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.