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South African Reserve Bank
 
 
     
 
 

Publication Detail 

Title:
Full Quarterly Bulletin – No 281 – September 2016
Publish Date:
2016-09-13
Category:
Quarterly Bulletins

Global economic growth moderated in the second quarter of 2016, following a slowdown in activity in both advanced and emerging-market economies. This outcome is broadly aligned with the International Monetary Fund’s (IMF) marginally lower global growth forecast of 3,1 per cent for 2016 in its July 2016 World Economic Outlook Update. Among advanced economies, the sluggish economic performance of Japan and the euro area was notable. The outcome of the Brexit referendum and potential banking stresses in some European countries further negatively affected the outlook for the United Kingdom (UK) and the euro area. Output growth in emerging-market economies decelerated on account of slower growth in India, a contraction in economic activity in Russia and recessions in several major Latin American economies, with the outlook remaining mixed.

The fragile environment prompted the authorities in the United States (US) to keep the federal funds rate unchanged so far this year. More forcefully, central banks in Japan, the euro area and the UK eased policy further in response to heightened global uncertainty and disappointing growth. Expanded quantitative easing programmes and lower policy rates, some even below zero, boosted demand for emerging-market bonds.

World trade volumes contracted in the three months to June 2016, with export volumes of both emerging-market and advanced economies declining. However, most international commodity prices recovered somewhat from recent lows registered in January 2016 after an extended period of decline. The price of crude oil, in particular, increased significantly although it remained volatile around the somewhat higher levels amid reduced exploration and uncertainty around potential cooperation among producers in managing crude supplies to the market.

In South Africa economic growth turned positive with real gross domestic product (GDP) rising at a brisk annualised pace of 3,3 per cent in the second quarter of 2016, following a contraction in the first quarter. The variations in economic growth from quarter to quarter were mostly the result of fluctuations in the primary and secondary sectors.

Real production in the primary sector increased in the second quarter of 2016, following sustained contractions since the second quarter of 2015. The real value added by the mining sector rebounded as platinum production rose substantially alongside more modest increases in manganese ore, iron ore and coal output. By contrast, agricultural production inched lower to record a sixth consecutive quarter of contraction as the drought left its scars on most field crops. In livestock farming real value added was supported by drought-induced culling.

Real value added by the secondary sector also accelerated in the second quarter of 2016, as the volume of manufacturing production picked up significantly. Increased production of vehicles buoyed activity as exports benefited from the more competitive exchange value of the rand. In the construction sector activity essentially moved sideways, adversely affected by the steady rise in interest rates, escalating building costs and a lack of new projects.

Growth in real value added by the tertiary sector accelerated in the second quarter of 2016. The pace of activity in the commerce sector was supported by an increase in wholesale trade and firm, albeit slower, growth in retail trade. As real disposable income of households continued to edge higher, retail trade held up fairly well despite low consumer confidence, high levels of consumer debt, interest rate increases and poor employment prospects. Freight transport benefited from rising exports and the deployment of new rolling stock by Transnet, while activity in the finance sector accelerated somewhat as banks’ fee income picked up in the second quarter.

Viewed from the expenditure side, growth in real GDP in the second quarter emanated primarily from increased real net exports. The contraction in real gross domestic expenditure in the first quarter of 2016 persisted into the second quarter. The increase in real final consumption expenditure by households, after having contracted in the first quarter of 2016, and the slower pace of contraction in real gross fixed capital formation assisted expenditure in the second quarter. Real final consumption expenditure by general government continued to increase at a pedestrian pace, consistent with government’s commitment to restrain current expenditure.

The turnaround in real final consumption expenditure by households in the second quarter of 2016 reflected stronger growth in real expenditure on semi-durable goods, non-durable goods and services. Having contracted in the first quarter of 2016, growth in semi-durable goods and non-durable goods consumption turned positive in the second quarter. By contrast, expenditure on durable goods contracted for the sixth consecutive quarter. This turnaround in real final consumption expenditure by households was partly related to growth in real disposable income of households which edged higher, following a marginally faster pace of increase in compensation of employees. Encouragingly, the ratio of household debt to disposable income edged lower. However, as the increases in interest rates of the first quarter worked through the debt-service cost ratio rose to its highest level since the first quarter of 2010.

Real gross fixed capital formation registered a third successive quarter of contraction in the second quarter of 2016. Capital outlays by private business enterprises, which account for almost two-thirds of total capital formation, contracted at a slower pace, impeded by low business confidence, excess capacity and subdued demand. Real capital spending by public corporations turned negative in the second quarter of 2016, held back by postponed capital projects and unplanned delays, while government’s capital expenditure contracted for the third consecutive quarter. Real inventories contracted markedly in the second quarter of 2016 as production for the export market was augmented by running down stock levels and the smaller grain crops were reflected in inventories.

The further increase in formal non-agricultural employment in the first quarter of 2016 resulted entirely from temporary appointments in the public sector by the Independent Electoral Commission (IEC). Overall employment growth in the public sector remained aligned to government’s commitment to fiscal consolidation. Consistent with the contraction in domestic economic activity, the private sector shed jobs in the first quarter of 2016. Employment losses were broad-based in both the goods-producing and services sectors. The official unemployment rate amounted to 26,6 per cent in the second quarter of 2016, with the youth unemployment rate twice as high. The pace of increase in nominal remuneration per worker remained unchanged at a year-on-year rate of 6,1 per cent in the first quarter of 2016, as an acceleration in the private sector was offset by a moderation in the public sector.

Headline consumer price inflation breached the upper limit of the inflation target range of 3–6 per cent from January to June 2016. The marked acceleration in headline consumer price inflation to 7,0 per cent in February 2016 – its highest level in almost seven years – reflected the quickening of food price inflation in response to the severe drought conditions and exchange rate pass-through from the depreciation of the exchange value of the rand. The subsequent moderation in consumer price inflation to 6,0 per cent in July mainly resulted from favourable base effects related to petrol price changes and somewhat lower services price inflation.

Given concerns about the expected medium-term inflation trajectory, the Monetary Policy Committee (MPC) increased the policy interest rate in January and again in March 2016. A moderation in inflationary pressures and generally weak domestic economic activity resulted in the policy rate being left unchanged at 7,0 per cent at the subsequent meetings of the MPC. Money-market interest rates remained generally aligned with the policy stance while being influenced by movements in the exchange value of the rand, inflation outcomes and interest rate expectations.

Notwithstanding the moderation in global economic activity, merchandise export volumes increased markedly in the second quarter of 2016, benefiting from the lagged effect of the depreciation of the rand and increased external demand. Export values surged across all major categories, especially vehicles and platinum group metals, along with a broad-based increase in international commodity prices. Simultaneously, weak growth in domestic demand and a sustained contraction in capital spending led to a decline in merchandise import volumes, although import values in rand terms increased marginally as the prices of oil and other imported commodities firmed. South Africa’s trade balance consequently switched to a surplus, and coupled with the marginally smaller deficit on the services, income and transfer account, the deficit on the current account of the balance of payments narrowed significantly to 3,1 per cent of GDP in the second quarter of 2016. This smaller shortfall on the current account was financed through net portfolio and direct investment inflows, while other investment registered a net outflow.

While South Africa’s foreign assets continued to exceed its foreign liabilities, the net international investment position receded to 13,3 per cent of GDP at the end of March 2016, as the market value of the country’s foreign liabilities increased marginally while that of foreign assets declined. South Africa’s gross gold and foreign-exchange reserves amounted to US$45,7 billion at the end of August 2016, and covered on average 5,3 months’ worth of imports of goods and services in the second quarter of 2016.

The external value of the rand on balance strengthened slightly further in the second quarter of 2016 and continued to appreciate markedly in July and early August 2016 along with other high-yielding currencies. Towards the end of August the rand, however, depreciated abruptly in the wake of domestic political events.

Year-on-year growth in money supply (M3) decelerated significantly in the first half of 2016. This deceleration was driven by pedestrian growth in corporate deposits, in contrast with consistent double-digit growth in household deposits. Growth in bank credit extension to the domestic private sector moderated somewhat in the second quarter of 2016 with the corporate sector’s demand for credit remaining relatively strong but that of households exceptionally weak.

The yield curve flattened during 2016 along with the general decline in South African bond yields. The downward trend was interrupted in May and late-August, mainly by negative perceptions related to political developments which also led to rand depreciation. Share price movements on the JSE Limited (JSE) remained volatile, but on balance the overall price index recorded an increase thus far in 2016. In the first eight months of 2016, turnover in the share and bond markets reached record-high levels.

National government’s budgeted plans seemed to be on track, with revenue increasing at a faster pace than expenditure in the first quarter of fiscal 2016/17. Consistent with subdued domestic economic activity, corporate income tax collections increased sluggishly, but to the contrary personal income tax collections increased at a double-digit rate. Revenue from import duties also increased strongly, buoyed by the relatively weaker domestic currency which raised the rand value of imports.

The primary balance recorded a deficit of 0,7 per cent of GDP in the first quarter of fiscal 2016/17, demonstrating progress with fiscal consolidation when compared with the value of 1,7 per cent of GDP registered in the first quarter of fiscal 2015/16. Total gross loan debt of national government seemed to be levelling off as a ratio of GDP, while the non-financial public-sector borrowing requirement also narrowed somewhat in the first quarter of fiscal 2016/17.

 
 
     
 
 
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