Consumer price inflation in the advanced economies moderated somewhat in recent months despite the acceleration in real output growth and tighter labour markets. Inflation also slowed in the emerging market economies. The continued absence of meaningful global inflationary pressures was supported by the sustained low price of crude oil and, more recently, by decreases in the prices of most international commodities in the second quarter of 2017, especially those of metals and agricultural commodities. However, the price of Brent crude oil has rebounded somewhat since the end of June 2017 in response to a higher demand for the commodity, slower growth in the US rig count, and lower oil inventories in the Organisation for Economic Co-operation and Development (OECD) countries.
In South Africa, real gross domestic product (GDP) rebounded in the second quarter of 2017, advancing at an annualised rate of 2.5% following two successive quarters of contraction. The recovery in the second quarter of 2017 reflected a turnaround in the real output of both the secondary and the tertiary sectors. The real gross value added (GVA) by the primary sector advanced at a slightly slower pace as output growth in the mining sector slowed notably. By contrast, real agricultural output increased at a brisk pace, largely on account of the record domestic maize crop.
The rebound in the real output of the secondary sector in the second quarter of 2017 largely reflected an increase in the real GVA by the manufacturing sector following three consecutive quarters of contraction. However, confidence among manufacturers remained very low despite the increase in output. Growth in the output of the sector supplying electricity, gas and water accelerated notably in the second quarter of 2017, underpinned by increased mining and manufacturing output. The GVA added by the construction sector contracted further, consistent with weak building and civil construction confidence.
The recovery in the real output of the tertiary sector in the second quarter of 2017 resulted largely from increased real economic activity in the commerce and finance sectors. Robust growth in real retail trade sales underpinned the turnaround in the commerce sector while output growth in the finance sector was boosted by increased commercial banking activity and trading activity in the equity market. Real output growth in the transport sector also rebounded in the second quarter of 2017 due to increased activity in land transport. By contrast, the real GVA by the general government subsector contracted further.
Growth in real gross domestic expenditure (GDE) accelerated to an annualised 2.4% in the second quarter of 2017. The acceleration resulted primarily from a rebound in the real final consumption expenditure by households and, to a lesser extent, in that by general government. Real gross fixed capital formation contracted anew in the second quarter of 2017 while the pace of real inventory accumulation slowed.
Viewed from the expenditure side, real final consumption expenditure by households contributed significantly to real GDP growth in the second quarter of 2017, while real government consumption expenditure and real net exports contributed only marginally. By contrast, real capital expenditure subtracted from GDP growth.
Real final consumption expenditure by households increased sharply in the second quarter of 2017 after contracting in the first quarter. Households’ real spending on semi-durable goods in particular rebounded strongly, reflecting brisk growth in spending on most categories. Real expenditure on both durable and non-durable goods also rebounded in the second quarter of 2017. However, real spending by households on services contracted for the first time since the fourth quarter of 2015, lowered by reduced outlays on services related to transport and communication, recreation and entertainment as well as education. The surge in real household consumption expenditure was supported by an increase in households’ real disposable income in the second quarter of 2017.
Real gross fixed capital formation contracted anew in the second quarter of 2017. Following a brief pickup in the first quarter of 2017, fixed investment spending by the private sector extended its downward trend in the second quarter as capital investment in transport equipment as well as in residential and non-residential buildings contracted. In addition, real capital outlays by public corporations contracted for a fourth successive quarter. By contrast, fixed investment spending by general government increased at a fairly brisk pace.
Amid declining fixed capital investment and persistently weak business and consumer confidence, the domestic economy failed to create meaningful employment opportunities. Formal non-agricultural employment remained virtually unchanged from the fourth quarter of 2016 to the first quarter of 2017 as the marginal increase in private sector employment was almost fully offset by a further decrease in public sector employment. Even though informal employment increased significantly in the year to the second quarter of 2017, the notable increase in the number of unemployed persons resulted in a further rise in the seasonally adjusted unemployment rate, to 27.6%.
Real wage growth per worker accelerated in the first quarter of 2017 as growth in the nominal remuneration per worker accelerated alongside a moderation in consumer price inflation. Growth in labour productivity in the formal non-agricultural sector of the economy remained lacklustre while growth in nominal unit labour cost accelerated somewhat in the first quarter of 2017 but nevertheless remained within the inflation target range.
Consumer price inflation has slowed markedly in 2017 thus far, approaching the midpoint of the inflation target range at 4.6% in July. Domestic price pressures eased across a broad range of product categories, with core inflation also moderating to its lowest level in four-and- a-half years.
The value of exported gold and merchandise goods increased at a slightly faster pace than that of merchandise imports, resulting in a widening of South Africa’s trade surplus with the rest of the world in the second quarter of 2017. The value of both mining and manufacturing exports increased, the latter following three successive quarterly declines. The value of mining imports increased despite a decline in the value of crude oil imports, while manufacturing imports were boosted by higher values of imported machinery, transport equipment and textiles.
The shortfall on the services, income and current transfer account widened further in the second quarter of 2017, resulting in the deficit on the current account of the balance of payments widening from 2.0% of GDP in the first quarter of 2017 to 2.4% of GDP in the second quarter, despite the improved trade surplus.
Although the net inflow of capital on South Africa’s financial account of the balance of payments declined from the first to the second quarter of 2017, the shortfall on the current account was mainly financed through net portfolio investment inflows. Non-resident investors continued to acquire South African debt securities in particular, driven largely by the ongoing global search for yield. Following four consecutive quarterly declines, South Africa’s positive net international investment position (IIP) improved significantly from 3.6% of GDP at the end of December 2016 to 6.6% at the end of March 2017 as the market value of the country’s foreign assets increased much more than that of its foreign liabilities.
Growth in the broadly defined money supply remained subdued in the second quarter of 2017. Although growth in the deposit holdings of households slowed further, it nevertheless surpassed that of the corporate sector. However, quarter-to-quarter seasonally adjusted and annualised growth in total money supply decelerated in the second quarter of 2017 – the first contraction since the final quarter of 2009. Bank credit extension to the domestic private sector was subdued in the second quarter of 2017. Growth in loans and advances to the household sector remained lacklustre while corporate credit growth slowed further. In real terms, year-on- year growth in total loans and advances continued to fluctuate at around zero since early 2016.
The external value of the rand remained broadly unchanged on a trade-weighted basis in the second quarter of 2017. However, movements in the domestic currency diverged notably against the major advanced-economy currencies as the US dollar in particular weakened further over the period following continued political uncertainty in that country. Between June and August 2017, the trade-weighted exchange value of the rand weakened somewhat following the decision by a prominent international credit rating agency to downgrade South Africa’s sovereign foreign credit rating, the release of disappointing domestic economic data as well as concerns over the Public Protector’s recommendations regarding the central bank’s mandate. These developments occasionally interrupted the broad downward trend in South African government bond yields that prevailed thus far in 2017. The weaker exchange value of the rand, coupled with a surge in the share prices on international bourses and those of companies in the domestic resources sector, lifted the share prices on the JSE Limited (JSE) to an all-time high on 25 August 2017.
In an environment of weak output growth and an improved inflation outlook, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lowered the repurchase rate by 25 basis points to 6.75% with effect from 21 July 2017. As usual, money-market rates across the various maturities followed this reduction in the repurchase rate, while the prime lending rate and the rates on the different types of loans offered by commercial banks were also adjusted lower. The level of the yield curve moved higher and its slope has steepened in recent months as bond yields in the medium- to long-term maturity range were negatively affected by political developments and the weaker rand while yields at the extreme short end of the curve decreased following the decline in the policy rate. Consequently, the yield gap, measured as the difference between yields at the extreme long and short ends of the curve, widened notably.
National government’s finances were somewhat strained in the first quarter of fiscal 2017/18. Although government expenditure was kept below budgeted projections, revenue increased at a much slower pace than expenditure following weak real economic activity. This resulted in a higher cash book deficit compared with the same period a year earlier. The revenue shortfall resulted from lower-than-projected collections on all tax categories, in particular on taxes related to international trade and transactions.
The non-financial public sector borrowing requirement increased in the first quarter of fiscal 2017/18, largely due to the higher cash deficits of non-financial public enterprises and corporations as well as of national government. The total gross loan debt of national government increased to 51.6% of GDP at the end of June 2017 compared with 47.8% a year earlier, largely due to an increase in the stock of domestic debt.