The recovery remained uneven and fragile, with macroeconomic policies in key economies continuing to support economic activity. In September 2013 the United States (US) Federal Reserve surprised markets by postponing the tapering of its quantitative easing programme, mindful of the uncertainties arising from the deadlock in US fiscal policy and the need to reinforce further the traction in the economic recovery.
While some international commodity prices moved higher in the third quarter of 2013, the broad downward trend of the past 2½ years resumed in October and November. Crude oil prices, which picked up sharply in July and August 2013 on account of geopolitical tensions and global supply concerns, eased again in the subsequent months. At the same time, the global economy continued to be characterised by significant surplus capacity. Under these circumstances global inflation remained benign, although significantly higher in the emerging than in the advanced economies. Ultra-low policy interest rate settings were maintained in most advanced economies. In the euro area, with concerns regarding deflation more prominent than the threat of inflation, the European Central Bank (ECB) reduced its main refinancing rate further in early November 2013 to a record low level.
Following a rebound in the second quarter of 2013, real growth in the South African economy was disappointingly low in the third quarter, mainly on account of industrial action in the motor vehicle and component industries, which resulted in a notable contraction in manufacturing production. In the services industries growth also moderated, mainly as a result of a slower pace of expansion in the trade and finance sectors. The motor trade subsector in particular was hampered by the above-mentioned industrial action at vehicle and vehicle component manufacturers. The negative impact for the sector was softened as existing inventories could be drawn down and due to the fact that many models are imported rather than built domestically.
By contrast, real value added in the primary sector recovered strongly in the third quarter of 2013. Following severe strike-induced labour disruptions in the second quarter of 2013, mining production rebounded in the third quarter as brisk increases in the production of diamonds, platinum and gold more than offset slower growth in the coal and other mining sectors. At the same time, the real value added by the agricultural sector turned around to register an increase in the third quarter of 2013, mainly as a result of improved horticultural and animal production.
Real final consumption expenditure by households expanded further in the third quarter of 2013 but at a significantly slower pace than before, consistent with the simultaneous deceleration in the real disposable income of the household sector as industrial action weighed on striking workers’ earnings. However, wage settlements continued to be reached at levels significantly above the contemporaneous rate of consumer price inflation. With overall real disposable income levels rising moderately, interest rates at relatively low levels, the real prices of high-technology products moderating and the somewhat depreciated exchange value of the rand fuelling fears that the domestic prices of imported and import-competing goods could rise in the near future, consumer expenditure on durable and semi-durable goods continued rising briskly in the third quarter of 2013. However, this occurred at a somewhat slower pace than in the preceding quarter. Households’ real spending on services registered very slow growth while real expenditure on non-durable goods displayed virtually no growth in the third quarter, probably in part related to the loss of income by striking workers.
Alongside the slower pace of increase in household consumption expenditure and given the subdued conditions in the home-loan market and lustreless credit growth in general, the ratio of household debt to disposable income edged lower in the third quarter of 2013. With rising prices of shares, the household sector’s net wealth continued to rise over the period.
Growth in the general government’s real final consumption expenditure slowed somewhat further in the third quarter of 2013 as spending was curtailed in order to restrain the budget deficit. While real expenditure on non-wage goods and services slowed, real compensation of government employees increased marginally.
Fixed capital formation recorded further real growth at a somewhat firmer pace in the third quarter of 2013. The acceleration was mainly evident in the capital expenditure of the general government as the upgrading of public roads by provincial governments and expenditure on water and sanitation projects by local governments gained further momentum. Driven by enterprises in the electricity and transport sectors, real fixed capital expenditure by public corporations remained at a high level, but essentially moved sideways in the third quarter. The pace of growth in fixed capital spending by private business enterprises moderated somewhat in the quarter under review. This moderation was spread across most sectors with the exception of the mining sector (which continued to invest in ongoing projects) and the private transport sector.
Real inventory holdings registered a further firm increase in the third quarter of 2013, with manufacturing inventories rising briskly as parts for vehicle assembly could not be utilised due to industrial action and as petroleum refineries imported more crude oil. Although of smaller magnitude generally, inventories declined in a number of other sectors; these included sectors experiencing strike activity, such as the motor trade sector, whose sales were facilitated by running down stock levels significantly.
With real domestic expenditure increasing more strongly than real domestic production, and given the relatively high import content of capital goods and durable and semi-durable consumer goods, the volume of merchandise imported into South Africa rose more strongly in the third quarter of 2013 than the volume of merchandise exports. Exports were restrained by lustreless export markets and domestic supply-side constraints. In addition, the terms of trade deteriorated over the period as the prices of exports did not keep up with those of imports. The deficit on the services, income and current transfer account also widened in the third quarter of 2013, largely on account of higher net dividend and interest payments to the rest of the world. As a result of these developments, the deficit on the current account of the balance of payments widened from a downwardly revised 5,9 per cent of gross domestic product in the second quarter of 2013 to 6,8 per cent in the third quarter.
The third-quarter deficit was financed through a combination of direct, portfolio and other investment. Inward foreign direct investment was concentrated in the financial and pharmaceutical sectors of the economy, while portfolio investment consisted mainly of the acquisition of debt securities by non-residents as their net purchases of domestic rand-denominated bonds were augmented by the issuance of international bonds by the National Treasury and by a public corporation. In the other investment category, South African banks reduced their foreign currency-denominated deposits held with foreign banks. Related mainly to the international bonds that were issued by the National Treasury, South Africa accumulated more foreign reserves in the third quarter of 2013 and ran a surplus on the overall balance of payments. The nominal effective exchange rate of the rand nevertheless declined in the third quarter of the year as the deterioration in the current-account deficit in the previous quarter, the release of data showing large trade deficits in the third quarter, the prolonged strike action, and the deterioration in the terms of trade weighed on sentiment in the market for foreign exchange.
Employment trends reflected the generally subdued growth in economic activity. Enterprise-surveyed employment in the formal non-agricultural sector displayed very little growth over the most recently available four quarters to the second quarter of 2013. With real output having registered a more pronounced increase over the same period, labour productivity rose and helped to contain unit labour cost inflation. Household-surveyed employment statistics suggest more vigorous increases in employment in the year to the third quarter of 2013, accompanied by a modest reduction in the unemployment rate and an encouraging decrease in youth unemployment to less than 50 per cent.
Wage settlements increased moderately over the past year but, allowing for productivity improvements, unit labour cost increases have remained close to 6 per cent – the upper limit of the inflation target range. Twelve-month consumer price inflation gained momentum over the past few quarters and momentarily exceeded 6 per cent, pushed higher by especially petrol and food price inflation. However, partly due to base effects, lower international food price inflation and a sustained large output gap in the economy, inflation moderated and has fallen inside the inflation target range most recently. While most measures of underlying inflation edged higher over the past year, they have remained well within the target range.
The domestic financial markets continued to be characterised by orderly conditions and adequate liquidity. Given the fairly subdued economic activity, both overall bank advances to the domestic private sector and the broad money supply continued to increase at single-digit rates. Growth in banks’ general advances to the household sector slowed considerably over the past year, whereas instalment sale and leasing finance maintained a firm pace of increase alongside sturdy durable consumption expenditure. At the same time, mortgage advances continued to register very slow growth with a slight upward bias in recent months, consistent with conditions in the real-estate market.
The repurchase rate of the South African Reserve Bank (the Bank) has been maintained at 5 per cent since July 2012, anchoring other money-market interest rates. Bond yields initially trended lower over this period but rose sharply in May 2013 following the US Federal Reserve Chairman’s remarks regarding the downscaling of quantitative easing measures in the future. Yields have subsequently remained in higher territory. Share prices rose to successive record highs over the past year, supported by companies’ earnings growth and constrained alternative investment opportunities.
Fiscal policy continued to provide support to the economic recovery. The public-sector borrowing requirement remained slightly above 6 per cent of gross domestic product in the first half of fiscal 2013/14 as both general government and the non-financial public corporations continued to incur more expenditure than their current revenue, aligning infrastructure and other programmes with the targets set out in the National Development Plan. The October 2013 Medium Term Budget Policy Statement emphasised the need for discipline in containing government expenditure and suggested steps to achieve this outcome, using the principles of efficiency, countercyclicality and debt sustainability to anchor the public finances.