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Title Forecast and Country Report for South Africa
Brief
description
This document provides a brief analysis of the South
African economy in the first and second quarters of
2016. Furthermore, a forecast of selected economic
indicators over a three-year horizon is provided.
Client United Nations Department of Economic and Social
Affairs
Prepared by Prof Charlotte du Toit
Plus Economics Advisory (Pty) Ltd
Date October 2016
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List of abbreviations
ANC African National Congress
bp Basis points
CPI Consumer Price Index
DBSA Development Bank of Southern Africa
GDE Gross Domestic Expenditure
GDP Gross Domestic Product
GVA Gross Value-Added
IDC Industrial Development Corporation
m/m Month-on-month
q/q Quarter-on-quarter
QLFS Quarterly Labour Force Survey
Repo rate Repurchase rate
saa Seasonally adjusted and annualised
SAA South African Airways
SANRAL South African National Road Agency Limited
SARB South African Reserve Bank
SOE State-owned enterprise
Stats SA Statistics South Africa
y/y Year-on-year
ZAR South African Rand
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Contents
1 South African Macroeconomic Forecast ................................................................................ 5
1.1 Major Assumptions Underlying the Forecast ............................................................... 5
1.2 Forecast Summary .................................................................................................................. 5
1.3 Uncertainties and Risks to the Forecast ......................................................................... 7
2 Recent Developments in Domestic Economic Conditions .............................................. 9
2.1 Supply Sector ........................................................................................................................... 9
2.1.1 Production and Output ................................................................................................ 9
2.1.2 Investment and Capital .............................................................................................. 12
2.1.3 Labour Market ............................................................................................................... 14
2.2 Fiscal Sector ............................................................................................................................ 17
2.3 Monetary Sector ................................................................................................................... 18
2.4 Demand Sector ...................................................................................................................... 19
2.4.1 Gross Domestic Expenditure .................................................................................... 19
2.4.2 Household Income and Consumption Expenditure ........................................ 21
2.5 Foreign Sector ....................................................................................................................... 21
2.5.1 Current Account ........................................................................................................... 21
2.5.2 Financial Account ......................................................................................................... 23
2.5.3 Exchange Rates ............................................................................................................. 23
2.6 Prices ......................................................................................................................................... 23
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List of Tables Table 1: Forecast of selected economic indicators for South Africa ..................................................... 6
Table 2: Sectoral gross value-added growth (q/q, saa, constant 2010 prices) ................................. 9
Table 3: Labour force by population group and age group ................................................................. 16
Table 4: Remuneration per worker – trends ............................................................................................... 17
Table 5: Key Fiscal Indicators and Trends .................................................................................................... 17
List of Figures
Figure 1: Forecast of selected economic indicators for South Africa ................................................... 6
Figure 2: Real GDP growth (constant 2010 prices) ................................................................................... 11
Figure 3: Sectoral contributions to annualised GDP growth ................................................................ 11
Figure 4: Real sectoral GVA growth (q/q, saa, constant 2010 prices) ............................................... 11
Figure 5: Gross fixed capital formation growth (constant 2010 prices) ............................................ 13
Figure 6: Growth in asset types ........................................................................................................................ 13
Figure 7: Real sectoral investment growth (q/q, saa) .............................................................................. 13
Figure 8: Contributors to the financing of gross capital formation ................................................... 14
Figure 9: Key labour market trends (growth: q/q, saa) ........................................................................... 15
Figure 10: Profile of total employment growth (q/q, saa) ..................................................................... 15
Figure 11: Contributors to total employment in 2016Q2 ...................................................................... 15
Figure 12: Growth in wages and productivity ............................................................................................ 16
Figure 13: Trends in key interest rates and M3 growth (y/y) ................................................................ 19
Figure 14: Credit extension to the private and government sectors (y/y) ....................................... 19
Figure 15: Trends in the components of gross domestic expenditure ............................................. 20
Figure 16: Household income and debt ....................................................................................................... 20
Figure 17: Household consumption expenditure ..................................................................................... 20
Figure 18: Indices of volumes of exports and imports of goods and services .............................. 22
Figure 19: Balances on the current and financial accounts of the balance of payments ........... 22
Figure 20: Year-on-year changes in major exchange rates of the Rand .......................................... 22
Figure 21: Consumer and producer price inflation (y/y) ........................................................................ 24
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1 South African Macroeconomic Forecast
1.1 Major Assumptions Underlying the Forecast
The forecast of the South African economy is driven by the structural nature of the economy,
approached from the supply-side. However, key assumptions have been made in terms of the
outlook of national economic policy, and of the global economy.
South African fiscal policy is expressly committed to reigning in expenditure, reducing the
budget deficit and stabilising debt. Despite dwindling revenue on the back of sluggish
economic growth, the budget deficit is projected to contract from -3.9 per cent of gross
domestic product (GDP) in 2015/16 to -2.4 per cent of GDP by 2018/19. In order to achieve
this, government has committed to: manage the financial risks posed by state-owned
enterprises (SOEs); curtail government wage growth; reprioritise existing spending without
expanding growth; and increasing tax revenue through tax policy measures.
The South African Reserve Bank’s (SARB’s) inflation forecast is one of medium-term
deterioration, driven by expected worsening food price inflation, recoveries in fuel prices and
by a depreciating Rand. The SARB also anticipates a more uncertain global economic outlook
on the back of weak Chinese prospects and the Brexit fall-out; as well as a weak economic
growth outlook for the domestic economy. The SARB is therefore cautionary in its monetary
policy predictions due to inflation breaching the upper target band of 6 per cent in early
2016. The repo rate is expected to rise in reaction over the forecast horizon.
Global economic growth recovered at the beginning of 2016 – representative of improved
expansion in both advanced and emerging-market economies on average. This trend then
moderated into the second quarter of 2016 following a slow-down in economic activity. It is
expected that growth in South Africa’s major trade partners will remain moderate but steady
in the short-term. Expected GDP growth for the US is 3.4, 3.9 and 4.5 per cent for 2016, 2017
and 2018 respectively. The impact of Brexit on European trade relations with South Africa is
unknown, and poses risks to export growth in the short-to medium-term.
It is assumed that commodity prices (specifically oil prices) will remain low in the short term,
averaging $40 per barrel over the forecast horizon. Gold prices are expected to increase over
the short-term, approaching $1800 per fine ounce by 2018. Global consumer inflation is
expected to remain steady and moderate at 2.8, 3.0 and 3.1 per cent over the forecast
horizon.
1.2 Forecast Summary
Economic activity is expected to remain subdued in South Africa, with GDP growth shrinking
to 0.6 per cent in 2016, recovering marginally to 2.0 per cent by 2018. Gross domestic
expenditure (GDE) growth is similarly expected to remain muted, along with its components.
Household spending is forecast to retain its current trend of slowing down, growing by only
1.4 per cent in 2018. Gross fixed capital formation is expected to grow by a 1.8 per cent in
2016, slowing to growth of 1.5 per cent in 2018. In line with expansionary counter-cyclical
fiscal policies, government consumption spending is expected to grow by 2.7 per cent by
2018.
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Table 1: Forecast of selected economic indicators for South Africa
Source: Plus Economics Advisory
Figure 1: Forecast of selected economic indicators for South Africa
Source: Plus Economics Advisory
2012 2013 2014 2015 2016 2017 2018
10P (Rm) 2 901 076 2 968 681 3 017 037 3 055 192 3 074 232 3 113 241 3 175 823
% change 2.2 2.3 1.6 1.3 0.6 1.3 2.0
10P (Rm) 2 958 138 3 039 934 3 055 731 3 106 788 3 160 097 3 212 852 3 272 158
% change 3.2 2.8 0.5 1.7 1.7 1.7 1.8
10P (Rm) 1 768 365 1 803 665 1 816 227 1 847 688 1 875 180 1 902 732 1 929 813
% change 3.7 2.0 0.7 1.7 1.5 1.5 1.4
10P (Rm) 591 275 613 871 625 025 626 515 634 867 649 222 666 793
% change 3.5 3.8 1.8 0.2 1.3 2.3 2.7
10P (Rm) 573 310 613197 622 661 638 394 649 834 655 710 665 682
% change 2.6 7.0 1.5 2.5 1.8 0.9 1.5
10P (Rm) 820 302 850 103 877 998 913 957 940 564 966 151 1 006 602
% change 0.8 3.6 3.3 4.1 2.9 2.7 4.2
10P (Rm) 877 364 921 356 916 692 965 553 988 711 1 014 258 1 039 247
% change 4.2 5.0 -0.5 5.3 2.4 2.6 2.5
Current Account Balance Relative
to GDP% -5.1 -5.9 -5.3 -4.3 -3.9 -3.8 -2.4
Consumer Price Index % change 5.7 5.8 6.1 4.6 6.8 2.6 5.0
3-Month Interest Rate % 9.0 8.6 9.0 9.4 10.2 10.1 8.9
10-Year Interest Rate % 7.4 8.3 7.8 9.3 9.9 10.4 10.2
Exchange Rate (ZAR/USD)
Averagec/$ 821.0 965.0 1084.4 1275.1 1334.9 1857.1 1944.2
Unemployment rate % 24.9% 24.7% 25.1% 25.4% 25.0% 24.8% 26.4%
Wage Rate (Compensation per
Employee)R 102 597 876 109 320 509 115 829 978 120 243 515 124 144 974 130 355 375 137 278 669
% change 6.2 6.6 6.0 3.8 3.2 5.0 5.3
Imports of Goods & Services
Total Final Consumption
Expenditure by Gen. Government
Total Final Consumption
Expenditure by Households
Gross Domestic Expenditure
Gross Domestic Product
Gross Fixed Capital Formation
Exports of Goods & Services
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The deficit on the current account of the balance of payments is expected to benefit from a
slow-growth environment domestically (resulting in slow import growth over the short-term)
and from a depreciating exchange rate (leading to increasing exports). The deficit is
projected to contract to -2.4 per cent by 2018.
Consumer inflation is expected to remain high, at 6.8 per cent, in 2016, recovering in 2017
due to recoveries in food prices and fuel prices. Wage inflation is also expected to pick up in
the wake of this, increasing from a moderate 3.2 per cent in 2016 to 5.3 per cent in 2018. In
response to rising policy rates due to inflationary pressures, interest rates are expected to
rise over the short-term, but then moderate again by 2018.
In the absence of major policy pronouncements to address it, the structural, “sticky” nature
of unemployment in South Africa dictates that it will remain in the vicinity of 25 per cent over
the forecast horizon.
1.3 Uncertainties and Risks to the Forecast
The South African political climate is presently quite tenuous. The ruling party, the African
National Congress (ANC), has been rocked by a number of serious allegations against the
president, including a ruling by the Constitutional Court of the country that the president of
the country, Mr Jacob Zuma, mismanaged public funds in building a luxury private residence
for himself. There have been calls from various quarters, including from within his own party,
for Mr Zuma to step down – resulting in much political uncertainty. In the latest municipal
elections, held in August 2016, the ruling party lost major ground to the official opposition
and to minor parties, resulting in the ANC losing control of four major metropolitan areas in
the country. This has resulted in significant shifts in certain policy areas within these metros.
South Africa is still reeling from a major loss in investor confidence due to a bizarre cabinet
reshuffle in November/December 2015, which saw three finance ministers within
approximately two weeks. The Rand lost major ground in the following days, and has
struggled to recover as allegations of corruption, nepotism, and state capture by an influential
business family in South Africa, continue to dominate the airwaves. Contributing to the jitters
is the persistent pursuit of the present finance minister, Mr Pravin Gordhan, by the Hawks
(South Africa's specialised task force for organised crime) on an alleged spy unit within the
South African Revenue Service (Mr Gordhan was head of the Revenue Service between 1999
and 2009). All of the above do not bode well for a possible ratings downgrade being
signalled by most major ratings agencies – which would result in South Africa's debt being
downgraded to non-investment grade speculative, widely referred to as junk status.
The budget deficit in South Africa, presently -3.9 per cent of GDP, has been regarded as
structural in nature. A key proposal is to reduce the spending ceiling, which has been
hampered by high public sector wage hikes, and by poor financial performance of state-
owned enterprises (SOEs). In fact, Futuregrowth – a major fixed income asset manager – has
suspended loans to six SOEs, namely, Eskom, the South African National Road Agency
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Limited (SANRAL), Transnet, the Land Bank, the Industrial Development Corporation (IDC)
and the Development Bank of Southern Africa (DBSA)1.
South Africa is still structurally constrained by stubborn and high unemployment levels. The
official unemployment rate is on the rise, presently sitting at 26.6 per cent for the second
quarter of 2016. More disturbing, is the expanded-definition youth unemployment rate of
66.3 per cent.
Due to the El Niño weather phenomenon, South Africa, along with most of Southern Africa,
faced the worst drought in more than a century, and since record-keeping began in 1904.
The effects of this drought have been exacerbated heading into the third and fourth quarters
of the year by the normal dry winter conditions that South Africa experiences. National
emergencies have been declared in South Africa’s neighbouring Lesotho, Malawi, Namibia,
Swaziland and Zimbabwe. Agricultural lobby groups in South Africa estimate that nearly R17
billion in aid will be necessary to assist farmers in the country in the coming year. The
crippling effect on the agricultural sector and associated food shortages, along with highly
elevated food-price inflation, which is trickling into wage demands from all sectors; are likely
to put pressure on the South African economy in the short-to-medium term. The inflationary
impacts of the drought have been further exacerbated by a weakening exchange rate.
1 Eskom has since negotiated a loan with China Development Bank.
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2 Recent Developments in Domestic Economic Conditions
2.1 Supply Sector
2.1.1 Production and Output
The gains made in production following the 2008 global financial crisis, where real GDP
growth picked up to reach a modest 3.3 per cent in 2011, have steadily slid. Growth in 2014
of 1.6 per cent fell to 1.3 per cent in 2015, and this preceded a first quarter contraction for
2016 (quarter-on-quarter (q/q), seasonally adjusted and annualised (saa)) of -1.2 per cent.
Growth picked up in the second quarter, narrowly avoiding a technical recession, to 3.3 per
cent. This follows on from a trend of volatility in real q/q (saa) GDP growth, beginning with a
contraction in the first quarter of 2014 (-1.6 per cent), which preceded a rebound of 4.1 per
cent in the fourth quarter of the same year. A further contraction in the second quarter of
2015 (-2 per cent) was not significantly improved upon, with sluggish and slow growth of 0.3
per cent and 0.4 per cent in the third and fourth quarters of 2015 respectively.
The major sectoral contributor to the 3.3 per cent rise in GDP in the second quarter of 2016
was manufacturing, which contributed 1.0 percentage points, and which experienced growth
in gross value-added of 8.1 per cent in the same quarter (q/q, saa). Following a contraction in
the last quarter of 2015 of 2.5 per cent, manufacturing output grew very slightly by 0.6 per
cent in the first quarter of 2016, and then accelerated significantly to growth of 8.1 per cent
in the second quarter (q/q, saa). This expansion was encouraged by increased demand for
the production of export-destined motor vehicles and their parts and accessories (on the
back of a stronger exchange rate); as well as increased demand for petroleum, chemical,
rubber and plastic products; and food and beverages.
Table 2: Sectoral gross value-added growth (q/q, saa, constant 2010 prices)
2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016Q2
Agriculture, forestry and fishing -11.28% -20.38% -11.83% -6.73% -6.47% -0.83% Mining and quarrying 12.70% -7.80% -10.51% 1.45% -18.07% 11.81% Manufacturing -2.14% -6.32% 4.71% -2.49% 0.57% 8.11% Electricity, gas and water 4.59% -6.88% -7.15% 0.96% -2.78% -1.77% Construction 2.78% 1.62% 1.23% 1.44% 0.35% 0.05% Wholesale and retail trade, hotels and restaurants
3.19% -0.85% 1.25% 2.60% 1.28% 1.40%
Transport, storage and communication
0.78% 0.08% 0.00% -0.29% -2.71% 2.91%
Finance, real estate and business services
2.87% 2.31% 2.54% 1.70% 1.90% 2.95%
General government services -0.49% 0.88% 1.28% 1.18% 1.12% 1.17% Personal services 0.96% 1.00% 1.19% 0.40% 0.55% 0.80%
Data Source: Statistics South Africa (Stats SA)
The mining and quarrying sector contributed 0.83 percentage points to the second quarter
expansion in GDP, growing by 11.8 per cent (q/q, saa) over the same period. In the first
quarter, conversely, mining contributed -1.5 percentage points to the contraction in GDP in
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the first quarter, with output in this sector falling by -18.1 per cent (q/q, saa). This contraction
in the mining sector was largely due to reduced platinum output brought about by increased
cost pressures and safety stoppages, the production of which turned around in the second
quarter to improve the sector’s overall performance.
The agricultural sector detracted -0.02 percentage points to the rise in GDP, and output in
this sector, which has contracted consistently since the first quarter of 2015, fell by -0.8 per
cent in the second quarter of 2016. (The last expansion of output in this sector was growth of
8.8 per cent in the fourth quarter of 2014). Agricultural output shrank severely in 2015 due to
the impact of the worst drought in recorded history on growing, planting and harvesting
conditions. Despite projections of relatively normal rainfall for late 2016; the delayed
economic impacts of crops not planted due to lack of rain and/or seed, as well as the
impacts on livestock reductions, will be felt in the agricultural sector for some time to come.
The commercial agricultural sector in South Africa is also suffering from low business
confidence levels due to policy ambiguity on land restitution, as well as perceptions of
increased criminal attacks against farmers.
A decrease in building activity led to a narrowing of growth in the construction sector from
1.4 to 0.05 per cent from the fourth quarter of 2015 to the second quarter of 2016 (q/q, saa).
Output in the electricity, gas and water sector shrank by -2.8 and -1.8 per cent in the first and
second quarters of 2016 respectively (q/q, saa). This was driven by low electricity demand
due to mild winter temperatures, higher tariffs and the increased use of alternative energy
sources.
Lacklustre demand, especially for vehicles and luxuries, meant that growth slowed in the
wholesale and retail trade sector from 2.6 per cent in the last quarter of 2015 to 1.3 and 1.4
per cent in the first and second quarters of 2016 respectively (q/q, saa).
The transport, storage and communication sector contracted in the first quarter of 2016 by -
2.71 per cent, only to recover with growth of 2.9 per cent in the second quarter (q/q, saa);
contributing 0.25 percentage points to GDP growth. This expansion was largely driven by
growth in the freight transport subsector.
The financial services sector, which grew by 1.9 and 2.95 per cent respectively in the first and
second quarters of 2016 (q/q, saa), contributed 0.6 percentage points to overall GDP growth.
This was largely due to increased real-estate transactions and increased turnover in the
securities market.
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Figure 2: Real GDP growth (constant 2010 prices)
Real GDP contracted by 1.2% in the first quarter of 2016, preceding an expansion of 3.3 per cent in the second quarter (q/q, saa)…
Data Source: South African Reserve Bank (SARB)
Figure 3: Sectoral contributions to annualised GDP growth
…and the manufacturing sector contributed -1.0 percentage points to this expansion…
Data Source: Stats SA
Figure 4: Real sectoral GVA growth (q/q, saa, constant 2010 prices)
…while the total contraction in manufacturing output was 8.1 per cent. Only mining’s output growth was higher in the second quarter, at 11.8 per cent (q/q, saa).
Data Source: Stats SA
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2.1.2 Investment and Capital
Symptomatic of the generally depressed South African economy, gross fixed capital
formation followed a 4.6 per cent expansion in the third quarter of 2015 with consecutive
contractions in the fourth quarter of 2015 and the first and second quarters of 2016 of -2.8, -
10 and -4.6 per cent respectively (q/q, saa).
General government invested heavily in the first three quarters of 2015, with growth of 29.5,
36.3 and 33.5 per cent respectively (q/q, saa). However, this expansion preceded contractions
of -4.4, -12.3 and -8.9 per cent in the fourth quarter of 2015 and the first and second
quarters of 2016 respectively. This was due to lower infrastructure spending.
Public corporations increased their capital formation by 4.1 and 2.5 per cent in the fourth
quarter of 2015 and the first quarter of 2016 respectively. These increases were due to
Eskom’s infrastructure spending at selected power stations, whilst all other public
corporations reduced their investment outlays. However, investment fell in the second
quarter of by -5.4 per cent (q/q, saa) due to the postponement of capital projects within the
transport sector.
Investment by private business enterprises fell dramatically by -13.3 per cent in the first
quarter of 2016, and then by -3.1 per cent in the second quarter (q/q, saa). This was on the
back of low business confidence and lacklustre economic activity and demand – particularly,
investment in machinery and equipment contracted.
In terms of gross fixed capital formation by asset type, investment in buildings (both
residential and non-residential) fell in the first quarter of 2016, but recovered to growth of
17.2 per cent for residential and 4.9 per cent for non-residential in the second quarter (q/q,
saa). Following an increase of 23.6 per cent in the third quarter of 2015; transport equipment
capital formation fell by -21.5 per cent in the first quarter of 2016, recovering to increase by
16.2 per cent in the second quarter (q/q, saa). Machinery investment also fell by -20 and -9.8
per cent in the first and second quarters of 2016 respectively (q/q, saa). Investment in
construction equipment and transfer costs both fell in the second quarter of 2016 – by -14.4
and -5.9 per cent respectively (q/q, saa).
Quarterly investment data is only available for a selection of industries in South Africa, but
that data which is available shows widespread shrinkages in investment. Only the transport,
storage and communication sector recorded a notable increase in capital formation in the
second quarter of 2016, by 8.8 per cent (q/q, saa) (albeit from a negative growth base the
previous quarter). Significant in terms of diminishing investment is the mining and quarrying
sector, exhibiting a decrease of 29.8 per cent in the second quarter of 2016 (q/q, saa).
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Figure 5: Gross fixed capital formation growth (constant 2010 prices)
Despite recovering from the lows of 2008/09, investment growth has been weak, with all components contracting in the second quarter of 2016, leading to gross fixed capital formation shrinking by -4.6 per cent (q/q, saa).
Data Source: SARB
Figure 6: Growth in asset types
…Growth of investment in all asset types was negative, except for buildings and transport equipment…
Data Source: SARB
Figure 7: Real sectoral investment growth (q/q, saa)
…while most industries saw significant drops in investment, notably the transport, storage and communications sector (-38% in the first quarter of 2016).
Data Source: SARB
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2.1.2.1 Financing of Capital
Consumption of fixed capital
has consistently been the
largest contributor to the
financing of gross capital
formation, and in 2015
accounted for 67.4 per cent of
the total (in real terms). Foreign
investment and corporate
savings made up 20.9 and 21.5
per cent of financing
respectively in 2015.
Households and general
government have been net dis-
savers since 2006 and 2009
respectively, although at a
diminishing rate since 2012.
Figure 8: Contributors to the financing of gross capital formation
Data Source: SARB
South Africa’s gross national saving rate has declined steadily from a thirteen-quarter high of
17.5 per cent of GDP in the first quarter of 2015. The saving rate reached 14.9 per cent in the
first quarter of 2016, down from 15.4 per cent in the last quarter of 2015, and then improved
to 16.5 per cent in the second quarter of 2016. This recovery was driven by increasing
corporate savings and a decline in general government dissaving; whilst household dissaving
increased over the same period.
2.1.3 Labour Market
2.1.3.1 Employment and Unemployment
According to Stats SA’s Quarterly Labour Force Survey (QLFS), the number of employed
people in South Africa fell (q/q, saa) in the first and second quarters of 2016 by 8.3 per cent
and 3.3 per cent respectively. Alongside this, the number of unemployed people increased in
the first quarter of 2016 by 47.6 per cent (q/q, saa), from 5.19 million to 5.72 million people.
The unemployment rate fell in the fourth quarter of 2015 from 25.5 per cent to 24.5 per cent.
However, this was followed by a drastic increase to 26.7 and 26.6 per cent unemployment in
the first and second quarters of 2016 respectively. Also of concern is the growth in
discouraged work-seekers of 30.1 and 16 per cent in the first and second quarters of 2016
respectively (q/q, saa). The expanded definition of unemployment has seen rates rise steadily
from 33.8 per cent in the fourth quarter of 2015 to 36.4 per cent in the second quarter of
2016. The labour absorption rate has steadied at 42.5 per cent in the second quarter of 2016,
following a 26 quarter high of 44.2 per cent in the fourth quarter of 2015.
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Figure 9: Key labour market trends (growth: q/q, saa)
The unemployment rate is on an upward trend, while employment growth was negative in the first two quarters of 2016…
Data Source: Stats SA QLFS
Figure 10: Profile of total employment growth (q/q, saa)
…This was driven by negative growth in formal and informal employment, as well as negative growth in employment in the agricultural sector…
Data Source: Stats SA QLFS
Figure 11: Contributors to total employment in 2016Q2
The largest contributors to employment in 2016Q2 were the community and social services, trade and finance sectors.
Data Source: Stats SA QLFS
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There is disparity in South African labour statistics along racial lines, as well as between age
groups. Unemployment is highest among black South Africans (30.1 per cent in 2016 quarter
2), the group which also has the lowest labour absorption rate and labour force participation
rate (39.4 and 56.4 per cent respectively). Youth unemployment is startling and of concern
for policy-makers in South Africa – 53.7 per cent of individuals aged 15 to 24 years are
unemployed (66.3 per cent according to the expanded definition of unemployment).
Table 3: Labour force by population group and age group
2016 Quarter 2 Unemployment rate Labour absorption rate Labour force participation rate
South Africa 26.6% 42.5% 57.9%
Black 30.1% 39.4% 56.4% Coloured 23.2% 47.8% 62.2% Indian/Asian 11.7% 51.2% 58.0% White 6.6% 63.1% 67.6%
15-24 years 53.7% 11.9% 25.8% 25-34 years 31.4% 50.1% 73.1% 35-44 years 21.4% 61.9% 78.7% 45-54 years 14.2% 62.0% 72.3% 55-64 years 9.6% 38.9% 43.1%
Data Source: Stats SA QLFS
2.1.3.2 Wages and Productivity
Growth in real wages per worker
(year-on-year, y/y) in the formal non-
agricultural sectors slowed down from
the second to the fourth quarters of
2015. This was matched by a
deceleration in labour productivity
growth over the same period, which
reached 0.5 per cent y/y and 0 per
cent q/q growth in the final quarter of
2015. However, the labour
productivity movements can be
explained by a simultaneous slow-
down in economic growth and up-tick
in employment growth.
Figure 12: Growth in wages and productivity
Data Source: SARB
The moderation of wage rate growth exhibited in 2015 was spread across all sub-sectors of
the economy, apart from growth accelerations in the mining and construction sectors.
At a y/y rate, public sector wage growth consistently outstripped that of the private sector in
2015, except in quarter 3. However, public sector wages per worker remain on average eight
per cent lower than those in the private sector.
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Table 4: Remuneration per worker – trends
Constant 2010 prices
Remuneration per worker in the non-agricultural
sector: Public sector
Remuneration per worker in the non-agricultural sector:
Private sector
Total remuneration per worker in the non-agricultural sector
% change, y/y % change, y/y, % change, y/y
2014 Q1 102.2 -0.8% 111.8 8.1% 108.9 4.9% 2014 Q2 98.6 -6.0% 111 0.5% 107.5 -1.1% 2014 Q3 105.5 1.5% 114 2.4% 111.5 2.4% 2014 Q4 105.5 0.9% 114.5 1.9% 111.9 1.7% 2015 Q1 107.5 5.2% 116.2 3.9% 113.6 4.3% 2015 Q2 107 8.5% 115.4 4.0% 113 5.1% 2015 Q3 108.5 2.8% 117.8 3.3% 115 3.1% 2015 Q4 109.1 3.4% 116 1.3% 114.1 2.0%
Data Source: SARB
2.2 Fiscal Sector
A deteriorating economic environment, coupled with poor agricultural output, increasing
food inflation and low investor confidence, have led to stagnating growth in revenue.
Revenue grew from R907.6 billion (27.3 per cent of GDP) in 2012/13 to R1.2 trillion (30 per
cent of GDP) in 2015/16, and is expected to settle at 30.4 per cent of GDP by 2018/19.
Expenditure has risen from R1.04 trillion (31.4 per cent of GDP) in 2012/13 to R1.4 trillion
(33.9 per cent of GDP) in 2015/16, and is projected to stabilise at R1.7 trillion (32.8 per cent
of GDP) in 2018/19. Interest payments constitute 3.3 per cent of GDP in 2015/16, up from 2.8
per cent in 2012/13, on the back of rising interest rates and a depreciating exchange rate.
Uncertainty regarding the issues of government funding of tertiary education in the country,
along with ongoing spending on drought relief, pose risks in the short-term to government’s
commitment of a lower expenditure ceiling. Further risks include the financial instability of
state-owned enterprises (SOEs), such as the controversy presently surrounding South African
Airways (SAA) (see also Section 1.3 of this report).
Table 5: Key Fiscal Indicators and Trends
(% of GDP) 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
Revenue 27.3 27.9 28.6 30.0 30.2 30.2 30.4 Expenditure 31.4 31.7 32.2 33.9 33.3 33.1 32.8
Interest payments 2.8 3.0 3.2 3.3 3.5 3.6 3.6 Budget balance -4.1 -3.8 -3.6 -3.9 -3.2 -2.8 -2.4 Primary balance -1.3 -0.7 -0.4 -0.6 0.4 0.7 1.2 Net loan debt 35.5 38.2 41.2 44.3 45.7 46.2 46.2
Data Source: South African National Treasury
Uncertain spending requirements and sluggish revenue growth notwithstanding, the budget
deficit has contracted from -4.1 per cent of GDP in 2012/13 to -3.9 per cent in 2015/16, with
an expected improvement to -2.4 per cent of GDP by 2018/19. In order to achieve this,
government has committed to: manage the financial risks posed by SOEs; curtail government
wage growth; reprioritise existing spending without expanding growth; and increasing tax
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revenue through tax policy measures. The primary balance has improved from -1.3 per cent
of GDP in 2012/13 to -0.6 per cent in 2015/16, and is expected to achieve its first surplus
since the 2009 recession in the 2016/17 fiscal year.
The net borrowing requirement (so as to finance the budget deficit) increased from R166.6
billion in 2014/15 to R172.8bn in 2015/16. This is however expected to decrease steadily over
the medium term to R151.3 billion in 2018/19; coupled with a risk-sensitive borrowing
strategy laid out by National Treasury.
Net loan debt has increased substantially from R1.2 trillion (or 35.5 per cent of GDP) in
2012/13 to R1.8 trillion in 2015/16 (44.3 per cent of GDP) – an annual average increase of
15.2 per cent over the three years. This has been driven by rising interest rates and inflation
and a considerable depreciation of the exchange rate.
Foreign debt is low, rising from 9.1 per cent of gross loan debt in 2012/13 to 11.3 per cent in
2015/16, and is projected to fall back to 9.8 per cent of gross loan debt in 2018/19. However,
global investors hold 32 per cent of Rand-denominated government bonds – these holdings
are sensitive to shifting US and European monetary policy as well as to South Africa’s
sovereign debt ratings.
2.3 Monetary Sector
Following gradual accelerations in 2014 and 2015, monthly growth in M3 (y/y) fell from 10.5
per cent in December 2015 to 5.9 per cent in June 2016. Contributing factors to this
slowdown may include lower capital expenditure and lower corporate deposits. Monthly
growth in private sector credit extension has remained relatively stable between 8 and 9 per
cent y/y since January 2014, apart from a slowdown in December 2013 to 6.1 per cent.
However, growth has slowed down from a high of 10.2 per cent in December 2015 to 7.2 per
cent in June 2016.
Monetary policy has been in a tightening cycle since the start of 2014, seeing a cumulative
200bp rise in the repurchase (repo) rate since then. Money-market rates have risen steadily
with the hikes in the repo rate, and have also factored in exchange rate depreciations over
the same period, leading to fluctuations in yields. In line with international bond yields,
South African government bond yields dropped steadily in 2016, from a high of 9.6 per cent
in January to 8.7 per cent in July. Further contributing to the fall in yields were the
appreciation of the exchange rate over the same period and weak economic growth.
Household credit extension, under pressure due to high interest rates and weak economic
growth, has led this slowdown – and is in fact experiencing negative growth in real terms.
Credit extended to the government sector has shown erratic and wide-ranging growth rates
since 2012. Following average monthly growth rates of 62 per cent (y/y) in 2015, credit
growth has however moderated somewhat. Government credit extension grew by 7.4 per
cent (y/y) in January 2016, rising to 40.2 per cent in June 2016.
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Figure 13: Trends in key interest rates and M3 growth (y/y)
Monthly M3 growth has been rising steadily (y/y) since early 2014; only to slow down quite dramatically in mid-2016. Short-term interest rates have been steadily rising over the same period, whilst long-term yields are on a downward trend…
Data Source: SARB
Figure 14: Credit extension to the private and government sectors (y/y)
… And credit extension growth diminished in the first half of 2016, especially to households.
Data Source: SARB
2.4 Demand Sector
2.4.1 Gross Domestic Expenditure
Gross domestic expenditure (GDE) contracted in both the first and second quarters of 2016,
by -2.16 and -3.31 per cent respectively (q/q, saa). This followed two consecutive
expansionary quarters at the end of 2015. These contractions were largely driven by falling
gross fixed capital formation and a de-accumulation of inventories; and in the first quarter by
a contraction in household spending of -1.65 per cent (q/q, saa). Government consumption
expenditure has consistently expanded (q/q, saa) since 2010, apart from a contraction in the
first quarter of 2015. Growth in government spending levelled out at 1.35 per cent in the
second quarter of 2016, consistent with government’s commitment to keeping current
expenditure increases in check.
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Figure 15: Trends in the components of gross domestic expenditure
GDE contracted in the first half of 2016, mostly driven by a sharp decline in investment of -10 and -4.6 per cent in the first two quarters respectively (q/q, saa)…
Data Source: SARB
Figure 16: Household income and debt
…While households managed to decrease relative debt levels despite rising debt-service costs and falling disposable income growth.
Data Source: SARB
Figure 17: Household consumption expenditure
Household consumption spending fell in line with a depressed economy in the first quarter of 2016, but recovered to grow by 1 per cent in the second quarter (q/q, saa).
Data Source: SARB
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2.4.2 Household Income and Consumption Expenditure
Growth in gross disposable income of households has slowed since a pre-recession high of
12.6 per cent in 2007, reaching 7.7 per cent in 2015. At an annualised rate, real disposable
income grew by 0.4 and 0.7 per cent in the first and second quarters of 2016 respectively, on
the back of marginally higher wage increases. Alongside rising lending rates, household debt-
service costs have risen steadily, from 8.6 per cent of disposable income in 2013, to 9.3 per
cent in 2015, and further still to 9.8 per cent in the second quarter of 2016 – the highest
value since the beginning of 2010. Household debt as a percentage of disposable income has,
despite rising debt-service costs and falling disposable income levels, fallen steadily from
85.7 per cent in 2008 to 76.9 per cent in 2015.
Household consumption expenditure contracted in the first quarter of 2016 by -1.65 per cent
(q/q, saa) – the first contraction in two years. This then reversed into an expansion of 1 per
cent in the second quarter. Spending on durable goods has contracted steadily since the first
quarter of 2015 – it fell by -12.5 and -7.3 per cent in the first and second quarters of 2016
respectively (q/q, saa). These declines were due to higher durable goods inflation and rising
debt-service costs amid higher interest rates.
Growth in expenditure on semi-durable goods was robust in the third and fourth quarters of
2015 at 8.9 and 11.1 per cent respectively (q/q, saa). This was followed by a contraction of -
1.2 per cent in the first quarter of 2016, recovering to growth of 2.1 per cent in the second
quarter (q/q, saa). Spending on non-durable goods exhibited similar trends – an expansion of
3.1 per cent in the fourth quarter of 2015 preceded a contraction of -0.9 per cent in the first
quarter of 2016, which recovered to growth of 0.4 per cent in the second quarter (all q/q,
saa). Growth in spending on services has remained positive since the beginning of 2014, and
was the fastest growing expenditure in the second quarter of 2016 at 3.2 per cent (q/q, saa).
2.5 Foreign Sector
2.5.1 Current Account
Despite the slowdown in global economic activity, nominal merchandise exports grew in the
first and second quarters of 2016 by 7.2 and 41.5 per cent respectively (q/q, saa). This was
largely driven by rising international prices of South African produced commodities
(excluding gold) alongside a weaker Rand exchange rate. The volume of goods and services
exported fell in the first quarter of 2016 by 8 per cent, recovering with growth of 17.9 per
cent in the second quarter (q/q, saa). Net gold exports contracted in the first quarter by -72.7
per cent (q/q, saa) in nominal terms due to declining physical volumes of gold exported; but
then recovered with nominal growth of 21.5 per cent in the second quarter of 2016 (q/q,
saa).
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Figure 18: Indices of volumes of exports and imports of goods and services
The volume of imports fell in the first half of 2016, while export volumes rose in the second quarter of the year…
Data Source: SARB
Figure 19: Balances on the current and financial accounts of the balance of payments
…And this led to an improvement in the current account deficit to -3.1 per cent in the second quarter of 2016, which is lower than the 2015 average deficit of -4.3 per cent of GDP. The financial account surplus shrank to 0.5 per cent of GDP in the second quarter of 2016.
Data Source: SARB
Figure 20: Year-on-year changes in major exchange rates of the Rand
Significant depreciations in the Rand against major currencies towards the end of 2015 were partly recouped during a Rand rally in the first half of 2016.
Data Source: SARB
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On the back of sluggish domestic demand and a weakened exchange rate of the Rand,
growth in merchandise imports slowed from 12.7 per cent in the third quarter of 2015 to 7.4
per cent in the fourth quarter and 1.4 per cent in the first quarter of 2016 (q/q, saa). This
improved to an expansion of 4.7 per cent in the second quarter, bolstered by crude oil and
agricultural imports, the latter due to South Africa’s severe drought. The volume of goods and
services imported decreased steadily in the first half of 2016 – by -10.7 and -5 per cent in the
first and second quarters respectively (q/q, saa). This was due to declining imports of
manufactured goods, vehicles and transport equipment.
The boost in export volumes and concomitant fall in import volumes resulted in the first
quarter trade deficit of R48 billion switching to a trade surplus of R33 billion in the second
quarter. This improvement in the trade balance, along with a smaller deficit on the services,
income and current transfer account, led to a narrowing of the current account deficit from -
5.3 per cent of GDP in the first quarter of 2016 to -3.1 per cent in the second quarter.
2.5.2 Financial Account
Direct investment recorded a net outflow of R10.6 billion in the first quarter of 2016,
reversing to a net inflow in the second quarter of R2.2 billion, due to foreign parent
companies increasing their shareholding in domestic entities. Net outflows of portfolio
investment in the third and fourth quarters of 2015 reversed to net inflows of R21.5 billion
and R30.6 billion in the first and second quarters of 2016 respectively; reflecting international
investors’ appetites for higher yields in emerging market debt securities. Other investments
recorded a net inflow of R17.7 billion in the first quarter of 2016, and then a net outflow of
R19.8 billion in the second quarter, due to the repayment of loans by the domestic banking
sector and the redemption of long-term loans in the private sector.
The surplus on the financial account of the balance of payments shrunk from 5.2 per cent of
GDP in the fourth quarter of 2015 to 0.5 per cent in the second quarter of 2016. The financial
account surplus is therefore not sufficient to finance the deficit on the current account.
2.5.3 Exchange Rates
The South African Rand (ZAR) depreciated against major currencies towards the end of 2015,
thanks to a political controversy surrounding the appointment of the country’s finance
minister (see Section 1.3 of this report). The Rand depreciated by 30.2 per cent against the
US Dollar in the 12 months to December 2015; and by 94 per cent when measured at a
month-on-month (m/m) saa rate. The Rand however rallied in the first half of 2016 on the
notion that global monetary policy would remain loose. The improvement in the value of the
Rand against the British Pound is ascribed to the Pound’s overall poor performance in the
wake of the Brexit vote.
2.6 Prices
Following a low of 3.96 per cent in March 2015, headline consumer inflation accelerated
steadily to 5.2 per cent in December 2015 (all y/y). Consumer prices then breached the upper
limit of the SARB’s monetary policy band of 6 per cent in January 2016, with registered
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headline inflation of 6.2 per cent; followed by a peak for the year of 7.0 per cent in February
2016 (all y/y). Inflation has remained above the 6 per cent limit for the rest of 2016, settling
at 6.3 per cent in August (y/y).
The sharp increments in consumer inflation at the beginning of 2016 were driven by both
rising transport costs and food price inflation. The transport component of the Consumer
Price Index (CPI) increased by 8.5 per cent (y/y) in February 2016, up from 5.3 per cent in
January, and 1.9 per cent in December of 2015. This sharp rise was caused by a petrol price
spike of 9.96 per cent and 20.6 per cent in January and February respectively (y/y). Petrol
prices have since recovered and have in fact been deflationary between April and August of
2016 – the petrol price component of the CPI fell by 7.2 per cent (y/y) in August 2016. This
has helped to keep overall consumer headline inflation moderate in 2016, despite rapidly
rising food prices.
Figure 21: Consumer and producer price inflation (y/y)
Sharply rising food prices from early 2016 onwards have pushed consumer headline inflation above the SARB’s 6 per cent target limit. Deflationary petrol prices have, however, counteracted this trend somewhat.
Data Source: Stats SA
Food price inflation has risen steadily throughout 2016, beginning the year at 7.4 per cent in
January (y/y), and peaking at 12.7 per cent in August. This has been in response to the severe
drought conditions gripping the country, as well as an exchange rate pass-through effect in
the early months of 2016.
Producer prices have followed a similar path to consumer prices. Producer price inflation for
final manufactured goods rose sharply in January 2016 to 7.6 per cent, from 4.8 per cent in
December 2015 (y/y). After peaking in February 2016 at 8.1 per cent, producer inflation
moderated somewhat to 6.5 per cent in May, and then accelerated again to 7.2 per cent in
August (all y/y).
