Full Quarterly Bulletin – No 296 – June 2020
Publish Date: 2020-07-16
Category: Quarterly Bulletins
The further contraction in South Africa’s real gross domestic product (GDP) at an annualised rate of 2.0% in the first quarter of 2020 extended the economic recession into its third quarter. The nationwide lockdown, from 27 March, to curb the spread of the coronavirus disease 2019 (COVID-19) is expected to severely affect economic activity in the second quarter.
The real output of the primary sector declined further and was driven by a sharp contraction in mining output, which was impacted by electricity load shedding and supply-chain disruptions as well as lower global demand as the COVID-19 pandemic impacted export markets. By contrast, the real gross value added (GVA) by the agricultural sector expanded markedly in the first quarter of 2020, following four consecutive quarterly contractions. Favourable weather conditions supported the production of field crops as well as horticultural and animal products.
The real output of the secondary sector contracted for a third successive quarter. Economic activity declined in most manufacturing subsectors in the first quarter of 2020, as both global and domestic demand conditions deteriorated. The sustained decline in the output of the electricity-intensive mining and manufacturing sectors also weighed on electricity production and consumption. Real construction activity contracted for a seventh successive quarter, suppressed by persistent low business confidence, policy uncertainty and the recessionary conditions.
The real GVA by the tertiary sector reverted from a contraction in the final quarter of 2019 to an increase in the first quarter of 2020. Growth in the real output of the finance, insurance, real estate and business services sector accelerated in the first quarter, in part reflecting increased trading activity in the financial markets following the worldwide panic-trading in reaction to the COVID-19 pandemic. By contrast, the real GVA by the commerce sector decreased further as weak trading conditions and pre-lockdown supply-chain disruptions constrained the real output of the wholesale trade subsector, while lower sales of new and used vehicles reflected weak consumer confidence and spending. However, real retail trade activity improved marginally, reflecting increased sales of food and beverages as well as pharmaceuticals as consumers stockpiled before the start of the national lockdown.
Real gross domestic expenditure (GDE) declined for a third successive quarter in the first quarter of 2020, mainly due to another substantial de-accumulation in real inventory holdings and a much faster pace of contraction in gross fixed capital formation. Growth in the real final consumption expenditure by households moderated, while that by general government reverted from a slight contraction to an increase. Real net exports contributed the most to growth in real GDP for the third consecutive quarter, but were outweighed by the sharp contraction in fixed investment spending and the depletion of inventories.
The slowdown in household consumption expenditure in the first quarter of 2020 resulted from sharp contractions in real outlays on durable and semi-durable goods, particularly in March, as the social distancing prior to the national lockdown and the trading days lost due to the actual lockdown impacted sales, with most of these goods being classified as non-essential. By contrast, real spending on services and, in particular, non-durable goods increased at a faster pace as consumers likely stockpiled food, beverages and tobacco as well as medical and pharmaceutical products before the lockdown.
Household debt increased at a slower pace in the first quarter of 2020 as the quarterly pace of increase in most categories of credit moderated. However, household debt as a percentage of nominal disposable income increased slightly to 73.7% over the period. Households’ net wealth deteriorated markedly in the first quarter of 2020 as the value of assets decreased while that of liabilities increased moderately. The lower value of assets reflected equity holdings in particular, as share prices fell sharply following the panic-trading associated with COVID-19. The FTSE/JSE All-Share Price Index (Alsi) declined by 22.1% in the first quarter of 2020 – the largest decline since the third quarter of 1998.
Real gross fixed capital formation contracted at an accelerated pace in the first quarter of 2020 as fixed investment by the private sector in particular fell sharply. Capital investment by public corporations also contracted notably as the decline in construction works as well as investment in machinery and equipment by state-owned entities persisted. By contrast, capital spending by general government rebounded in the first quarter of 2020, following a sustained decline since the first quarter of 2018. The level of fixed capital investment in the first quarter of 2020 was well below that of a year earlier and reflected continued weak business confidence, political uncertainty, the recessionary environment and constrained public sector budgets.
The number of unemployed South Africans increased significantly by 869 000 in the year to the first quarter of 2020 due to a surge in the number of new and re-entrants into the labour market who failed to find employment. This brought total unemployment to an all-time high of 7.07 million, with the official unemployment rate increasing to a record-high of 30.1% in the first quarter of 2020. The seasonally adjusted unemployment rate also increased to a new high of 29.9%, reflecting the economic recession amid a labour market that was already in distress before the outbreak of the COVID-19 pandemic.
The year-on-year pace of increase in formal non-agricultural nominal remuneration per worker accelerated somewhat in the fourth quarter of 2019, as remuneration growth per worker quickened in both the public and private sectors. However, on an annual average basis, growth in nominal remuneration per worker moderated from 4.9% in 2018 to 4.1% in 2019 – the lowest since 1970 – as private sector remuneration growth per worker slowed to below consumer price inflation. The average wage settlement rate in collective bargaining agreements also decreased further to a 14-year low in the first quarter of 2020, as current economic and labour market conditions are exerting downward pressure on wage increases amid excess labour supply and weaker bargaining power.
Both producer and consumer price inflation picked up pace from recent lows in November 2019 to February 2020, but moderated again from March. Most of the initial quickening was related to higher fuel price inflation outcomes due to the low base established at the beginning of 2019. Following the outbreak and rapid global spread of the COVID-19 pandemic, international crude oil prices declined significantly as most countries implemented lockdown restrictions. The average monthly price of Brent crude oil fell from a recent high of US$67.15 in December 2019 to only US$18.68 in April 2020, as fears of an unprecedented contraction in global output mounted, following sudden stops in economic activity. This resulted in a marked deceleration in domestic fuel price inflation from March 2020 onwards, despite the sharp depreciation in the exchange value of the rand between February and April 2020. Headline consumer price inflation thus moderated to 3.0% in April, despite a gradual acceleration in food price inflation. Core inflation slowed to a multi-year low of 3.2% in April 2020, indicative of a lack of pricing power in an environment of weak economic activity.
World trade volumes already reflected the disruptive effects of the COVID-19 pandemic in the first quarter of 2020. However, with the domestic lockdown restrictions only introduced late in March, the impact on South Africa’s imports and exports in the first quarter was still limited, despite supply-chain disruptions throughout the quarter. Against this backdrop, South Africa’s trade surplus with the rest of the world increased noticeably further to 4.0% of GDP in the first quarter of 2020 – the largest since the fourth quarter of 2010. This reflected a sustained increase in the value of net gold and merchandise exports alongside a third consecutive quarterly contraction in merchandise imports. Mining, manufacturing and agricultural exports all increased in the first quarter of 2020, with the value of gold exports, which reflected both a near record-high US dollar average quarterly gold price and the depreciation in the exchange value of the rand, also supporting the value of total goods exported. By contrast, the third consecutive quarterly contraction in the value of merchandise imports reflected weaker domestic demand amid the recessionary conditions as well as a substantial decline in both the value and volume of crude oil imports.
The deficit on the services, income and current transfer account narrowed significantly further in the first quarter of 2020 as all three sub-accounts recorded smaller deficits. The income deficit narrowed the most as domestic companies generally opted to withhold dividends to strengthen finances amid uncertainty regarding the effect of COVID-19 on operations. This, together with the much larger trade surplus, led to the first surplus on the current account of the balance of payments since the first quarter of 2003, with the balance switching from a deficit of 1.3% of GDP in the fourth quarter of 2019 to a surplus of 1.3% in the first quarter of 2020.
South Africa’s terms of trade improved notably further in the first quarter of 2020, supported by higher commodity prices. Apart from the higher gold price, the US dollar price of a basket of domestically produced non-gold export commodities surged by 15.8% in the first quarter and, combined with the depreciation in the exchange value of the rand, contributed to the fourth consecutive quarterly increase in the rand price of merchandise exports. By contrast, the rand price of merchandise imports declined further, in line with lower crude oil prices.
The net inflow of capital on South Africa’s financial account of the balance of payments increased from R10.1 billion in the fourth quarter of 2019 to R16.6 billion in the first quarter of 2020. On a net basis, direct investment, financial derivatives and reserve assets recorded inflows during the first quarter, while portfolio and other investment recorded outflows. Portfolio investment flows reflected the impact of COVID-19 on global financial markets with a substantial liability outflow in the first quarter of 2020 as non-residents sold domestic equity and, in particular, debt securities. This was partially countered by South African residents’ disposal of foreign portfolio assets. Although South Africa’s international reserve assets decreased further in the first quarter of 2020, the level of import cover rose to 6.9 months at the end of March – the highest on record.
South Africa’s positive net international investment position decreased further from the end of September 2019 to the end of December, as the value of foreign assets declined more than foreign liabilities. The increase in the nominal effective exchange rate (NEER) of the rand over the period affected foreign assets more than foreign liabilities.
The NEER decreased markedly by 19.2% in the first quarter of 2020, in line with most other emerging market currencies, as the outbreak and rapid spread of the COVID-19 pandemic led to global risk aversion with the lockdowns implemented in most countries causing fears of a sharp global economic recession. The NEER increased slightly in the second quarter of 2020 after central banks across the globe, including the South African Reserve Bank (SARB), implemented various measures to assist and enhance liquidity in financial markets to restore confidence.
The yields on South African government bonds increased significantly from the end of February 2020 to late March. This was in line with the re-pricing of emerging market debt securities in the wake of COVID-19, and was exacerbated by both the sharp depreciation in the exchange value of the rand as well as the notable net selling of bonds by non-residents as South Africa’s sovereign credit rating fell below investment grade. The yields subsequently declined again as the SARB supported liquidity through bond purchases in the secondary market together with successive decreases in the repurchase (repo) rate as well as fiscal measures by National Treasury to mitigate the effects of the lockdown.
Domestic short-term money market interest rates declined sharply in the first half of 2020, consistent with the four decreases in the repo rate in the first five months of the year. Rates on forward rate agreements (FRAs) declined gradually in January and February 2020 on account of favourable inflation outcomes before decreasing sharply from March as it followed the reductions in the repo rate.
Growth in the broadly defined money supply (M3) accelerated notably in the first quarter of 2020 and was driven by a marked acceleration in non-financial corporate deposits, with growth in household deposits trending only moderately higher. Growth in M3 accelerated further from April as the lockdown and associated uncertainty resulted in a noticeable shift toward bank deposits, with private sector companies placing inflows and surplus funds on deposit to provide for expenses during the lockdown, while reduced spending and payment holidays augmented household deposit balances.
Growth in total loans and advances extended by monetary institutions to the domestic private sector was fairly muted in the early months of 2020 amid the protracted weakness in economic activity. Growth in credit extension slowed further in May and was broad based among the credit categories, despite the substantial reduction in interest rates and a variety of measures to ease liquidity conditions to alleviate the impact of COVID-19.
The preliminary non-financial public sector borrowing requirement increased to R250 billion in fiscal 2019/20 as the deficit of consolidated general government almost doubled. This was due to continued revenue shortfalls following weaker than expected domestic economic activity as well as over expenditure relative to the original budget, mostly due to additional allocations to state-owned companies. The financing of national government’s borrowing requirement led to a significant increase in gross loan debt to 63.4% of GDP as at 31 March 2020 compared with the originally budgeted ratio of 56.2%.
On 24 June 2020, government tabled a special supplementary budget in response to the expected impact of COVID-19 on public finances. The pandemic has changed the spending priorities initially proposed in the 2020 Budget, while the outlook for tax revenue deteriorated significantly. A national government budget deficit as a ratio of GDP of 14.6% is now expected in fiscal 2020/21 compared with 6.8% in the original 2020 Budget Review. The total gross loan debt of national government is now expected to increase sharply to 81.8% of GDP in the current fiscal year.
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Link full article: Full Quarterly Bulletin – No 296 – June 2020