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International energy prices increased notably in the second quarter of 2018, underpinned by higher prices of natural gas and oil. The price of Brent crude oil increased by more than 60% between June 2017 and May 2018, as supply disruptions and geopolitical tensions continued to boost prices. The higher energy prices contributed to an acceleration in headline consumer price inflation in advanced and emerging market economies, with the latter also affected by currency weakness.

The South African economy entered a technical recession for the first time since 2009, as real gross domestic product (GDP) contracted further at an annualised rate of 0.7% in the second quarter of 2018 following a revised decline of 2.6% in the first quarter. Excluding agriculture, real output increased marginally by 0.1% following a decline of 1.7% in the previous quarter. When measured over four quarters, growth in real GDP halved to only 0.4% in the second quarter, while the average level of real output was only 0.6% higher in the first half of 2018 than in the corresponding period of 2017.

The real output of the primary sector contracted further in the second quarter of 2018 as agricultural output again decreased sharply, owing to the lower production of horticultural products and in particular field crops, in part due to a delay in the harvesting of maize. Mining production rebounded following two consecutive quarters of contraction.

The real gross value added (GVA) by the secondary sector increased marginally in the second quarter of 2018 after contracting in the first quarter, as real activity in the electricity, gas and water; and the construction sectors increased. By contrast, real activity in the manufacturing sector contracted marginally further, impacted by higher input costs and weak domestic demand. Following five consecutive quarters of contraction, real activity in the construction sector increased in the second quarter of 2018 as activity in non-residential buildings and civil construction works improved, despite building and civil construction confidence remaining weak.

The real output of the tertiary sector contracted marginally in the first quarter of 2018, as declines in the real GVA by the transport, commerce and general government services sectors outweighed slightly faster output growth in the finance sector. The contraction in the transport sector was driven by reduced rail and road freight transport as well as a marked decline in road passenger transport following the three-week nationwide bus strike. Real activity in the commerce sector was affected by lower retail and vehicle sales.

Real gross domestic expenditure reverted from a slight increase in the first quarter of 2018 to a contraction of 3.4% in the second quarter, as real final household consumption expenditure and real gross fixed capital formation contracted along with a notable rundown of inventories. By contrast, net real exports and, to a much lesser extent, real final consumption expenditure by general government contributed positively to growth in real GDP.

Real final consumption expenditure by households contracted in the second quarter of 2018, as spending on goods declined notably while spending on services increased at a much slower pace. Real outlays on goods decreased, as households mostly reduced discretionary spending amid a decline in real disposable income following tax increases and successive fuel price hikes. Household spending was also suppressed by diminishing wealth effects in the first eight months of 2018, as the FTSE/JSE All-Share Price Index trended gradually lower amid heightened volatility driven by increased risk aversion towards emerging economies, together with weak domestic economic activity and policy uncertainty, particularly regarding land expropriation without compensation. In addition, annual growth in nominal house prices remained subdued and negative in real terms.

Real gross fixed capital formation decreased further in the second quarter of 2018, as capital spending by general government and by public corporations in particular contracted further. Fixed investment spending by the private sector increased somewhat following a contraction in the first quarter, largely due to increased capital expenditure on non-residential buildings. The decline in capital spending by public corporations reflects the financial, operational and governance challenges faced by many state-owned companies.

Enterprise-surveyed formal employment outside of the agricultural sector increased notably in the first quarter of 2018, boosted by a large number of temporary public sector jobs in preparation for the 2019 general elections. Formal private sector employment increased somewhat in the first quarter but remained virtually unchanged compared to a year earlier. Growth in labour productivity in the formal non-agricultural sector of the economy slowed in the first quarter of 2018 as year-on-year growth in employment accelerated slightly – even when excluding the election-related outliers – while output growth slowed notably.

South Africa’s official unemployment rate increased from 26.7% in the first quarter of 2018 to 27.2% in the second quarter, as total household-surveyed employment decreased and the number of unemployed persons increased. The seasonally adjusted unemployment rate also increased in the second quarter. The number of discouraged work seekers increased markedly to a new record high, indicative of the poor domestic employment prospects.

Nominal remuneration growth per worker in the formal non-agricultural sector of the economy moderated further in the first quarter of 2018, as remuneration growth slowed in the public sector and remained unchanged at a fairly subdued rate in the private sector. The slowdown in remuneration growth in excess of output growth resulted in a further moderation in year-on-year growth in nominal unit labour cost to 4.2% in the first quarter of 2018.

Domestic inflationary pressures increased somewhat in recent months, primarily due to successive fuel price increases, the higher value-added tax (VAT) rate as from April 2018, and higher electricity prices and municipal assessment rates. Headline consumer price inflation nevertheless remained within the inflation target range for 17 consecutive months up to August 2018. Consumer food price inflation appears to be nearing a lower turning point, despite a continued slowdown in meat price inflation. The moderation in services price inflation contributed to fairly subdued core inflation below the midpoint of the inflation target range.

South Africa’s trade balance with the rest of the world changed from a small deficit in the first quarter of 2018 to a surplus in the second quarter, as the value of net gold and merchandise exports increased much more than that of merchandise imports. The value of merchandise exports was boosted by increased volumes and, to a lesser extent, higher rand prices. The value of mining exports in particular increased significantly in the second quarter, while agricultural and manufactured exports also increased. The slight increase in the value of merchandise imports resulted primarily from mineral products, in particular crude oil. South Africa’s terms of trade improved in the second quarter of 2018, as the rand price of exported goods and services increased at a faster pace than that of imports. The improvement in the trade balance far outweighed the small widening in the shortfall on the services, income and current transfer account and rendered an improvement in the deficit on the current account of the balance of payments, from 4.6% of GDP in the first quarter of 2018 to 3.3% in the second quarter.

The net inflow of capital on South Africa’s financial account of the balance of payments decreased slightly from the first to the second quarter of 2018. On a net basis, direct and other investment inflows dominated in the second quarter although portfolio investment and financial derivatives also recorded inflows. Net portfolio investment inflows to South Africa decreased significantly in the second quarter, as non-residents’ net purchases of domestic equity, and in particular debt securities, declined notably. South Africa’s positive net international investment position decreased further from the end of December 2017 to the end of March 2018, as the value of foreign assets deceased more than foreign liabilities.

Following a moderate increase in the first quarter of 2018, the external value of the rand decreased sharply, on balance, by 10.0% on a trade-weighted basis in the second quarter, largely due to US dollar strength, higher international oil prices and increasing global inflation expectations. Risk aversion towards emerging market economies also increased, following concerns of the potential impact of escalating trade tensions between the US and its trading partners on global economic growth. In August 2018, the Turkish lira depreciated sharply after the US imposed sanctions on that country, resulting in a sharp global sell-off of emerging market assets as investors became increasingly concerned about the high levels of US dollar borrowing by some of these countries. At the same time, the Argentine peso also depreciated significantly as the country’s debt crisis intensified. In line with other emerging currencies, the nominal effective exchange rate of the rand declined, on balance, by 9.7% in August 2018. Following the depreciation in the exchange value of the rand and increased risk aversion towards emerging markets, South African government bond yields rose notably from March 2018 and the yield curve shifted higher beyond the extreme short end.

The Monetary Policy Committee (MPC) of the South African Reserve Bank kept the repurchase rate unchanged at 6.50% at the July and September meetings, having assessed the monetary policy stance as appropriate, given the current state of the economy. However, the MPC noted the deteriorating domestic inflation outlook, primarily due to supply-side factors. Despite the unchanged policy rate, domestic short-term money market rates increased slightly in the second quarter of 2018 and further in August. Similarly, rates on forward rate agreements trended upwards over this period, with the longer-term rates reacting more.

Growth in the broadly defined money supply remained lacklustre in the second quarter of 2018. Household deposit growth fluctuated sideways and continued to outpace that of the corporate sector. The deposit holdings of the corporate sector slowed somewhat over the period, as the slowdown in financial companies outweighed the acceleration in non-financial companies. Bank loans and advances extended to the domestic private sector remained subdued and increased at a slower pace in the first seven months of 2018. Credit extension to the corporate sector slowed further, with the deceleration partly exacerbated by technical reasons related to the implementation of International Financial Reporting Standard 9 from January 2018. Although remaining very subdued, growth in household credit extension continued to trend steadily upwards over this period.

The cash book deficit of national government was much smaller in the first quarter of fiscal 2018/19 than in the corresponding period of the previous fiscal year, as annual growth in revenue far outpaced that in expenditure. The strong growth in revenue was boosted by a sharp increase in VAT collections in particular, following the 1% increase in the VAT rate effective from the start of the current fiscal year. As such, the non-financial public sector borrowing requirement decreased notably in the first quarter of fiscal 2018/19 compared to a year earlier, due to the much smaller cash deficit of consolidated general government. By contrast, the cash deficit of the non-financial public enterprises and corporations increased over the period, as cash receipts from operating activities declined more than expenditure. National government’s total gross loan debt increased from 52.7% of GDP at the end of March 2018 to 54.2% at the end of June.