The prices of most international commodities increased in the third quarter of 2017, in particular those of metals and minerals and, to a lesser extent, energy. Despite the higher commodity prices, global inflationary pressures remained quite subdued. The outcomes of consumer price inflation in the advanced economies were generally below both expectations and central bank targets, with the United Kingdom the notable exception.
In South Africa, growth in real gross domestic product (GDP) slowed to an annualised rate of 2.0% in the third quarter of 2017. This is the first time since 2014 that real GDP has expanded at a rate of 2.0% or more for two consecutive quarters. The moderation in the third quarter of 2017 was brought about by a deceleration in real output growth of the tertiary sector, while economic activity expanded at a slightly faster pace in both the primary and secondary sectors.
An acceleration in the real output growth of the agricultural sector, underpinned by the 2017 bumper maize crop, drove the acceleration in growth in the real gross value added (GVA) by the primary sector in the third quarter of 2017. Mining production increased for a third successive quarter, albeit at a slower pace than in the second quarter. Growth in the real output of the secondary sector accelerated marginally in the third quarter of 2017, reflecting the faster pace of expansion in the manufacturing sector. By contrast, the real GVA by the electricity, gas and water sector as well as the construction sector contracted.
The real output of the tertiary sector advanced at a notably slower pace in the third quarter of 2017, suppressed by contractions in the real GVA by the commerce and the general government services sectors. The contraction in the commerce sector resulted from a significant decrease in real wholesale trade sales. By contrast, real economic activity in both the transport and finance sectors advanced further in the third quarter of 2017.
Growth in real gross domestic expenditure (GDE) moderated to 0.7% in the third quarter of 2017. The deceleration resulted from a contraction in the real final consumption by general government, a rundown of real inventory holdings, and slower growth in real household consumption expenditure. Conversely, real gross fixed capital formation increased in the third quarter of 2017 following a contraction in the previous quarter. Viewed from the expenditure side, real final consumption expenditure by households and net exports both contributed significantly to real GDP growth in the third quarter of 2017, while the change in inventories subtracted the most.
Real final consumption expenditure by households increased further in the third quarter of 2017, albeit at a slightly slower pace than in the second quarter. Growth in households’ real spending on semi-durable and non-durable goods moderated markedly, while spending on durable goods accelerated sharply on account of a significant increase in motor vehicle purchases. Following a slight contraction in the second quarter of 2017, households’ real spending on services increased in the third quarter. The increase in real household consumption expenditure was supported by a further increase in households’ real disposable income in the third quarter of 2017, albeit at a slightly slower pace than in the previous quarter.
Real gross fixed capital formation rebounded in the third quarter of 2017 following a contraction in the second quarter. Fixed investment spending by the private sector in particular reverted from a fairly sharp contraction in the second quarter of 2017 to a steady increase in the third quarter, supported by notable increases in real outlays on machinery and transport equipment. In addition, growth in real capital outlays by public corporations accelerated while that by general government slowed notably in the third quarter of 2017.
Employment growth in the domestic economy remained insufficient to fully absorb new entrants into the labour market, resulting in the official unemployment rate remaining unchanged at 27.6% for a third successive quarter in the third quarter of 2017. Public sector employment contracted for a third successive quarter in the second quarter of 2017, reflecting the impact of government’s attempts to contain the public sector wage bill on employee headcount through a freeze on new appointments as well as natural attrition.
Year-on-year growth in labour productivity in the formal non-agricultural sector of the economy slowed further in the second quarter of 2017, while growth in nominal unit labour cost accelerated to 6.0% – the upper limit of the inflation target range. Despite the acceleration in unit labour cost, domestic inflationary pressures remained fairly subdued in the first 10 months of 2017. With the exception of meat prices, food price inflation slowed across a broad range of food product categories. Consumer price inflation nevertheless accelerated marginally in recent months, largely due to higher fuel and housing rental prices. However, core inflation receded further to its lowest rate in five years in October 2017, reflecting subdued domestic demand and the still disinflationary effect of the appreciation in the exchange value of the rand throughout most of 2016.
South Africa’s trade surplus with the rest of the world improved for a fourth successive quarter in the third quarter of 2017, as the value of merchandise imports decreased more than the value of net gold and merchandise exports. Both export and import volumes also decreased over the period. Contrary to the larger trade surplus, the shortfall on the services, income and current transfer account widened further in the third quarter of 2017, resulting in the deficit on the current account of the balance of payments improving marginally to 2.3% of GDP. The terms of trade remained broadly unchanged in the third quarter of 2017, as the increase in export prices was almost fully offset by the increase in import prices.
The net inflow of capital on South Africa’s financial account of the balance of payments increased from the second to the third quarter of 2017, with the shortfall on the current account mainly financed through net portfolio investment inflows. This largely reflected the acquisition of domestic debt securities and, to a lesser extent, domestic equity securities by foreign investors as the global search for higher investment returns continued. South Africa’s positive net international investment position (IIP) improved significantly up to the end of June 2017, as the market value of the country’s foreign assets increased substantially while the value of foreign liabilities remained broadly unchanged.
Twelve-month growth in the broadly defined money supply accelerated somewhat in the third quarter of 2017, reflecting a notable recovery in the deposit holdings of financial companies, a sustained increase in household deposits, and a marginal improvement in those of non-financial companies. Bank credit extended to the domestic private sector remained subdued in the third quarter of 2017. Growth in loans and advances to the household sector accelerated marginally but remained weak, while corporate credit growth continued to slow.
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, but kept the rate unchanged at its September and November 2017 meetings due to increased upside risk to the inflation outlook. Other money market rates initially followed the reduction in the repurchase rate, but fluctuated higher after the September 2017 MPC meeting.
On a trade-weighted basis, the external value of the rand depreciated at a much faster pace in the third quarter of 2017 than in the second quarter, weighed down by, among other things, a prominent international credit rating agency’s warning that political pressure around the central bank posed a key credit risk, and rising expectations of a tightening in United States (US) monetary policy in December 2017. The exchange value of the rand weakened further in October and during most of November as sentiment continued to be depressed by domestic political uncertainty following another surprise cabinet reshuffle, the presentation of the October 2017 Medium Term Budget Policy Statement (2017 MTBPS) which showed much wider projected government deficits and higher debt levels, and increased expectations of a credit rating downgrade. However, the exchange value of the rand appreciated after only S&P Global Ratings downgraded South Africa’s local-currency debt on 24 November 2017, while Moody’s Investors Service put the country’s credit rating on review instead of an immediate downgrade, resulting in South African government bonds remaining part of some key international bond indices. These developments also affected South African government bond yields, which remained closely aligned to movements in the exchange value of the rand.
The share prices of companies listed on the JSE Limited (JSE) increased notably from a recent low in June 2017 to an all-time high in November, led by industrial and resource companies. Share prices were supported by the depreciation in the exchange value of the rand, higher international commodity prices, and higher share prices of companies listed on international bourses following an improved global economic outlook.
Although growth in both national government revenue and expenditure fell short of the original 2017 Budget projections, expenditure increased at a much faster pace than revenue in the first half of fiscal 2017/18. Year-on-year growth in most of the main tax categories was well below budgeted estimates. The revenue under-collection, together with weaker economic growth projections and a decline in tax buoyancy, prompted a significant review of the fiscal framework as put forth in the 2017 MTBPS. The consolidated government budget deficit is now expected to be much wider in the current fiscal year as well as over the medium term than projected in the February 2017 Budget. As a result of the higher projected deficits, projections for government debt have also been adjusted upwards, with the total gross loan debt of national government now expected to reach almost 60% of GDP.