1996 - National Treasury

CHAPTER 1
ECONOMIC CONDITIONS
AND PROSPECTS
This chapter contains a review of economic developments
in 1995 together with an outlook for both the international
and domestic economy for 1996. Economic conditions in
1995 are discussed with regard to domestic production,
expenditure and savings, the labour market, productivity and
inflation. Developments in the balance of payments and
financial markets are also explained.
1.1 ECONOMIC CONDITIONS
1.1.1 Domestic production
The South African economy entered a cyclical recovery in
mid-1993 which lasted throughout 1994. At the beginning of
1995 there was consensus that buoyant economic conditions
would continue. As events unfolded, it became clear that
the initial growth forecast for 1995 was too conservative and
the growth in real gross domestic product of 316 per cent
turned out to be somewhat higher than expected.
The growth of the South African economy in 1995 is all the
more remarkable if cognisance is taken of the output setbacks
in the primary sectors of the economy. Poor rainfall
in the summer growing season affected field crops badly and
contributed to a decline of 15 per cent in the real value of
agricultural production in 1995. Gold and diamond production
were plagued by labour problems. In addition, the goldmining
industry had to battle with rising production costs and
declines in the gold content of ore milled. As a result gold
production declined by 1016 per cent in 1995. The real
value added by diamond mining also declined sharply
because of problems experienced with the international
marketing of uncut diamonds. The real output of the entire
mining sector declined by 316 per cent in 1995.
Outside of the primary sectors, output growth accelerated to
41£ per cent in 1995 from a growth rate of 216 per cent in
1994. The manufacturing sector, in particular, experienced
strong demand in the domestic market and from abroad.
Real value added by manufacturing increased by Vh per
cent in 1995; in 1994 the comparable growth rate was
2 1 /2 per cent. In the commercial sector (i.e. the wholesale,
retail and motor trade) real value added was raised by 6 per
cent in 1995 compared with 4 per cent in 1994.
Economic growth in 1995 was the highest recorded since
1988. Some cooling down occurred in the fourth quarter,
however, when output growth fell back slightly to 2V4 per
cent at an annualised rate, largely on account of a decline
in manufacturing output.
GROSS DOMESTIC PRODUCT
(Constant 1990 prices)
Percentage change
Percentage change
5i 15
4 | 1 4
3 ;•• — I |3
2 I 1 I | 2
1 I \ 1
-2 I I -2
.31 1.3
85 86 87 88 89 90 91 92 93 94 95
YEAR
Source: South African Reserve Bank
Whereas the growth in real gross domestic product which
measures economic output in the Republic, accelerated from
2 1 /2 per cent in 1994 to 3 1 /2 per cent in 1995, the growth of
real gross national product, which represents the real
income of South African nationals, declined from 4 per cent
in 1994 to 3 per cent in 1995. This was essentially the
result of a rise in South Africa's real net factor payments to
the rest of the world (mostly interest and dividend payments
to foreigners and the labour rewards of foreign nationals
working in South Africa) and a deterioration in the terms of
trade (i.e. a weakening of the ratio of the prices of exports
to the prices of imports).
1.1.2 Gross domestic expenditure
Aggregate real gross domestic expenditure maintained the
growth momentum it has gained since 1993 and increased
by 616 per cent in 1994 and by 516 per cent in the 1995
calendar year as a whole. Increases in all the main components
of expenditure contributed to the firm rise in
aggregate domestic expenditure in 1995.
Real private consumption expenditure in 1995, reflecting the
positive outlook of South African consumers, grew by 5 per
cent - the highest rate of increase in any calendar year since