International commodity prices were elevated in the first quarter of 2017, particularly for energy as well as metals and minerals. The prices of most commodities have since softened, especially for crude oil, owing to increased US shale production as well as market disappointment with the extent of the production cuts agreed to by the major oil producers. The uptick in these commodity prices caused advanced economy inflation to accelerate in the first quarter, even as core inflation remained fairly subdued. By contrast, inflation in emerging market economies benefited from stronger exchange rates and the effects of previous policy adjustments.
The South African economy has entered a technical recession, having contracted for a second consecutive quarter in the first quarter of 2017. Real gross domestic product (GDP) decreased at an annualised rate of 0.7% in the first quarter of 2017, as the real output of the secondary sector contracted further while that of the tertiary sector declined for the first time since the second quarter of 2009. By contrast, the real gross value added by the primary sector rebounded strongly in the first quarter of 2017, with significant increases in both mining and agricultural output. Mining production was supported by increased global demand and higher international commodity prices, while the end of the drought underpinned the strong recovery in agricultural output.
The decline in the real output of the secondary sector in the first quarter of 2017 was broad-based. Manufacturing production contracted for a third successive quarter as weak domestic demand and low business confidence continued to suppress output. Real output also contracted in the sector supplying electricity, gas and water as well as in the construction sector.
Real economic activity contracted in all the tertiary subsectors in the first quarter of 2017. The gross value added by the commerce sector decreased notably as wholesale and retail trade activity contracted on account of weak demand. Real output in the transport sector was weighed down by lower activity in the road and rail passenger subsector, while real output in the finance sector contracted largely due to lower non-interest income of commercial banks and reduced trading activity in the derivatives market.
Although real production contracted further, real gross domestic expenditure (GDE) switched from a contraction in the fourth quarter of 2016 to an annualised increase of 1.2% in the first quarter of 2017. The expansion resulted from the accumulation of real inventory holdings, largely in the wholesale trade sector, and from an increase in real gross fixed capital formation. By contrast, real final consumption expenditure by households contracted notably while that by general government also decreased in the first quarter of 2017.
Viewed from the expenditure side, real net exports and real final consumption expenditure by households subtracted significantly from growth in real GDP in the first quarter of 2017, while the change in real inventories made the largest positive contribution.
Real final consumption expenditure by households contracted in the first quarter of 2017, following three consecutive quarters of expansion. Real spending on semi-durable goods in particular contracted sharply, exacerbated by strong sales in the fourth quarter of 2016 following extended Black Friday promotions. Households’ real expenditure on non-durable goods also contracted notably, as spending on food, beverages and tobacco as well as on petroleum products declined. In addition, real outlays by households on durable goods contracted anew in the first quarter of 2017 following a moderate increase in the final quarter of 2016. Real spending on services advanced further in the first quarter of 2017, albeit at a slower pace. The contraction in households’ real disposable income in the first quarter of 2017 curtailed their ability to spend.
Real gross fixed capital formation increased at a slower pace in the first quarter of 2017. Following five consecutive quarters of contraction, growth in real capital spending by the private sector turned positive, mainly due to increased capital outlays on residential buildings and on machinery and equipment. Growth in fixed investment spending by general government slowed but remained fairly brisk. By contrast, real fixed capital formation by public corporations contracted in the first quarter of 2017.
Formal non-agricultural employment increased marginally by 0.2% on an annual average basis in 2016. Despite the contraction in real output, the private sector nevertheless managed to create new employment opportunities in the fourth quarter of 2016, while the decrease in public sector employment resulted largely from the termination of the contracts of a large number of temporary municipal-election workers. The number of unemployed South Africans looking for work rose at a faster pace than the number of employed persons, resulting in a further increase in the seasonally adjusted unemployment rate, to 27.3% in the first quarter of 2017.
Real wage growth per worker slowed notably in 2016 as nominal remuneration per worker moderated somewhat while consumer price inflation accelerated markedly. When adjusting for election-related employment, growth in labour productivity in the formal non-agricultural sector moderated to 0.7% in the fourth quarter of 2016 and to 0.4% in 2016 as a whole. Growth in nominal unit labour cost moderated to 4.7% in the fourth quarter of 2016, remaining well within the inflation target range.
Headline consumer price inflation slowed from a recent peak of 6.8% in December 2016 to 5.3% in April 2017. The moderation in consumer price inflation was fairly broad-based, as the slowdown in domestic food price inflation, weak consumer demand and the continued benefit from currency appreciation in 2016 all contributed to easing inflationary pressures. Core inflation also moderated to its lowest level in 51 months in April 2017.
The external value of the rand appreciated further on a trade weighted basis up to the final week of March 2017, buoyed by higher international commodity prices and prospects of improved global and domestic economic growth. However, heightened domestic political uncertainty at the end of March resulted in a sharp depreciation in the external value of the rand and culminated in two prominent international credit rating agencies downgrading South Africa’s long-term foreign currency credit rating to sub-investment grade in April. Subsequently, the external value of the rand appreciated again, supported by the continued search for higher yields by international investors. South Africa’s sovereign credit rating was also downgraded by a third rating agency in June, but this rating remained investment grade.
South Africa’s trade surplus was sustained for a second consecutive quarter in the first quarter of 2017. The value of net gold and merchandise exports increased slightly in the first quarter of the year alongside a marginal increase in the value of merchandise imports. Mining exports increased for a second successive quarter while the value of manufacturing exports decreased for a third successive quarter, in step with lower manufacturing output. The higher value of merchandise imports was underpinned by increased imports of crude and refined oil-products.
The shortfall on the services, income and current transfer account widened in the first quarter of 2017, largely due to a widening in the net income deficit following a significant decrease in dividend receipts from abroad. Combined with the broadly unchanged trade surplus, this led to a widening in the deficit on the current account of the balance of payments, from 1.7% of GDP in the fourth quarter of 2016 to 2.1% of GDP in the first quarter of 2017.
The financing of the current account shortfall through the financial account of the balance of payments mainly took the form of net portfolio and other investment inflows in the first quarter of 2017. South Africa’s net international investment position retreated further to 3.6% of GDP at the end of December 2016, as the market value of the country’s foreign assets declined at a much faster pace than that of its foreign liabilities.
Growth in money supply moderated in the first quarter of 2017 and remained broadly aligned with growth in nominal GDP. The deposit holdings of households continued to grow at a faster pace than those of the corporate sector. Growth in the deposit holdings of non-financial companies in particular slowed notably. Growth in aggregate bank credit extended to the domestic private sector remained weak in the first quarter of 2017, largely due to subdued growth in loans and advances to the household sector. Nevertheless, credit extension to the corporate sector also advanced at a slower pace in the first quarter of 2017.
South African bond yields initially trended lower in the opening months of 2017, reflecting expectations of lower future inflation and remaining in line with movements in the rand per US dollar exchange rate. However, between the final week of March and the first week of April, this downward trend was briefly interrupted in response to domestic political developments and South Africa’s sovereign credit rating downgrades. Bond yields subsequently trended lower again as the international search for yield continued. Share prices on the JSE Limited (JSE) rose in the first five months of 2017, largely due to a notable increase in the share prices of industrial companies, before receding more recently.
National government revenue and expenditure for the full 2016/17 fiscal year were both lower than the original 2016 Budget projections and the revised 2017 Budget projections. The revenue shortfall resulted largely from lower-than-expected collections of personal income tax, import value added tax and import duties. Revenue undershot projections by a wider margin than expenditure, resulting in a marginally higher cash book deficit. However, as a ratio of GDP, the cash book deficit amounted to 3.9% in fiscal 2016/17 compared with 4.2% in the previous fiscal year. The non-financial public-sector borrowing requirement narrowed as national government experienced a smaller cash shortfall and local governments experienced higher cash surpluses compared with the previous fiscal year. By contrast, non-financial public enterprises and corporations recorded a larger cash deficit in fiscal 2016/17. Government revenue collection could remain under pressure given the contraction in real output and consumer spending in the first quarter of 2017.