Publication Details

Global inflation remained muted in 2015 and has moved broadly sideways in recent months, reinforced by a notable further decline in international oil prices since September 2015. Monetary policy measures are expected to remain accommodative in most advanced economies, but could be tightened in some emerging-market countries faced by the need to adjust to lower commodity prices, declining export earnings, and depreciating exchange rates.

Domestically, the South African Reserve Bank (the Bank or SARB) has officially identified November 2013 as the upper turning point in the business cycle, implying that the South African economy is now officially in a downward phase of the business cycle.

Concurrent with indications of slower quarter-to-quarter global economic growth, real economic growth in South Africa slowed marginally to an annualised rate of only 0,6 per cent in the fourth quarter of 2015, bringing the real growth rate for 2015 as a whole to a disappointing 1,3 per cent. Agricultural output declined further in the final quarter of the year as dry weather conditions adversely affected field crop production in most areas of South Africa; livestock production held up well over the period, although in part reflecting the forced marketing of animals due to the drought. Mining output rose on account of increased production of coal, platinum-group metals and building materials, but more especially diamonds and nickel. Real value added in the manufacturing sector contracted anew in the final quarter of 2015 due to disappointing global and domestic demand conditions coupled with sustained supply-side constraints. Activity in the electricity, gas and water as well as construction sectors, however, strengthened somewhat during the quarter. In the services sector, the real value added expanded at a slower pace despite slightly stronger growth in the commerce sector.

While growth in real production slowed marginally, real gross domestic expenditure growth picked up further to an annualised rate of 4,3 per cent in the fourth quarter of 2015. Growth in real final consumption expenditure by households inched higher, consistent with a slight acceleration in real disposable income and probably reinforced by expectations of higher prices in future arising from exchange rate depreciation. Firm increases were registered in the purchases of durable goods, in particular transport equipment, as well as semi-durable goods. Expenditure on non-durable goods and services, however, increased at more subdued rates over the period. The household-debt-to-disposable-income ratio decreased somewhat while the debt-service-cost ratio rose marginally in the final quarter of 2015. The pace of increase in general government’s real final consumption expenditure accelerated slightly over the period as government stepped up spending on non-wage goods and services.

Growth in total gross fixed capital formation accelerated somewhat in the fourth quarter of 2015, reflecting higher real capital outlays by all three institutional sectors. Real fixed capital formation by the private sector accelerated largely due to increased capital spending on renewable energy projects; real capital outlays in most other sectors contracted over the period given the availability of ample capacity. Over the same period, capital outlays by public corporations accelerated notably, underpinned by increased spending on construction works and transport equipment, whereas capital spending by general government continued at a steady pace to address the infrastructure bottlenecks constraining the economy from the supply side.

The sharp decline in real inventory holdings in the middle quarters of 2015 moderated in the final quarter of the year. The slower pace of destocking could largely be explained by a significant increase in the volume of crude oil imports following maintenance work performed at certain oil refineries in the preceding quarters alongside lower export sales. Viewed from the expenditure side, the disappointing performance of the economy was reinforced by weak net exports to the rest of the world.

Against the generally subdued growth in economic activity, enterprise-surveyed employment in the formal non-agricultural sector advanced only marginally in the year to the third quarter of 2015. Household-surveyed employment statistics that extend to the fourth quarter of 2015 suggest more vigorous increases in employment in the informal sector, although roughly a quarter of the workforce remains unemployed. With year-on-year remuneration growth slowing at a slightly faster pace than year-on-year output growth, the pace of increase in nominal unit labour cost in the formal non-agricultural sector moderated marginally to 5,0 per cent in the third quarter – consistent with the inflation target range.

Inflationary pressures have intensified in recent months. Headline consumer price inflation breached the upper limit of the inflation target range in January 2016 and is expected to remain outside the target throughout the year. The acceleration in headline consumer price inflation mainly reflected the delayed response of food price inflation to the severe drought conditions and the sharp depreciation in the exchange rate of the rand towards the end of 2015 when investor confidence retreated. Consumer goods price inflation quickened noticeably over the period, driven mainly by movements in petrol price inflation. Against the background of a steady uptick in most measures of producer and consumer price inflation, the inflation expectations of business and trade union representatives were adjusted upwards towards the end of 2015, exceeding the 6 per cent level by an even bigger margin.

Reflecting the fragile world economy and the concomitant slower growth in world trade volumes, South African export volumes declined in the fourth quarter of 2015, the first contraction since the second quarter of 2014. Though the depreciation in the exchange value of the rand boosted the export earnings of domestic producers, these benefits were more than fully offset by a further fall in international commodity prices. By contrast, import volumes increased further, reflecting firm growth in real domestic expenditure that flowed through to rising imports of capital and consumption goods. South Africa’s trade deficit resultantly widened in the final quarter of 2015 notwithstanding a slight improvement in the country’s terms of trade. Together with a somewhat larger shortfall on the services, income and current transfer account, the deficit on the current account of the balance of payments widened to 5,1 per cent of gross domestic product in the fourth quarter of 2015.

Despite bouts of increased risk awareness towards investment in emerging-market assets, the net inward movement of foreign capital was sufficient to finance the deficit on the current account. Financial inflows mainly took the form of other investment capital, as the domestic banking sector recorded an increase in foreign currency-denominated loans received as well as non-resident deposits while simultaneously repatriating loan finance previously extended to non-resident parties. The portfolio and direct investment categories registered capital outflows on a net basis during the quarter concerned.

In an environment of fairly subdued economic activity, growth in money supply and in total loans and advances to the domestic private sector nevertheless picked up moderately towards the end of 2015. Bank advances to the corporate sector rose firmly on account of increases in mortgage advances underpinning commercial property development and general loans related to projects in areas such as renewable energy. Credit extension to the household sector, however, remained subdued. Under these circumstances, house prices continued to increase, but at a pedestrian pace.

South African bond yields trended slowly higher during most of 2015 as inflation expectations deteriorated, but rose sharply in December as a sudden decline in investor confidence related to political events was reflected in the money and capital markets and the market for foreign exchange. Prompt action taken to restore confidence led to a partial recovery in financial rates and prices in the final weeks of 2015 and early 2016.

The budget for fiscal 2016/17, delivered in February 2016, strengthened measures to narrow the fiscal deficit more rapidly in the next three years and to stabilise government’s gross loan debt. The narrowing of the deficit is envisaged through various adjustments on both the revenue and expenditure side. Responding to the risk of higher inflation but also mindful of the need to protect the fragile economic growth momentum, the Monetary Policy Committee (MPC) of the SARB raised the repurchase rate by 25 basis points in July 2015 and by another 25 basis points in November. Given the subsequent notable deterioration in the inflation outlook, the MPC decided at its January 2016 meeting to raise the policy rate by a further 50 basis points to 6,75 per cent per annum, effective from 29 January 2016.