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South African Reserve Bank
 
 
     
 
 

Publication Detail 

Title:
Full Quarterly Bulletin – No 293 – September 2019
Publish Date:
2019-09-25
Publishing Approval:
2
Category:
Quarterly Bulletins

Global economic growth moderated from 3.4% in the first quarter of 2019 to 2.9% in the second quarter, largely due to a slowdown in the major advanced economies. Among emerging market economies, real economic growth accelerated in emerging Europe and Latin America, but slowed in emerging Asia. In China, real output expanded at the slowest pace since the fourth quarter of 2008. Globally, the impact of higher trade tariffs and ongoing trade tensions weighed on manufacturing production and export volumes in many countries.

Global inflationary pressures remained subdued in the second quarter of 2019, particularly in the advanced economies. The international prices of agricultural commodities remained broadly unchanged over this period, while those of metals, minerals and energy increased slightly. The price of Brent crude oil peaked at around US$74 per barrel in mid-May 2019, before trending lower to around US$60 per barrel by early-September as fears of a further slowdown in the global economy intensified.

In South Africa, real economic activity rebounded in the second quarter of 2019, in the absence of the severe electricity-supply disruptions that hampered output in the first quarter of the year. Real gross domestic product (GDP) advanced at an annualised rate of 3.1% in the second quarter, after contracting by a similar magnitude in the previous quarter. The rebound was broad-based with real output increasing in the primary, secondary and tertiary sectors.

The real gross value added (GVA) by the primary sector increased notably in the second quarter of 2019, following five consecutive quarters of contraction. The marked turnaround in mining output was fairly broad-based and contributed the most to overall real GDP growth in the second quarter. Despite the rebound, mining output for the first half of the year was still below that in the first half of 2018. Real agricultural output contracted further in the second quarter of 2019, albeit at a much slower pace, mostly due to lower production of field crops and horticultural products.

Following a sharp contraction in the first quarter of 2019, the real output of the secondary sector increased moderately in the second quarter as continuous electricity supply was restored, supported by Unit 3 of Eskom’s Medupi Power Station becoming operational. The real GVA by the manufacturing sector as well as the sector supplying electricity, gas and water reverted from sharp contractions to expansions, while real activity in the construction sector decreased for a fourth successive quarter.

The real GVA by the tertiary sector reverted from a slight contraction in the first quarter of 2019 to an expansion in the second quarter, as activity in the commerce, finance and general government services sectors increased notably. The latter mainly reflected a further increase in temporary election-related employment. By contrast, activity in the transport, storage and communication services sector decreased marginally further, largely due to subdued land transportation and transport support services.

Real gross domestic expenditure (GDE) increased at a much faster pace of 8.7% in the second quarter of 2019. The acceleration reflected increases in all of the expenditure components, in particular the accumulation of real inventory holdings. Real gross domestic final demand rebounded from a slight decrease in the first quarter of 2019 as both real final consumption expenditure by households and real gross fixed capital formation reverted to increases and as real final consumption expenditure by general government advanced at a faster pace. Real net exports detracted significantly from real GDP growth for a second successive quarter, as import volumes increased while export volumes contracted marginally further.

The increase in real household consumption expenditure in the second quarter of 2019 reflected sharp rebounds in real outlays on durable and semi-durable goods, while spending on non-durable goods increased at a faster pace and that on services moderated. Household debt increased at a slightly faster pace than nominal disposable income with the ratio of debt to disposable income edging higher to 72.7% in the second quarter of 2019. Nevertheless, households’ net wealth increased further over the period as the increase in household debt was outweighed by the increase in the market value of assets, mainly reflecting a further increase in the value of equity portfolios and housing stock.

Real gross fixed capital formation increased in the second quarter of 2019, following five consecutive quarterly contractions. The turnaround resulted from a sharp rebound in real fixed investment by private business enterprises – from a very low base – which mainly reflected increased capital spending on machinery and other equipment. By contrast, real capital outlays by public corporations contracted anew after increasing notably in the first quarter, while that by general government decreased further in a constrained fiscal environment.

South Africa’s official unemployment rate increased markedly to 29.0% in the second quarter of 2019 – the highest since the inception of the Quarterly Labour Force Survey in 2008. The unemployment rate was lifted by a significant number of new entrants and previously discouraged work-seekers actively searching for jobs which entered the labour market and elevated the number of unemployed people to a new all-time high. This possibly reflected optimism around the May 2019 national elections as well as more strain on household finances. Household-surveyed employment increased marginally in the second quarter of 2019, mostly due to more informal sector jobs.

Wage growth in the formal non-agricultural sector of the economy slowed further in the first quarter of 2019. This reflected a marked slowdown in nominal private sector remuneration growth per worker, while that in the public sector accelerated. In the first half of 2019, the average nominal wage settlement rate in collective bargaining agreements decreased to its lowest level since the second quarter of 2007 in an environment of generally weak output and employment growth as well as relatively subdued consumer price inflation. The slower wage growth resulted in a significant moderation in formal non-agricultural nominal unit labour cost in the first quarter of 2019.

Domestic inflationary pressures initially increased somewhat since January 2019, largely due to higher international crude oil prices at the time and, to a lesser extent, also because of the earlier depreciation in the exchange value of the rand. As such, most measures of producer price inflation accelerated in the first four months of the year, before slowing somewhat thereafter. Headline consumer price inflation has fluctuated at or below the midpoint of the inflation target range thus far in 2019, slowing to 4.0% in July. Domestic food price inflation has started to accelerate gradually in recent months, following a prolonged period of muted food price pressures. Core inflation has remained fairly muted below the midpoint of the inflation target range for a prolonged period, suggesting the absence of meaningful underlying inflationary pressures in the domestic economy.

South Africa’s trade balance with the rest of the world switched from a surplus of R41.9 billion in the first quarter of 2019 to a deficit of R27.2 billion in the second quarter, as the increase in the value of net gold and merchandise exports was less than that of imports. The higher value of merchandise imports reflected a rebound in the importation of mining, manufacturing and agricultural products. The value of mining imports was boosted by a substantial increase in crude oil and refined petroleum products, while that of manufacturing imports emanated mainly from the increased importation of machinery and electrical equipment as well as chemical products. The higher value of merchandise exports reflected a recovery in mining and manufacturing exports in the second quarter of 2019.

The deterioration in the trade balance in the second quarter of 2019 was contrasted by a smaller shortfall on the services, income and current transfer account, largely due to a narrowing in the income deficit. The deficit on the current account of the balance of payments nevertheless widened notably from 2.9% of GDP in the first quarter of 2019 to 4.0% of GDP in the second quarter.

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

South Africa’s positive net international investment position increased notably from the end of December 2018 to the end of March 2019, as foreign assets increased more than foreign liabilities. The strong increase in the value of foreign assets was broad-based among the functional categories and was to a large extent driven by the significant rebound in global equity markets in the first quarter of 2019. South Africa’s external debt increased in the three months to the end of March 2019, largely due to an increase in rand-denominated debt as non-residents purchased domestic government bonds on a net basis.

The nominal effective exchange rate (NEER) of the rand increased, on balance, in the second quarter of 2019, following two consecutive quarterly decreases. However, the NEER decreased in May 2019 amid continued economic policy uncertainty following the national elections and together with the more constrained financial position of South Africa’s major state-owned companies (SOCs). The exchange value of the rand appreciated towards the end of the second quarter and early in the third quarter of 2019, along with most other emerging market currencies amid expectations of an interest rate reduction in the United States (US), which materialised on 31 July. However, the exchange value of the rand depreciated when the US Federal Reserve downplayed prospects for further interest rate cuts and with the focus shifting to domestic policy uncertainty, while the announcement of additional government support to Eskom spurred speculation of sovereign credit rating downgrades. Early in August 2019, the escalation in global trade tensions and the depreciation of the Chinese yuan to above ¥7 to the US dollar contributed to the further depreciation in the exchange value of the rand to around R15.50 against the US dollar.

South African government bond yields trended generally lower from October 2018 to mid-July 2019, initially along with the appreciation in the exchange value of the rand and later tracking international bond yields lower as weak global economic growth raised expectations of interest rate cuts by some central banks. However, domestic yields then increased sharply up to mid-August, in response to, among other factors, government’s recapitalisation of Eskom, notable net sales of bonds by non-residents and the depreciation in the exchange value of the rand.

Risk aversion in the run-up to the May 2019 national elections boosted year-on-year growth in the broadly defined money supply (M3) to a multi-year high in the second quarter of 2019. The deposits of financial companies led the acceleration, with that of non-financial companies increasing at a more subdued pace. Growth in the deposit holdings of the household sector, which has slowed in recent years, also edged higher in the first half of 2019, reflective of banks’ continuous efforts to attract and retain deposits. Growth in bank credit extended to the domestic private sector accelerated further in the second quarter of 2019, as the gradual acceleration in loans and advances to households continued and credit extension to the corporate sector quickened. Although the acceleration was fairly broad-based among the different credit categories, growth in mortgage advances remained more subdued than that in the unsecured credit categories.

National government’s cash book deficit more than doubled in the first quarter of fiscal 2019/20 from a year earlier, as growth in expenditure far outpaced that in revenue. The continued shortfall in revenue resulted from, among other factors, generally weak domestic economic activity and higher tax refunds. The larger cash deficit resulted in a larger non-financial public sector borrowing requirement in the first quarter of fiscal 2019/20, as the cash deficits of both consolidated general government and the non-financial SOCs increased. The cash deficit of the non-financial SOCs more than tripled year on year as cash receipts from operating activities decreased markedly, reflecting continued constrained operations. National government’s total gross loan debt increased significantly to 58.3% of annual GDP as at 30 June 2019, already above the February 2019 Budget’s projection of 56.2% for the end of fiscal 2019/20. 

 
 
     
 
 
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