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 2015. 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 2015
Contents 1 Recent developments in domestic economic conditions... 4 1.1 Gross domestic product... 4 1.2 Household consumption and income... 6 1.3 Fixed capital investment... 7 1.4 Balance of Payments... 8 1.5 Labour market... 9 1.6 Interest rates... 11 1.7 Prices... 11 1.8 Exchange rate... 12 2 South African macroeconomic forecast... 13 2.1 Major assumptions underlying the forecast... 13 2.2 Forecast summary... 14 2.3 Uncertainties and risks to the forecast... 15 2 P a g e
List of Tables Table 1: Growth in production by selected industries... 5 Table 2: Real gross domestic product and expenditure components... 6 Table 3: Growth in gross fixed capital formation, by industry... 8 Table 4: Forecast of selected economic indicators for South Africa... 16 List of Figures Figure 1: Real gross domestic product (2010 prices)... 4 Figure 2: Growth in final consumption expenditure by households and components, by broad product category... 6 Figure 3: Growth in gross fixed capital formation, by institution... 7 Figure 4: Balance on the current and financial accounts... 9 Figure 5: Growth rates within the labour force... 10 Figure 6: Money-market rates... 11 Figure 7: Consumer price inflation, components... 12 Figure 8: Trends in average South African Rand exchange rates, against selected currencies... 12 Figure 9: Forecast of selected economic indicators for South Africa... 14 3 P a g e
1 Recent developments in domestic economic conditions 1.1 Gross domestic product South Africa s real gross domestic product (GDP) at market prices contracted by -1.3 per cent quarter-on-quarter (q/q), seasonally adjusted and annualised (saar), in the second quarter of 2015. This followed an increase in GDP of 1.3 per cent in the first quarter of the year, representing a sharp downturn. The real average annual economic growth rate in 2014 was 1.5 per cent, down from 2.2 per cent in 2013. Figure 1: Real gross domestic product (2010 prices) Data source: South African Reserve Bank, Quarterly Bulletin The main drivers of the contraction in GDP in the second quarter of 2015 were contractions in GDP in the agriculture, mining and manufacturing sectors of -17.4, -6.8 and -6.3 per cent respectively. Agriculture s contractionary path in the first two quarters of 2015 is largely explained by dry weather conditions. The contraction in mining output was driven by declines in coal and iron-ore production (platinum, diamond and gold production registered increases). Coal output fell due to industrial action in the sector, as well as lower demand due to a mild winter and electricity load-shedding. Iron-ore output fell due to diminished global demand, and due to lower iron-ore prices. The declining trend in manufacturing output in the first two quarters of 2015 was broadbased; a result of listless domestic and global demand, falling commodity prices, persistent electricity load-shedding, and increased costs of production. The largest sectoral contributors to South Africa s GDP in the second quarter of 2015 were the finance, real estate and business services sector and the general government services sector with shares of total GDP of 22 and 17 per cent respectively. The finance, real estate and business services sector was also the fastest growing sector in the second 4 P a g e
Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas and water Construction Wholesale and retail trade, hotels and restaurants Transport, storage and communication Finance, real estate and business services General government services Personal services quarter of 2015, with growth of 2.7 per cent (saar, q/q). This however represented a slowdown in growth from 3.8 per cent in the preceding quarter, largely due to lower demand for loans in the banking sub-sector. Value added by the tertiary sector grew moderately in the second quarter of 2015, slowing down from 1.5 per cent in the first quarter to 1.1 per cent in the second. The slow-down was driven by slower positive growth in all tertiary sectors, apart from accelerated performances in the general government and personal services sectors. The commerce sector exhibited a contraction in the second quarter of -0.4 per cent, due to higher input costs, lower consumer demand, and falling business and consumer confidence. Growth in the transport, storage and communication sector slowed from 2.9 per cent in the last quarter of 2014 to just 0.2 per cent in the second quarter of 2015. This was due to a slowdown in the transport sub-sector, which was negatively affected by higher road tariffs, increased petrol prices, increased driver fees, and higher vehicle maintenance costs. Table 1: Growth in production by selected industries Constant 2010 prices Percentage change, q/q saar 2013 Q1-2.9 14.3-7.8-4.8-0.8 0.9 2 4.8 1.3 1.2 Q2-1.1-4.5 11.7 3 5.1 2.2 1.6 5 2.8 2.7 Q3 3.6 12.3-6.6 1.9 0.6 0.3 2.6 2.8 2.8 1.2 Q4 6.9 17.2 12.3-6 3.6 1.8 1.6 2.6 4.6 1.2 2014 Q1 4.8-22.8-6.4 0.2 3.7 1.5 1.4 1.4 2.3 1.5 Q2 5.6-3 -4-0.5 2.1-0.2 3.9 1.2 3.9 1.5 Q3 9.5 3.9-1 -1.1 2.2 3.4 2.2 2.4 2.2 1.3 Q4 7.5 15.2 9.5 0.3 3.5-0.3 2.9 3.5 1.2 0.8 2015 Q1-16.6 10.2-2.4 0.7 0.8 1.2 1.2 3.8-0.8 0.9 Q2-17.4-6.8-6.3-2.9 0.2-0.4 0.2 2.7 0.6 1.3 Data source: Statistics South Africa According to seasonally adjusted figures, real gross domestic expenditure (GDE) contracted by an annualised rate of -7.2 per cent in the second quarter of 2015, down from growth of 2.7 per cent in the first quarter. As shown in Table 2, reductions in inventory holdings contributed the most to the shrinkage in both GDE and GDP. An improvement in exports of 14.3 per cent in the second quarter of 2015 dampened the contractionary effect of the inventory holdings destocking on GDP. 5 P a g e
Table 2: Real gross domestic product and expenditure components Constant 2010 prices Final consumption expenditure by households Final consumption expenditure by general government Gross fixed capital formation Change in inventories Exports of goods and services Imports of goods and services Gross domestic expenditure Percentage change, q/q saar R millions Percentage change, q/q saar Gross domestic product at market prices 2013 Q1 1.9 3.1 9.2 1 259 24.0 7.2-2.5 1.4 Q2 1.9 1.0 9.8 35 683-5.0 8.3 7.7 3.7 Q3 1.8 0.7 9.7 5 939 12.2 0.5-1.9 1.2 Q4 1.7 3.5 4.8-35 321 10.8-23.5-5.8 5.1 2014 Q1 1.0 1.7-9.2-4 094 1.6 21.7 3.8-1.6 Q2 1.0 2.4-5.4-950 -15.7-14.2 0.9 0.5 Q3 1.1 1.4 2.4 2 858 8.6 12.5 3.2 2.1 Q4 1.6 1.0 2.6 3 770 22.7 7.8 0.3 4.1 2015 Q1 2.4-1.9 1.8 8 812 10.7 15.8 2.7 1.3 Q2 1.2 0.4 1.0-38 904 14.3-6.3-7.2-1.3 Data source: South African Reserve Bank, Quarterly Bulletin 1.2 Household consumption and income The rate of growth in real final household consumption expenditure slowed in the first two quarters of 2015, increasing by 2.4 and 1.2 per cent (saar) respectively. This was consistent with slower real income growth and diminishing consumer confidence over the same period. Spending on both durable non-durable and semi-durable goods increased at slower rates over the period, whilst spending on goods fell by -0.7 per cent in the second quarter of 2015. Making up the largest portion of total household consumption expenditure, spending on services grew at an accelerated 2.9 per cent in the second quarter of 2015, driven by higher costs of rent and medical services. Figure 2: Growth in final consumption expenditure by households and components, by broad product category Data source: South African Reserve Bank, Quarterly Bulletin 6 P a g e
Growth in real disposable household income also slowed down to 1.6 per cent in the second quarter from 2.2 per cent in the preceding quarter. As a percentage of household disposable income, household debt decreased marginally from 78.7 per cent in the first quarter of 2015, to 77.8 per cent in the second quarter. Debt-service costs remained unchanged at 9.4 per cent of disposable household income for both the first and second quarters of 2015. 1.3 Fixed capital investment Growth in real gross fixed capital formation remained subdued, at 1.8 per cent in the first quarter of 2015 and 1.0 per cent in the second quarter. This trend is driven by low levels of capital outlays by both private business enterprises (which traditionally generate the largest portion roughly 60 per cent of total gross fixed capital investment) and public corporations, each recording muted growth of 0.1 per cent in the second quarter. These slow-downs are consistent with falling business confidence levels. Figure 3: Growth in gross fixed capital formation, by institution Data source: South African Reserve Bank, Quarterly Bulletin General government fixed investment spending dropped from 9.8 per cent in the second quarter of 2014 to 5.1 per cent in the first quarter of 2015. This trend reversed slightly in the second quarter with the rate of gross investment by government increasing to 5.3 per cent. Capital spending by government focussed on energy, water, transport, education and road networks. Sources of moderating growth in private sector investment spending can be seen from the sectoral perspective of gross fixed capital formation, summarised in Table 3. During the second quarter of 2015, real gross capital formation growth in the community, social and 7 P a g e
personal services, manufacturing and the electricity, gas and water sector largely had to compensate for the negative or subdued growth in contributions in capital outlays in the other sectors of the economy. Table 3: Growth in gross fixed capital formation, by industry Constant 2005 prices Mining and quarrying Manufacturing Electricity, gas and water Transport, storage and communication Financial intermediation, insurance, real estate and business services Community, social and personal services Percentage change, q/q saar 2013 Q1-4.2-1.7 19.7-12.9 20.2 26.1 Q2-19.4-7.0 356.8 8.6-30.0-13.0 Q3 24.1-0.8 45.4-7.8 10.6 7.1 Q4 5.3-8.0 31.8-8.3-0.3 23.0 2014 Q1-7.1 1.4-54.1 2.5-3.8 19.4 Q2 8.0 3.9-6.7-7.9-13.6 0.2 Q3-0.6 0.8-18.9 13.4 3.5 12.2 Q4 1.0 7.7-4.5-3.5 12.4 9.0 2015 Q1-11.5 1.7-7.5 20.1 13.1 0.3 Q2 0.0 1.8 8.2-2.8-2.5 1.8 Data source: South African Reserve Bank, Quarterly Bulletin 1.4 Balance of Payments Increased global demand and a consistently depreciated value of the rand led to a notable rise in exports in the second quarter of 2015. Coupled with falling imports on the back of depressed local demand, this resulted in the trade balance switching from a deficit to a surplus of R14 billion in the second quarter the first surplus since the fourth quarter of 2011. A widening shortfall on services, income and current transfer payments was however not large enough to offset the positive gains of the trade balance surplus. Consequently, the current account deficit narrowed in the second quarter of 2015 to 3.1 per cent of GDP, down from 4.7 per cent in the first quarter. The financial account of the balance of payments recorded an inflow of R33.1bn in the first quarter of 2015, but this slowed dramatically to an inflow of R3.6bn in the second quarter. Changing global market sentiment was partly to blame, led by the strengthening of the US economy, the worsening Greek debt crisis, a Chinese stock market slump, and weakening commodity prices. Domestic factors impeding investor sentiment included sluggish economic growth and electricity load-shedding. 8 P a g e
Figure 4: Balance on the current and financial accounts Data source: South African Reserve Bank, Quarterly Bulletin 1.5 Labour market Conditions in South Africa s labour market continue to remain critical. The official unemployment rate continues to stagnate around the 25 per cent mark amongst the highest in the world. This rate however decreased from 26.2 per cent during the first quarter of 2015 to 24.7 per cent in the second quarter. Of major concern to policy makers in South Africa is the high youth unemployment rate (those in the age group 15 to 24) 49.9 per cent in the second quarter of 2015. On the back of sluggish economic growth in the first quarter of 2015, the Quarterly Employment Statistics (QES) (surveying enterprises regarding employment in the formal non-agricultural economy) recorded a slight decrease in employment in the first quarter of 0.4 per cent (saar), or 8 700 jobs. This was largely ascribed to a decline in public-sector employment of 4.4 per cent (saar) over the same period. In contrast, private-sector employment reversed a consecutive five-quarter decline and recorded a minor 1 per cent (16 600 jobs) increase. Gains were experienced in the manufacturing, commerce and personal services sectors. However these were nearly offset by job losses in the remaining sectors, due to fundamental constraints such as electricity load-shedding, strike action, political uncertainty, low business and investor confidence and slowing global economic growth. 9 P a g e
When scrutinising the industry winners and losers (according to the QES) in the nonagricultural labour market between the first and the second quarters of 2015, the number of employed people declined in five of the eight industries. However the majority of the 8 700 net job losses recorded in this period was due to large declines in the public sector (- 25 300). In the private sector, the largest job losses were experienced in the mining (- 3 100), construction (-1 300), transport, storage and communication (-1 300) and finance and other business services (-500) sectors. These were partly offset by job gains in manufacturing (4 500), commerce services (16 400) and community and social services (2 000). Figure 5: Growth rates within the labour force Data source: Statistics South Africa, Quarterly Labour Force Survey When considering the total employment statistics according to the Quarterly Labour Force Survey (QLFS) (surveying householdbased labour market activities for individuals aged 15 and above), similar trends abound. From the first to the second quarters of 2015, total employment grew by 1.2 per cent, or roughly 190 000 jobs that were created mainly in the informal and agricultural sectors. The year-on-year employment growth picked up from 2.8 per cent in the first quarter of 2015 to 3.9 per cent in the second quarter. Despite the employment improvements, the number of unemployed people according to the official unemployment definition increased at the same time by 630 000 (or 12.8 per cent) between the last quarter of 2014 and the first quarter of 2015. This was somewhat reversed between the first and second quarters of 2015, when the number of unemployed fell by 300 000 (or -5.5 per cent). Year-on-year growth in unemployment fell from 9.2 per cent in the first quarter of 2015 to 1.5 per cent in the second quarter. Perhaps the most concerning trend within the labour market has been the steady growth in discouraged job-seekers. Year-on-year growth rates of 9.6 per cent and 9.4 per cent in the last two quarters of 2014 eased off to growth of 1.8 per cent and 0.5 per cent in the 10 P a g e
first two quarters of 2015, respectively. The number of discouraged work-seekers at the end of the second quarter of 2015 totalled 2.4 million. 1.6 Interest rates Taking account of the potential considerable upside inflationary risks, the MPC continued its gradual policy normalisation patterns, and increased the repurchase rate by 25 basis points to 6 per cent at its meeting in July 2015. This followed a 25bp hike exactly a year earlier. Despite the general lack of excess demand conditions in the economy at this stage, the central bank justified these increases as attempts to curb possible inflationary pressures from a weaker rand exchange rate and rising food price inflation. Short-term money market rates have generally followed the repurchase (repo) rate and rose across all maturities in 2014 and 2015. Figure 6: Money-market rates Data source: South African Reserve Bank, Quarterly Bulletin 1.7 Prices Consumer price (CPI) inflation breached the South African Reserve Bank upper band of its target range of 3 to 6 per cent in March 2014, when inflation reached 6.1 per cent. From September 2014, headline CPI inflation slipped back to just below the 6 per cent threshold, where it has remained since. In August 2015, the headline CPI inflation came in at 4.5 per cent, and is expected to see upward pressure in the remainder of 2015, due to a reversal of petrol price deflation, higher food prices, and double-digit electricity tariff hikes. 11 P a g e
Figure 7: Consumer price inflation, components Data source: Statistics South Africa 1.8 Exchange rate Emerging-market and commodity-linked currencies were stressed by falling commodity prices in the first half of 2015, as well as by heightened global risk aversion (largely as a result of a slowdown in Chinese growth and of the ongoing Greek debt crisis). On the domestic front, Rand weakness was exposed by weak economic growth, stubbornly high unemployment levels, credit-downgrade fears, electricity load-shedding. The currency did however marginally strengthen on the back of a narrower than expected current account deficit (with associated positive performance of the trade balance) in the first quarter of 2015. Figure 8: Trends in average South African Rand exchange rates, against selected currencies Data source: South African Reserve Bank, Quarterly Bulletin 12 P a g e
2 South African macroeconomic forecast 2.1 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. In the 2015 National Budget, the South African government stated its commitment to reducing the budget deficit and stabilising debt. Despite weaker GDP growth, the deficit is projected to drop from 3.9 per cent of GDP in 2015/16 to 2.5 per cent of GDP by 2017/18. Nevertheless, the budget deficit has been identified as largely structural in nature, necessitating a structural shift in fiscal policy. Proposals include: reducing the expenditure ceiling; increasing personal income taxes and the fuel levy; controlling government numbers; and prudent financial management of state-owned enterprises (SOEs). Total public-sector debt was 59.1 per cent of GDP in 2013/14, and this is expected to grow at a slower rate. Hence, the public sector borrowing requirement is expected to drop from 6.1 per cent of GDP in 2015/16 to 3.9 per cent of GDP by 2017/18. Risks to the fiscal policy outlook include weak economic output growth; higher-than-inflation government wage bill increases; and weak balance sheets of SOEs. The South African Reserve Bank s inflation forecast is one of near term improvement and medium-term deterioration, driven by expected 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; as well as a weak economic growth outlook for the domestic economy. The SARB is therefore cautionary in its monetary policy predictions due to the high possibility of inflation breaching the upper target band of 6 per cent and due to subdued growth. The repo rate is expected to rise in reaction over the forecast horizon. On the international front, it is expected that growth in South Africa s major export partners will marginally improve, with expected growth of 2.6, 2.8 and 2.8 per cent for the US in 2015, 2016 and 2017 respectively. The medium term view utilised in this report is one of optimism i.e. global growth will be slow but positive, and the Euro area and the US will maintain responsible and supportive monetary and fiscal policies, so as to avoid future global financial catastrophes. It is furthermore assumed that commodity prices (specifically oil and gold prices) will remain low in the medium term, but will moderate in the longer term as the global 13 P a g e
financial economy is expected to recover. Global consumer inflation is expected to remain steady and moderate at 3.2, 3.3 and 3.5 per cent over the forecast horizon. 2.2 Forecast summary Forecast values for a selection of macroeconomic indicators for the period 2013 to 2015 are presented in Table 4 and Figure 9. GDP growth is expected to pick up marginally from 2014 s 1.5 per cent to 1.9 per cent in 2015, with relatively sideways growth expected after that, reaching 2.6 per cent by 2017. This will be driven by gross fixed capital formation growth that is expected to improve dramatically over the forecast horizon, reaching 10.5 and 11.1 per cent in 2016 and 2017 respectively. Growth in consumption expenditure by both households and government is expected to remain muted over the forecast horizon, reaching 2.5 and 2.4 per cent respectively in 2017. This is on the back of stricter credit extension and higher interest rates. Figure 9: Forecast of selected economic indicators for South Africa Source: Plus Economics Advisory The imports of goods and services are expected to pick up from a contraction in 2014 to growth of 8.4 per cent in 2017. As the exchange rate of the Rand is expected to continue its depreciating path over the forecast horizon (averaging R11.05 per US Dollar in 2015), so exports are expected to increase by 7.1 and 6.7 in 2016 and 2017 respectively. With import growth exceeding export growth, the current account deficit is expected to widen to -6.9 per cent of GDP by 2017. 14 P a g e
The impacts of significant hikes in domestic electricity prices, municipal administrative prices, along with exchange rate depreciations, are expected to keep inflation levels above the upper band of the South African Reserve Bank target band of 3 to 6 per cent over the forecast horizon. Even though the economy is expected to recover to growth rates of between 2 and 3 per cent in the long-run, the alarming characteristic of South Africa s past economic growth is its inability to resolve the severe unemployment problem in South Africa. Due to capacity constraints in the South African economy, primarily as a consequence of structural constraints associated with the labour market and with the education system, South Africa experiences a divergence of economic growth and employment creation. Employment rate growth (based on total employment including both the formal and informal sectors) will hardly, if at all, be supported by the demand-driven output growth. It is evident that the unemployment problem, although partly cyclical in nature, is primarily hampered by structural impediments retarding the ability of the wage-price mechanism to resolve the problem. The official unemployment rate is expected to remain around the 24 per cent level, until a decline to 20 per cent in 2017 which is still a significantly high unemployment level. 2.3 Uncertainties and risks to the forecast South Africa was relatively protected from the global financial recession of 2008/09 due to tight credit regulations; however the second-round effects of macroeconomic instability in major trading partners pose a definite risk to the country s outlook through export and currency jolts. High and climbing global food prices are a significant risk to inflation in South Africa. This will likely further hamper the government s efforts at improving food security and reducing poverty levels. This also threatens to heighten the social and economic tension in South Africa, especially evident in labour unrest and industrial action, particularly in the mining and manufacturing sectors leading to twitchiness amongst foreign investors, and to a significant depreciation of the Rand which, added to major disruptive and violent protests against poor service delivery, means that South Africa s image as an attractive foreign investment destination is waning fast. Further aggravating the situation is continued (nearly daily) allegations of corruption, political factionalism and instability within the country s ruling party, the ANC. 15 P a g e
While the South African government has not satisfactorily take a firm political stand on resolving the issues of inter alia skewed income distribution, poor levels and quality of education, militant labour unions, intra-party in-fighting and corruption; the country has lost its foothold as the economic powerhouse of Africa to Nigeria and Ghana. Table 4: Forecast of selected economic indicators for South Africa Gross Domestic Product Gross Domestic Expenditure 2011 2012 2013 2014 2015 2016 2017 05P (Rm) 2 836 286 2 899 248 2 963 389 3 008 576 3 064 836 3 135 021 3 217 159 % change 3.2 2.2 2.2 1.5 1.9 2.3 2.6 05P (Rm) 2 847 254 2 959 594 3 002 116 3 020 172 3 105 001 3 199 131 3 303 905 % change 4.9 3.9 1.4 0.6 2.8 3.0 3.3 Total Final Consumption Expenditure by Households 05P (Rm) 1 701 007 1 758 568 1 809 592 1 834 136 1 890 077 1 938 652 1 987 118 % change 4.9 3.4 2.9 1.4 3.1 2.6 2.5 Total Final Consumption Expenditure by Gen. Government Gross Fixed Capital Formation Exports of Goods & Services Imports of Goods & Services 05P (Rm) 565 451 584 766 603 920 615 567 625 909 642 057 657 338 % change 1.7 3.4 3.3 1.9 1.7 2.6 2.4 05P (Rm) 559738 579 916 624127 621 715 658 645 727 605 808 151 % change 5.7 3.6 7.6-0.4 5.9 10.5 11.1 05P (Rm) 820 508 821 414 859 079 881 504 895 167 958 724 1 022 671 % change 4.3 0.1 4.6 2.6 1.6 7.1 6.7 05P (Rm) 831 476 881 760 897 806 893 100 934 897 1 021 843 1 107 882 % change 10.5 6.0 1.8-0.5 4.7 9.3 8.4 Current Account Balance Relative to GDP % -2.2-5.0-5.8-5.4-6.1-6.7-6.9 Consumer Price Index % change 5.0 5.7 5.8 6.1 6.6 6.8 1.5 3-Month Interest Rate % 9.6 9.0 8.6 9.1 9.2 9.5 10.2 10-Year Interest Rate % 8.5 7.4 8.3 7.8 8.2 8.2 8.3 Exchange Rate (ZAR/USD) Average c/$ 725.3 821.0 965.0 1084.4 1105.0 1214.0 1224.0 Unemployment rate % 23.6 24.3 24.1 24.3 23.6 24.1 19.5 Wage Rate (Compensation per Employee) R 93 861 100 575 106 124 113 108 120 607 128 820 130 765 % change 6.7 7.2 5.5 6.6 6.63 6.81 1.51 Source: Plus Economics Advisory 16 P a g e