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.