Global economic activity remained subdued in 2016, with growth moderating somewhat in the fourth quarter following a slowdown in activity in advanced economies, in particular the United States (US). In its January 2017 World Economic Outlook Update, the International Monetary Fund (IMF) kept the global real economic growth outlook unchanged at 3.4% for 2017. Improved prospects for advanced economies alongside expected fiscal stimulus in the US contrasts with less favourable prospects for some emerging market economies.
Inflation accelerated somewhat in the fourth quarter of 2016 and in the opening months of 2017 in some countries as the international prices of crude oil, metals and mineral commodities increased. However, underlying inflationary pressures remained fairly muted, especially in advanced economies. Monetary policy in advanced economies diverged further when the US policy interest rate was increased in December 2016 and again in March 2017, as the growth outlook in that country appears more robust. Monetary policy settings also differed among emerging market economies, with some central banks tightening policy due to weaker currencies while others eased policy, given subdued output growth and muted inflationary pressures.
In South Africa, real economic growth slowed further and turned negative in the fourth quarter of 2016. The contraction at an annualised pace of 0.3% in the fourth quarter of 2016 in real gross domestic product (GDP) was in step with the current downward phase of the business cycle. For 2016 as a whole, real economic growth slowed to a mere 0.3% – the lowest annual growth rate since 2009. However, the increase in the composite leading business cycle indicator since May 2016 suggests improved economic activity in 2017.
The contraction in real GDP in the final quarter of 2016 resulted from declines in real output of the primary and secondary sectors. Despite improved rainfall after the devastating prolonged drought, agricultural output contracted for an eighth consecutive quarter, albeit only marginally. Real value added in the mining sector contracted on account of lower production in all major mineral groups. Manufacturing production contracted for a second successive quarter, affected by a lack of demand and persistent weak sentiment. Growth in real output of the tertiary sector accelerated in the fourth quarter of 2016, as real output of the commerce sector switched from a contraction in the third quarter to an expansion. The real value added by the finance and transport subsectors expanded at a slightly faster pace during the quarter under review.
While real production contracted marginally, real gross domestic expenditure (GDE) contracted by a more significant 1.9% in the fourth quarter of 2016. The de-accumulation of real inventories, particularly in the mining sector, contributed the most to the contraction in real GDE. In addition, real final consumption expenditure by general government increased at a slower pace in the final quarter of 2016, partly due to the normalisation in spending after the municipal elections in August. This was partly offset by an increase in real gross fixed capital formation.
Viewed from the expenditure side, the change in real inventories subtracted significantly from growth in real GDP in the final quarter of 2016, while real net exports made a marked positive contribution. For 2016 as a whole, gross fixed capital formation and the change in inventories subtracted from overall economic growth, while real net exports made a positive contribution.
The pace of increase in real consumption expenditure by households remained unchanged in the fourth quarter of 2016. Following seven consecutive quarters of contraction, real spending on durable goods increased marginally in the fourth quarter, as a further decline in spending on transport goods was fully countered by increased spending on all other durable goods components. Growth in real spending by households on semi-durable goods accelerated briskly in the fourth quarter of 2016, buoyed by increased spending on clothing and footwear, household textiles, and recreation and entertainment goods. By contrast, real outlays by households on non-durable goods and services advanced at a slower pace in the final quarter of 2016. Relative to disposable income, households reduced their indebtedness in the fourth quarter of 2016.
The contraction in real gross fixed capital formation in 2016 represented the first negative annual growth rate since 2010. As a percentage of GDP, it fell to below the 20% level on an annual basis for the first time since 2012. Following four successive quarterly declines, real capital spending increased in the final quarter of 2016. Growth in real capital outlays by general government accelerated notably in the fourth quarter of 2016, supported by capital spending on water infrastructure projects, the maintenance of roads and the refurbishment of schools in the quarter under review. By contrast, real fixed capital expenditure by public corporations contracted for a second consecutive quarter, while capital outlays by the private sector contracted for a fifth successive quarter, suppressed by weak output growth and persistent low business confidence.
Within an environment of subdued output growth, the domestic economy struggled to create sufficient employment opportunities. In the fourth quarter of 2016, the seasonally adjusted unemployment rate increased to its highest level since the global financial crisis. Wage settlements moderated slightly in 2016, and while growth in nominal unit labour cost accelerated to 5.7% in the fourth quarter of the year, it remained within the inflation target range.
Headline consumer price inflation has breached the upper limit of the inflation target range since September 2016 and accelerated to 6.8% in December, before moderating marginally in January 2017. The acceleration in consumer price inflation resulted largely from higher fuel prices and a pickup in price inflation of exchange rate sensitive durable and semi-durable consumer goods following delayed pass-through from currency depreciation in 2015. In addition, consumer food price inflation remained elevated. However, given expectations of a bumper maize crop in 2017, domestic maize prices have receded notably in recent months and should assist in lowering consumer food price inflation in due course. Moreover, average inflation expectations moved lower over the entire forecast period as analysts, business people and trade union representatives all lowered their expectations.
The external value of the rand appreciated further on a trade-weighted basis in the fourth quarter of 2016, supported by higher international commodity prices and reduced global and domestic uncertainty. In December 2016, two prominent international credit rating agencies decided to keep South Africa’s sovereign credit ratings unchanged, which further improved sentiment towards the rand. Global trade volumes increased in the final quarter of 2016, while higher rand prices of South African export commodities contributed towards a strengthening in the terms of trade.
The trade balance switched from a small deficit in the third quarter of 2016 to a sizeable surplus in the fourth quarter. The value of merchandise exports increased in the final quarter of the year alongside improved demand for domestically produced goods and higher commodity prices. Mining exports increased significantly over the period, in particular iron ore and coal exports. The value of merchandise imports receded further as domestic demand remained subdued. This coincided with a narrowing of the shortfall on the services, income and current transfer account, as the net income deficit narrowed following a notable increase in dividend receipts from abroad. Consequently, the deficit on the current account of the balance of payments narrowed significantly to 1.7% of GDP in the fourth quarter of 2016. For 2016 as a whole, the deficit narrowed to 3.3% of GDP from 4.4% in 2015.
The smaller current account deficit was financed through net portfolio inflows, while direct and other investment registered outflows in the fourth quarter of 2016. South Africa’s net international investment position remained positive, but retreated further to 9.0% of GDP at the end of September 2016 as the market value of the country’s foreign liabilities increased, while that of foreign assets declined somewhat. South Africa’s gross gold and other foreign exchange reserves amounted to US$46.7 billion at the end of February 2017, and covered on average 5.2 months’ worth of imports of goods and services, and income payments in the fourth quarter of 2016.
Year-on-year growth in the broadly defined money supply (M3) remained fairly subdued in the final quarter of 2016, before accelerating somewhat in January 2017. Deposit holdings of households grew at a faster pace than that of the corporate sector over the period under review. Growth in bank credit extended to the domestic private sector slowed further in the final quarter of 2016 to a multi-year low as growth in loans and advances to the corporate sector, which remained the driving force, slowed notably over the period. Growth in bank advances to households, which has been very subdued over the past three years, moderated further as household finances remained under pressure.
South African bond yields trended generally lower throughout 2016. However, from mid-August to November 2016 the downward trend was interrupted, in response to a combination of international and domestic factors. The downward trend in bond yields nevertheless continued from December 2016 following the appreciation in the exchange value of the rand and as South Africa’s sovereign credit ratings remaining unchanged, among other factors. The All-Share Price Index of the JSE Limited (JSE) trended lower in the fourth quarter of 2016, but has subsequently recovered somewhat.
The year-on-year rate of increase in national government expenditure exceeded original 2016 Budget projections in the first nine months of fiscal 2016/17, while that of revenue fell short as most revenue sources performed below budgeted projections. Nevertheless, in the first nine months of fiscal 2016/17 the non-financial public sector borrowing requirement narrowed as the non-financial public enterprises and corporations experienced a smaller cash shortfall and local governments experienced higher cash surpluses compared with the same period a year earlier. Government’s fiscal space continued to be constrained by, among other factors, persistent weak economic growth, higher debt levels and debt-service costs, and mounting spending pressures.
Against this backdrop, the budget for fiscal 2017/18 was delivered in February 2017, reaffirming government’s continued commitment to a measured and prudent consolidation path. This would be achieved through a combination of tax increases, notably personal income tax, and a reduction in government’s expenditure ceiling. As a percentage of GDP, the budget deficit is expected to narrow over the medium term. In addition, government expects to record a primary surplus in fiscal 2016/17 and over the medium term.