Global inflation remained fairly well contained in the first four months of 2013, although inflation outcomes in emerging-market and developing countries exceeded those in the advanced economies. The pedestrian pace of expansion in global activity and slowdown in China’s resource-intensive growth contributed to a moderation in the international prices of oil and a range of other commodities, particularly from mid-February 2013. Under these circumstances most countries maintained an expansionary monetary policy stance, particularly the advanced economies.
In South Africa economic activity lost traction in the first quarter of 2013 as real growth decelerated to an annualised rate of 0,9 per cent – less than the concurrent pace of population growth. The marked loss of growth momentum was largely due to a contraction in manufacturing output, as steel production was affected by a fire at a large steel mill and petroleum refineries were shut down for maintenance. Simultaneously, agricultural output declined as a dry mid-season spell resulted in a downward revision in crop estimates. The production of electricity also contracted further over the period, reflecting the impact of supply constraints and higher real prices. By contrast, real value added in mining increased as platinum output recovered from the strike-related production stoppages that affected the platinum industry in the second half of 2012, while gold output rose somewhat despite an underground fire at one of the major gold mines. In the construction industry activity in the residential and non-residential building sectors picked up somewhat in the first quarter of 2013.
In the services sector real output continued expanding at a reasonably firm pace, buoyed by activity in the finance, retail trade and communication subsectors. With employment gains in government slowing in the first quarter of 2013, growth in the general government’s real value added moderated somewhat over the period.
Growth in real gross domestic expenditure accelerated in the first quarter of 2013 as real final consumption by government and inventory investment rebounded, having registered declines in the previous quarter. The most significant increases in real inventory holdings in the first quarter were recorded in the manufacturing and mining sectors, replenishing low stock levels carried over from the previous period. Government simultaneously stepped up real spending on non-wage goods and services, alongside a slower pace of increase in real compensation of government employees.
Growth in real disposable income of households and the pace of increase in real final consumption expenditure by households both moderated somewhat in the first quarter of 2013. The pace of increase in spending on durable goods continued to lose momentum, especially in the area of purchases of new motor vehicles albeit off a high base. Expenditure on semi-durable goods remained firm, supported by resilient spending on clothing and footwear, whereas the pace of increase in households’ purchases of non-durable goods also decelerated significantly over the period. Real spending by households on services registered a moderate acceleration in the first quarter of 2013 as expenditure on rent, household and medical services increased. Households continued to incur further debt over the period but at a fairly modest pace which was closely aligned with the growth in disposable income, resulting in a broadly sideways movement of the household debt-to-income ratio.
Growth in real gross fixed capital formation slowed further in the first quarter of 2013. Of the main three institutional sectors, only general government registered an acceleration as provincial and central government departments increased their capital spending on housing and construction works. Fixed capital outlays by both private business enterprises and public corporations registered slower growth. The deceleration in investment activity by private business enterprises was widespread and consistent with the generally more subdued economic conditions, with only the agricultural sector, building contractors and business services firms stepping up their expenditure on capital goods. Albeit off a high base, the pace of increase in real capital spending by public corporations slowed considerably in the first quarter, reflecting a weakening of capital investment by the electricity sector as industrial action interrupted progress with the construction of a new power plant. This negative impact was partly offset by firm capital expenditure by public corporations related to the expansion of freight rail, port terminal and road capacity.
The subdued growth trajectory in South Africa was mirrored in lustreless job creation, with total employment rising by only 1,5 per cent over the year to the first quarter of 2013 and a quarter of the workforce remaining unemployed. Job creation continued to be skewed towards the public sector rather than the private sector. Average wage settlements rose marginally in the first quarter of 2013 when compared with 2012, but allowing for productivity improvements, unit labour cost increases remained fairly aligned with the upper limit of the 3 to 6 per cent inflation target range. Consumer price inflation accelerated in the course of the past year, driven by the prices of petrol, food, transport, education, health services and health insurance, and levelled off just below the upper limit of the target range in the early part of 2013. The depreciation in the exchange value of the rand over the past year was an important indirect contributor to the inflation process.
In the first quarter of 2013 the deficit on the current account of the balance of payments narrowed to 5,8 per cent of gross domestic product. The trade account benefited from an increase in external demand, especially from emerging-market economies, firm international prices for South African export commodities, an improvement in the terms of trade and a more competitive exchange value of the rand. Although imports also rose significantly as domestic expenditure expanded, this fell short of the increase in export proceeds. Simultaneously the deficit on the services and current transfer account narrowed, reflecting improved travel and dividend receipts from the rest of the world.
The deficit on the current account was fully financed by a further sizeable inflow of foreign capital in the first quarter of 2013, registered against the backdrop of nominal interest rate differentials that continued to favour South Africa. A net inflow of direct investment capital was recorded as foreign parent companies extended long-term loans to their domestic subsidiaries. Other investment flows also registered an inflow of capital on a net basis, while portfolio investment (including new issues and redemptions of portfolio investment assets) switched to a net outflow of capital over the period.
The exchange value of the rand depreciated in the first five months of 2013 driven by apprehension about a range of factors including South Africa’s comparatively large current-account deficit, loss of international competitiveness, electricity-supply constraints, labour unrest, the possibility of weaker global demand for commodities, and concerns about further sovereign debt downgrades. During May severe industrial action and violent unrest highlighted the risk of further mining-supply disruptions, exacerbating the depreciation of the exchange rate.
Overall bank lending to the domestic private sector remained hesitant in the first four months of 2013 despite the low levels at which benchmark interest rates had been maintained since mid- 2012. Growth in general loans to the household sector started to lose some of its earlier buoyant momentum, probably reflecting greater caution among lenders and borrowers alike. However, instalment sale credit continued to expand briskly over the period, consistent with fairly high levels of purchases of durable goods. Mortgage lending remained very slow, although a number of indicators of housing activity and prices started improving.
Share prices on the JSE Limited (JSE) reached further record highs in the first part of 2013 and bond yields also trended lower to levels previously observed more than four decades ago. However, in May and early June the depreciation of the exchange value of the rand and associated expectations of higher inflation resulted in a significant firming of bond yields, while rates on forward rate agreements also rose notably.
The finances of the broad public sector had a decidedly more expansionary thrust in the past fiscal year. While the general government continued to render support to the economic recovery by incurring a somewhat larger deficit, the financial shortfall of the non-financial public enterprises and corporations more than doubled over the period as these institutions stepped up their infrastructure investment drive. At the same time the ratio of government debt to gross domestic product continued on an upward trajectory, although remaining well contained when compared with debt ratios in other economies.