World trade volumes contracted in the first quarter of 2016, whereas international commodity prices bottomed out and in some instances started recovering somewhat, albeit from low levels. This provided some relief to commodity-exporting countries, alongside the widespread depreciation of currencies which helped to buffer the impact of subdued international demand for commodities. Nevertheless, commodity-exporting economies continue to face headwinds, which impacted on economic growth and external and fiscal balances.
Apart from the challenges brought about by subdued commodity prices, a number of countries in Southern Africa had to face severe drought conditions in late 2015 and early 2016 which detracted further from growth and exports, setting in motion various negative multipliers in the economy and causing increases in domestic food prices. This was exacerbated by currency depreciation, culminating in an acceleration in food price and general inflation. The weakening exchange rates and rising inflation was not confined to Southern Africa, but extended to many other emerging-market economies. By contrast, headline consumer price inflation moderated in a number of advanced economies in the opening months of 2016, mostly reflecting the decline in global oil and other commodity prices and the continued presence of slack in those economies.
In South Africa real growth turned negative in the first quarter of 2016, with real gross domestic product (GDP) contracting at an annualised rate of 1,2 per cent. This disappointing outcome also dragged the growth rate over four quarters down to a negative value – the first year-on-year contraction since 2009, when economic conditions were dominated by the global financial crisis. Real production in the primary sector declined sharply in the first quarter, with the widespread drought having a debilitating impact on the agricultural sector and mining output falling on account of weak global demand and subdued commodity prices. Production of iron ore and platinum, in particular, declined during the quarter under review.
The real value added by the secondary sector inched higher in the first quarter of 2016 as the volume of manufacturing production picked up marginally and the real output of the construction sector rose somewhat, offsetting a decline in real activity in the sector supplying electricity, gas and water. With electricity supply in the country having stabilised following a strong maintenance drive by the electricity utility, Eskom, the decline in output was largely demand-driven and reflected the weak conditions in the economy, particularly in the electricity-intensive mining sector.
Growth in the real value added by the tertiary sector decelerated further in the first quarter of 2016 to its slowest pace since the fourth quarter of 2009. Activity contracted in the transport subsector, while the real value added by the general government and trade subsectors registered a slower pace of increase – the latter subsector largely due to a reduction in activity in the cyclically sensitive motor trade sector. The real value added by the finance sector accelerated marginally in the first quarter of 2016 as the securities markets recorded record-high turnover. While the real output of the communication subsector continued along its upward path, both freight and passenger transport activity contracted in the quarter under review.
Having increased in the preceding two quarters, real gross domestic expenditure contracted in the first quarter of 2016. Real final consumption expenditure by households and real gross fixed capital formation both declined, while growth in real final consumption expenditure by general government slowed over the period. The contraction in household consumption expenditure was concentrated in real spending on durable goods, with purchases of vehicles, recreational goods and personal computers suffering the largest setbacks in the first quarter. This was partly related to slower growth in the real disposable income of the household sector, higher debt-service cost and low consumer confidence.
Consistent with the subdued economic conditions, real gross fixed capital formation declined further in the first quarter of 2016. While capital spending by general government contracted significantly, the public corporations sector stepped up its capital expenditure, particularly in the area of electricity provision. Real fixed capital formation by the private sector also declined in the first quarter with notable decreases recorded in private transport services and mining. Capital spending in the drought-stricken agricultural sector increased over the period, albeit from a low base. Real inventory investment turned positive in the first quarter of 2016, probably partly as a result of the generally low levels of stocks, but also arising from an increase in orders received and pre-emptive stocking in the anticipation that prices would rise in the near future.
The annual average growth rate in formal non-agricultural employment slowed continuously from 2011 and came to a negative 0,5 per cent in 2015. Amid the slow growth in domestic and global output, total formal non-agricultural employment nevertheless increased somewhat in the fourth quarter of 2015. The increase emanated from public-sector employment at local government level for municipal projects under the Expanded Public Works Programme, and employment to assist with municipal elections. Overall employment in the private sector was unchanged but sectoral outcomes were mixed, with the services-related sectors creating jobs but these being cancelled out by job losses in the goods-producing sectors.
The number of unemployed persons looking for work rose further in the first quarter of 2016, resulting in an increase in the official unemployment rate to 26,7 per cent, from 26,4 per cent a year earlier. Youth unemployment remained particularly high.
In the first quarter of 2016 average wage settlements remained above consumer price inflation, as had also been the case in 2015. Remuneration growth per worker in 2015 was higher in the public sector than in the private sector. While headline consumer price inflation benefited from the lower oil price and averaged only 4,6 per cent in 2015, the depreciation in the exchange value of the rand and unfavourable food price developments resulted in a renewed acceleration in inflation towards the end of 2015. By January 2016 headline consumer price inflation breached the upper level of the inflation target for the first time after a spell of 16 consecutive months – from September 2014 – during which it had stayed inside the target range. Most recent consumer price inflation outcomes have been slightly above the target range. The policy interest rate increases implemented in January and March 2016 were aimed at moderating inflation and in time returning it to within the target range.
In volume terms both exports and imports contracted somewhat in the first quarter of 2016, but rose in nominal value terms. A recovery in the international prices of a number of South African export commodities and a more depreciated exchange rate of the rand contributed to an increase in the value of merchandise exports in the first quarter of 2016. The value of merchandise imports edged higher over the same period, with an increase in the value of imported capital and intermediate goods largely offset by lower imports of consumer goods. With a slightly firmer increase in exports than in imports, the country’s trade deficit narrowed somewhat over the period.
However, in the first quarter of 2016 net income payments to the rest of the world increased notably compared with the preceding quarter, as dividend receipts from non-South African firms declined while dividend payments by South African entities to foreign shareholders rose. This pushed the shortfall on the service, income and current transfer account to a higher level, resulting in a widening of the deficit on the current account to 5,0 per cent of GDP. The financing of the shortfall through the financial account of the balance of payments mainly took the form of portfolio and other investment.
South Africa’s net international investment position (or foreign assets minus foreign liabilities) registered a record-high positive value of 17,8 per cent of annualised GDP at the end of December 2015. This was largely driven by revaluation effects, with a much stronger increase in 2015 in the value of South Africa’s foreign assets compared with the increase in the value of the country’s foreign liabilities.
The banking sector’s balance sheet firmed in 2015 and early 2016, with growth in both money supply and credit extension exceeding that in nominal GDP. Credit extension to the corporate sector continued to rise at double-digit rates, buoyed by real-estate, storage and communication, and renewable energy funding. Credit extension to households was more subdued. The monetary policy tightening cycle which started in early 2014 had added some 200 basis points to benchmark short-term interest rates up to the halfway mark of 2016.
After the steep increase in December 2015, South African bond yields started to moderate as the exchange value of the rand recovered and inflation outcomes turned out to be lower than expected. On occasion in the first five months of 2016, concerns regarding political developments and a possible credit rating downgrade drove bonds yields higher and the exchange value of the rand lower, but when all three the major credit rating agencies reaffirmed their investment-grade sovereign ratings for South Africa in May and early June, bond yields retreated to lower levels.
Bond and share market activity was brisk in the first five months of 2016, with record-high turnover. Share prices on the JSE Limited recovered over this period and have fluctuated close to previous record levels in the most recent three months.
Actual national government revenue and expenditure for the full 2015/16 fiscal year were close to the budgeted amounts – slightly higher than the original February 2015 budgeted projections, but somewhat lower than the revised February 2016 projections. While corporate income tax collections were subdued, revenue collections in all the other tax categories were firm. The cash-book deficit for the 2015/16 fiscal year came to 4,3 per cent of GDP, slightly lower than in the previous fiscal year. For the non-financial public sector as a whole, inclusive of all levels of government as well as non-financial public enterprises, borrowing was channelled to investment: the sector’s gross fixed capital formation in 2015/16 continued to exceed its borrowing requirement by a significant margin.