The international prices of South African export commodities on average declined somewhat in the second quarter of 2014. While the price of crude oil fluctuated higher up to June 2014, driven by concerns about the geopolitical tension in Iraq and the Russian–Ukrainian crisis, the price subsequently receded as oil supply remained robust whereas estimates for global oil demand were revised downwards. Global inflation remained well contained although it was higher in the emerging economies than in the advanced economies.
Following the negative growth rate recorded in the first quarter of 2014, the South African economy escaped a further contraction in the second quarter as real domestic production rose at an annualised rate of 0,6 per cent. This barely positive growth rate was extremely disappointing given the country’s development needs, and was mainly brought about by the drawn-out industrial action in the platinum-mining subsector which started on 23 January 2014 and only came to an end five months later. The strike activity, which resulted in a sharp contraction in mining output in the first quarter of the year, led to a further but less drastic decline in real mining production in the second quarter of 2014 as the real output of platinum group metals registered a pronounced decline. Given the backward and forward linkages of the mining sector, real value added by and utilisation of capacity in the manufacturing sector also declined in the second quarter of the year. The subdued conditions extended to the electricity sector, where weakness in demand was amplified by a relatively mild winter and a higher real price of electricity. By contrast, the agricultural sector registered stronger growth in real output over the period, supported by a bumper maize crop.
In the services industries, the pace of increase in real value added recorded in the first quarter of 2014 was maintained in the second quarter. A decline in activity in the commerce sector and slower growth in the real value added by the financial services sector were fully offset by firmer growth in the transport and general government services sectors in the second quarter of the year.
Real gross domestic expenditure lost some of its earlier momentum in the second quarter of 2014. Growth in real final consumption expenditure by households decelerated further in the second quarter of the year, consistent with the deceleration in the real disposable income of the household sector as industrial action detracted from striking workers’ earnings. The slower growth in household spending was particularly evident in expenditure on durable and semi-durable goods and on services; the pace of increase in real spending on non-durable goods accelerated over the period.
As household consumption expenditure decelerated slightly more than disposable income, and given the subdued home-loan activity, the ratio of household debt to disposable income declined somewhat further in the second quarter of 2014. At the same time the household sector’s net wealth rose firmly over the period, driven mainly by brisk increases in share prices. Growth in general government’s real final consumption expenditure accelerated slightly in the second quarter of 2014, partly on account of additional expenditure incurred with the national and provincial elections held in May.
Against a background of industrial action and strife, growth in real fixed capital expenditure decelerated abruptly in the second quarter of 2014 to a barely positive rate of increase. Real capital outlays by both private business enterprises and public corporations declined over the period, but those by general government accelerated. In the private sector, most industries reduced their capital outlays, but the most pronounced declines were registered in the mining, trade, construction, transport and personal services sectors. These declines were partially offset by higher capital outlays in the manufacturing sector. Public corporations in the electricity and transport subsectors reduced their real capital spending somewhat compared with the preceding quarter. At the same time, however, general government raised its level of capital spending as all three levels of government prioritised infrastructure provision.
Real inventory holdings registered a further decline in the second quarter of 2014, with the mining sector in particular working down stock levels in order to continue supplying markets despite the industrial action. The pace of destocking was somewhat slower than in the preceding quarter.
South Africa’s export performance in the second quarter of 2014 was inhibited by the prolonged industrial action, logistical and energy constraints, a moderation in global demand, and a decline in some commodity prices. The value of merchandise imports also contracted over the period, but to a lesser extent. The larger trade deficit coincided with a widening in the shortfall on the services, income and current transfer account with the rest of the world as South African institutions made higher net income payments to non-resident investors. With both sub-accounts deteriorating, the current-account deficit widened substantially to 6,2 per cent of gross domestic product in the second quarter of 2014, from 4,5 per cent in the first quarter of the year.
The deficit in the second quarter was financed through a combination of direct, portfolio and, to a lesser extent, other investment flows. Inward foreign direct investment was concentrated in manufacturing and telecommunication enterprises while portfolio investment consisted mainly of the net acquisition of government debt securities by non-residents and, to a somewhat lesser extent, of equities. A small decline in the official gross gold and other foreign-exchange reserves in the second quarter of 2014 was offset by reserve increases in July and August 2014. The nominal effective exchange rate of the rand fluctuated broadly sideways in the period from the end of March 2014 to the end of August, notwithstanding industrial action and a downward rerating of South Africa’s long-term sovereign debt.
Employment trends reflected the generally subdued growth in economic activity. Enterprise-surveyed employment in the formal non-agricultural sector rose somewhat over the most recently available four quarters to the first quarter of 2014, but all the job creation took place in the public sector. Household-surveyed employment statistics suggest more vigorous increases in employment in the year to the second quarter of 2014.
The number of workdays lost to industrial action have escalated since the beginning of 2014. Average wage settlements increased moderately over the past year although a number of high-profile settlements were in double-digit territory. Allowing for productivity improvements, unit labour cost increases recently decelerated to less than 6 per cent – the upper limit of the inflation target range. However, industrial action and restructuring in the workplace make it necessary to interpret such statistics with circumspection.
Twelve-month consumer price inflation gained momentum and exceeded 6 per cent most recently, pushed higher by the prices of especially petrol, food and education. Most measures of underlying inflation edged higher over the past year. Given the risk of inflation remaining above the target range for a protracted period, the Monetary Policy Committee (MPC) at its July 2014 meeting decided to raise the repurchase rate by 25 basis points to 5,75 per cent per annum. That followed an earlier increase from 5,00 per cent to 5,50 per cent, announced in January 2014.
The domestic financial markets continued to be characterised by orderly conditions and adequate liquidity in the second quarter of 2014 and the subsequent two months. The broad money supply continued to register subdued growth. However, growth in bank advances to the domestic private sector recorded a moderate acceleration in the first seven months of 2014 – notably in the advances to companies, not to individuals, since the household sector’s unsecured borrowing ran out of steam. Growth in mortgage advances, though still subdued, inched slightly higher, while some other indicators of property-market activity registered an improvement.
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 amounted to 4,6 per cent of gross domestic product in April–June 2014, slightly higher than a year earlier. Both general government and the non-financial public corporations continued to incur more expenditure than their current revenue as they aligned their infrastructure and other programmes with the targets set out in the National Development Plan (NDP). In the most recent quarter, however, general government raised its share of the borrowing requirement whereas public corporations decreased theirs.