Publication Details

In May 2013 the chairman of the Federal Reserve in the United States (US) signalled plans to start tapering off the quantitative easing programme. Despite the inevitability of such a course eventually being pursued, this announcement triggered a strong reaction in financial markets worldwide, with bond yields rising, share prices declining and some emerging-market currencies depreciating significantly. International prices of a range of commodities declined in the second quarter of 2013, not least due to an expected lower growth trajectory in China. However, the price of crude oil remained resilient and was bolstered by events in the Middle East, particularly the conflicts in Egypt and Syria and their political ramifications.

South Africa’s real growth rate picked up to an annualised rate of 3 per cent in the second quarter of 2013, recovering from the disappointing performance registered in the first quarter of the year. The biggest contribution came from the manufacturing sector, where production rebounded following the first-quarter setback related to a fire at a steel mill, maintenance of refineries and other mainly temporary forces. The electricity and construction sectors also registered improved growth rates in the second quarter. Growth in tertiary production broadly maintained its previous momentum, with the finance and trade sectors registering firm rates of expansion, whereas growth in the production of government services slackened mainIy due to a high base in the previous quarter when employees were temporarily appointed to assist with by-elections. However, in the primary sector real output contracted in the second quarter of the year. The real value added by the agricultural sector declined as dry weather conditions in most maize-producing areas of South Africa in the opening months of 2013 led to lower field-crop production. Mining production also receded as platinum output was hampered by escalating cost pressures, unstable ground formations, safety stoppages and sporadic labour disruptions, while diamond production was held back in the wake of severe flooding early in the year at one of the country’s largest opencast mines.

Domestic final demand maintained brisk growth momentum in the second quarter of 2013. Overall real final consumption expenditure by households expanded at a slightly firmer pace than in the preceding quarter, as did the real disposable income of the household sector. Households’ spending on goods – particularly on durable and semi-durable goods – registered a notable acceleration over the period, led by purchases of motor vehicles, as well as computers and related equipment. Expenditure on motor vehicles was supported by rising income, low interest rates and other incentives offered to customers, the introduction of technologically advanced models, and pre-emptive buying in anticipation of price increases related to the depreciation in the exchange value of the rand. Household debt relative to disposable income inched higher in the second quarter of 2013, while the ratio of household net wealth to disposable income also edged higher despite setbacks to share and bond prices. The pace of increase in the general government’s real consumption expenditure slackened marginally in the quarter under review.

Growth in real fixed capital formation accelerated in the second quarter of 2013, led by the private sector. Producers in the agricultural, mining and manufacturing sectors were especially active in this regard. Accordingly, purchases of agricultural machinery picked up. The mining subsectors extracting coal, gold and iron ore recorded higher capital expenditure, while in manufacturing the food, paper products, fuel and motor vehicle subsectors contributed most forcefully to the acceleration in capital spending. Capital formation by general government maintained a firm rate of expansion in the second quarter, with the local authorities in particular stepping up their expenditure. However, capital spending by public corporations contracted moderately in the second quarter, albeit off a high base.

As the economy expanded, inventories continued to accumulate in the quarter under review, with the most significant build-up recorded in the manufacturing and commerce sectors. Agricultural stocks-in-trade were boosted by the relatively early harvesting of a large part of the latest maize crop.

Having inched lower in the preceding two quarters, the deficit on South Africa’s current account with the rest of the world widened in the second quarter of 2013 to 6,5 per cent of gross domestic product. The terms of trade deteriorated notably on account of lower international commodity prices, but export revenues were also held back by lacklustre growth in the volume of non-gold exports, notwithstanding a significant depreciation in the exchange value of the rand over the period under review. Manufacturing export volumes contracted somewhat, particularly in the subcategory for vehicles and transport equipment, whereas the export volumes of mining and agricultural products edged higher over the period under review. The volume of merchandise imports also inched higher in the second quarter of 2013. A contraction in dividend receipts from the rest of the world simultaneously contributed to a widening of the deficit on the services, income and current transfer account.

Net capital inflows into South Africa slowed in the second quarter of 2013, congruent with a general dampening of capital flows into emerging-market debt securities in the wake of the US Federal Reserve’s indications regarding the tapering of asset purchases. The inflows into South Africa in the second quarter largely took the form of loans extended to South African companies in a foreign direct investment relationship. Renewed purchases of South African equity securities by non-residents were neutralised by selling and redemptions of debt securities in the quarter under review. The net result of the larger deficit on the current account and smaller surplus on the financial account was a moderate deficit on the overall balance of payments, which was mirrored in a somewhat lower level of the gross gold and other foreign reserves. At the same time, the exchange value of the rand depreciated significantly amid the ‘tapering’ remarks of the Federal Reserve chairman, the weakening of South Africa’s terms of trade, sluggish economic growth, high unemployment and ongoing labour union rivalry.

The pass-through from the depreciation in the exchange rate of the rand to domestic inflation remained muted in the first half of 2013, partly on account of substantial surplus capacity in the economy. Nevertheless, in July 2013 consumer price inflation accelerated, driven by food and in particular petrol price inflation, to exceed the upper limit of the target range for the first time since April 2012. At just below 8 per cent, average wage settlement rates in collective bargaining agreements were slightly higher in the first half of 2013 than in 2012, while working days lost due to industrial action were relatively high in the first half of this year. Overall employment in the South African economy nevertheless made modest gains in the first half of 2013, although a brisk expansion in the labour force resulted in the unemployment rate rising somewhat further over this period.

The twelve-month pace of increase in both the broadly defined M3 money supply and the banks’ loans and advances to the domestic private sector fluctuated in high single-digit territory in the first seven months of 2013, broadly aligned with the rate of growth in nominal gross domestic product and expenditure. While mortgage lending remained very slow, growth in instalment sale credit remained brisk, consistent with the lively spending on durable goods in the economy. General loans to households lost momentum over the past year as lenders became more cautious in the area of unsecured lending.

The South African Reserve Bank (the Bank) has kept its policy rate unchanged at its current growth-supportive level since July 2012. However, in the second quarter of 2013 long-term interest rates rose considerably and market expectations of future short-term interest rates also moved notably higher following the US Federal Reserve’s comments on scaling down asset purchases, the sharp depreciation in the exchange value of the rand, the weakening of the international prices of key South African export commodities and the intensification of domestic labour strife. The environment was characterised by increased uncertainty, with analysts and traders often holding divergent views. South African share prices were supported by the depreciation of the exchange rate of the rand and despite setbacks to resources share prices, the overall share-price index reached record highs in the second quarter of the year and remained in high territory in the subsequent two months. House prices continued rising at a moderate pace during the period under review.

The public sector continued providing support to the economic recovery in the second quarter of 2013, recording a public-sector borrowing requirement equal to 5,1 per cent of gross domestic product. Non-financial public enterprises and corporations registered a significantly higher cash shortfall than a year earlier as they continued with their infrastructure drive. National government recorded a slightly smaller borrowing requirement as rising expenditure was matched by brisk collections of especially taxes on property, customs duty, personal income tax and value-added tax. During the quarter under review government redeemed a euro-denominated foreign bond and financed its cash shortfall by issuing domestic government bonds and Treasury bills, raising its total gross loan debt to 43,7 per cent of gross domestic product at the end of June 2013.

In August 2013 the Bank announced changes to its money-market management strategy, aimed at gradually raising the money-market shortage and thereby the banks’ dependence on the central bank for the refinancing of their liquidity shortfalls. Going forward, the trend growth in the money-market shortage would broadly reflect the movements in the stock of notes and coin in circulation outside the Bank and in the banks’ required cash reserve deposits with the Bank.