The moderate recovery in global economic activity did not arrest the almost unabated decline in international commodity prices that commenced in 2011. In fact, commodity prices receded further, adversely affecting prospects for export growth in commodity-exporting countries, including South Africa. However, the downward trend in international commodity prices and, more in particular, international oil prices from the middle of 2014 contributed meaningfully to containing inflation across most countries.
In South Africa, real growth turned positive in the third quarter of 2015, thereby evading a recession following the short-lived contraction in the second quarter. The acceleration in growth to an annualised rate of 0,7 per cent in the third quarter was largely brought about by a turnaround in the real value added by the manufacturing sector. By contrast, the real output of the primary sector shrank further at a somewhat faster pace over the period. The real output of the agricultural sector declined sharply in all three quarters of 2015, suppressed by adverse drought conditions in many parts of the country. In addition, mining production shrank for the second consecutive quarter, affected primarily by lower production of platinum and iron ore in the third quarter. Platinum production declined due to scheduled maintenance work at certain platinum furnaces as well as safety stoppages, while iron ore production was reduced in reaction to a global oversupply. In manufacturing, higher production levels mainly replicated increased domestic demand as export volumes receded over the period. Notwithstanding the pickup in production, the manufacturing sector continued to be characterised by substantial surplus capacity. Activity in the construction sector remained lacklustre, while electricity output contracted during the quarter under review as a moderate winter resulted in lower demand. The tertiary sector continued its perennial solid growth performance in the third quarter.
In the third quarter of 2015, growth in real gross domestic expenditure was broadly in step with that in real gross domestic product (GDP). Growth in household consumption slowed further in the third quarter, influenced by a moderation in real income growth and persistently low consumer confidence levels. Spending on durable and non-durable goods contracted while outlays on services increased at a slower pace. In line with the relatively weak growth prospects for the South African economy and low business confidence, growth in gross fixed capital formation decelerated further in the third quarter of 2015. Real capital spending by private business enterprises, constituting the largest part of total capital formation, contracted slightly, whereas real capital outlays of public corporations increased at a marginally faster pace in the third quarter. Inventory investment decreased further, though at a somewhat slower pace, as companies continued to align their inventory levels with lower expected sales.
Consistent with the lacklustre growth performance of the economy, employment continued to trend sideways in the first half of 2015. Average wage settlements moderated somewhat in the first three quarters of 2015 compared with the corresponding period in 2014.
Domestic inflationary pressures intensified at a more gradual pace than initially anticipated thus far in 2015, bringing headline consumer price inflation to a level only slightly above the midpoint of the inflation target range of 3 to 6 per cent in October 2015. Consumer goods price inflation, and particularly the behaviour of non-durable goods prices, shaped the recent trajectory of headline consumer price inflation. However, consumer goods price inflation has not yet fully responded to the acceleration in agricultural producer food price inflation following the severe drought conditions in many parts of the country. The further depreciation of the exchange value of the rand since mid-2015, partly induced by weaker export commodity prices, also represents a risk for inflation going forward.
Despite the acceleration in global economic growth, growth in export volumes slowed in the third quarter of 2015, following firm increases in the preceding four quarters. Together with a further decline in international commodity prices, in part offset by the depreciation in the exchange rate of the rand, the nominal value of export proceeds remained essentially unchanged during the period. Conversely, import volumes advanced in the third quarter, in line with the moderate pickup in gross domestic expenditure. Boosted by the domestic price- raising effect of the depreciation of the rand, import values advanced moderately during the period. However, with imports rising more strongly than exports, the trade surplus recorded in the second quarter of 2015 reverted to a deficit in the third quarter. Alongside a further increase in net income payments to the rest of the world, the deficit on the current account of the balance of payments rose from 3,1 per cent of GDP in the second quarter of 2015 to 4,1 per cent in the third quarter.
South Africa continued to attract financial flows on a net basis in the third quarter of 2015 despite investors remaining cautious towards investment in emerging-market assets. The capital inflow in the third quarter consisted mainly of a reduction in the other foreign investment assets of the domestic banking sector, as bank advances and trade finance extended to non- resident parties declined while local banks also withdrew some of their deposits held with foreign banks. Foreign direct investment, widely regarded as essential for the promotion of sustainable growth, recorded a small inflow on a net basis. Non-resident investment in South African equity and debt securities was more than offset by the acquisition of foreign portfolio assets by South African investors over the period.
Overall growth in bank loans and advances to the private sector remained lustreless, registering single-digit rates of increase in the first ten months of 2015. Credit extension to the household sector was particularly subdued, expanding at rates marginally below the concurrent rate of consumer price inflation as consumer confidence remained low and personal income constrained. However, bank advances to the corporate sector maintained double-digit rates of growth throughout the ten months to October 2015, propelled by brisk credit extension to the energy, commercial real-estate and financial services sectors – areas where opportunities continued to beacon.
Having raised the repurchase (repo) rate by 25 basis points to 6,0 per cent in July 2015, the Monetary Policy Committee (MPC) agreed on an unchanged rate in September, but at its meeting in November 2015 decided to raise the repo rate further to 6,25 per cent per annum. This was mainly motivated by a deterioration in the risk of inflation overshooting the trajectory that was adopted by the MPC as its central scenario. The increase in the repurchase rate was mirrored by other money-market interest rates.
In the South African capital market, bond yields steepened from February to September 2015. Several factors contributed to the upward trend, including the deterioration of inflation expectations in the wake of currency depreciation, but the expected resumption of monetary policy normalisation by the US Federal Reserve (Fed) was the most enduring factor. After the Fed refrained from raising its policy rate at the September meeting, bond yields had a short- lived respite but again picked up with the approach of the December policy meeting in the US.
Inflation in residential house prices continued to broadly match consumer price inflation outcomes in the ten months to October 2015 alongside the weak economy, constrained employment prospects, stagnating household disposable income and gradually rising interest rates. However, commercial property development gained momentum and was accompanied by an acceleration in commercial mortgage credit growth. Share prices fell back notably in the third quarter of 2015 following the significant setbacks in the Chinese equity market, but recovered in the subsequent months.
At end September 2015, the first half of fiscal 2015/16 ended with a slight shortfall of revenue against the budgeted projections, while expenditure progressed in close alignment with expectations so that the resultant cash-book deficit widened slightly. The October 2015 Medium Term Budget Policy Statement (MTBPS) entrenched the expenditure ceiling introduced in the previous fiscal year aimed at stabilising debt levels. Improving the effectiveness of spending was a theme that was emphasised in the policy statement, along with some broad structural reforms to nurture a more competitive economy. For the non-financial public sector as a whole, the borrowing requirement remained around 6 per cent of GDP in both the second and the third quarters of 2015.