Global inflation has remained subdued thus far in 2019. In the advanced economies, headline consumer price inflation continued to undershoot most central banks’ inflation targets. Inflationary pressures in the emerging market economies have also remained generally well contained, with only a few exceptions, such as Argentina and Turkey. The price of Brent crude oil receded notably in the three months up to early September 2019 amid concerns about slowing global economic growth. Attacks on Saudi Arabia’s oil facilities in mid-September caused oil prices to temporarily surge by around US$10 per barrel before declining again after production was restored in early October.
Real economic growth in South Africa contracted once more by an annualised 0.6% in the third quarter of 2019 after rebounding by a slightly revised 3.2% in the second quarter. The weakness was broad-based as the real gross value added (GVA) by both the primary and the secondary sectors contracted, while output growth slowed markedly in the tertiary sector. Year-on-year growth in real gross domestic product (GDP) slowed markedly to only 0.1% in the third quarter. South Africa’s real GDP growth projections for 2019 have been lowered further in recent months, with estimates by the International Monetary Fund (IMF), National Treasury and the South African Reserve Bank (SARB) currently ranging between 0.5% and 0.7%, all below the 0.8% achieved in 2018.
The contraction in the real output of the primary and secondary sectors in the third quarter of 2019 occurred in all of the subsectors. The real GVA by the agricultural sector contracted for a third successive quarter, albeit at a slightly slower pace, and that by the construction sector for a fifth consecutive quarter. The real output of the sector supplying electricity, gas and water was hampered by sluggish economic activity in the electricity-intensive mining and manufacturing sectors as well as the renewed implementation of electricity load shedding in October.
Growth in the real GVA by the tertiary sector slowed sharply in the third quarter of 2019 as output increased at a slower pace in the commerce; finance, insurance, real estate and business services; and general government services sectors. In addition, real economic activity in the transport, storage and communication sector contracted for a third successive quarter.
Real gross domestic expenditure (GDE) contracted by 3.6% in the third quarter of 2019 after having increased by 9.0% in the previous quarter. The contraction resulted primarily from inventory de-accumulation, while growth in all the components of real gross domestic final demand moderated. Real net exports made the largest positive contribution to growth in real GDP in the third quarter of 2019.
Growth in the real final consumption expenditure by households moderated to only 0.2% in the third quarter of 2019. The pace of increase in real spending on services and, in particular, durable goods slowed, while purchases of semi-durable and non-durable goods decreased. This was consistent with the notably slower growth in households’ real disposable income and weaker consumer confidence.
Household debt as a percentage of nominal disposable income decreased slightly in the third quarter of 2019. Households’ net wealth also decreased in the third quarter as the market value of assets was impacted by lower domestic share prices, with the FTSE/JSE All-Share Price Index (Alsi) recording its worst third-quarter performance since 2011. Furthermore, the lacklustre growth in nominal residential property prices persisted in the third quarter of 2019, with house prices continuing to decline in real terms.
Real gross fixed capital formation expanded for a second consecutive quarter in the third quarter of 2019, driven largely by another sizable increase in capital expenditure by private business enterprises, particularly on machinery and other equipment as well as transport equipment. The increased capital outlays on machinery and equipment resulted from a marked increase in wind-powered generating sets for the ongoing construction of wind farms as well as automatic data-processing machines and units for a new data hub being established in Cape Town. By contrast, real fixed investment by general government decreased further and at a faster pace, while that by public corporations increased marginally following a substantial decrease in the second quarter.
South Africa’s official unemployment rate increased marginally further to 29.1% in the third quarter of 2019 – the highest level since the inception of the Quarterly Labour Force Survey (QLFS) in 2008. The number of unemployed South Africans increased to an all-time high of 6.73 million in the third quarter, elevated by further significant increases in the number of job losers as well as long-term unemployed people entering the labour market and actively searching for jobs.
The pace of increase in the nominal remuneration per worker in the formal non-agricultural sector accelerated somewhat to 5.6% in the second quarter of 2019, as both private and public sector (excluding temporary election-related jobs) wage growth accelerated. Private sector remuneration growth per worker rebounded from an all-time low in the first quarter, while public sector wage growth was elevated by the low base created a year earlier following the delayed implementation of the annual public sector wage increase. The acceleration in wage growth resulted in a quickening in formal non-agricultural nominal unit labour cost growth in the second quarter of 2019, although it remained within the inflation target range. The average nominal wage settlement rate in collective bargaining agreements decreased further to 6.8% in the first nine months of 2019 – its lowest level since the second quarter of 2007.
Domestic inflationary pressures have remained fairly subdued, with headline consumer price inflation remaining at, or below, the 4.5% midpoint of the inflation target range thus far in 2019. Consumer goods price inflation has consistently been below the midpoint and followed the deceleration in producer price inflation over this period, while consumer services price inflation moderated further. Consumer food price inflation has accelerated steadily since April 2019, mainly on account of higher bread and cereals prices. However, domestic grain prices have moved broadly sideways thus far in 2019, resulting in the gradual dissipation of the low base of 2018. Core inflation slowed to 4.0% in September and October 2019, suggesting that underlying inflationary pressures remain well contained within an environment of subdued demand-side pressures.
South Africa’s trade balance switched from a deficit in the second quarter of 2019 to a surplus in the third quarter. The turnaround resulted from an increase in the value of net gold and merchandise exports, alongside a contraction in merchandise imports. The value of merchandise exports was boosted by higher manufactured and agricultural exports which outweighed the contraction in non-gold mining exports. The lower value of merchandise imports reflected a sharp decline in the importation of mineral products, weighed down by fewer crude oil imports, while manufactured and agricultural imports increased.
The shortfall on the services, income and current transfer account increased in the third quarter of 2019 due to a larger deficit on the income account as gross dividend payments increased markedly. However, the deficit on the current account of the balance of payments as a ratio of GDP narrowed from 4.1% in the second quarter of 2019 to 3.7% in the third quarter, as the switch to a trade surplus outweighed the wider deficit on the services, income and current transfer account.
The net inflow of capital on the financial account of the balance of payments increased significantly in the third quarter of 2019. On a net basis, portfolio and, in particular, other investment registered inflows while direct investment, financial derivatives and reserve assets recorded outflows.
South Africa’s positive net international investment position decreased notably from the end of March 2019 to the end of June. This reflected an increase in foreign liabilities and a decrease in foreign assets. The increase in the value of both direct and portfolio investment liabilities reflected higher domestic share prices. The market value of South Africa’s foreign assets decreased as direct and portfolio investment as well as reserve assets all decreased while only other investment and financial derivatives increased.
The nominal effective exchange rate (NEER) of the rand declined, on balance, by 4.2% in the third quarter of 2019, largely reflecting a notable decline in August amid renewed global trade tensions. Despite adverse domestic idiosyncratic developments, the rand as well as other emerging market currencies was to a large extent influenced by global developments and risk aversion in the third quarter. In late October, the exchange value of the rand depreciated sharply after the release of the 2019 Medium Term Budget Policy Statement (2019 MTBPS), which presented a marked deterioration in South Africa’s fiscal position. This triggered renewed concerns of further credit-rating downgrades as two international rating agencies subsequently revised South Africa’s sovereign rating outlook from stable to negative. However, the exchange value of the rand stabilised towards the end of November.
South African government bond yields increased from mid-July 2019 up to the end of November, reflecting continued global trade tensions, notable non-resident net sales of domestic bonds, government’s recapitalisation of Eskom, the depreciation in the exchange value of the rand, the larger government budget deficit, and increased debt levels depicted in the 2019 MTBPS.
Growth in the broadly defined money supply (M3) slowed markedly in the third quarter of 2019 following an acceleration in the second quarter in the run-up to the national elections in May. The deceleration in the third quarter was driven by slower growth in the deposit holdings of the corporate sector as both financial and non-financial company deposit growth moderated, while that of households remained range-bound in recent months.
Growth in total loans and advances extended by monetary institutions to the domestic private sector accelerated moderately in early 2019 but slowed in subsequent months. The recent moderation reflected slower growth in loans extended to companies while that to households continued its gradual upward trend. The acceleration in credit extension to the household sector reflected a further gradual acceleration in mortgage advances as well as a marked quickening in the extension of general loans.
National government’s cash book deficit of R190 billion in the first half of fiscal 2019/20 was R62.1 billion more than in the same period of the previous fiscal year. The larger cash book deficit was brought about by a combination of significantly faster growth in expenditure and notably slower growth in revenue. The revenue shortfall reflected a marked increase in value-added tax (VAT) refunds and generally weak domestic economic activity along with weaker provisional tax payments. Higher government spending resulted mainly from increased transfers and subsidies, higher debt-service costs as well as additional allocations to some state-owned companies (SOCs). The larger cash deficit led to a larger non-financial public sector borrowing requirement in the first half of fiscal 2019/20 as the borrowing requirement of national government in particular increased notably. National government’s total gross loan debt increased significantly from 56.0% of GDP as at 30 September 2018 to 61.5% of GDP a year later, already surpassing the upwardly revised estimate of 60.8% for the end of fiscal 2019/20 in the 2019 MTBPS.