios inched higher in the first quarter of 2015. More positively, at the same time, higher share prices along with other favourable wealth developments raised the gross and net wealth of the household sector to such an extent that the sector’s debt-to-assets ratio declined somewhat. Growth in the real disposable income of households also inched higher following a slightly faster pace of increase in employees’ compensation.
Inventory investment picked up somewhat in the first quarter of 2015 with stocks of crude oil and platinum trending higher. Fixed capital expenditure recorded slower but still positive growth, pushed somewhat higher by brisk capital spending by government. While off a high base, capital spending by the public corporations registered a slight contraction over the same period, influenced by strike activity and technical problems in the electricity subsector. During the first quarter of 2015, fixed capital formation by private business enterprises increased marginally.
A slight reduction in government employment was reflected in a moderate decrease in government consumption expenditure and in the real value added by the general government sector in the first quarter of 2015.
Despite the moderation in global economic growth, the volume of South African exports advanced further in the first quarter of 2015, albeit at a somewhat slower pace than previously. The value of exports, however, was weighed down by a significant deterioration in the prices of South African export commodities. Growth in import volumes accelerated in the first quarter of 2015. As a result of these developments and a simultaneous smaller shortfall on the services, income and current transfer account, the deficit on the current account of South Africa’s balance of payments decreased slightly to 4,8 per cent of gross domestic product in the first quarter of 2015. The deficit was financed by inflows of portfolio and other investment capital as direct investment registered a net outflow over the period.
Headline consumer price inflation reached a lower turning point in February 2015, weighed down by the decline in the price of petrol and a moderation in food price inflation. This situation started to reverse in the subsequent months, fuelled by the recent increase in international crude oil prices, a renewed rise in food prices and double-digit electricity tariff increases.
Employment growth in the private sector continued to disappoint over the past year, consistent with the lackluster pace of economic expansion. Unemployment remained structurally high at around one in four persons in the labour force.
Money supply growth has exceeded growth in nominal gross domestic product since the middle of 2014, reversing the post-recession trend as lower prices of commodities restrained the nominal value added in the economy. M3 growth over the past year was largely concentrated in the deposits of households and non-financial companies, with the long-term deposit component of M3 benefiting from improved returns on such deposits. Foreign currency-denominated deposits – although only a small fraction of M3 – registered exceptionally high growth rates recently, alongside the depreciation in the exchange value of the rand.
Growth in aggregate bank credit extension maintained its sideways trend of the past three years in the early part - of 2015, as the brisk usage of general loans and overdrafts by the corporate sector was neutralised by a slower credit uptake by households. The implementation from March 2015 of the Regulations for Affordability Assessment, as part of regulatory revisions related to the National Credit Act, may further restrain the extension of credit to the overindebted sub-segment of the household sector.
The repurchase rate of the South African Reserve Bank, last raised in July 2014, has subsequently been maintained at 5,75 per cent against the background of subdued domestic economic growth outcomes and generally within the targeted medium-term forecasts for inflation. With the risks to inflation nevertheless tilted towards overshooting rather than undershooting, money-market interest rates reflected expectations of moderate increases in the policy rate going forward – congruent with the broad direction suggested in monetary policy statements.
In the capital market, bond yields declined in the first two months of 2015 as inflation decelerated and the inflation prognosis improved, but this was reversed in the subsequent months as the inflation environment again deteriorated. On the JSE Limited, the overall share price index reached new heights and then fluctuated close to those record levels in the first five months of 2015, although the prices of resources shares disappointed over this period, in conformity with weaker commodity prices.
Overall fiscal outcomes in 2014/15 were fairly closely aligned with initially budgeted and revised estimates; the national government’s cash-book deficit for the year amounted to 4,6 per cent of gross domestic product. The non-financial public-sector borrowing requirement remained around 5½ per cent of gross domestic product in 2014/15, but with a smaller requirement for the general government subsector and a larger one for the public enterprises that continued with their substantial capital spending programmes. As gradual fiscal consolidation continued, two international rating agencies affirmed their investment grade sovereign credit ratings of South Africa in early June 2015.