Global inflation remained muted throughout 2019. In the fourth quarter of 2019, a further decline in the international prices of metals and minerals contrasted a modest increase in that of agricultural products and energy. The price of Brent crude oil initially rose to a recent high of US$69 per barrel in early January 2020 amid optimism that a US–China trade deal would boost global economic growth prospects. In mid-February, however, oil prices decreased sharply due to concerns that the outbreak of the coronavirus disease 2019 (COVID-19) would weaken global demand. Oil prices declined further in early March as the virus spread to several countries. With Russia not cutting production in line with the Organization of the Petroleum Exporting Countries (OPEC), and Saudi Arabia then announcing an increase in production, oil prices fell significantly to around US$31 per barrel in mid-March. These developments contributed to a significant change in investors’ risk appetite, with global equity and bond prices falling sharply in the first two weeks of March.
The South African economy entered a second technical recession since the first quarter of 2018, with real gross domestic product (GDP) contracting by a further 1.4% in the fourth quarter of 2019 following a revised contraction of 0.8% in the third quarter. The weakness in economic activity in the fourth quarter was broad-based, with output contracting in the primary, secondary and tertiary sectors. Annual output growth slowed further from 0.8% in 2018 to only 0.2% in 2019 – the lowest growth rate since the sharp contraction in 2009 following the global financial crisis.
The faster pace of contraction in the real output of the agricultural sector was the main driver of the decrease in the real gross value added (GVA) by the primary sector in the fourth quarter of 2019 as mining output increased somewhat. On an annual basis, both agricultural and mining output contracted for a second successive year in 2019. Encouragingly, expectations of a much larger domestic maize crop could support agricultural output in 2020.
The real GVA by the secondary sector decreased further in the fourth quarter of 2019 as output contracted in all the subsectors. The renewed implementation of load-shedding, and the intensity thereof, weighed on electricity production and also adversely affected manufacturing output in addition to continued weak demand. The real output of the construction sector, which decreased for a sixth successive quarter in the fourth quarter of 2019 and for a third consecutive year, reflected subdued fixed investment amid persistent low business confidence and sluggish economic activity.
The real output of the tertiary sector reverted from an increase in the third quarter of 2019 to a decrease in the fourth quarter. Despite fairly strong Black Friday sales, which boosted retail trade in the fourth quarter, declines in wholesale and motor trade resulted in a contraction in the real GVA by the commerce sector. The output of the transport, storage and communication sector contracted notably further in the fourth quarter of 2019, consistent with the decline in import volumes. By contrast, growth in real economic activity in the finance, insurance, real estate and business services sector accelerated.
Real gross domestic expenditure (GDE) decreased by a further 4.6% in the fourth quarter of 2019 following a similar decrease in the third quarter. Both real gross fixed capital formation and real final consumption expenditure by general government reverted from increases to contractions, alongside a much faster pace of real inventory de-accumulation. Real net exports contributed the most to growth in real GDP in the fourth quarter of 2019, but were offset by the run-down of inventories.
Growth in real final consumption expenditure by households accelerated somewhat in the fourth quarter of 2019, supported by faster growth in real disposable income. Real spending on services, non-durable goods and, in particular, semi-durable goods increased at a faster pace, boosted by strong Black Friday promotion sales. By contrast, households purchased less durable goods in the fourth quarter, as consumer confidence and wage growth remained weak.
Household debt increased at a faster pace than disposable income in the fourth quarter of 2019, with the ratio of debt to disposable income rising slightly to 73.0%. However, households’ net wealth still increased as the value of equity portfolios and housing stock increased at a faster pace than the increase in household debt. Equity holdings were boosted by an increase of 4.1% in the FTSE/JSE All-Share Price Index (Alsi) in the fourth quarter of 2019, which was in line with international bourses.
Real gross fixed capital formation contracted sharply in the fourth quarter of 2019, following two consecutive quarters of expansion. Private business enterprises, public corporations and general government all reduced capital outlays in the fourth quarter. On an annual basis, real capital expenditure decreased for a second successive year in 2019, affected by persistent low business confidence, sluggish real economic activity and the further deterioration in the fiscal position. Consequently, the ratio of nominal fixed capital formation to nominal GDP declined further to 17.9% in 2019 – the lowest since 2005.
South Africa’s official unemployment rate remained unchanged at a record-high of 29.1% in the fourth quarter of 2019, with the seasonally adjusted unemployment rate increasing to a new all-time high of 29.6%. Contrary to the usual sharp seasonal decrease in unemployment in the fourth quarter of each year, the number of unemployed people remained fairly elevated in the fourth quarter of 2019 due to a significant number of new entrants in search of employment.
The downward trend in wage growth continued as the pace of increase in the nominal remuneration per worker in the formal non-agricultural sector decelerated notably to an all-time low year-on-year rate of 3.0% in the third quarter of 2019, with both public and private sector remuneration growth slowing. The deceleration in public sector remuneration growth was exacerbated by the high base following the delayed implementation of the annual public sector wage increase in 2018. In addition, the average wage settlement rate in collective bargaining agreements decreased further to a 12-year low of 6.7% in 2019. The moderation in wage growth resulted in a deceleration in the growth of formal non-agricultural nominal unit labour cost to 3.4% in the third quarter of 2019.
In line with the muted growth in unit labour cost and subdued demand pressures in the domestic economy, both producer and consumer price inflation slowed significantly throughout 2019. The moderation in domestic inflationary pressures was driven by a marked deceleration in fuel price inflation, muted food price increases and a renewed slowdown in underlying inflation. Core inflation slowed to 3.7% in January 2020, driven largely by the deceleration in consumer services price inflation to a record-low of 4.0%. Consumer goods price inflation accelerated somewhat in December 2019 and January 2020 as fuel price inflation quickened notably, largely due to base effects.
South Africa’s trade surplus with the rest of the world more than doubled from the third to the fourth quarter of 2019 as the value of merchandise imports decreased further, while that of net gold and merchandise exports increased further. The value of merchandise exports was boosted by mining exports, in particular of platinum group metals (PGMs) as well as pearls and semi-precious stones. The value of PGM exports benefitted from higher prices, especially palladium and rhodium. Despite a notable increase in the value of crude oil imports in the fourth quarter of 2019, lower volumes of manufacturing imports reduced the total value of merchandise imports.
The deficit on the services, income and current transfer account narrowed markedly from the third to the fourth quarter of 2019, mainly due to a notably smaller deficit on the income account as gross dividend payments receded from an exceptionally high level in the third quarter. This, together with the larger trade surplus, resulted in a significant narrowing in the deficit on the current account of the balance of payments as a ratio of GDP from 3.7% in the third quarter of 2019 to 1.3% in the fourth quarter – the smallest deficit since the fourth quarter of 2010.
The net inflow of capital on the financial account of the balance of payments decreased sharply from R73.9 billion in the third quarter of 2019 to R10.1 billion in the fourth quarter. On a net basis, portfolio investment, financial derivatives and reserve assets recorded inflows, while direct and other investment recorded outflows.
South Africa’s positive net international investment position decreased further from the end of June 2019 to the end of September as the value of foreign assets decreased more than that of foreign liabilities. Both foreign assets and liabilities declined as a result of the restructuring of a large South African company. In addition, the decrease in the nominal effective exchange rate (NEER) of the rand over the period affected foreign assets more than foreign liabilities.
Following its decrease in the third quarter of 2019, the NEER increased by 6.1% in the fourth quarter and outperformed many other emerging market currencies. This reflected notable increases in November and December 2019, attributable to the increased risk appetite of global investors following some relief from geopolitical tensions and an interest rate cut by the US Federal Reserve. However, in January and February 2020, the exchange value of the rand depreciated notably due to, among other factors, renewed downward revisions to South Africa’s economic growth projections, continued electricity-supply interruptions and a further deterioration in the fiscal position. In addition, the COVID-19 outbreak in China resulted in increased risk aversion and capital flows to safe-haven assets. In the first two weeks of March 2020, the exchange value of the rand depreciated further as the rapid spread of the virus disrupted global supply chains and sparked fears of a possible global recession.
Yields on South African government bonds increased from mid-July 2019 up to early December, initially reflecting heightened global risk aversion due to the ongoing US–China trade tensions, and later also government’s recapitalisation of some state-owned companies (SOCs), in particular Eskom, as well as the larger government budget deficit and increased debt levels projected in the October 2019 Medium Term Budget Policy Statement (2019 MTBPS). Domestic bond yields then declined up to the end of February 2020, along with lower international yields and optimism over a US−China trade deal as well as notable non-resident net purchases of domestic bonds. However, bond yields increased markedly again in the first two weeks of March as a result of the expected impact of the COVID-19 outbreak on global economic activity and the related domestic currency weakness, as well as higher domestic inflation outcomes and higher debt-to-GDP levels projected in the February 2020 Budget.
Domestic short-term money market interest rates trended moderately higher in late 2019, but quickly adjusted lower following the 25 basis point reduction in the repurchase (repo) rate in January 2020. Rates on forward rate agreements (FRAs) had already started to trend lower from late 2019 following the earlier appreciation in the exchange value of the rand and favourable inflation outcomes. FRA rates declined further in March 2020 as market participants started discounting the possibility of even lower interest rates due to the negative implications of COVID-19 for global and domestic economic growth, and following policy rate reductions by a number of major central banks.
Growth in the broadly defined money supply (M3) decelerated in both the third and fourth quarter of 2019, in line with weak domestic economic activity. A significant slowdown in corporate sector deposit growth in the second half of 2019 drove the overall moderation in M3, while household deposit growth fluctuated marginally higher.
Growth in total loans and advances extended by monetary institutions to the domestic private sector decelerated in the nine months up to January 2020. Similar to the slowdown in M3, the moderation in credit extension was also led by companies, while growth in credit to households continued at a fairly sturdy pace. Credit extension to the household sector was driven by steady growth in mortgage advances and fairly lively growth in general loans. The moderation in corporate credit growth in the fourth quarter of 2019 resulted mainly from a slowdown in loans to non-financial companies.
The preliminary non-financial public sector borrowing requirement increased by R70.8 billion year on year in the first nine months of fiscal 2019/20, as the cash book deficit of national government increased markedly. The larger borrowing requirement resulted from the fairly buoyant growth in national government expenditure which continued to outpace the modest growth in revenue. The revenue shortfall reflected continued weaker-than-expected domestic economic activity and higher tax refunds. Higher debt-service costs and, in particular, the recapitalisation of some SOCs boosted government spending. National government’s total gross loan debt increased significantly to 62.2% of GDP as at 31 December 2019, from 56.7% of GDP a year earlier.
In the interest of fiscal consolidation and sustainability, the February 2020 Budget proposed a reduction in government expenditure, partly through a decrease in the public sector wage bill as well as the reform of SOCs, despite additional support to some SOCs. On the revenue side, taxes were not increased as in recent years due to the weak economic environment and expected low future growth. The consolidated budget deficit is expected to widen from 6.3% of GDP in fiscal 2019/20 to 6.8% in fiscal 2020/21, before narrowing to 5.7% in fiscal 2022/23. The budget projected a debt-to-GDP ratio of 61.6% at the end of fiscal 2019/20, which is expected to increase to 71.6% at the end of fiscal 2022/23.