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South African Reserve Bank

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Full Quarterly Bulletin – No 288 – June 2018
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Quarterly Bulletins

Global economic growth accelerated to a robust 4.3% in the first quarter of 2018. However, the global economic expansion became less synchronised as output growth accelerated in   the emerging market economies while slowing notably in the major advanced economies. Similarly, export volumes in the emerging market economies increased strongly while those in the advanced economies remained broadly unchanged. Global inflationary pressures remained fairly benign in the first quarter of 2018, notwithstanding the significant increase in international crude oil prices since mid-2017.

South Africa’s real gross domestic product (GDP) contracted by an annualised 2.2% in the first quarter of 2018 despite a notable improvement in domestic business and consumer confidence. The contraction was fairly broad-based, with economic activity shrinking in both the primary and secondary sectors while advancing at a slower pace in the tertiary sector.

The real output of the primary sector contracted markedly in the first quarter of 2018 as both agricultural and mining output decreased sharply. When excluding the usually more volatile primary sector, the real output of the non-primary sector still contracted by 0.8% in the first quarter.

The real gross value added (GVA) by the secondary sector reverted from a fairly brisk increase in the fourth quarter of 2017 to a contraction in the first quarter of 2018, as output declined in all three of the subsectors. Manufacturing production decreased notably in the first quarter of 2018, led by a sharp contraction in non-durable goods production, while the seasonally adjusted utilisation of manufacturing production capacity also receded over the period. The real output of the sector supplying electricity, gas and water decreased marginally, likely suppressed by lower demand from the electricity-intensive mining and manufacturing sectors. The real GVA by the construction sector also contracted further, marking the 12th consecutive quarter in which this sector has not contributed to overall economic growth.

The slowdown in real output growth of the tertiary sector in the first quarter of 2018 could largely be attributed to a contraction in the real GVA by the commerce sector, while output growth moderated in both the finance and transport sectors. By contrast, the real output of the government services sector accelerated slightly. The contraction in the real GVA by the commerce sector resulted from lower activity in the wholesale, retail and motor trade subsectors.

Growth in real gross domestic expenditure (GDE) slowed significantly from 6.9% in the final quarter of 2017 to 1.0% in the first quarter of 2018, as growth moderated across all of the expenditure components. Net exports and real gross fixed capital formation subtracted from real GDP growth in the first quarter of 2018, while real final consumption expenditure by households made the largest positive contribution.

Growth in real final consumption expenditure by households moderated significantly in the first quarter of 2018. Base effects partly exacerbated the contraction in households’ real spending on durable and semi-durable goods following robust increases in the fourth quarter of 2017 which were supported by substantial ‘Black Friday’ promotions. Real outlays by households on non-durable goods increased at a slower pace, while real spending on services – the largest component of household consumption expenditure – increased fairly briskly. Growth in household consumption expenditure was inhibited by notably slower growth in households’ real disposable income.

Real gross fixed capital formation contracted anew in the first quarter of 2018 as capital spending by both the private sector and general government decreased. Fixed capital outlays by public corporations increased for a second successive quarter, albeit at a very moderate pace. Fixed investment spending continued to be hampered by the constrained fiscal space, policy uncertainty (in the mining sector in particular), and very weak civil construction confidence.

Employment growth slowed further in the year to the first quarter of 2018, with most of the limited job creation occurring in the informal sector. The decrease in South Africa’s seasonally adjusted unemployment rate to 26.3% in the first quarter of 2018 was largely due to a marked increase in the number of discouraged job seekers. Enterprise-surveyed formal non-agricultural employment decreased marginally in the fourth quarter of 2017 due to job losses in the private sector.

Year-on-year growth in labour productivity in the formal non-agricultural sector of the economy accelerated further in the fourth quarter of 2017 when excluding the temporary election-related outliers. This improvement in labour productivity growth assisted in the further moderation in the rate of increase in nominal unit labour cost to 4.9% over the same period. Annual average growth in formal non-agricultural nominal unit labour cost has fluctuated in a very narrow range since 2013 and slowed marginally to 5.2% in 2017.
Domestic consumer price inflation slowed further in the first quarter of 2018 to a low of 3.8% in March. The earlier appreciation in the exchange value of the rand continued to exert downward pressure on goods prices, while food and services price inflation also moderated. Core inflation slowed further to a six-year low of 4.1% in March 2018. However, consumer price inflation accelerated in April following the increase in the value-added tax (VAT) rate and higher fuel prices. Encouragingly, average headline inflation expectations receded to multi-year lows in the first quarter of 2018 the first time since 2007 that expectations across all four time horizons fell below the 6% upper limit of the inflation target range.

Following seven consecutive quarterly surpluses, South Africa’s trade balance with the rest of the world switched to a deficit in the first quarter of 2018 as the value of net gold and merchandise exports decreased much more than that of merchandise imports. The value of mining exports in particular receded notably, weighed down by a sharp decline in the rand price of mining commodities which contributed to a significant deterioration in South Africa’s terms of trade. Despite a slight narrowing of the shortfall on the services, income and current transfer account, the worsening of the trade balance resulted in a marked deterioration of the deficit on the current account of the balance of payments, to 4.8% of GDP in the first quarter of 2018.

The net inflow of capital on South Africa’s financial account of the balance of payments increased further from the fourth quarter of 2017 to the first quarter of 2018, driven largely by continued sizable net portfolio investment inflows. Non-residents’ net purchases of domestic debt securities were slightly more than their net purchases of domestic equity securities over the period. South Africa’s positive net international investment position (IIP) almost halved from the end of September 2017 to the end of December, as the value of foreign liabilities increased while that of foreign assets decreased. The decline in the value of foreign assets was exacerbated by the sharp appreciation in the exchange value of the rand in the fourth quarter of 2017, as South Africa’s foreign assets have a fairly large foreign-currency exposure.

The external value of the rand increased by a further 1.8% on a trade-weighted basis in the first quarter of 2018, supported by government’s renewed commitment to fiscal consolidation in the February Budget, the marked improvement in domestic business and consumer confidence, and the confirmation of South Africa’s investment-grade credit rating by Moody’s Investor Services, which also revised the credit outlook from negative to stable. Domestic money market rates and South African government bond yields also declined over this period, in step with the appreciation in the exchange value of the rand and lower realised and expected consumer price inflation.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) reduced   the repurchase rate by 25 basis points to 6.50% with effect from 29 March 2018 as the inflation outlook improved and risks to the forecast diminished. This narrowed the interest rate differential between South Africa and the advanced economies, while the United States (US)- China trade dispute, higher international crude oil prices, and the concomitant increase in global inflation expectations, as well as an interest rate increase by the US Federal Reserve (Fed), all led to decreased appetite for emerging market assets in general. Consequently, the rand depreciated against most currencies in April and May 2018 while South African government bond yields increased. After reaching an all-time high in January 2018, the share prices of companies listed on the JSE Limited (JSE) declined notably in subsequent months, mainly impacted by the appreciation in the exchange value of the rand in January and February as well as lower international share prices. Share prices have, however, recovered somewhat since the beginning of April.

Growth in the broadly defined money supply remained subdued in the first quarter of 2018,   and closely aligned to growth in nominal GDP. Although growth in the deposit holdings of the household sector moved sideways in the first four months of the year, it remained above that of the corporate sector. Year-on-year growth in long-term deposits decelerated markedly since November 2017, driven by heightened political uncertainty at the time. Concurrently, growth in short- and medium-term deposits accelerated significantly and remained fairly brisk up to April 2018. Growth in bank credit extended to the domestic private sector moderated somewhat in the first four months of 2018. Credit extension to the corporate sector slowed notably over this period, partly impacted by the implementation of International Financial Reporting Standard (IFRS) 9 from January 2018. Growth in loans and advances to the household sector remained subdued but continued to trend gradually upwards thus far in 2018.

The cash book deficit of national government was significantly larger in fiscal 2017/18 than originally budgeted, as annual growth in revenue was much lower than expenditure. The revenue shortfall was R50.7 billion for the full fiscal year; it resulted mainly from lower-than-expected personal income tax (PIT) and VAT collections. The non-financial public sector borrowing requirement increased considerably in fiscal 2017/18, primarily due to the larger cash deficits of both national government and the non-financial public enterprises and corporations. In order to finance the larger borrowing requirement, the total gross loan debt of national government increased to 52.7% of GDP as at 31 March 2018, with domestic debt accounting for 98% of the total.
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