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Full Quarterly Bulletin – No 296 – June 2020

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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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Attachments:

Full Quarterly Bulletin – No 294 – December 2019

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Publish Date: 2019-12-13
Category: Quarterly Bulletins

​Global economic growth remained subdued and slowed slightly further to 2.8% in the third quarter of 2019 as economic activity weakened in both the advanced and emerging market economies. Among the advanced economies, output growth decelerated notably in Japan while accelerating slightly in the Euro area, both expanding by less than one per cent. The moderation in the emerging markets was driven mainly by slower growth in Turkey and a likely further contraction in Argentina, while the gradual slowdown in China continued. World trade volumes contracted further, reflecting the slowdown in global economic growth and the impact of the ongoing trade tensions.

Global inflation has remained subdued thus far in 2019. In the advanced economies, headline consumer price inflation continued to undershoot most central banks’ inflation targets. Inflationary pressures in the emerging market economies have also remained generally well contained, with only a few exceptions, such as Argentina and Turkey. The price of Brent crude oil receded notably in the three months up to early September 2019 amid concerns about slowing global economic growth.  Attacks on Saudi Arabia’s oil facilities in mid-September caused oil prices to temporarily surge by around US$10 per barrel before declining again after production was restored in early October.

Real economic growth in South Africa contracted once more by an annualised 0.6% in the third quarter of 2019 after rebounding by a slightly revised 3.2% in the second quarter. The weakness was broad-based as the real gross value added (GVA) by both the primary and the secondary sectors contracted, while output growth slowed markedly in the tertiary sector. Year-on-year growth in real gross domestic product (GDP) slowed markedly to only 0.1% in the third quarter. South Africa’s real GDP growth projections for 2019 have been lowered further in recent months, with estimates by the International Monetary Fund (IMF), National Treasury and the South African Reserve Bank (SARB) currently ranging between 0.5% and 0.7%, all below the 0.8% achieved in 2018.

The contraction in the real output of the primary and secondary sectors in the third quarter of 2019 occurred in all of the subsectors. The real GVA by the agricultural sector contracted for a third successive quarter, albeit at a slightly slower pace, and that by the construction sector for a fifth consecutive quarter. The real output of the sector supplying electricity, gas and water was hampered by sluggish economic activity in the electricity-intensive mining and manufacturing sectors as well as the renewed implementation of electricity load shedding in October.

Growth in the real GVA by the tertiary sector slowed sharply in the third quarter of 2019 as output increased at a slower pace in the commerce; finance, insurance, real estate and business services; and general government services sectors. In addition, real economic activity in the transport, storage and communication sector contracted for a third successive quarter.

Real gross domestic expenditure (GDE) contracted by 3.6% in the third quarter of 2019 after having increased by 9.0% in the previous quarter. The contraction resulted primarily from inventory de-accumulation, while growth in all the components of real gross domestic final demand moderated. Real net exports made the largest positive contribution to growth in real GDP in the third quarter of 2019.

Growth in the real final consumption expenditure by households moderated to only 0.2% in the third quarter of 2019. The pace of increase in real spending on services and, in particular, durable goods slowed, while purchases of semi-durable and non-durable goods decreased. This was consistent with the notably slower growth in households’ real disposable income and weaker consumer confidence.

Household debt as a percentage of nominal disposable income decreased slightly in the third quarter of 2019. Households’ net wealth also decreased in the third quarter as the market value of assets was impacted by lower domestic share prices, with the FTSE/JSE All-Share Price Index (Alsi) recording its worst third-quarter performance since 2011. Furthermore, the lacklustre growth in nominal residential property prices persisted in the third quarter of 2019, with house prices continuing to decline in real terms.

Real gross fixed capital formation expanded for a second consecutive quarter in the third quarter of 2019, driven largely by another sizable increase in capital expenditure by private business enterprises, particularly on machinery and other equipment as well as transport equipment. The increased capital outlays on machinery and equipment resulted from a marked increase in wind-powered generating sets for the ongoing construction of wind farms as well as automatic data-processing machines and units for a new data hub being established in Cape Town. By contrast, real fixed investment by general government decreased further and at a faster pace, while that by public corporations increased marginally following a substantial decrease in the second quarter.

South Africa’s official unemployment rate increased marginally further to 29.1% in the third quarter of 2019 – the highest level since the inception of the Quarterly Labour Force Survey (QLFS) in 2008. The number of unemployed South Africans increased to an all-time high of 6.73 million in the third quarter, elevated by further significant increases in the number of job losers as well as long-term unemployed people entering the labour market and actively searching for jobs.

The pace of increase in the nominal remuneration per worker in the formal non-agricultural sector accelerated somewhat to 5.6% in the second quarter of 2019, as both private and public sector (excluding temporary election-related jobs) wage growth accelerated. Private sector remuneration growth per worker rebounded from an all-time low in the first quarter, while public sector wage growth was elevated by the low base created a year earlier following the delayed implementation of the annual public sector wage increase. The acceleration in wage growth resulted in a quickening in formal non-agricultural nominal unit labour cost growth in the second quarter of 2019, although it remained within the inflation target range. The average nominal wage settlement rate in collective bargaining agreements decreased further to 6.8% in the first nine months of 2019 – its lowest level since the second quarter of 2007.

Domestic inflationary pressures have remained fairly subdued, with headline consumer price inflation remaining at, or below, the 4.5% midpoint of the inflation target range thus far in 2019. Consumer goods price inflation has consistently been below the midpoint and followed the deceleration in producer price inflation over this period, while consumer services price inflation moderated further. Consumer food price inflation has accelerated steadily since April 2019, mainly on account of higher bread and cereals prices. However, domestic grain prices have moved broadly sideways thus far in 2019, resulting in the gradual dissipation of the low base of 2018. Core inflation slowed to 4.0% in September and October 2019, suggesting that underlying inflationary pressures remain well contained within an environment of subdued demand-side pressures.

South Africa’s trade balance switched from a deficit in the second quarter of 2019 to a surplus in the third quarter. The turnaround resulted from an increase in the value of net gold and merchandise exports, alongside a contraction in merchandise imports. The value of merchandise exports was boosted by higher manufactured and agricultural exports which outweighed the contraction in non-gold mining exports. The lower value of merchandise imports reflected a sharp decline in the importation of mineral products, weighed down by fewer crude oil imports, while manufactured and agricultural imports increased.

The shortfall on the services, income and current transfer account increased in the third quarter of 2019 due to a larger deficit on the income account as gross dividend payments increased markedly. However, the deficit on the current account of the balance of payments as a ratio of GDP narrowed from 4.1% in the second quarter of 2019 to 3.7% in the third quarter, as the switch to a trade surplus outweighed the wider deficit on the services, income and current transfer account.

The net inflow of capital on the financial account of the balance of payments increased significantly in the third quarter of 2019. On a net basis, portfolio and, in particular, other investment registered inflows while direct investment, financial derivatives and reserve assets recorded outflows.

South Africa’s positive net international investment position decreased notably from the end of March 2019 to the end of June. This reflected an increase in foreign liabilities and a decrease in foreign assets. The increase in the value of both direct and portfolio investment liabilities reflected higher domestic share prices. The market value of South Africa’s foreign assets decreased as direct and portfolio investment as well as reserve assets all decreased while only other investment and financial derivatives increased.

The nominal effective exchange rate (NEER) of the rand declined, on balance, by 4.2% in the third quarter of 2019, largely reflecting a notable decline in August amid renewed global trade tensions. Despite adverse domestic idiosyncratic developments, the rand as well as other emerging market currencies was to a large extent influenced by global developments and risk aversion in the third quarter. In late October, the exchange value of the rand depreciated sharply after the release of the 2019 Medium Term Budget Policy Statement (2019 MTBPS), which presented a marked deterioration in South Africa’s fiscal position. This triggered renewed concerns of further credit-rating downgrades as two international rating agencies subsequently revised South Africa’s sovereign rating outlook from stable to negative. However, the exchange value of the rand stabilised towards the end of November.

South African government bond yields increased from mid-July 2019 up to the end of November, reflecting continued global trade tensions, notable non-resident net sales of domestic bonds, government’s recapitalisation of Eskom, the depreciation in the exchange value of the rand, the larger government budget deficit, and increased debt levels depicted in the 2019 MTBPS.

Growth in the broadly defined money supply (M3) slowed markedly in the third quarter of 2019 following an acceleration in the second quarter in the run-up to the national elections in May. The deceleration in the third quarter was driven by slower growth in the deposit holdings of the corporate sector as both financial and non-financial company deposit growth moderated, while that of households remained range-bound in recent months.

Growth in total loans and advances extended by monetary institutions to the domestic private sector accelerated moderately in early 2019 but slowed in subsequent months. The recent moderation reflected slower growth in loans extended to companies while that to households continued its gradual upward trend. The acceleration in credit extension to the household sector reflected a further gradual acceleration in mortgage advances as well as a marked quickening in the extension of general loans.

National government’s cash book deficit of R190 billion in the first half of fiscal 2019/20 was R62.1 billion more than in the same period of the previous fiscal year. The larger cash book deficit was brought about by a combination of significantly faster growth in expenditure and notably slower growth in revenue. The revenue shortfall reflected a marked increase in value-added tax (VAT) refunds and generally weak domestic economic activity along with weaker provisional tax payments. Higher government spending resulted mainly from increased transfers and subsidies, higher debt-service costs as well as additional allocations to some state-owned companies (SOCs). The larger cash deficit led to a larger non-financial public sector borrowing requirement in the first half of fiscal 2019/20 as the borrowing requirement of national government in particular increased notably. National government’s total gross loan debt increased significantly from 56.0% of GDP as at 30 September 2018 to 61.5% of GDP a year later, already surpassing the upwardly revised estimate of 60.8% for the end of fiscal 2019/20 in the 2019 MTBPS.

 

Attachments:

Full Quarterly Bulletin – No 291 – March 2019

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Publish Date: 2019-03-20
Category: Quarterly Bulletins

​The synchronised global economic growth momentum experienced since the fourth quarter of 2016 faded in the second half of 2018. Although real global output growth recovered somewhat to 2.9% in the fourth quarter of the year, this still represented the second-lowest quarterly growth rate in the past two years. The moderate acceleration in the fourth quarter of 2018 resulted mainly from improved output growth in India and Japan, while growth slowed further in the United States (US) and China along with a contraction in world trade volumes.

The international prices of most commodities declined in the fourth quarter of 2018. In particular, the price of Brent crude oil decreased sharply from around US$86 per barrel at the start of October 2018 to below US$50 at the end of December. This contributed to lower inflation rates in advanced economies and emerging markets. However, oil prices have since recovered to around US$65 per barrel, which should exert some upward pressure on inflation.

In South Africa, real economic growth slowed from a revised 2.6% in the third quarter of 2018 to 1.4% in the fourth quarter. The real gross value added (GVA) by the primary sector contracted for a fourth successive quarter, while output growth slowed in the secondary and tertiary sectors. For 2018 as a whole, growth in real gross domestic product (GDP) moderated to 0.8% from an upwardly revised 1.4% in 2017. South Africa’s GDP per capita has decreased since 2015, consistent with the current downward phase of the business cycle.

The contraction in the real GVA by the primary sector in the final quarter of 2018 resulted from a further decline in the real output of the mining sector, while real agricultural output increased at a slower pace. Mining output was impacted by renewed electricity load-shedding in the final two months of the year, while gold production in particular was adversely affected by strike action. Mining and agricultural output both contracted in 2018.

The slowdown in the real output growth of the secondary sector in the fourth quarter of 2018 resulted from slower growth in manufacturing output as well as in that of the electricity, gas and water sector, while the real GVA by the construction sector contracted further. The increase in manufacturing output was fairly broad-based and supported demand for electricity. The decrease in construction output resulted from reduced residential, non-residential and civil construction activity.

Real output growth in the tertiary sector was slowed by contractions in the real GVA by the commerce and general government services sectors in the fourth quarter of 2018. By contrast, the real output of the transport and finance sectors increased at a faster pace. The real GVA by the commerce sector was suppressed by declines in wholesale and motor trade as well as in catering and accommodation, while activity increased in the retail trade subsector.

Real gross domestic expenditure (GDE) switched from an expansion of 2.1% in the third quarter of 2018 to a contraction of 7.0% in the fourth quarter, largely due to a significant decline in real inventory holdings, particularly in the mining and manufacturing sectors. In addition, real gross fixed capital formation contracted further in the fourth quarter of 2018. This was partly offset by faster growth in the real final consumption expenditure by households and, to a much lesser extent, by general government. Real net exports also contributed significantly to real GDP growth in the fourth quarter of 2018.

The faster growth in real consumption expenditure by households in the fourth quarter of 2018 resulted from rebounds in spending on durable goods and services, while growth in non-durable goods spending accelerated somewhat. Growth in spending on semi-durable goods slowed marginally but remained fairly robust. Household consumption expenditure was supported by faster growth in household debt in the fourth quarter of 2018, with mortgage advances and general loans contributing the most. However, households’ net wealth declined in the fourth quarter of 2018, mainly due to the effect of lower share prices on equity holdings and the increase in household debt.

Real gross fixed capital formation contracted for a fourth successive quarter in the final quarter of 2018 as private business enterprises, public corporations and general government all reduced capital outlays. The contraction in gross fixed capital formation for 2018 as a whole resulted from a marked decline in fixed investment by public corporations and, to a lesser extent, by general government. This reflected funding and governance challenges at public corporations and delays in the commencement and completion of large government infrastructure projects. By contrast, fixed investment by private business enterprises increased further in 2018, albeit at a slower pace than in 2017.

Employment growth remained fairly lacklustre, with more informal sector jobs than formal sector jobs created in the year to the fourth quarter of 2018. In addition, the number of unemployed South Africans increased notably over this period, with the seasonally adjusted unemployment rate rising to a record high of 27.7% in the fourth quarter of 2018.

Nominal wage growth per worker in the formal non-agricultural sector of the economy accelerated in the third quarter of 2018 as public sector wage growth picked up notably following the implementation of the annual public sector wage increase, which included backpay.By contrast, growth in private sector remuneration per worker slowed further in the third quarter. The average wage settlement rate in collective bargaining agreements also moderated from 2017 to 2018. The acceleration in nominal wage growth resulted in an acceleration in formal non-agricultural nominal unit labour cost growth, to 4.8% in the third quarter of 2018.

The inflationary pressures induced by higher domestic fuel prices in the second half of 2018 have dissipated in recent months, with headline consumer price inflation moderating from 5.2% in November 2018 to 4.0% in January 2019. Most measures of producer price inflation were also fairly subdued at the start of 2019. Consumer food price inflation slowed markedly in 2018, to its lowest annual average rate since 2010. Food price inflation slowed further in January 2019 as the acceleration in bread and cereals price inflation was more than offset by a further decline in meat prices. Core inflation slowed to below the midpoint of the inflation target range in 2018, in an environment of muted import price inflation and weak domestic consumer demand.

South Africa’s trade surplus with the rest of the world increased significantly from the third to the fourth quarter of 2018, as the value of merchandise exports increased while that of imports declined. The value of merchandise exports was boosted by higher mining and manufactured export volumes. The decrease in the value of merchandise imports was broad-based as the import volumes of mining, manufactured and agricultural products declined, partly reflecting weak domestic demand. The larger trade surplus coincided with a further narrowing in the shortfall on the services, income and current transfer account, as the deficit on the income account narrowed further following a relatively strong increase in gross dividend receipts, which more than offset the increase in dividend payments. Consequently, the deficit on the current account of the balance of payments narrowed significantly to 2.2% of GDP in the fourth quarter of 2018. However, on an annual basis, the deficit widened from 2.5% of GDP in 2017 to 3.5% of GDP in 2018.

The net inflow of capital on the financial account of the balance of payments decreased for a third successive quarter in the fourth quarter of 2018. However, on an annual basis, the net inflow of capital increased compared to 2017. In the fourth quarter of 2018, other investment liabilities recorded a marked inflow as non-residents extended loans to, and increased their deposits with, the domestic banking sector. By contrast, net direct and portfolio investment recorded outflows.

South Africa’s net international investment position (IIP) increased marginally from the end of June 2018 to the end of September, as the decrease in the value of foreign liabilities narrowly exceeded that in foreign assets. South Africa’s external debt in US dollars, decreased over the same period, mainly due to the revaluation of domestic rand-denominated bonds.

The further marginal decrease in the nominal effective exchange rate (NEER) of the rand in the fourth quarter of 2018 masked continued significant month-to-month volatility. Global economic growth concerns, expected further US interest rate increases as well as concerns around the domestic government deficit and debt trajectory portrayed in the 2018 Medium Term Budget Policy Statement (2018 MTBPS) all negatively affected the NEER in October. In November 2018, the NEER was supported by the US Federal Reserve’s much more dovish tone as well as the 25 basis points hike in the South African Reserve Bank’s (SARB) repurchase rate, before renewed global economic growth concerns and increased emerging market risk aversion led to a depreciation in the exchange value of the rand in December. The NEER then increased notably again in January 2019 as the US Federal Reserve’s tone became increasingly dovish and global trade tensions eased. However, the exchange value of the rand depreciated in February and early March following the resumption of electricity load-shedding and concerns around the financial position of Eskom. South African bond yields followed the movements in the exchange rate of the rand and trended generally lower from late October 2018. However, bond yields increased somewhat in February 2019 following the weakening in the exchange value of the rand.

Year-on-year growth in the broadly defined money supply (M3) remained subdued throughout 2018 and broadly at the same level as in 2017. Muted growth in the deposit holdings of the corporate sector during 2018 reflected subdued financial company deposits in the first half of the year and a moderation in non-financial company deposits towards the year-end amid weak economic growth. Slower wage growth contributed to a further deceleration in the deposit holdings of households, which became more noticeable towards the end of 2018. Growth in bank credit extended to the domestic private sector also remained subdued in 2018 but accelerated somewhat in the second half of the year as growth in loans and advances to households accelerated gradually. Although the acceleration was broad-based among the different credit categories, general loans to households increased notably in 2018, particularly in the fourth quarter. Credit extension to the corporate sector increased only marginally in the fourth quarter of 2018, as demand for loans from non-financial companies declined.

National government finances improved somewhat in the first nine months of fiscal 2018/19 as the cash book deficit was lower than in the corresponding period of the previous fiscal year. Faster growth in revenue outpaced slower growth in expenditure. However, revenue growth was still below the monthly budgeted estimates in the 2018 Budget, partly due to a notable increase in tax refunds as the backlog was reduced. Consistent with the smaller cash book deficit of national government, the non-financial public sector borrowing requirement was much lower in the first nine months of fiscal 2018/19 than in the corresponding period of the previous fiscal year, as the borrowing requirement of consolidated general government decreased notably. By contrast, the cash deficit of the non-financial public enterprises and corporations increased due to lower cash receipts from operating activities and increased expenditure.

The budget for fiscal 2019/20 was delivered in February 2019 against a backdrop of a weaker domestic economic outlook and a challenging fiscal environment due to an expected further large revenue shortfall and increased funding requests from state-owned companies (SOCs). The budget proposed tax and expenditure measures to narrow the deficit and stabilise debt. The consolidated budget deficit is now expected to widen from 3.6% of GDP in fiscal 2016/17 to 4.2% of GDP in fiscal 2018/19 before narrowing to 4.0% of GDP in fiscal 2021/22. The larger deficit is expected to increase government’s net borrowing requirement, necessitating the gross loan debt of national government to rise to 55.6% of GDP at the end of fiscal 2018/19, which is now expected to stabilise at 60.2% of GDP at the end of 2023/24.

Attachments:

Full Quarterly Bulletin – No 290 – December 2018

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Publish Date: 2018-12-14
Category: Quarterly Bulletins

​Following two successive quarters of robust expansion above 4.0%, global economic growth slowed significantly to 2.7% in the third quarter of 2018 as real output growth moderated in both the advanced and emerging market economies. The slowdown in the advanced economies was fairly broad based, with real gross domestic product (GDP) expanding at a slower pace in the United States (US) and the euro area, while contracting anew in Japan. The rapid deceleration in emerging market growth was particularly pronounced in emerging Asia, due to a marked slowdown in India and a further moderation in China – where real GDP growth slowed to below 6.0% for the first time since the global financial crisis. Furthermore, real output declined in emerging Europe, as both the Russian and Turkish economies contracted.

Global consumer price inflation accelerated further in the third quarter of 2018, mainly due to increases in international energy prices – largely natural gas, coal and crude oil – as well as currency depreciations in some emerging markets. The price of Brent crude oil rose further to US$86 per barrel in early October 2018, but then declined sharply to around US$60 per barrel at the end of November following record production by major producers as well as concerns over slowing global demand. Core inflation accelerated somewhat in the US, but remained relatively subdued in most other advanced economies.

Real economic growth in South Africa rebounded in the third quarter of 2018, following the technical recession in the first half of the year. Real GDP increased by an annualised 2.2% in the third quarter, following a revised contraction of 0.4% in the second quarter. Despite a rebound in agricultural output, the real gross value added (GVA) by the primary sector still contracted further as mining production declined sharply. When the volatile primary sector is excluded, real GDP increased by 3.0% in the third quarter, following a marginal decline in the previous quarter.

Growth in the real GVA by the secondary sector accelerated notably in the third quarter of 2018, due to a marked increase in manufacturing output which contributed the most to real GDP growth in the quarter. By contrast, real activity declined in the electricity, gas and water as well as the construction sectors. In line with persistent weak building and construction confidence, the real output of the construction sector contracted anew in the third quarter as civil construction works and non-residential building activity decreased.

The real output of the tertiary sector rebounded from a slight contraction in the second quarter of 2018 to a solid increase in the third quarter, as activity increased in all four of the tertiary subsectors. The real GVA by the commerce sector rebounded after two consecutive quarters of decline, as wholesale and retail trade activity in particular increased notably. The recovery in the transport sector resulted from increased road freight and passenger transport, boosted by the low base in the second quarter due to a nationwide three-week bus strike. The improvement in general government services reflected a slight increase in headcount, while the acceleration in output growth of the finance sector was fairly broad based.

Real gross domestic expenditure (GDE) reverted from a revised contraction in the second quarter of 2018 to an expansion of 3.2% in the third quarter, reflecting a rebound in real final household consumption expenditure and a build-up in real inventories, while growth in the real final consumption expenditure by general government accelerated somewhat. By contrast, net real exports subtracted from growth in real GDP, and real gross fixed capital formation contracted at a faster pace in the third quarter.

Real final consumption expenditure by households advanced by 1.6% in the third quarter of 2018, as spending on non-durable and semi-durable goods increased notably. Consumption expenditure was likely supported by an increase in households’ disposable income over the period. Reduced spending on personal transport equipment resulted in a further contraction in durable goods consumption, albeit at a much slower pace. Real outlays on services also contracted, as spending decreased in four of the six services subcategories. Households’ net wealth decreased in the third quarter of 2018, due to the increase in liabilities outpacing that in financial and non-financial assets. Household asset growth was weighed down by, among other factors, continued negative real house price growth and the general downward trend in the FTSE/JSE All-Share Price Index thus far in 2018.

Real gross fixed capital formation decreased for a third successive quarter in the third quarter of 2018, as capital spending by private business enterprises, and in particular public corporations, contracted notably. Private sector fixed investment was weighed down by reduced spending on transport equipment and non-residential buildings. The marked decline in capital spending by public corporations reflected the constrained financial position of many state-owned companies. By contrast, real gross fixed capital formation by general government increased marginally for a second successive quarter, due to increased capital spending by central and local government on transport equipment and construction works.

Labour market developments continued to reflect the recent weak domestic economic growth outcomes. Enterprise-surveyed formal non-agricultural employment decreased in the second quarter of 2018, largely due to the termination of temporary public sector jobs related to preparatory work for the 2019 general elections. The increase in private sector employment occurred mainly in the tertiary sectors of the economy, while job shedding continued in the goods-producing sectors. Formal non-agricultural labour productivity growth slowed further in the second quarter of 2018 – even more so when excluding the temporary election-related outliers – as year-on-year output growth slowed at a faster pace than that in employment.

South Africa’s official unemployment rate increased from 27.2% in the second quarter of 2018 to 27.5% in the third quarter, and the seasonally adjusted unemployment rate increased to 27.3%. A marked increase in the number of new entrants into the labour market – mainly discouraged work seekers who engaged in renewed job searching – lifted the number of unemployed persons, which increased by more than the number of employed persons. The moderate increase in household-surveyed employment in the third quarter of 2018 occurred mostly in the informal sector, while formal non-agricultural employment decreased.

Nominal remuneration growth per worker in the formal non-agricultural sector of the economy slowed significantly in the second quarter of 2018, while real wages per worker contracted at a faster pace. Remuneration growth moderated in both the private and public sectors, with the latter reflecting the delayed implementation of the annual public sector wage increase. The slowdown in remuneration growth continued to exceed that in real output, causing a further moderation in year-on-year growth in nominal unit labour cost to 3.6% in the second quarter of 2018. Furthermore, average wage settlement rates slowed to 7.2% in the first three quarters of 2018 – the lowest rate since the first quarter of 2012.

Rising domestic inflationary pressures resulted almost exclusively from higher fuel prices in recent months, while the effect of the one percentage point increase in the value-added tax (VAT) rate from April 2018 remained fairly muted in an environment of weak consumer demand. Headline consumer price inflation accelerated from 3.8% in March 2018 to 5.1% in October – largely due to higher goods prices – while services price inflation trended broadly sideways. Consumer food price inflation remained subdued at 2.9% in October 2018, as meat price inflation decelerated further and bread and cereals prices declined at a slower pace. Core inflation slowed marginally and remained below the midpoint of the inflation target range, reflecting the absence of significant underlying inflationary pressures.

South Africa’s trade surplus with the rest of the world more than halved from the second to the third quarter of 2018, as the value of merchandise imports increased more than that of merchandise and net gold exports. The notable increase in merchandise imports was broad based, as manufactured imports rebounded sharply and mineral imports surged, while the value of agricultural imports also increased. The increase in the value of merchandise exports was supported by higher volumes and was also fairly broad based, as mining, manufactured and agricultural exports increased. South Africa’s terms of trade deteriorated in the third quarter of 2018, as the rand price of imported goods and services increased at a faster pace than that of exports. The narrowing in the shortfall on the services, income and current transfer account was not enough to offset the decrease in the trade balance, resulting in a marginal deterioration in the deficit on the current account of the balance of payments, from 3.4% of GDP in the second quarter of 2018 to 3.5% in the third quarter.

The net inflow of capital on South Africa’s financial account of the balance of payments decreased further from the second to the third quarter of 2018. On a net basis, direct and portfolio investment as well as financial derivatives recorded inflows, while other investment recorded an outflow.

South Africa’s positive net international investment position increased significantly from the end of March 2018 to the end of June, as the value of foreign assets increased by much more than the value of foreign liabilities. The depreciation of 10% in the trade-weighted average exchange rate of the rand in the second quarter of 2018 significantly affected both foreign assets and liabilities.

The nominal effective exchange rate (NEER) of the rand decreased marginally further in the third quarter of 2018, amid significant month-to-month volatility due to both domestic and global factors. Domestic concerns included the weak economic growth outlook and the deteriorating fiscal position depicted in the 2018 Medium Term Budget Policy Statement (MTBPS), while tighter global financial conditions and recent downward revisions to economic growth in some of the major economies increased risk aversion towards emerging market economies. In August 2018, the NEER decreased markedly amid a broad emerging market sell-off that was triggered by political and financial instability in Turkey and Argentina. In September, monetary policy tightening in Turkey curbed spill-overs to other emerging market assets, supporting appreciations in the external values of many emerging market currencies, including the rand. Global economic growth concerns again triggered an equity sell-off in October, with emerging markets experiencing the largest sell-off since the so-called ‘taper tantrum’ in May 2013. Consequently, many emerging market currencies, including the rand, came under renewed pressure early in October as investors reallocated funds towards safe-haven assets amid the risk-off sentiment. Financial markets stabilised somewhat in November and the exchange value of the rand appreciated to below R14.00 against the US dollar towards month end. These developments also led to South African government bond yields increasing further up to the end of October 2018, before retracing somewhat to the end of November.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) raised the repurchase rate by 25 basis points to 6.75% in November 2018, citing concerns about medium- to long-term risks to domestic inflation, despite a slight improvement in the near-term inflation outlook. Most short-term money market rates adjusted marginally higher, in line with the increase in the policy rate. Rates on forward rate agreements responded to movements in the exchange rate, increasing up to mid-September 2018 as the exchange value of the rand depreciated, before decreasing again towards the end of November, as the subsequent appreciation in the exchange value of the rand lowered financial market participants’ domestic inflation expectations.

Growth in the broadly defined money supply accelerated in the third quarter of 2018, supported by higher corporate sector deposits amid uncertain financial market conditions. Year-on-year growth in the deposit holdings of non-financial companies accelerated further while that of financial companies rebounded, boosted by a strong increase in foreign currency-denominated deposits following the depreciation in the exchange value of the rand.  Household deposit growth slowed marginally, but still outpaced that of the corporate sector, as banks deliberately increased deposit rates since early 2016. Growth in bank loans and advances extended to the domestic private sector accelerated gradually from January to September 2018, but on average remained below those recorded over the same periods in the previous two years. Credit extension to the corporate sector was supported by the continued gradual acceleration in growth of general loans and instalment sale credit, as well as a strong acceleration in overdrafts. Growth in household credit extension continued to accelerate gradually in the third quarter of 2018, as all the household credit categories recorded higher growth.

National government’s cash book deficit was smaller in the first half of fiscal 2018/19 compared to the first half of the previous fiscal year, as annual growth in revenue accelerated significantly while that in expenditure slowed slightly. Although revenue growth was largely boosted by a notable increase in VAT collections after the one percentage point increase in the VAT rate from April 2018, the 2018 MTBPS noted a sizeable backlog in VAT refunds. In line with the smaller cash book deficit, the non-financial public sector borrowing requirement decreased significantly in the first half of fiscal 2018/19 compared to the same period a year earlier. The cash deficit of consolidated general government decreased markedly, while that of the non-financial public enterprises and corporations increased slightly. National government’s total gross loan debt increased from 52.7% of GDP at the end of March 2018 to 55.2% at the end of September. The 2018 MTBPS projected a rising debt-to-GDP ratio over the medium term – driven by the persistent increase in the budget deficit due to lower real economic growth projections – with national government’s total gross loan debt expected to only stabilise in fiscal 2023/24, at 59.6% of GDP.

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December 2017 – The further development of sectoral financial balance sheets for South Africa’s integrated economic accounts

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Publish Date: 2017-12-14
Category: Quarterly Bulletins
Author: B de Beer and M Kock

​The South African Reserve Bank (SARB) has been advancing the development of sectoral balance sheet statistics for the South African economy within the context of the integrated economic accounts (IEA) framework. These statistics will extend the range of macroeconomic aggregates available for national policy formulation and contribute towards the fulfillment of South Africa’s international statistical commitments. The methodological approach used is aligned with the Group of Twenty (G20)3 Data Gaps Initiative (DGI), in particular recommendation 8 of the second phase of the DGI (DGI-2), which specifically focuses on sectoral balance sheets, flows, and a from-whom-to-whom analysis of stocks and transactions. The goal is to compile a complete and integrated set of sectoral balance sheets and accumulation accounts for South Africa covering the main institutional sectors and financial instrument categories4 as proposed in the System of National Accounts, 2008 (SNA 2008). This note focuses on the progress made with the sectoral financial balance sheet component of the IEA as indicated by the red dotted lines in Figure 1.

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Full Quarterly Bulletin – No 285 – September 2017

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Publish Date: 2017-09-14
Category: Quarterly Bulletins

​Global economic growth accelerated for a third successive quarter in the second quarter of 2017 as real economic activity expanded at a faster pace in most of the advanced economies. In particular, output growth accelerated significantly in the United States (US) and Japan. By contrast, real economic growth in the emerging market economies moderated somewhat, led largely by slower output growth in Brazil, China and India.

Consumer price inflation in the advanced economies moderated somewhat in recent months despite the acceleration in real output growth and tighter labour markets. Inflation also slowed in the emerging market economies. The continued absence of meaningful global inflationary pressures was supported by the sustained low price of crude oil and, more recently, by decreases in the prices of most international commodities in the second quarter of 2017, especially those of metals and agricultural commodities. However, the price of Brent crude oil has rebounded somewhat since the end of June 2017 in response to a higher demand for the commodity, slower growth in the US rig count, and lower oil inventories in the Organisation for Economic Co-operation and Development (OECD) countries.

In South Africa, real gross domestic product (GDP) rebounded in the second quarter of 2017, advancing at an annualised rate of 2.5% following two successive quarters of contraction. The recovery in the second quarter of 2017 reflected a turnaround in the real output of both the secondary and the tertiary sectors. The real gross value added (GVA) by the primary sector advanced at a slightly slower pace as output growth in the mining sector slowed notably. By contrast, real agricultural output increased at a brisk pace, largely on account of the record domestic maize crop.

The rebound in the real output of the secondary sector in the second quarter of 2017 largely reflected an increase in the real GVA by the manufacturing sector following three consecutive quarters of contraction. However, confidence among manufacturers remained very low despite the increase in output. Growth in the output of the sector supplying electricity, gas and water accelerated notably in the second quarter of 2017, underpinned by increased mining and manufacturing output. The GVA added by the construction sector contracted further, consistent with weak building and civil construction confidence.

The recovery in the real output of the tertiary sector in the second quarter of 2017 resulted largely from increased real economic activity in the commerce and finance sectors. Robust growth in real retail trade sales underpinned the turnaround in the commerce sector while output growth in the finance sector was boosted by increased commercial banking activity and trading activity in the equity market. Real output growth in the transport sector also rebounded in the second quarter of 2017 due to increased activity in land transport. By contrast, the real GVA by the general government subsector contracted further.

Growth in real gross domestic expenditure (GDE) accelerated to an annualised 2.4% in the second quarter of 2017. The acceleration resulted primarily from a rebound in the real final consumption expenditure by households and, to a lesser extent, in that by general government. Real gross fixed capital formation contracted anew in the second quarter of 2017 while the pace of real inventory accumulation slowed.

Viewed from the expenditure side, real final consumption expenditure by households contributed significantly to real GDP growth in the second quarter of 2017, while real government consumption expenditure and real net exports contributed only marginally. By contrast, real capital expenditure subtracted from GDP growth.

Real final consumption expenditure by households increased sharply in the second quarter of 2017 after contracting in the first quarter. Households’ real spending on semi-durable goods   in particular rebounded strongly, reflecting brisk growth in spending on most categories.  Real expenditure on both durable and non-durable goods also rebounded in the second quarter of 2017.  However, real spending by households on services contracted for the first time since the fourth quarter of 2015, lowered by reduced outlays on services related to transport and communication, recreation and entertainment as well as education. The surge in real household consumption expenditure was supported by an increase in households’ real disposable income in the second quarter of 2017.

Real gross fixed capital formation contracted anew in the second quarter of 2017. Following a brief pickup in the first quarter of 2017, fixed investment spending by the private sector extended its downward trend in the second quarter as capital investment in transport equipment as well as in residential and non-residential buildings contracted. In addition, real capital outlays by public corporations contracted for a fourth successive quarter. By contrast, fixed investment spending by general government increased at a fairly brisk pace.

Amid declining fixed capital investment and persistently weak business and consumer confidence, the domestic economy failed to create meaningful employment opportunities. Formal non-agricultural employment remained virtually unchanged from the fourth quarter of 2016 to the first quarter of 2017 as the marginal increase in private sector employment was almost fully offset by a further decrease in public sector employment. Even though informal employment increased significantly in the year to the second quarter of 2017, the notable increase in the number of unemployed persons resulted in a further rise in the seasonally adjusted unemployment rate, to 27.6%.

Real wage growth per worker accelerated in the first quarter of 2017 as growth in the nominal remuneration per worker accelerated alongside a moderation in consumer price inflation. Growth in labour productivity in the formal non-agricultural sector of the economy remained lacklustre while growth in nominal unit labour cost accelerated somewhat in the first quarter of 2017 but nevertheless remained within the inflation target range.

Consumer price inflation has slowed markedly in 2017 thus far, approaching the midpoint of the inflation target range at 4.6% in July. Domestic price pressures eased across a broad range of product categories, with core inflation also moderating to its lowest level in four-and- a-half years.

The value of exported gold and merchandise goods increased at a slightly faster pace than that of merchandise imports, resulting in a widening of South Africa’s trade surplus with the rest of the world in the second quarter of 2017. The value of both mining and manufacturing exports increased, the latter following three successive quarterly declines. The value of mining imports increased despite a decline in the value of crude oil imports, while manufacturing imports were boosted by higher values of imported machinery, transport equipment and textiles.

The shortfall on the services, income and current transfer account widened further in the second quarter of 2017, resulting in the deficit on the current account of the balance of payments widening from 2.0% of GDP in the first quarter of 2017 to 2.4% of GDP in the second quarter, despite the improved trade surplus.

Although the net inflow of capital on South Africa’s financial account of the balance of payments declined from the first to the second quarter of 2017, the shortfall on the current account was mainly financed through net portfolio investment inflows. Non-resident investors continued to acquire South African debt securities in particular, driven largely by the ongoing global search for yield. Following four consecutive quarterly declines, South Africa’s positive net international investment position (IIP) improved significantly from 3.6% of GDP at the end of December 2016 to 6.6% at the end of March 2017 as the market value of the country’s foreign assets increased much more than that of its foreign liabilities.

Growth in the broadly defined money supply remained subdued in the second quarter of 2017. Although growth in the deposit holdings of households slowed further, it nevertheless surpassed that of the corporate sector. However, quarter-to-quarter seasonally adjusted and annualised growth in total money supply decelerated in the second quarter of 2017 – the first contraction since the final quarter of 2009. Bank credit extension to the domestic private sector was subdued in the second quarter of 2017. Growth in loans and advances to the household sector remained lacklustre while corporate credit growth slowed further. In real terms, year-on- year growth in total loans and advances continued to fluctuate at around zero since early 2016.

The external value of the rand remained broadly unchanged on a trade-weighted basis in the second quarter of 2017. However, movements in the domestic currency diverged notably against the major advanced-economy currencies as the US dollar in particular weakened further over the period following continued political uncertainty in that country. Between June and August 2017, the trade-weighted exchange value of the rand weakened somewhat following the decision by a prominent international credit rating agency to downgrade South Africa’s sovereign foreign credit rating, the release of disappointing domestic economic data as well as concerns over the Public Protector’s recommendations regarding the central bank’s mandate. These developments occasionally interrupted the broad downward trend in South African government bond yields that prevailed thus far in 2017. The weaker exchange value of the rand, coupled with a surge in the share prices on international bourses and those of companies in the domestic resources sector, lifted the share prices on the JSE Limited (JSE) to an all-time high on 25 August 2017.

In an environment of weak output growth and an improved inflation outlook, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lowered the repurchase rate by 25 basis points to 6.75% with effect from 21 July 2017. As usual, money-market rates across the various maturities followed this reduction in the repurchase rate, while the prime lending rate and the rates on the different types of loans offered by commercial banks were also adjusted lower. The level of the yield curve moved higher and its slope has steepened in recent months as bond yields in the medium- to long-term maturity range were negatively affected by political developments and the weaker rand while yields at the extreme short end of the curve decreased following the decline in the policy rate. Consequently, the yield gap, measured as the difference between yields at the extreme long and short ends of the curve, widened notably.

National government’s finances were somewhat strained in the first quarter of fiscal 2017/18. Although government expenditure was kept below budgeted projections, revenue increased at a much slower pace than expenditure following weak real economic activity. This resulted in a higher cash book deficit compared with the same period a year earlier. The revenue shortfall resulted from lower-than-projected collections on all tax categories, in particular on taxes related to international trade and transactions.

The non-financial public sector borrowing requirement increased in the first quarter of fiscal 2017/18, largely due to the higher cash deficits of non-financial public enterprises and corporations as well as of national government. The total gross loan debt of national government increased to 51.6% of GDP at the end of June 2017 compared with 47.8% a year earlier, largely due to an increase in the stock of domestic debt.

 

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Full Quarterly Bulletin – No 284 – June 2017

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Publish Date: 2017-06-20
Category: Quarterly Bulletins

​Global economic activity expanded at a faster pace in the first quarter of 2017 than in the final quarter of 2016, supported by stronger growth in emerging market economies. Output growth accelerated meaningfully in Brazil, China, India and Russia. By contrast, real economic growth moderated in the advanced economies, led by a loss of momentum in the United States (US) and the United Kingdom (UK).

International commodity prices were elevated in the first quarter of 2017, particularly for energy as well as metals and minerals. The prices of most commodities have since softened, especially for crude oil, owing to increased US shale production as well as market disappointment with the extent of the production cuts agreed to by the major oil producers. The uptick in these commodity prices caused advanced economy inflation to accelerate in the first quarter, even as core inflation remained fairly subdued. By contrast, inflation in emerging market economies benefited from stronger exchange rates and the effects of previous policy adjustments.

The South African economy has entered a technical recession, having contracted for a second consecutive quarter in the first quarter of 2017. Real gross domestic product (GDP) decreased at an annualised rate of 0.7% in the first quarter of 2017, as the real output of the secondary sector contracted further while that of the tertiary sector declined for the first time since the second quarter of 2009. By contrast, the real gross value added by the primary sector rebounded strongly in the first quarter of 2017, with significant increases in both mining and agricultural output. Mining production was supported by increased global demand and higher international commodity prices, while the end of the drought underpinned the strong recovery in agricultural output.

The decline in the real output of the secondary sector in the first quarter of 2017 was broad-based. Manufacturing production contracted for a third successive quarter as weak domestic demand and low business confidence continued to suppress output. Real output also contracted in the sector supplying electricity, gas and water as well as in the construction sector.

Real economic activity contracted in all the tertiary subsectors in the first quarter of 2017. The gross value added by the commerce sector decreased notably as wholesale and retail trade activity contracted on account of weak demand. Real output in the transport sector was weighed down by lower activity in the road and rail passenger subsector, while real output in the finance sector contracted largely due to lower non-interest income of commercial banks and reduced trading activity in the derivatives market.

Although real production contracted further, real gross domestic expenditure (GDE) switched from a contraction in the fourth quarter of 2016 to an annualised increase of 1.2% in the first quarter of 2017. The expansion resulted from the accumulation of real inventory holdings, largely in the wholesale trade sector, and from an increase in real gross fixed capital formation. By contrast, real final consumption expenditure by households contracted notably while that by general government also decreased in the first quarter of 2017.

Viewed from the expenditure side, real net exports and real final consumption expenditure by households subtracted significantly from growth in real GDP in the first quarter of 2017, while the change in real inventories made the largest positive contribution.

Real final consumption expenditure by households contracted in the first quarter of 2017, following three consecutive quarters of expansion. Real spending on semi-durable goods in particular contracted sharply, exacerbated by strong sales in the fourth quarter of 2016 following extended Black Friday promotions. Households’ real expenditure on non-durable goods also contracted notably, as spending on food, beverages and tobacco as well as on petroleum products declined. In addition, real outlays by households on durable goods contracted anew in the first quarter of 2017 following a moderate increase in the final quarter of 2016. Real spending on services advanced further in the first quarter of 2017, albeit at a slower pace. The contraction in households’ real disposable income in the first quarter of 2017 curtailed their ability to spend.

Real gross fixed capital formation increased at a slower pace in the first quarter of 2017. Following five consecutive quarters of contraction, growth in real capital spending by the private sector turned positive, mainly due to increased capital outlays on residential buildings and on machinery and equipment. Growth in fixed investment spending by general government slowed but remained fairly brisk. By contrast, real fixed capital formation by public corporations contracted in the first quarter of 2017.

Formal non-agricultural employment increased marginally by 0.2% on an annual average basis in 2016. Despite the contraction in real output, the private sector nevertheless managed to create new employment opportunities in the fourth quarter of 2016, while the decrease in public sector employment resulted largely from the termination of the contracts of a large number of temporary municipal-election workers. The number of unemployed South Africans looking for work rose at a faster pace than the number of employed persons, resulting in a further increase in the seasonally adjusted unemployment rate, to 27.3% in the first quarter of 2017.

Real wage growth per worker slowed notably in 2016 as nominal remuneration per worker moderated somewhat while consumer price inflation accelerated markedly. When adjusting for election-related employment, growth in labour productivity in the formal non-agricultural sector moderated to 0.7% in the fourth quarter of 2016 and to 0.4% in 2016 as a whole. Growth in nominal unit labour cost moderated to 4.7% in the fourth quarter of 2016, remaining well within the inflation target range.

Headline consumer price inflation slowed from a recent peak of 6.8% in December 2016 to 5.3% in April 2017. The moderation in consumer price inflation was fairly broad-based, as the slowdown in domestic food price inflation, weak consumer demand and the continued benefit from currency appreciation in 2016 all contributed to easing inflationary pressures. Core inflation also moderated to its lowest level in 51 months in April 2017.

The external value of the rand appreciated further on a trade weighted basis up to the final week of March 2017, buoyed by higher international commodity prices and prospects of improved global and domestic economic growth. However, heightened domestic political uncertainty at the end of March resulted in a sharp depreciation in the external value of the rand and culminated in two prominent international credit rating agencies downgrading South Africa’s long-term foreign currency credit rating to sub-investment grade in April. Subsequently, the external value of the rand appreciated again, supported by the continued search for higher yields by international investors. South Africa’s sovereign credit rating was also downgraded by a third rating agency in June, but this rating remained investment grade.

South Africa’s trade surplus was sustained for a second consecutive quarter in the first quarter of 2017. The value of net gold and merchandise exports increased slightly in the first quarter of the year alongside a marginal increase in the value of merchandise imports. Mining exports increased for a second successive quarter while the value of manufacturing exports decreased for a third successive quarter, in step with lower manufacturing output. The higher value of merchandise imports was underpinned by increased imports of crude and refined oil-products.

The shortfall on the services, income and current transfer account widened in the first quarter of 2017, largely due to a widening in the net income deficit following a significant decrease in dividend receipts from abroad. Combined with the broadly unchanged trade surplus, this led to a widening in the deficit on the current account of the balance of payments, from 1.7% of GDP in the fourth quarter of 2016 to 2.1% of GDP in the first quarter of 2017.

The financing of the current account shortfall through the financial account of the balance of payments mainly took the form of net portfolio and other investment inflows in the first quarter of 2017. South Africa’s net international investment position retreated further to 3.6% of GDP at the end of December 2016, as the market value of the country’s foreign assets declined at a much faster pace than that of its foreign liabilities.

Growth in money supply moderated in the first quarter of 2017 and remained broadly aligned with growth in nominal GDP. The deposit holdings of households continued to grow at a faster pace than those of the corporate sector. Growth in the deposit holdings of non-financial companies in particular slowed notably. Growth in aggregate bank credit extended to the domestic private sector remained weak in the first quarter of 2017, largely due to subdued growth in loans and advances to the household sector. Nevertheless, credit extension to the corporate sector also advanced at a slower pace in the first quarter of 2017.

South African bond yields initially trended lower in the opening months of 2017, reflecting expectations of lower future inflation and remaining in line with movements in the rand per US dollar exchange rate. However, between the final week of March and the first week of April, this downward trend was briefly interrupted in response to domestic political developments and South Africa’s sovereign credit rating downgrades. Bond yields subsequently trended lower again as the international search for yield continued. Share prices on the JSE Limited (JSE) rose in the first five months of 2017, largely due to a notable increase in the share prices of industrial companies, before receding more recently.

National government revenue and expenditure for the full 2016/17 fiscal year were both lower than the original 2016 Budget projections and the revised 2017 Budget projections. The revenue shortfall resulted largely from lower-than-expected collections of personal income tax, import value added tax and import duties. Revenue undershot projections by a wider margin than expenditure, resulting in a marginally higher cash book deficit. However, as a ratio of GDP, the cash book deficit amounted to 3.9% in fiscal 2016/17 compared with 4.2% in the previous fiscal year. The non-financial public-sector borrowing requirement narrowed as national government experienced a smaller cash shortfall and local governments experienced higher cash surpluses compared with the previous fiscal year. By contrast, non-financial public enterprises and corporations recorded a larger cash deficit in fiscal 2016/17. Government revenue collection could remain under pressure given the contraction in real output and consumer spending in the first quarter of 2017.

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