International commodity prices, on balance, weakened somewhat further in the second quarter of 2015 and beyond. The imminent lifting of sanctions against Iran and the expected normalisation of its oil exports, alongside subdued global economic growth, contributed to lower crude oil prices, while the prices of many other commodities also fluctuated lower. Commodity-exporting countries therefore continued to face downward pressure on export proceeds, income and employment levels, fiscal receipts and exchange rates. These constraints were of particular relevance for countries in sub-Saharan Africa, given the lack of diversification in their economies.
Financial markets were upset by events in China, mostly in the third quarter of the year when share prices fell precipitously from their previously established exuberant levels. This triggered volatility in global financial markets and led to various policy actions on the side of the Chinese authorities in an attempt to stabilise the situation; these actions included the easing of monetary policy and the devaluation of the renminbi exchange rate.
The South African economy contracted in the second quarter of 2015. Real gross domestic product (GDP) fell at an annualised rate of 1,3 per cent, reversing the positive growth of equal magnitude that was recorded in the first quarter of the year. During the second quarter, real output contracted sharply in the agricultural sector, brought about by widespread drought conditions. Real value added also fell back considerably in the mining, manufacturing and electricity sectors of the economy as a combination of disappointing global and domestic demand conditions and supply-side frictions, including electricity load-shedding, weighed on production. The trade and accommodation sector also registered a marginal contraction in the quarter under review, reflecting subdued domestic sales and tourism expenditure.
Lustreless production was reflected in meagre job creation. Over the year to the second quarter of 2015, the bulk of the jobs that were created was in the informal sector rather than in the formal sector of the economy, while roughly one in four workers remained unemployed.
Real gross domestic expenditure declined more forcefully than real production in the second quarter of 2015. Real consumption expenditure by households rose at a much slower pace than in the previous quarter as the beneficial effect on household finances of a reduction in fuel prices was partially reversed. The rebound in fuel prices contributed to a contraction in household spending on petrol and diesel, culminating in lower real expenditure on non-durable goods. Real spending on semi-durables lost some momentum, and growth in real expenditure on durable goods slowed to its weakest rate since the second quarter of 2009, mainly due to a reduction in expenditure on motor vehicles. Only services expenditure picked up somewhat. The generally lacklustre expenditure by households contributed to slow growth in household debt and a decline in the household debt-to-income ratio in the second quarter.
While the general government’s real final consumption expenditure edged higher in the quarter under review, growth in real gross fixed capital formation lost further momentum. This deceleration was concentrated in capital outlays by private business enterprises and was consistent with the sluggish economic growth performance of the country and the poor state of business confidence. The only area of private-sector investment which picked up notably was that of electricity-generation projects. Capital investment by public corporations, which contracted in the first quarter of 2015, ticked higher in the second quarter as Eskom again stepped up spending, while real fixed capital formation by general government maintained its growth momentum.
Real inventory levels declined significantly in the second quarter of 2015 as platinum inventories were run down in the mining sector while crude oil import volumes were also reduced, aligned with scheduled maintenance shutdowns at major oil refineries.
The external trade account staged a gratifying reversal into a surplus in the second quarter of the year. Despite a further decline in the international prices of South African export commodities, the quantities exported rose notably, led by platinum, gold, iron ore, chemical products and vehicles. Simultaneously, import volumes edged lower, mainly brought about by a lull in imports of crude oil in the second quarter, but also reflecting the weak domestic expenditure and depreciated real exchange value of the rand. Part of the improvement in the trade account was offset by a larger deficit on the services, income and current transfer account. Large reductions in dividend and travel receipts – some of them probably related to stricter South African visa regulations – contributed to this outcome. Nevertheless, in the second quarter of 2015 the deficit on the current account narrowed further to 3,1 per cent of GDP, thereby contracting for the fourth consecutive quarter.
The financial account continued to benefit from a net inflow of capital in the quarter under review. This consisted mainly of inward portfolio investment, with equity inflows bolstered by non-residents who responded positively to a rights issue by a health insurance company and debt security inflows benefiting from further net bond purchases from abroad. However, ‘other’ investment flows switched from sizeable inflows previously to an outflow in the second quarter of 2015. Non-resident deposits with South African banks declined notably when the proceeds of an earlier disinvestment transaction, temporarily held on deposit with local banks, were withdrawn. The various flows on the current and financial accounts broadly neutralised each other, resulting in an almost unchanged reserve asset position in the second quarter.
The exchange value of the rand, on balance, depreciated further in the second quarter of the year and continued to fluctuate lower in July and August 2015, in line with a more general downward trend in the exchange rates of emerging-market and commodity currencies. Exchange-rate volatility increased in the wake of the turmoil in the Chinese share market and the devaluation of the renminbi, and the trading range of the rand widened significantly, although to a lesser extent in the deep and liquid domestic market for trading rand against foreign currency than in the thinner offshore market outside of normal South African trading hours.
The rate of growth in bank loans and advances remained low in the first seven months of 2015, consistent with the generally subdued economic conditions. Credit extension to households remained particularly weak, whereas lending to companies maintained somewhat firmer momentum, led by loans to the electricity, real-estate development and financial intermediation sectors.
In the housing market, prices continued to rise in the first seven months of 2015 but at a slightly slower pace than before. Share- and bond-market turnover remained brisk over the same period, with share prices on the JSE Limited (JSE) reaching a record high late in April 2015 before running out of steam in the subsequent four months as weaker commodity prices, the subdued economy and the uncertainties introduced by the turmoil in the Chinese share market took their toll.
With economic conditions tough and capacity utilisation low, consumer price inflation outcomes in the middle months of 2015 were generally slightly below market expectations and comfortably within the target range. Average wage settlements declined marginally compared with the previous year, while unit labour cost increases seemed consistent with the inflation target range. At the same time, most measures of underlying inflation also decelerated somewhat as consumer services price inflation slowed. However, inflation was expected to gain momentum in the remainder of the year and in the first half of 2016, propelled by higher food and electricity prices as well as a reversal of the deflationary trend in petrol price inflation.
Against this background, in July 2015 the Monetary Policy Committee (MPC) decided to raise the repurchase rate by 25 basis points, bringing the cumulative increase in the policy rate since the first upward move in January 2014 to 100 basis points. Other money-market interest rates followed the repurchase rate. Orderly conditions with adequate liquidity continued to characterise the money market.
The national government’s finances progressed broadly as planned during the first four months of the 2015/16 fiscal year. Weaker-than-expected collections of company taxes were offset by strong income tax collections from individuals and by firm collections of value- added tax (VAT). Aggregate expenditure was also kept within the budgeted projections, notwithstanding the awarding of a higher-than-budgeted salary increase to the public service with effect from April 2015.
In the April–June quarter of 2015, the public-sector borrowing requirement was significantly higher than in the corresponding period a year earlier. Part of this increase arose from stepping up the infrastructure expenditure of general government and public corporations. While the infrastructure programmes have encountered numerous delays and frustrations, a significant milestone in the quest to resolve the bottlenecks in the economy was reached at the end of August 2015 when full commercial operation of the first generating unit completed at the Medupi power station, Unit 6, commenced, adding almost 800 MW to the capacity of the electricity grid.