1. A macroeconomic overview
28 October 2014
Chris Loewald
South African Reserve Bank

2. Global outcomes slowly improving
The recovery in the advanced economies has been very mixed. The UK has only recently returned to pre-crisis levels of output. The outlook for the Japanese economy is also uncertain, while the eurozone remains well below pre-crisis levels.

3. Like many EMs, SA growth has trended lower since 2010

4. Growth forecasts have fallen, too

5. With global demand softer, affecting prices for exports

6. …with no clear relief in sight

7. Subdued credit extension by banks to households in particular
Growth in credit extension has mainly been to the corporate sector, a lot of it driven by renewable energy projects.
There has been a steady downward trend in credit extension to households. Mortgage credit extension growth has remained around the 3 per cent level or lower for some time, while unsecured lending has become negative.

8. Growth in household consumption spending has been moderating steadily…...
Growth in household consumption expenditure measured 1,5 per cent in the second quarter. Although high wage settlement will help to underpin consumption expenditure, continued downward pressure can be expected from low employment growth, high debt levels, rising interest rates and declining credit extension to households.

9. Household debt remains high, with some gradual deleveraging
Having reached a peak of 83,0 per cent in the first quarter of 2009, the household debt to disposable income ratio has declined to 73,5 per cent in the second quarter of this year. Although debt service costs are relatively low, the risk is to the upside as interest rates start normalising, and could put further strain on household consumption expenditure.

10. While the economy has suffered from a series of supply shocks…
2013Q1 was weak in part because of an unusual number of holidays falling in the quarter – note that Q2 was quite strong. The biggest contractions were in manufacturing (-7.9%) and agriculture, forestry & mining (-4.9%).
Automotive sector strike
(Aug & Sep 2013)
Platinum sector strike
(Jan-June 2014)
Metalworkers strike (July 2014)
Electricity constraints

11. Impact of shocks to mining & manufacturing very large
Sectoral growth rates in Q1 and Q2:
Agriculture , ,9
Mining , ,4
Manufacturing -4, ,1
Construction , ,0
Tertiary sector 1, ,8

12. Real fixed capital formation weakened sharply late in 2013 & contracted in 2014
Largest contractions:
Mining
Trade
Construction
Transport
Real gross fixed capital formation grew by 0,5 per cent in the second quarter of this year (seasonally adjusted and annualised), as the downward trend continued. Of major concern is the fact that private sector investment, which accounts for almost two thirds of investment spending, contracted at an annualised rate of 1,1 per cent in the second quarter, following a weak 1,0 per cent in the first quarter.

13. The unemployment rate has fluctuated around the 25 per cent level for some time….
The latest unemployment figure is 25,5 per cent, but the rate has fluctuated around the 25 per cent level for some time, well above the low point of 21,5 per cent reached in the fourth quarter of 2008 when the global financial crisis hit.

14. Impacting on the Bank’s GDP forecasts
2014: 1,5 per cent (3,0 per cent in November 2013…..)
2015: 2,8 per cent
2016: 3,1 per cent
But risks to the downside
Continuous downward revisions

15. The current account deficit is large and persistent

16. Swings in the current account tend to be driven by the trade account

17. Where imports consistently outpace exports

18. And global inflation trending down

19. SA inflation is near top of target, with core trending upwards

20. Inflation may have peaked in Q2, but expect further volatility

21. Inflation forecast Headline: 2015: average 5,7 per cent
Peak of 6,5 per cent in Q2
2015: average 5,7 per cent
To return to within the target range in Q1
2016: average 5,8 per cent.
Core:
2014: 5,6 per cent
2015: 5,7 per cent
2016: 5,5 per cent

22. Rate hiking cycle moderate

23. Balancing inflation & world rates with weak economy
Duration
Total Hike (bps)
Cycle 1: 1998 (Pre-IT)
5 months
705
Cycle 2: 2002
8 months
400
Cycle 3:
24 months
500
Cycle 4: 2014-
9 months (still underway) 75

24. Global pressures mounting as ECB and FED shift policy stance

25. Exchange rate mirrors domestic & global events

26. Another view… major trend movement in the currency

27. Conclusion
SA is part of the EM growth slowdown but idiosyncratic factors unhelpful
Domestic confidence & spending weak
SA has stubbornly high inflation, a softening terms of trade, and a large current account deficit
Global pressures from normalisation