Economic Trends: Key trends in the South African economy. Department of Research and Information

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1 Economic Trends: Key trends in the South African economy 9 31 March 1 15 Department of Research and Information

2 Contents Overview 3 Gross domestic product Gross domestic product GDP growth at sectoral level Sectoral composition of the South African economy Real GDP growth by economic sub-sector Domestic expenditure Gross domestic expenditure Final consumption expenditure by households Final consumption expenditure by government Gross fixed capital formation Fixed investment by type of organisation Inventories Employment Formal and informal sector employment Productivity and unit labour costs Unemployment Manufacturing sector 1 Manufacturing GDP and volume of production Physical volume of production per sub-sector of manufacturing Fixed investment and capacity utilisation Utilisation of production capacity per sub-sector Expectations regarding employment creation Expectations regarding employment creation per sub-sector Inflation and monetary aggregates 13 Consumer price inflation Producer price inflation Credit extension to the private sector Interest rates and yields 1 Repo and prime overdraft rates Inflation and interest rates Long- and short-term yields Capital markets 15 Johannesburg Securities Exchange performance Shares traded on the JSE Net portfolio purchases/sales by non-residents Government finance 1 Budget balance Government debt Government savings Exchange rates 17 The rand versus the US dollar and the euro The rand versus other foreign currencies Effective exchange rates of the rand Balance of payments 1 Trade balance Trade performance per sector Current account of the balance of payments Balance on financial account Total reserves and import cover Composition of the export basket Imports according to broad category Key export destinations Commodities 1 Commodity prices Gold and platinum Brent crude oil Business cycle indicators SARB business cycle indicators BER business confidence indicators BER/FNB confidence indicators Miscellaneous indicators 3 Retail trade sales New vehicles sales and exports Building plans passed and buildings completed Foreign direct investment Liquidations of companies Petrol price and crude oil prices International indicators 5 World Gross economic Domestic climate index Product GDP growth in advanced economies GDP growth Conditions in emerging economies the South African economy remain unsatisfactory. Equity market performance Consumer The price rate inflation of decline in consumer spending deteriorated to Interest rates 5.% in Q of 9, its worst performance in almost 5 years. Glossary of Factors termscontributing to poor consumer spending include 7 : Increased job losses Falling real disposable incomes Note: An * in a specific graph indicates % change at constant prices, at a seasonally adjusted and annualised rate.

3 Overview Growth in the global economy was more robust and synchronised in 17, with most regions and countries recording relatively strong rates of economic expansion. At an estimated 3.7%, world GDP growth was driven by the sturdy contributions made by some advanced economies, as well as by the solid performances of several emerging markets and developing economies, particularly those of emerging Asia. The US economy expanded by.3% in 17. This was on the back of rising consumer and business confidence, which led to higher household spending and private sector fixed investment. Demand conditions improved significantly, as reflected by strong business sentiment. Economic growth in the Eurozone rose to.5% in 17, the best performance in the past decade. A much stronger momentum in regional demand, accommodative monetary policy and a supportive global environment, underpinned this growth. The United Kingdom s economy has shown a degree of resilience, with growth accelerating to 1.7% in 17 due mostly to a good export performance. However, a sharp rise in consumer inflation, alongside weak growth in nominal wages, constrained consumer spending. Brexitrelated challenges are likely to pose a drag on economic growth in the medium-term. Japan s GDP expanded by 1.% in 17. This relatively robust performance was supported by strong household spending, increased fixed investment (partly bolstered by building and construction activity in preparation for the Olympics), and higher export earnings. South Africa s external balance improved further in 17. The current account deficit narrowed to.5% of GDP, from.% in 1. This was largely due to improved terms of trade, with the balance of trade recording a surplus of R9 billion for the year as a whole. Headline consumer price inflation moderated to an average of 5.3% in 17, from.% in 1. Significant declines in food prices on the back of substantially better harvests, relatively lower rates of increase in electricity tariffs, as well as favourable exchange rate movements, which reduced the prices of imported goods, helped to contain inflation. However, rising crude oil prices pushed domestic fuel prices upward. Prompted by a relatively benign inflation environment, but also in support of overall economic growth, the Monetary Policy Committee reduced the repo rate by 5 basis points in July 17 and again in March 1. On the employment front, the South African economy has been struggling to post significant gains, having managed to create only 1 new jobs in 17. Although the unemployment rate declined to.7% by the end of the year, from a 1-year high of 7.7% during the first three quarters of 17, it remains very high. Some 5.9 million individuals were unable to find a job in 17. Signs of improving confidence in the economy s prospects started emerging in the first quarter of 1. This is being confirmed by the upwardly trending leading business cycle indicator of the South African Reserve Bank. China s economy grew at a robust pace of.%, with strong export demand as a major contributor. However, a deceleration seems to be underway as financial deleveraging takes hold. Moderate rates of expansion were reported in Russia and Brazil, while Sub-Saharan Africa posted a modest growth of.7% in 17. In general, commodity prices remained fairly stable in 17, with the exception of metal prices, which moved substantially higher. 17 saw the start of monetary policy tightening by some of the major central banks. Normalisation of policy rates began in the US and the UK, while the European Central Bank and the Bank of Japan have kept their interest rates unchanged. The world economy is expected to post a faster rate of growth, at 3.9%, in 1, according to IMF forecasts. However, rising protectionism in the US is bringing forth substantial risks, particularly if key trading partners such as China and the EU, among others, retaliate. Should trade flows be adversely affected, this could weigh heavily on global growth. Although still subdued, South Africa s economic growth surprised on the upside in 17. GDP growth came in at a better than expected 1.3%, from an upwardly revised.% in 1 (previously.3%). The extraordinary rebound in agricultural output, as well as an improved contribution from the mining sector on the back of relatively higher commodity prices, largely underpinned the overall economic recovery. The manufacturing sector, however, remained under pressure, with its GDP declining by.% in real terms. On the expenditure side, household spending, which represents about % of GDP, contributed the most to overall economic growth in 17. Despite a challenging consumer environment, household expenditure rose by.% in real terms. This was supported by relatively higher real disposable incomes (up.% during the year). Weak business sentiment and subdued domestic demand continued to weigh on fixed investment activity, which was only.% higher in 17, after having contracted by.1% in 1. Nevertheless, fixed investment spending by the private sector recovered in real terms, whereas the public sector at large is continuing to cut back on capital spending. And Although consumers are still facing significant constraints, household spending is expected to increase at a progressively faster pace as economic conditions and employment prospects improve, for this will raise consumer confidence. Furthermore, growth in disposable incomes in real terms, complemented by the impact of recent interest rate cuts, could provide further impetus. However, the recently announced increases in VAT and in the tax component of domestic fuel prices, among others, will constrain spending to some extent. Fixed investment activity is set to rise gradually going forward. This is expected to be driven by a recovery in private sector investment, for capital spending by the public sector at large is projected to decline in real terms. In its most recent review, Moody s maintained its rating of South Africa s local currency denominated debt at investment grade (Baa3), but also revised the country s credit outlook from negative to stable. In so doing, this credit rating agency has recognised the positive developments that have started coming through. Over and above a better than Gross anticipated Domestic economic performance Product in recent times, these include a more business-friendly political administration that is committed toconditions restoring trust in inthe key institutions, South African fiscal consolidation economy remain and debt sustainability, unsatisfactory. as well as to providing certainty and consistency in the policy and regulatory environments. The rate of decline in consumer spending deteriorated to Against the 5.% backdrop in Q of a of significantly 9, its worst improved performance political environment, in almost 5 which is having positive impacts on consumer, business and investor years. sentiment, alongside more favourable prospects for the world economy, including commodity Factors contributing prices, the outlook to poor for consumer the South African spending economy include has improved : considerably. As such, the economic recovery already underway is likely to gain further momentum in the coming years. Increased job losses Falling real disposable incomes 3

4 % Change (q-o-q) * Gross domestic product Source: IDC, compiled from Stas SA data Gross Domestic Product (GDP) Gross domestic product The South African economy expanded by 1.3% in 17, from an upwardly revised.% (previously.3%) in 1. This very modest performance was supported by robust growth in agriculture and by the recovery in mining output. The finance and transport sectors also made positive contributions. Weak domestic demand continued to weigh on the manufacturing sector, resulting in a.% decline in its real GDP in 17. Although drought conditions persist in parts of the country, a bumper maize crop underpinned the strong rebound in agricultural output. Faster growth globally underscored the mining sector s improved performance in 17. Confidence levels are recovering among domestic businesses and consumers, with recent changes in the political landscape a key contributing factor. The world economy, in turn, is set to grow at a faster pace in 1, thereby supporting export demand. The South African economy is thus expected to record a higher rate of growth in 1. GDP growth at sectoral level Real GDP growth by main economic sector Total GDP Personal services (5.9) 17 1 Government (1.) Finance (.3) Transport (9.) Trade (15.) Construction (3.) Total GDP (at market prices) in 17 = R 5 billion Electricity (.3) Manufacturing (13.5) Mining (.) Gross Domestic Product Conditions in the South African economy remain unsatisfactory. The rate of decline in consumer spending deteriorated to Agriculture (.) 5.% in Q of 9, its worst performance in almost 5 years % Change Factors contributing to poor consumer spending include : Source: IDC, compiledfrom Stats SA data Notes: Increased job losses (i) Figures in brackets in the above graph refer to the sector s percentage share of total GDP at basic prices (constant 1 prices) in 17 Falling real disposable incomes

5 % Change (q-o-q)* % Change (q-o-q)* % Change (q-o-q)* % Change (q-o-q)* Gross domestic product (cont.) Sectoral composition of the South African economy in 17 Personal services 5.% General government services 17.7% Agriculture, forestry and fishing.% Mining and quarrying.% Manufacturing 13.% Electricity, gas and water 3.7% Construction 3.9% Finance, real estate and business services.% Source: IDC, compiled from Stats SA data Transport, storage and communication 9.9% Trade, catering and accommodation 15.% Note: Sector share according to GDP at basic prices (current prices) 5 Real GDP growth in service-related sectors Services sectors include: Electricity, Construction, Trade, Transport, Finance, Government and Other services Real GDP growth in the manufacturing sector Source: IDC, compiled from Stats SA data Source: IDC, compiled from Stats SA data Real GDP growth in the mining sector 5 Gross Domestic Product Real GDP growth in the agricultural sector Conditions in the South African economy remain unsatisfactory. The rate of decline in consumer spending deteriorated to 5.% in Q of 9, its worst performance in almost 5 years. Factors contributing to poor consumer spending include : Increased job losses - - Falling real disposable incomes -3 9 Source: IDC, compiled from Stats SA data Source: IDC, compiled from Stats SA data

6 % Change (q-o-q) * % Share of GDP % Change (q-o-q) * Debt-to-disposable income (%) % Change (q-o-q) * Imports: % of GDE Domestic expenditure Source: IDC, compiled from SARB, Stats SA data Gross Domestic Expenditure (GDE) GDE (% change) Imports as % of GDE Gross domestic expenditure Domestic spending benefitted from the gradual recovery in the economic environment in 17, particularly in the last quarter. GDE rose by 1.9% for the year as a whole (-.9% in 1). Modest improvements in the financial position of consumers largely permitted an increase in household consumption expenditure. Furthermore, a marginal increase in investment spending by private business enterprises contributed to the turnaround in gross fixed capital formation, which saw positive growth of.% in 17 (-.1% in 1). The recovery in fixed investment activity, albeit still restrained, resulted in increased demand for imported goods, as reflected by the higher ratio of imports to GDE, at 31%, in the fourth quarter of 17. GDE growth is expected to accelerate to some extent in 1 on the back of higher household and investment spending. Final consumption expenditure by households Source: IDC, compiled from SARB, Stats SA data Final consumption expenditure by households 11 1 Consumer spending (Lhs) Household debt as % of disposable income (Rhs) Household spending increased by.% in 17. Although modest, this was its highest rate of growth since 1. Continued improvements in the levels of household indebtedness, lower debt servicing costs, higher disposable incomes in real terms and a relatively lower inflation environment supported overall spending by South African households. Spending on durable goods (e.g. motor vehicles, furniture) recovered strongly (+%) in 17, after having declined by.9% in 1. Despite this improvement, the consumer landscape remains challenging, with the high rate of unemployment, concerns over job prospects and generally stretched household balance sheets continuing to affect their ability and willingness to raise spending levels. 1 - Final consumption expenditure by government (FCEG) Government spending (Lhs) FCEG as % of GDP (Rhs) 9 1 Source: IDC, compiled from SARB, Stats SA data Final consumption expenditure by government Fiscal constraints held back the pace of growth in consumption spending by general government, which slowed to.% in 17, compared to 1.9% in 1. This was mainly due to a moderation in spending on the compensation of employees and non-wage goods and services. Although decreasing gradually, the share of government spending in national GDP, at just over %, still reflects the strong role played by the state in the economy, particularly as a counter-cyclical force in a subdued growth environment. It is, however, crucial that business enterprises and consumers come to the fore as contributors to the economic recovery. Expectations are that government will contain overall spending in 1, particularly recurrent spending such as the large public sector wage bill. The credit rating agencies will continue to scrutinise government s fiscal consolidation efforts and debt sustainability outcomes.

7 % of GDP Rand Billion % Change (q-o-q) * % Change (q-o-q) * % Share of GDP Domestic expenditure (cont.) Gross fixed capital formation 1 Gross fixed capital formation (GFCF) GFCF (% change) GFCF as % of GDP A difficult operating environment has impacted negatively on fixed investment activity in recent years. Subdued domestic demand, low business confidence and spare production capacity in several industries weighed on the private sector s investment decisions More recently, financial constraints in key state-owned enterprises, alongside relatively weak demand conditions, affected the public sector s fixed investment spending, including in infrastructure development. Low levels of investment activity are not only affecting the economy s current growth momentum, but also its productive capacity, in the process limiting its expansion potential Source: IDC, compiled from SARB, Stats SA data The last quarter of 17 witnessed a strong rebound in gross fixed capital formation, and expectations are that a positive trend is likely to ensue. Fixed investment by type of organisation 7 Gross fixed capital formation Government Public corporations Fixed investment increased by.% in 17, after having contracted over two consecutive years. Capital outlays were particularly strong on general machinery and equipment. 5 3 Private sector Total investment Facing significant revenue shortfalls, government continued to cut back on capital expenditure, with growth in its investment spending declining for the second consecutive year (-.7% in 17, -3.5% in 1) Source: IDC, compiled from SARB, Stats SA data Although fixed investment by public corporations rose strongly in the fourth quarter of 17, on a quarter-on-quarter basis, the quantum of expenditure for the year as a whole was still 1.3% lower than in 1. This was largely due to financial constraints and sluggish demand. Improving business confidence augurs well for a sustained recovery in private sector fixed investment. Capital spending by the public sector at large is, however, likely to remain restrained. Inventories Change in inventories (RHS) Industrial & commercial inventories as % of GDP Change in inventory levels A challenging operating environment, including subdued trading conditions, resulted in business enterprises reducing their inventory levels further in 17, albeit by a much lower level of R.3 billion (at constant 1 prices), compared to a R7. billion decrease in The mining sector, alongside the wholesale and retail trade, catering and accommodation sector, reported substantially lower inventory levels in 17 in real terms. However, these were largely offset by sharp inventory accumulation in the manufacturing sector Source: IDC, compiled from SARB, Stats SA data As a percentage of GDP, industrial and commercial inventories eased marginally to 11.3% in 17, from 11.% in 1. This was considerably lower than the ratio of almost 1% recorded prior to the 9 recession, indicating that business enterprises are holding limited stocks. 7

8 Percentage % Change (y-o-y) Change in number (y-o-y) in ' Employment Q1 9 1 Source: IDC, compiled from Stats SA data Employment in the formal and informal sector Labour productivity and unit labour costs Labour productivity Nominal unit labour costs Q3 17 Formal and informal sector employment The economy s weak performance resulted in limited employment creation in 17, thus frustrating efforts to meaningfully reduce the high levels of unemployment and poverty prevailing in South Africa. Total employment increased by 1 over the course of the year, with the formal sectors of the economy recording additional jobs. The employment gains in the community, social, and personal services sector amounted to around 119. Other sectors that made positive headway on the employment front in 17 included: manufacturing (+3 ); finance, insurance, real estate and business services (+ ); transport and communications (+ ). In contrast, the following sectors reported job losses in 17: construction (-9 ); agriculture (-7 ); private households (-9 ); and mining (-1 ). Productivity and unit labour costs Growth in labour productivity in the formal non-agricultural sectors remains low, with average output per worker having risen at a very modest rate in the first three quarters of 17. In recent years, nominal employee remuneration has increased at a faster pace than inflation, thus placing upward pressure on operational costs. The rate of increase in nominal remuneration per worker reached.% in the third quarter of 17. The upward trend is particularly prominent in the public sector, for growth in remuneration per worker accelerated toward 13.% in the third quarter of the year. This contrasts sharply with the private sector, where it moderated to.7%, from 5.% in the second quarter of 17. Although growth in nominal unit labour costs has been on a decline over the past few years, there was a sharp, aboveinflation uptick in the second and third quarters of Latest data: Q 17 9 Source: IDC, compiled from Stats SA data 1 Unemployment rate Unemployment South Africa has a high level of structural unemployment. The unemployment rate improved marginally to.7% in the fourth quarter of 17, after having reached a 1-year high of 7.7% in the second and third quarters of the year. Approximately 5.9 million people are currently unemployed according to the official definition, with the figure increasing to 9. million (or 3.3%) under the expanded definition. The number of discouraged work-seekers stood at.5 million by the end of 17. Nearly 7% of the unemployed have been without a job for more than 1 year, and many are also poorly qualified. Hence, their re-employment in the formal sectors of the economy becomes particularly challenging. With key labour-intensive sectors of the economy still under pressure, the prospects for a meaningful recovery in job creation are not particularly favourable in the short-term.

9 Employment (cont.) Community, social & personal services.3% Sectoral composition of employment in South Africa in 17 Private households.1% Agriculture, forestry Other.3% & fishing 5.% Mining.7% Manufacturing 11.% Electricity, gas & water.9% Construction.7% Finance & business services 1.9% Source: IDC, compiled from Stats SA data Transport, storage & communication.% Trade, catering & accommodation.1% Note: Data is for the formal and informal sector as per data from the Quarterly Labour Force Survey (QLFS). Employment according to main economic sector Change in employment : Q 17 vs Q 1 Total employment Community, social & personal services Manufacturing Finance & business services Transport, storage & communication Trade, catering & accommodation Electricity, gas & water Other industry Mining Private households Agriculture, forestry & fishing Construction Source: IDC, compiledfrom Stats SA data Change in number (') 9

10 % Change (y-o-y) % Change (y-o-y) Manufacturing sector Manufacturing GDP and volume of production Volume of production (monthly) - Manufacturing GDP (quarterly) Source: IDC, compiled from Stats SA data Manufacturing GDP and volume of production Manufacturing output declined by.5% in 17, reflecting the persistently difficult trading and operating conditions facing the sector in general. The sector had recorded a marginal.7% increase in its output in 1. Positive economic developments in some of South Africa's key external markets, including Europe, supported production in export-oriented industries. However, muted domestic demand, rising operational costs, as well as concerns over the political landscape and policy uncertainty, weighed on activity levels in the sector. Several sub-sectors of manufacturing reported lower volumes of production in 17, particularly chemicals; wood and paper; non-metallic mineral products; textiles and clothing; and electrical machinery. These largely offset the strong increases in output reported by metals and machinery, as well as food and beverages. Physical volume of production per sub-sector of manufacturing Volume of production by sub-sector Gross Domestic Product - -1 Food & beverages (5.%) Source: IDC, compiledfrom Stats SA data Textiles, clothing, leather & footwear (3.3%) Wood & paper (11.%) Chemicals (.%) Total Manufacturing Nonmetallic mineral products (3.9%) Note: Figures in brackets refer to the sub-sector s percentage share of total manufacturing production. Conditions in the South African economy remain unsatisfactory. The rate of decline in consumer spending deteriorated to Metals & Electrical Radio Transport Furniture 5.% in Q of 9, its worst performance in almost 5 machinery machinery and TV equip. & other (1.7%) years. (1.7%) (1.%) (.9%) industries (3.%) Factors contributing to poor consumer spending include : Increased job losses Falling real disposable incomes 1

11 % Change (y-o-y) Capacity utilisation (%) Manufacturing sector (cont.) Source: IDC, compiled from Stats SA and BER data Total Manufacturing (.) Other transport equipment (79.7) Petroleum products () Other chemicals (.) Glass products () Radio, TV & communication (5.1) Electrical machinery (1.) Non-ferrous metals (79.9) Machinery & equipment (1) Basic chemicals (9) Plastic products (5.7) Footwear (5.) Food (.7) Motor vehicles, parts & accessories () Other manufacturing (79.) Professional equipment (7.1) Beverages (7.) Leather (7.3) Paper & paper products (7.7) Fabricated metal products (7.9) Iron & steel (79) Clothing (7) Furniture (7) Printing & publishing (7.) Rubber products (3.) Textiles (.3) Non-metallic mineral products (.7) Wood products (3.) Source: IDC, compiledfrom Stats SA data Fixed investment * and capacity utilisation Fixed investment (% change) Capacity utilisation Fixed investment and capacity utilisation In line with the modest improvement in manufacturing activity during the course of 17, the utilisation of production capacity in the sector increased to.% in the final quarter of 17 the highest since 1. Fixed investment spending in manufacturing also rose, by a modest 1.% in real terms, in 17, after having declined considerably (-15.7%) in 1. However, with production activity still relatively subdued and significantly under-utilised production capacity in several manufacturing sub-sectors, much of this investment was directed towards maintenance, replacement and technology upgrades, as opposed to expansionary investment. The survey of manufacturers undertaken by the BER in the fourth quarter of 17 revealed a slight improvement in their expectations regarding investment spending in machinery and equipment in 1-months time, but on balance still in negative territory. Note: * Fixed investment data for the manufacturing sector is only available on an annual basis. Hence, the y-o-y growth for the particular year is shown in Q of that year. Utilisation of production capacity per sub-sector of manufacturing Absolute change in sub-sectoral utilisation of production capacity (Q of 17 vs Q of 1) Gross Domestic Product Conditions in the South African economy remain unsatisfactory. The rate of decline in consumer spending deteriorated to 5.% in Q of 9, its worst performance in almost 5 years. Factors contributing to poor consumer spending include : 3 5 Absolute change (%-points) Increased job losses Falling real disposable incomes Note: Figures in brackets refer to the sub-sector s percentage utilisation of production capacity in the fourth quarter of

12 Net balance Manufacturing sector (cont.) Source: IDC, compiled from BER data Employment trend - number of factory workers Expected 17 Expectations regarding employment creation The manufacturing sector recorded substantial job losses over the past decade. Within its formal segment, almost 9 jobs were lost in the year to the fourth quarter of 17. The manufacturing sector employed 1.79 million people, in its formal and informal segments combined, by the end of 17. This was equivalent to 11% of total employment in the South African economy. This fairly labour-intensive sector has not yet managed to regain all of the jobs lost in the aftermath of the global financial crisis in 7/ and subsequent recession in 9. Overall employment levels in manufacturing are still 3 below those recorded at the beginning of. According to the latest survey of manufacturers conducted by the BER, additional job shedding is anticipated, for business conditions are expected to remain largely unsatisfactory over the course of 1. Expectations regarding employment creation per sub-sector of manufacturing Employment creation by sub-sector Manufacturing total Wood Q1 1 Q1 17 Basic metals Food Textiles Beverages Paper Chemicals Printing & publishing Machinery Non-metallic minerals Furniture Plastic Fabricated metals Transport equipment Clothing Electrical machinery Gross Domestic Product Conditions in the South African economy remain unsatisfactory. The rate of decline in consumer spending deteriorated to 5.% in Q of 9, its worst performance in almost 5 years. Factors contributing to poor consumer spending include : Pessimistic Neutral Increased job losses Optimistic Source: IDC, compiledfrom BER data Falling real disposable incomes 1

13 % Change (y-o-y) % Change (y-o-y) % Change (y-o-y) Inflation and monetary aggregates Consumer price inflation 1 CPI : Targeted inflation 1 Goods Services Source: IDC, compiled from Stats SA data Consumer price inflation Inflationary pressures subsided to a significant extent in 17, with the average rate of increase in consumer prices coming in at 5.3% for the year, compared to.% in 1. Substantially improved weather conditions over large parts of the country supported record/near-record harvests, permitting a reversal of previous sharp hikes in food prices. Food price inflation fell from 1.% in 1 to 7% in 17, with the downward trajectory still in place by February 1 (.%). Rand weakness alongside a recovery in international oil prices resulted in further increases in the petrol price in 17, albeit at a considerably slower pace of 7.% (5.% in 1). The benign inflation trajectory is expected to continue in 1. This will be supported by substantially stronger exchange rates of the rand vis-à-vis major world currencies. However, the prices of food products produced in the Western Cape could experience significant increases. Producer price inflation Producer price inflation Source: IDC, compiled from Stats SA data The pace of increase of prices at the factory gate, as measured by the producer price index (PPI), declined in 17. Producer price inflation averaged.9% for the year, compared to the 7.1% recorded in 1. Lower food prices and subdued demand conditions domestically contributed to this outcome. The sharp rise in meat prices (+1.3%) in 17, combined with the.% increase in fuel costs, was countered by the declines recorded in the prices of grain mill products (-11.3%), starches (-.%), sugar (-1.3%) and transport equipment (-.%). Producer price inflation is expected to remain at similar levels throughout 1. The relatively stronger rand should limit the impact of higher international commodity prices, as well as the effect of various tax increases, such as the recent one percentage point increase in the value added tax (VAT) rate, to 15%, and the sugar tax, among others. Private sector credit extension 3 Households 5 Corporate sector Credit extension to the private sector Low levels of confidence amongst consumers and businesses throughout 17 largely underpinned the continued weak demand for credit. Credit extended to households increased, on average, by only.% in 17 (.3% in 1) in nominal terms. Nevertheless, an upward trend became noticeable as from April, with the 5 basis points cut in interest rates in July 17 providing further impetus. Corporate demand for credit, in turn, rose by.% in 17 (11.% in 1) in nominal terms. Excluding the impact of inflation, credit provided to households thus declined in real terms in 17, whereas demand from the corporate sector rose modestly. Gradually improving consumer and business sentiment, together with the March 1 cut in interest rates, should provide the basis for stronger demand for credit by households and corporates in the current year. 13

14 Percentage CPI : % Change (y-o-y) Repo rates : Percentage Percentage (month-end) Interest rates and yields Repo and Prime overdraft rates 1 Repo rate 1 Prime overdraft rate Repo and prime overdraft rates Moderating inflation readings and expectations, as well as adverse developments in terms of economic activity, prompted the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) to cut the repo rate by 5 basis points in July 17. It should be noted that, according to the GDP data made available by Stats SA at the time, the South African economy was in a technical recession. Real GDP had contracted by.7% in Q1 17 after having declined by.3% in Q 1. This data was later revised by Stats SA. Recent inflation readings of close to.5%, which is the midpoint of the SARB s inflation target band, alongside an improved outlook for inflation going forward and yet subdued levels of economic activity, provided scope for the MPC to reduce the repo rate by a further 5 basis points in March 1. Inflation developments and the interest rate environment 1 Nominal Repo rate (Rhs) 1 Real Repo rate (Rhs) 1 CPI: Targeted inflation measure Source: IDC, compiled from Stats SA and SARB data Long- and short-term yields 1 Yield on long-term government bonds Day Treasury bills Inflation and interest rates Despite the recent cuts (a combined 5 basis points in July 17 and March 1), in real terms the repo rate currently stands at its highest level since the end of 1. Nonetheless, the real repo rate is still below the level of around 3% that was maintained prior to the global financial crisis, indicating that monetary policy remains relatively accommodative. The lowering of interest rates in March 1 enhanced the support being provided by monetary policy to the economic recovery. However, the impact may turn out to be relatively muted, considering the constraints and challenges generally faced by households as well as businesses. Should the economic growth momentum gain further traction, as anticipated, with higher rates of increase in household spending, the MPC may keep policy rates on hold for some time. This is likely to prove necessary especially in light of the rising interest rate trend in the United States, accompanied by monetary policy normalisation in other advanced economies. Long- and short-term yields Long-term government bond rates trended higher for most of 17, as the risk of downgrades to the sovereign credit ratings to sub-investment levels (also know as junk levels) by all three major international credit rating agencies loomed large. However, bond yields moved sharply lower after the African National Congress elective conference in mid-december 17, reflecting a positive response to the election of Mr Cyril Ramaphosa as the ruling party s president. The trend was reinforced as Mr Ramaphosa assumed the country s presidency on 15 February 1, as well as by the relatively favourable reaction to fiscal consolidation and debt containment efforts outlined in the National Budget 1. These developments allayed fears of a further ratings downgrade by Moody s, which not only retained South Africa s credit rating in investment grade territory on 3 March 1, but in fact changed the outlook from negative to stable. 1

15 Rand Billions Value of shares: R Billion Volatility index Index Capital markets Johannesburg Securities Exchange (JSE) performance JSE performance 1 All Share Index 9 Industrials Resources - Top Monthly averages Source: IDC, compiled from Bloomberg data Despite the weak performance of the South African economy, the FTSE/JSE All-Share Price Index (Alsi) ended 17 at 59 5 points, or 1.% higher. This performance was underpinned mainly by the performance of rand hedge stocks, with Naspers as the principal driver, which benefitted from a weaker exchange rate and/or rising commodity prices. The revelation of accounting irregularities at Steinhoff not only led to a collapse in the company s share price, but also knocked the Industrials index. The domestic currency s strengthening trend late in the year pushed rand hedge stocks lower, particularly from the end of November 17 onward. The Alsi lost.% from its 1 November 17 high to year end. The impact of an appreciating currency continued in the first quarter of 1. Improving investor sentiment based on expectations of accelerating economic growth should support South African equities throughout 1. Shares traded on the JSE Shares traded on the JSE Value of shares traded (Lhs) SA volatility index (SAVI) (Rhs) Source: IDC, compiled from SARB and JSE data The number of shares traded on the Johannesburg Securities Exchange (JSE) increased by.1% in 17, while their collective value fell by 7%. Boosted to a considerable extent by rand exchange rate movements, the JSE s overall market capitalisation reached an all-time high of R1. trillion in October 17. It subsequently declined as the rand strengthened and the domestic equities market was rocked by the accounting irregularities uncovered at Steinhoff. The value of capital raised via the JSE decreased by 13.5% to R11 billion in 17. Most of this capital was aimed at acquisitions in foreign markets, with a smaller share utilised to fund domestic operations. The South African Volatility Index (SAVI) remained at relatively low levels throughout 17, despite the political uncertainty and the volatility seen in the government debt market. This possibly reflected the favourable assessments, especially by local investors, of South African equities as investment vehicles, for foreigners were net sellers of equities during Net portfolio purchases / sales by non-residents Net portfolio purchases/sales by non-residents Non-residents continued to shun local equities in 17, selling R7. billion worth of shares during the year. The trend accelerated at the start of 1, with shares valued at R3.3 billion sold in the opening two months. Despite the looming threats of sovereign credit rating downgrades, foreign investors returned to South Africa s bond market in 17, purchasing a total R. billion in bond instruments over the course of the year. The election of Mr Cyril Ramaphosa as president of the African National Congress in December 17 further buoyed foreign investor sentiment, with bonds worth R1 billion bought in the opening two months of Net purchases of Shares Net purchases of Bonds Efforts to improve government finances and the economy s overall performance, coupled with favourable developments in the political landscape, are expected to support non-resident investor interest in the domestic bond and equity markets. 15

16 % of GDP % of GDP % of GDP Government finance Budget balance as a % of GDP Budget balance Government revenue collections during the 17/1 fiscal year fell short of expectations, as per the February 17 national budget, by an estimated R7. billion. This was a reflection of weak levels of economic activity, which were significantly lower than anticipated by National Treasury. The estimated under-collection is mainly due to weaker personal income tax and VAT receipts, with expected shortfalls of R1.1 billion and R15.9 billion, respectively. Revenue from corporate taxes and the fuel levy is expected to be largely in line with the original budgeted amounts. Despite the need to contain government expenditure, expectations are for an overrun of R billion, mainly due to the R1 billion increase in the allocation to National Treasury, associated with the capital injection for South African Airways. As a result of these developments, the main budget deficit is estimated to have widened to.% of GDP, which is considerably larger than the 3.5% projected in February Government's gross loan debt as a % of GDP Government debt One of the main sources of concern for the international credit rating agencies has been the continued increase in the gross loan debt levels of the South African government. This key metric of fiscal health increased further in 17, reaching a ratio of 53% of GDP by December. A ratio of 53.3% of GDP is expected by the end of the 17/1 fiscal year, and expectations are that it will remain around the 55% level over the next three years. The total outstanding value of government debt is estimated at R 5 billion by the end of the fiscal year. The resultant cost of servicing the debt, which has been accumulating at a rapid pace, is estimated at R13. billion for 17/1. This represents 11.% of total consolidated government expenditure, which is almost equivalent to the amount spent on social protection for vulnerable South Africans Government savings as a % of GDP Government savings A wider fiscal deficit resulted in government finances reducing the overall savings levels in South Africa by R.1 billion (or around 1.9% of GDP), compared to the R55. billion in government dissavings in 1. Efforts to contain borrowing requirements so as to stabilise debt ratios will assist in keeping the adverse trend in government dissavings in check. Tightening the reins on government expenditure will be complemented by improved tax collection. An improved macroeconomic performance would also have a beneficial impact on fiscal revenues. Importantly, effective action is being taken by government to improve governance and governing structures at key stateowned enterprises, so as to address their financial challenges and thereby reduce the burden being imposed on the state. 1

17 Index: 1 = 1 Rand per GBP or Yen Rand per USD or Euro Exchange rates Exchange rate movements of the rand Rand per euro Rand per US dollar The rand vs. the US dollar and the Euro Developments in the political arena took a toll on the South African rand for a large part of 17. From a domestic standpoint, the firing of the former Minister of Finance, Mr Pravin Gordhan, in March 17 by former President Jacob Zuma set a strong currency depreciation trend in motion. By mid-november 17, the rand was trading at just over R17 to the euro and around R1.3 to the US dollar. The adverse trend was reversed late in the year, ahead of the ANC s elective conference, marking the start of a sharp strengthening of the currency which has endured ever since. The rand has appreciated by 7.% and 17.7% against the USD and the Euro, respectively, from its weak levels of January 1 (note that Minister Nene had been fired in December 15) to March Source: IDC, compiled from SARB and Bloomberg data The rand versus other foreign currencies Exchange rate movements of the rand Rand per British pound Rand per Japanese Yen (X 1) Source: IDC, compiled from SARB and Bloomberg data The following table illustrates the extent of appreciation (+) or depreciation (-) of the rand against select currencies over the period March 17 to March 1*: Australian dollar :.% Brazilian real : 1.7% British pound : -3.% Chinese renminbi :.3% Eurozone euro : -5.7% Indian rupee : 7.% Japanese yen :.5% US dollar :.5% * The above % changes are all based on monthly average exchange rates Real and nominal effective exchange rates Nominal effective exchange rate Real effective exchange rate Appreciation Depreciation Effective* exchange rates of the rand The nominal effective exchange rate ended the year 17 approximately 3% weaker, whereas the real effective exchange rate, which takes inflation differentials into account, strengthened by.% over the course of the year. On a trade weighted basis, during the opening months of 1 the rand managed to recover most of the losses incurred in 17. It is important to note, however, that these figures mask the movements over shorter periods of time. For example, the nominal effective exchange rate weakened by.7% from January to November 17. * Basket of currencies: euro (9.3% weight), US dollar (13.7%), Chinese renminbi (.5%), British pound (5.%) and Japanese yen (.%), among others

18 R billion Balance of payments Movements in the trade balance Trade balance South Africa s balance of trade recorded a surplus of R.9 billion in 17, compared to a surplus of R3.7 billion in 1 (according to SARB data). The key contributors to this substantial improvement in the trade balance included: the reversal in traded maize flows, from net imports in 1 to net exports in 17; the weakening of the rand for most of 17; increasing demand in world markets; and, among others, improving commodity prices. To illustrate, mining exports increased by 3.5%. The weak domestic economy, in turn, resulted in a significant decline in oil imports, as well as in demand for imported capital equipment, particularly machinery Seasonally adjusted and annualised data The balance of trade in manufactured items was particularly hampered by the decline in motor vehicle exports, while imports continued to increase. Trade performance per sector Agriculture Mining Processed food Beverages Textiles Clothing Leather Footwear Wood products Paper products Printing and publishing Petroleum Industrial chemicals Other chemicals Rubber products Plastic products Glass Non-metallic minerals Iron and steel Non-ferrous metals Fabricated metals Machinery & equipment Electrical machinery Radio & TV Professional equipment Motor vehicles & parts Other transport equipment Furniture Other manufacturing Source: IDC, compiled from SARS data Change in export and import values : 17 vs 1 Imports Gross Domestic Product Conditions in the South African economy remain unsatisfactory. The rate of decline in consumer spending deteriorated to 5.% in Q of 9, its worst performance in almost 5 years. Factors contributing to poor consumer spending include : Increased job losses Exports Falling real disposable incomes R1 3 million R Million 1

19 Reserves: R Billion Number of months R Billion % of GDP Balance of payments (cont.) Note: Seasonally adjusted and annualised data Current account of the balance of payments and its respective components 9 Transfers Income Services Trade Overall current account Total reserves and the import cover Total reserves (gold & foreign exchange): (LHS) Import cover (months) Balance on the financial account Current account of the balance of payments Despite the positive contribution made by the trade balance, the current account of the balance of payments deteriorated during the first three quarters of 17. However, a marked improvement in the final quarter resulted in a current account deficit of R11.3 billion for 17 as a whole, compared to the R11. billion deficit recorded in 1. The differential between the income payments (dividends and interest) received from foreigners and those paid by South Africans to external parties widened in 17, as foreigners continued to repatriate earnings to their home countries. The deficit on the services account improved from R billion in 1 to R5.3 billion in 17. Transfer payments (on a net basis), including transfers to SACU countries, increased to R3.3 billion in 17, from R7.5 billion 1, on the back of higher import values in the past year. Balance on financial account The balance on South Africa s financial account recorded a net inflow of R11.1 billion in 17. This account captures flows of direct investment (which is generally of a longer-term nature), portfolio investment (which tends to be of a shorterterm nature), as well as other (smaller) financial transactions. There was a net outflow of direct investment, as South Africans invested R9 billion (R5. billion in 1) in foreign markets, compared to the R17. billion (R3.9 billion) invested by foreigners in South Africa. The challenging economic environment and political uncertainty contributed to these outcomes. Investor sentiment has improved in recent months. This could significantly raise inward direct investment activity. Portfolio investments recorded a net inflow of R billion in 17 (R billion in 1), as yields lured foreigners to invest a net R79 billion (R1 billion) in local assets. South Africans invested a net R5 billion in foreign markets during 17, compared to a net repatriation of R11 billion in 1. Total reserves and import cover South Africa s total gold and foreign currency reserves increased during the first ten months of 17, from R7. billion at the start of the year to a peak of R9.3 billion by October. This was mostly due to higher gold prices and a depreciating rand. The currency s subsequent recovery contributed to overall reserves declining to R. billion by the end of 17. The number of months worth of imports that are covered by reserves remained at.9 over the last three quarters of 17. Although this is below the peak recorded in the first quarter of 1, it exceeds the long-term average. Relative resilience in the rand, coupled with an anticipated increase in imports as domestic economic activity recovers, could result in a further decline in the import cover ratio going forward. 19

20 R Billion % Share % of Exports Balance of payments (cont.) Composition of the export basket Source: IDC, compiled from SARS data Source: IDC, compiled from SARS data Composition of the export basket Manufactured products Agriculture, forestry & fishing Gold Other mining products Composition of the merchandise import basket Capital goods Intermediate goods Raw materials (incl. Crude oil) Consumption goods Higher global commodity prices and a weaker rand supported the value of mining exports, which increased by 3.% in 17. This helped to lift growth in overall exports to 7.%. In contrast, manufactured export growth was flat despite the rand s substantial depreciation. Having increased by a mere.3% in 17, manufactured exports saw their share of the overall export basket fall to 57.%, from.3% in 1. Substantial declines in the exports of motor vehicles (-R.7 billion), other transport equipment (-R. billion) as well as radios and televisions (-R. billion), countered the improved export performances recorded by basic iron and steel (+R. billion), industrial chemicals (+R billion) and non-ferrous metal products (+R3. billion). The bumper maize crop underscored the agricultural sector s good export performance in 17. Cereal exports increased by R1.5 billion, while those of fruits and nuts rose by R.7 billion. Imports according to broad category Weak domestic demand resulted in the value of overall imports increasing by only.7% in 17, despite the upward price pressure placed by a weaker currency. Modest growth in household spending underscored the higher share of consumption goods in the overall import basket in 17. The opposite occurred where raw material imports were concerned. The drop in their export value in 17 highlighted the weakness in domestic production activity. A further indication of subdued business conditions came from the 1.% decline in imports of capital goods, as investment plans were cut back, put on hold or cancelled. Gradually improving confidence amongst consumers, businesses and investors, together with the inducement provided by a much stronger rand, are likely to translate into significantly higher import growth over the medium-term Source: IDC, compiled from SARS data Export performance by key destination 1 17 Key export destinations South Africa s largest individual trading partner, China, was the main contributor to higher exports in 17. Exports to this country increased by 1.% or R1.5 billion, primarily due to higher exports of iron ore, manganese and chrome ore. In contrast, exports of steel and steel products to China declined substantially. The faster pace of growth in exports to the United States (US) relative to Germany, resulted in these two countries swapping places in the rankings of South Africa s leading export destinations in 17. Exports to a number of regional partners, such as Botswana, Namibia and Zimbabwe, declined in 17 relative to the previous year. This was concerning, for the African continent is an important market for South Africa s manufactured goods, having accounted for almost 39% of the total manufactured export basket in 17.

21 USD / barrel Rand / barrel USD / oz Rand / oz Index: 1 = 1 Commodities Commodity prices Commodity price movements 1 Agricultural raw materials Food 1 Metals All non-fuel commodities Source: IDC, compiled from IFS data Commodity prices remained fairly stable, in general terms, during the course of 17. Metal prices were an exception, for they moved substantially higher. Industrial commodity prices were supported by global supplyside rationalisation, as well as demand growth on the back of recovering global manufacturing and industrial production. Continued demand by China, the world s largest consumer of industrial commodities, also supported the upturn in prices. Although the prices of coal, copper, aluminium and palladium rose fairly sharply in 17, the iron ore price remained under pressure as the year progressed. After a steep spike to an average of USD5 per ton in the first quarter of the year, from USD71 per ton in fourth quarter of 1, iron ore prices fell to USD5 per ton by the final quarter of 17. The on-streaming of mine supplies, following disruptions during 17, is expected to weigh on iron ore and copper prices in the near-term. Gold and platinum Gold and platinum prices Platinum : US$/oz Gold : US$/oz Platinum : Rand/oz Gold : Rand/oz Source: IDC, compiled from SARB and Bloomberg data Expectations of a more hawkish policy stance by the US Federal Reserve have been limiting the rise in the gold price. The latter averaged USD1 3 per oz in the fourth quarter of 17, or 5% higher than a year earlier. Should the US dollar remain under pressure in the short-term, this could be supportive of a stronger gold price. Platinum prices were adversely affected by market fundamentals during 17. A persistent market surplus has been weighing on prices, with weak demand-side dynamics playing a major role. Contributing factors in this regard have included the declining share of diesel vehicles in the European automotive market, and a slowdown in jewellery demand in China. The platinum price fell from an average of around USD1 11 per oz in February 17 to USD911 per oz by December. However, it rose by USD5 per oz by March 1. Brent crude oil price 1 1 Oil: USD / barrel Oil: Rand / barrel Source: IDC, compiled from IFS and Bloomberg data Brent crude oil Higher international oil prices have exerted upward pressure on global inflation, but have simultaneously provided some trade balance relief for oil-exporting countries, many of these on the African continent. Crude oil prices increased by almost 11% in rand terms during the course of 17. The weaker rand played a role earlier in the year, but the strong rise in international crude oil prices in the second half of 17 was the primary contributing factor. The rand s sharp recovery in recent months has, however, reversed this trend, leading to a drop in oil prices in local currency terms. While a weaker US dollar should support commodity prices, the anticipated hikes in US policy rates over the course of 1 are expected to result in downward price pressure. Brent crude oil prices are also expected to experience some price resistance due to rising non-opec oil output. 1

22 Index Net balance Index: 1 = 1 Business cycle indicators The leading business cycle indicator SARB business cycle indicators The upward trend in the leading business cycle indicator of the SARB, which started during the second half of 17, points towards an improving outlook for the South African economy. A reading of 1.1 index points was recorded in January 1, the highest in months. The leading indicator, which provides an indication of the economy s performance in about to 1 month s time, therefore supports expectations of a gradual recovery in the pace of economic growth Q1 9 Source: IDC, compiled from BER data Business confidence in the SA economy and in the manufacturing sector SA economy Manufacturing 1 17 Extreme confidence Neutral Extreme lack of confidence BER business confidence indicators After having recovered only modestly in the second half of 17, business confidence rebounded strongly at the start of 1. The 11 point rise to 5 took it to the highest level in three years. This welcomed development reflected the reaction of South Africa s business sector to recent changes in the political landscape, which have brought about renewed optimism. Manufacturing sector confidence, however, remains weak at a reading of 37 points, indicating that more than % of survey respondents are still unsatisfied with current business conditions. Weak domestic demand continues to affect production activity in the manufacturing sector. Sentiment improved considerably amongst retailers, specifically by 13 points to a reading of in the first quarter of 1. The challenging consumer environment is, however, still affecting their sales performance Q1 Source: IDC, compiled from BER data Confidence in the construction industry Civil engineering 9 1 Building industry BER/FNB confidence indicators Subdued investment activity in the public and private sectors has adversely affected the construction industry. In real terms, fixed investment in the construction sector has been on a decline for the past couple of years, with only a modest uptick in growth recorded in 17. Capital spending on nonresidential buildings (e.g. office blocks, shopping centres) dropped by 1.7% in real terms over the period 1 to 17. Confidence levels in the civil engineering and construction industry fell to a reading of just 1 points in the first quarter of 1. This is an all-time low. Sentiment levels in the building industry, in turn, improved by 1 points to 3, but the latter is still indicative of a difficult operating environment. Expectations of a gradual recovery in investment spending in the economy augur well for the construction industry in the medium-term, but the road ahead will remain challenging for some time.

23 Index: 1 = 1 % Change (y-o-y) % Change (y-o-y) % Change (y-o-y) Miscellaneous indicators Retail trade sales in real terms Source: IDC, compiled from Stats SA data Domestic vehicles sales and exports Domestic sales (Lhs) Exports (Rhs) Source: IDC, compiled from NAAMSA data Retail trade sales Despite the ongoing challenges facing households, retail sales growth gained some momentum during the course of 17. It measured 5.% (year-on-year) in the fourth quarter, the best performance in almost years. For 17 as a whole, retail trade sales expanded by 3% (1.7% in 1). After a few difficult years, sales of furniture and appliances increased by.5% in 17, the fastest expansion rate since the 5.% recorded in 1. Spending on pharmaceuticals and cosmetics (+3.9%) and on clothing and textiles (+.3%) continued to grow at a fair pace. Growth in retail trade sales decelerated to 3.1% (year-onyear) in January 1, but strong growth was again recorded in furniture and appliances, as well as in clothing and textiles. Consumer spending is likely to continue being negatively affected by constrained household balance sheets and weak employment prospects over the shorter-term, but is expected to gain a stronger momentum thereafter. New vehicles sales and exports Although growth in household spending on durable goods rebounded by % in 17 (-.9% in 1), this was mainly due to increased expenditure on furniture items. In contrast, consumer spending on transport equipment remained under pressure. The number of new passenger cars sold increased by 1.9% in 17. However, such growth was off a very low base. To illustrate, only units were sold in 17, compared with sales of 5 9 new passenger vehicles in 13. Exports of motor vehicles also remained under pressure in 17, having recorded a % decline. Exports of passenger cars, in turn, fell by 3.%. The improved outlook for the global economy, which is being accompanied by increasing consumer confidence in many parts of the world, may result in higher vehicle exports in 1. Building plans passed and buildings completed Building plans passed Buildings completed Source: IDC, compiled from Stats SA data Building plans passed and buildings completed The building sector was adversely affected by the difficult economic environment in 17. Investment spending on residential and non-residential buildings contracted for the second year in a row. Consequently, the real value of building plans passed fell by 7.% in 17, with a steep 15.1% drop (or R. billion) in nonresidential buildings being the main contributor. However, the decline was confined to the first semester of 17, when the value of building plans passed decreased by 17.3% in real terms, for the situation improved slightly (+.%) in the second half of the year. The value of buildings completed, in turn, rose by 1.% (or R7. billion) in real terms in 17, with all categories recording increases. 3

24 Rand per Litre Crude oil in USD / barrel Number R billion Miscellaneous indicators (cont.) 5 3 Foreign direct investment into South Africa Foreign direct investment After reaching an all-time high of R billion in 13, foreign direct investment (FDI) in the South African economy experienced a declining trend in subsequent years. FDI inflows declined to R17.7 billion in 17, the lowest since (R.1 billion). This was mainly due to a net outflow in the final quarter of the year, the second largest decline on record Globally, overall FDI inflows plummeted by an estimated 1% to USD1.5 trillion in 17, from USD1.1 trillion in 1. This was largely due to a 7% drop in FDI flows into developed economies. Developing economies, in turn, reported a % increase in FDI inflows. However, FDI flows into Africa declined by 1%, mainly due to lower investments in countries like Nigeria (-%), Angola (-%) and Egypt (-1%). Liquidations of companies 5 3 Number of liquidations Total Companies Close Corporations The overall number of liquidations of companies and close corporations decreased by 3.% in 17 to 1 entities. The finance and business services sector (-1.5%), as well as the retail trade sector (-11.%) reported the sharpest declines in liquidations during 17. Improving economic prospects, underpinned by renewed optimism in the country s future and strengthening demand in external markets, should contribute towards the progressive financial recovery of many businesses that find themselves in a distressed situation at the present time Source: IDC, compiled from Stats SA data Petrol price and crude oil prices 1 1 Petrol and Brent crude oil prices 1 1 International crude oil prices rose steadily during the course of 17, from an average of USD5.9 per barrel in December 1 to USD3.7 per barrel by December 17. This represented a 1% increase Although the rand strengthened against the US dollar late in 17, this was not enough to counter the impact of higher crude oil prices on the domestic petrol price. Crude oil price (USD / barrel) - (RHS) At R1.9 per litre in Gauteng province in December 17, the local petrol price was at an all-time high. However, it declined in subsequent months to R13.5 per litre by March 1. Petrol price: 93 ULP (Gauteng) - (R / litre) Source: IDC, compiled from SAPIA and Bloomberg data

25 % Change (y-o-y) % Change (y-o-y) Balance International indicators The world economic climate indicator Q World economic climate index Economic conditions improved in most regions of the world during the course of 17 and since the start of 1. The world economic climate indicator rose sharply over the past 1 months to a reading of points in the first quarter of 1, the highest level in more than 1 years. This renewed optimism is being reflected in upward revisions to global growth forecasts by institutions such as the International Monetary Fund, which now expects the world economy to expand by 3.9% in 1, the fastest growth rate since 11. Although the economic climate indicator for Sub-Saharan Africa rose to its best level in 5 years in the first quarter of 1, current economic conditions remain largely unsatisfactory. Source: IDC, compiled from Ifo data GDP growth in advanced economies GDP growth in advanced economies USA Japan Euro area Source: IDC, compiled from IMF data The economic expansion in the US has been gaining momentum on the back of rising household consumption spending, increased investment by the private sector and an improved export performance. Further stimuli are being provided by the recently enacted tax cuts and, once the necessary budgetary allocations have been approved, by an ambitious infrastructure development programme. The Eurozone, which is a key market for South Africa s manufactured goods, recorded in 17 the fastest rate of expansion in the past decade, at.5%. Rising consumer confidence, which reached its best levels in more than 1 years, is being reflected in strong retail trade sales. Despite a stronger currency, exports have increased at a robust pace. Japan s GDP rose by 1.% in 17, the fastest growth rate since 13. Consumer spending, private sector investment and exports all made substantial contributions to growth, and the manufacturing PMI has been on an upward trend GDP growth in the BRIC countries Brazil Russia India China Source: IDC, compiled from IMF data GDP growth in emerging economies Emerging markets and developing economies have become increasingly important in the global economy, having contributed an estimated 75% to world GDP growth in 17. Although its expansion momentum has been decelerating, the Chinese economy grew by.% in 17. Manufacturing output is still expanding, albeit at a modest pace. The Indian economy is one of the fastest growing economies in the world, with robust growth in fixed investment and household spending as key drivers. Supported by higher production activity in its mining, manufacturing and energy sectors, Russia s economy returned to positive growth (1.5%) in 17. After years of recession, Brazil s GDP expanded modestly (1%) in 17. Consumer spending recorded positive growth for the first time since 1, whilst exports expanded at a robust pace. Imports, in turn, fell for the fourth year in a row. 5