Full Quarterly Bulletin – No 297 – September 2020
South Africa’s real GDP contracted by a massive annualised 51.0% in the second quarter of 2020 – the largest contraction since quarterly records began in 1960 – extending the economic recession to a fourth quarter. In the second quarter of 2020, real GDP contracted by 16.4% on a quarter-to-quarter, not annualised basis, and the economy shrank by an unprecedented 17.5% in nominal terms.The effect of the restrictions on economic activity in the second quarter of 2020 was broad-based, with output declining sharply in the primary, secondary and tertiary sectors. In the primary sector, the sharp contraction in real gross value added (GVA) was driven by a broad-based reduction in real mining output. Mining production was supressed by supply-chain disruptions related to domestic and international lockdown restrictions, and after the initial hard lockdown by regulations that prohibited mines from operating at full capacity in the interest of the safety of workers. By contrast, agriculture was the only sector that expanded in the second quarter of 2020, albeit at a much slower pace than in the first quarter. This reflected the agricultural sector’s essential-goods-provider status during the national lockdown as well as favourable weather conditions and increased foreign demand.
The real output of the secondary sector contracted even more than the primary sector in the second quarter of 2020. The sharp and broad-based decrease in manufacturing output subtracted the most of all sectors from overall GDP growth, at 10.8 percentage points. The decline in both electricity consumption and production reflected the sharp contraction in economic activity in the electricity-intensive mining and manufacturing sectors, while water consumption also declined. The real GVA by the construction sector decreased the most of all sectors in the second quarter of 2020, at 76.6%, as the national lockdown brought almost all construction activity to a halt.
The real output of the usually fairly stable tertiary sector also contracted sharply in the second quarter of 2020. The pronounced decline in the real GVA by both the commerce and the transport sectors largely reflected the restrictions on non-essential purchases and travel during the national lockdown. The real GVA by the finance, insurance, real estate and business services sector also decreased notably in the second quarter of 2020 – the first contraction since the second quarter of 2009, in the aftermath of the global financial crisis.
Real gross domestic expenditure (GDE) shrank for the fourth consecutive quarter in the second quarter of 2020, mirroring the contractions in real GDP over this period. All of the expenditure components subtracted from growth in real GDP in the second quarter of 2020. In particular, real gross fixed capital formation and real final consumption expenditure by households decreased significantly, alongside a fourth successive quarterly de-accumulation in real inventory holdings – the largest ever recorded – as well as real net exports, with global trade severely affected by COVID-19.
The sharp contraction in household consumption expenditure in the second quarter of 2020 reflected reduced real outlays on all categories. Spending on durable and semi-durable goods contracted the most, as these goods were mostly classified as non-essential during the lockdown, with sales prohibited. The real disposable income of households also contracted in the second quarter of 2020, as the compensation of employees declined amid job losses and reduced salary payments during the lockdown.
Household debt declined in the second quarter of 2020, for the first time since the third quarter of 2002. The outstanding balances of most categories of credit extended to households decreased as the national lockdown and related uncertainty likely affected households’ saving and spending patterns. However, the ratio of household debt to nominal disposable income increased significantly from 73.6% in the first quarter of 2020 to 85.3% in the second quarter, as the notable quarter-to-quarter decline in nominal disposable income exceeded the decline in household debt. Households’ net wealth increased notably in the second quarter of 2020, as the recovery in share prices after the sharp initial correction boosted the value of equity portfolios. The FTSE/JSE All-Share Price Index (Alsi) increased by 47.7% from a recent low on 19 March 2020 up to 11 September, in line with most international bourses.
Real gross fixed capital formation registered the largest contraction on record in the second quarter of 2020 following already sizeable contractions in the preceding two quarters. Real capital investment by both the private sector and public corporations declined steeply in the second quarter, while capital spending by general government decreased only slightly. Reduced spending on transport equipment was especially pronounced as new vehicle sales plummeted to an all-time low in April, with dealerships not allowed to operate under level 5 of the lockdown restrictions. In addition, infrastructure projects were delayed and interrupted by inaccessible project sites and restrictions on the use of essential amenities such as transport during the lockdown.
The national saving rate declined markedly from 15.8% in the first quarter of 2020 to 10.7% in the second quarter. This resulted from a marked increase in dissaving by general government, as revenue fell sharply across all major tax categories in the second quarter of 2020.
The effect of the COVID-19-related lockdown is not yet visible in the official labour market statistics, as the release of Statistics South Africa’s (Stats SA) household-based
Quarterly Labour Force Survey for the second quarter of 2020 has been delayed following lockdown-related logistical and methodological complications. The number of unemployed South Africans had already increased significantly 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. The official unemployment rate increased to a record high of 30.1% in the first quarter of 2020, reflecting the impact of the economic recession that had already started in the third quarter of 2019. Growth in the formal non-agricultural nominal remuneration per worker was restrained by the recessionary conditions in the first quarter of 2020, with remuneration growth slowing in both the public and the private sector. Year-on-year growth in nominal unit labour cost in the formal non-agricultural sector moderated to 4.5% in the first quarter of 2020, while labour productivity continued to contract. Both headline producer and consumer price inflation moderated to historical lows in May 2020 in the wake of the COVID-19 pandemic, mostly due to a significant decrease in fuel prices as the shutdown of economic activity in most economies supressed the demand for crude oil. The lockdown restrictions aimed at containing the spread of COVID-19 required methodological changes to the compilation of the consumer price index (CPI), which introduced some temporary downward statistical bias. Headline CPI inflation then accelerated from a 16-year low of 2.1% in May 2020 to 3.2% in July, as fuel prices decreased at a slower year-on-year rate and as the extent of price imputations by Stats SA diminished. Underlying inflationary pressures receded further during the first half of 2020, reflective of muted price pressures amid the domestic recessionary conditions. World trade volumes decreased notably further in the second quarter of 2020, reflecting the sharp contraction in output in many countries following production stoppages and with ports operating at reduced capacity. The adverse effects of this were also visible in South Africa’s trade surplus, which more than halved from the first to the second quarter of 2020, as the value of net gold and merchandise exports contracted much more than merchandise imports. Mining and manufacturing exports contracted sharply in the second quarter of 2020 while agricultural exports increased, supported by citrus exports in particular. The value of merchandise imports contracted for a fourth consecutive quarter as most of the mining and manufacturing subcategories declined. The value of crude oil imports decreased sharply due to the marked decline in the average realised rand price per barrel and, to a lesser extent, lower volumes. South Africa’s terms of trade improved further to a record high in the second quarter of 2020 as the rand price of exports increased while that of imports decreased. The shortfall on the services, income and current transfer account widened significantly in the second quarter of 2020 as the deficits of all three sub-accounts widened. In particular, the deficit on the services account widened substantially due to the unusual circumstances brought about by the COVID-19-related international travel restrictions. Consequently, the balance on the current account of the balance of payments reverted from a surplus of 1.2% of GDP in the first quarter of 2020 – the only surplus since the first quarter of 2003 – to a deficit of 2.4% in the second quarter. The net flow of capital on South Africa’s financial account of the balance of payments reverted from an inflow of R16.6 billion in the first quarter of 2020 to an outflow of R10.3 billion in the second quarter. On a net basis, direct investment, financial derivatives and reserve assets recorded inflows during the second quarter, while portfolio and other investment recorded outflows. Portfolio investment flows largely reflected non-resident net sales of South African debt securities, as well as the redemption of international bonds by national government. This was partly countered by South African residents’ disposal of foreign portfolio assets. Despite a further decrease in South Africa’s international reserve assets in the second quarter of 2020, the level of import cover rose to a new all-time high of 8.0 months at the end of June, reflecting the continued decline in imports. South Africa’s positive net international investment position (IIP) increased more than threefold from the end of December 2019 to the end of March 2020, reflecting a notable increase in the market value of foreign assets and a further decline in foreign liabilities. The decrease in the nominal effective exchange rate (NEER) of the rand of 19.3% over this period affected foreign assets more than foreign liabilities, while divergent movements in some asset prices also contributed to the significant increase in the positive net IIP. The NEER increased by 2.7% in the second quarter of 2020 following the notable decrease in the first quarter, as investor sentiment improved amid the gradual lifting of lockdown restrictions and further monetary policy easing in several countries, including South Africa. The NEER increased marginally further up to mid-September as domestic developments, such as the resumption of electricity load-shedding and the larger-than-expected contraction in real GDP in the second quarter of 2020, were offset by the continued appreciation of the rand against the United States (US) dollar. The movements in South African government bond yields thus far in 2020 have reflected uncertainty as to the economic impact of the COVID-19 pandemic and the concomitant changes in South Africa’s sovereign and currency risk premiums, as well as net sales of bonds by non-residents and fluctuations in the exchange value of the rand. Bond yields also reflected concerns about the sustainability of South Africa’s public finances against the backdrop of an increase in government debt, as projected in the June 2020 Supplementary Budget. The decline in domestic short-term money market interest rates in the first half of 2020 continued after the further reduction in the repurchase (repo) rate in July. Growth in the broadly defined money supply (M3) accelerated further in the second quarter of 2020 as both financial and non-financial companies as well as households showed a preference for bank deposits amid uncertainty about the impact of the national lockdown on economic activity and financial markets. By contrast, growth in total loans and advances extended by monetary institutions to the domestic private sector continued to moderate in the second quarter of 2020 amid the sharp contraction in real GDP. The deceleration occurred despite substantial interest rate relief and a variety of measures aimed at easing liquidity conditions to alleviate the effects of the COVID-19 pandemic. The preliminary non-financial public sector borrowing requirement of R160 billion in the first quarter of fiscal 2020/21 (April–June 2020) far exceeded the R62.9 billion recorded in the same period of the previous fiscal year. This mainly reflected the notably larger cash deficit of national government, attributable to revenue shortfalls and higher transfers to other levels of general government for COVID-19-related expenditure. The response to COVID-19 was also evident in the change from a social security fund cash surplus in the first quarter of fiscal 2019/20 to a sizeable deficit in the first quarter of fiscal 2020/21. The financing of national government’s borrowing requirement led to a significant year-on-year increase of 18.7% in gross loan debt to 69.4% of GDP as at 30 June 2020. National government revenue contracted sharply by 22.8% year on year in the first four months of fiscal 2020/21, as all tax categories underperformed following the restrictions on economic activity to try and curb the spread of the COVID-19 pandemic. By contrast, total expenditure increased by 2.7% over this period, yielding a cash book deficit of R260 billion, which was R104 billion more than a year earlier.