The sustained slack in the world economy continued to weigh on international commodity prices, reinforced by indications of excess capacity in the Chinese manufacturing sector. With global oil demand lacking vigour and oil supply remaining robust, augmented by shale gas, the price of Brent crude oil receded to five-year lows of less than US$70 per barrel towards the end of November 2014. This contributed to a reduction in actual and projected inflation in most parts of the world, while also impacting negatively on the external and fiscal balances of, and growth prospects for, oil-producing countries. In sub-Saharan Africa, which includes several oil producers such as Nigeria, Ghana and Angola, the near-term growth outlook was scaled down accordingly.
In South Africa, the annualised real economic growth rate picked up to 1,4 per cent in the third quarter of 2014 as the frictions related to the five-month-long platinum strike in the first half of the year started to dissipate, but were replaced by industrial action in the steel and engineering subsector of manufacturing. This lasted one month, involved 220 000 employees, and contributed to the manufacturing sector registering a third successive quarter of negative real growth. It also spilled over to the real output of the electricity-producing sector, which contracted for a second successive quarter. Taking account of the direct and indirect effects, it is estimated that in the absence of the industrial action in the manufacturing sector, the growth rate of the overall economy in the third quarter would have been 3,1 per cent.
In the third quarter agricultural sector output was bolstered by a near-record maize crop. Mining output rose marginally over the period, while activity in the construction sector continued to expand, albeit at a moderate pace.
The steady performance of the tertiary sector was sustained in the third quarter with the trade and finance sectors recording higher growth, whereas some momentum was lost in the transport and communication sector due to the Post Office strike and in the general government sector, where temporary employment related to the elections held in May 2014 was discontinued.
Real gross domestic expenditure regained some momentum in the third quarter of 2014. Growth in real final consumption expenditure by households inched higher over the period, aligned with a slight acceleration in real disposable income. Purchases of durable goods picked up in the third quarter, led by spending on personal transport equipment which benefited from the introduction of new passenger vehicle models. Expenditure on semi-durable goods also registered a firm increase, whereas spending on non-durable goods and services was subdued. Given muted home-loan activity, the ratio of household debt to disposable income declined somewhat further in the third quarter of 2014. Simultaneously, the household sector’s net wealth ratio also declined marginally, consistent with the lacklustre performance of the equity market.
The general government’s real final consumption expenditure registered moderately lower growth in the quarter under review as temporary employment related to the national and provincial elections held in May 2014 was discontinued.
Real fixed capital formation registered a contraction in the first half of 2014 as a number of projects started to wind down and were not replaced by others given the slack in the economy, the infrastructure-related constraints and the additional caution brought about by extended industrial action. In the third quarter of 2014 capital spending turned around and inched higher. While moderate increases in capital expenditure were registered by private businesses in the agricultural, mining, manufacturing and transport and communication sectors, the most significant boost came from a recovery in real outlays by Eskom and Transnet.
A moderate build-up of inventories was recorded in the third quarter of the year following destocking in each of the preceding three quarters.
Real net exports declined somewhat in the third quarter of 2014, subtracting from overall expenditure on gross domestic product. Export volumes rose by less than import volumes over the period, with exports of gold and iron ore registering contractions as short-term frictions inhibited delivery to external markets and global demand for commodities softened. However, with the price of crude oil declining more steeply than the prices of South African export commodities, the terms of trade improved. In value terms, the deficit on the trade account narrowed somewhat in the third quarter of 2014. This was partly offset by a widening in the deficit on the services, income and current transfer account, reflecting higher net interest payments to non-residents and higher net payments for transport-related services.
The smaller trade deficit but larger services and income shortfall culminated in a slightly narrower deficit on the current account; it edged lower from 6,3 per cent of gross domestic product in the second quarter to 6,0 per cent in the third quarter. The third-quarter deficit was fully financed by net portfolio and net other investment flows. Non-resident investors acquired domestic equity and debt securities in roughly equal proportions during the quarter concerned, and supported the South African government when it issued three international bonds. In the other investment category, loans extended to the South African banking sector rose significantly. By contrast, net direct investment recorded a sizeable outflow of capital over the same period, with a substantial part involving a food and beverage retail investment by a South African entity.
South Africa’s international reserves increased in the third quarter of 2014, aided by proceeds from the government’s international bond issues. While the nominal effective exchange rate of the rand depreciated further in early 2014, adding additional risk to the inflation outlook, it subsequently recovered much of the lost ground and thereafter fluctuated broadly sideways in the remainder of the year to date.
Employment trends reflected the generally subdued growth in economic activity, with the unemployment rate as estimated by household surveys remaining marginally above 25 per cent in the third quarter of 2014. Enterprise-surveyed employment in the formal non-agricultural sector rose somewhat over the most recently available four quarters to the second quarter of 2014, but with most of the job creation taking place in the public sector and a significant part thereof being temporary employment related to the elections held in May.
Average wage settlements increased moderately over the past year, but allowing for advances in productivity, the underlying pace of increase in unit labour cost remained reconcilable with the inflation target range. The number of workdays lost due to industrial action stood at high levels in each of the first three quarters of 2014, adding friction and hidden costs to the economy.
Consumer price inflation, which moved above the inflation target range from April 2014, returned to within the target range from September. While most measures of underlying inflation also seem to have stabilised more recently, the inflation expectations of business and trade union representatives have continued to exceed 6 per cent, although by a fairly slight margin.
In the first eleven months of 2014, orderly conditions and adequate liquidity continued to characterise the domestic financial markets, with no contagion spreading to the system when a relatively small banking institution was placed under curatorship by the authorities in August. Growth in bank advances to the private sector remained in single-digit territory, with credit extended to the corporate sector rising briskly, but advances to the household sector displaying lethargic growth. General advances to the household sector (or unsecured lending) was particularly weak as lenders and borrowers alike seemed to become more risk-averse. As a main balance-sheet counterpart to banks’ credit extension, growth in the broad money supply also lacked vigour.
The continued sluggish economic growth bodes ill for the trajectory of government tax revenue, the fiscal deficit and government debt. As further setbacks to growth resulted in the projected trajectories of these variables worsening further, the Minister of Finance announced a shift in fiscal policy in the October 2014 Medium Term Budget Policy Statement to arrest the deterioration, re-establish a sustainable foundation for the public finances and build a platform for investment- led growth. The key ingredients of the fiscal package included a reduction in growth in government spending, and an increase in tax revenue brought about by adjusting tax policy and administration through proposals to be introduced in the 2015 Budget.
In close alignment with international bond yields, South African bond yields trended lower from early 2014. The shift in fiscal policy as already mentioned was favourably received in the bond market, helping to support the trend in yields. Domestic share prices came under downward pressure from the end of July 2014 along with international share prices, but started recovering from mid-October.
In the real-estate market, turnover and house prices rose somewhat in 2014 to date, and the average time properties remained on the market before being sold shortened somewhat. Growth in mortgage advances also inched higher.
Earlier in 2014 as inflation outcomes and the outlook for inflation deteriorated, the Monetary Policy Committee (MPC) increased the repurchase rate twice – from 5,00 per cent to 5,50 per cent in January, and further to 5,75 per cent in July. With the international prices of oil and food – previously drivers of accelerating inflation – reversing course, the most recent inflation outcomes receded to within the target band and the outlook for inflation also improved significantly. This prompted the MPC to indicate at its November 2014 meeting that it viewed the risks to inflation to be more or less evenly balanced between the upside and the downside, and the repurchase rate to be at an appropriate level for the time being. As seen in the accompanying graph, the trajectory followed by the repurchase rate in the present upward cycle in interest rates is very gradual compared to preceding cycles. This is consistent with the measured approach followed by the MPC in which the need to vigilantly keep inflation under control is balanced against the need to avoid unnecessary policy tightening in an environment of fragile economic growth.