Real gross value added (GVA) by the primary sector contracted significantly by 5.6% in the third quarter of 2021 as real output in both the agricultural and mining sectors contracted anew.
The marked decrease in agricultural output in the third quarter reflected lower production of field crops and animal products, exacerbated by the civil unrest in Kwazulu-Natal in July. The decline in mining output was broad-based, with production decreasing in 8 of the 12 subsectors, impacted by lower international commodity prices and rising domestic input costs.
Real GVA by the secondary sector contracted at a faster pace in the third quarter of 2021 as output decreased further in the manufacturing and construction sectors. Real economic activity in the manufacturing sector contracted at a much faster pace in the third quarter of 2021, and apart from the civil unrest, output continued to be weighed down by domestic and global supply chain disruptions and shortages of raw materials as well as subdued domestic demand and electricity-supply disruptions. The decrease in the real GVA by the construction sector resulted largely from lower non-residential building and civil construction activity, with this being the only sector where the average output for the first three quarters of 2021 was lower than in the corresponding period of 2020. Real GVA by the sector supplying electricity, gas and water increased further in the third quarter of 2021, but the seasonally adjusted level was still well below the average in 2019.
The real GVA by the tertiary sector also contracted in the third quarter of 2021, as output decreased in the commerce and in the transport, storage and communication services sectors. By contrast, the real output of the finance, insurance, real estate and business services sector and the general government services sector expanded over the period. The sharp contraction in the output of the commerce sector reflected the impact of the civil unrest in July. The output of the transport sector was curtailed by reduced rail and land freight transportation activity as well as a decline in transport support services, affected by the technical challenges at Transnet and the civil unrest. The increase in real output of the finance, insurance, real estate and business services sector was supported by monetary intermediation and financial auxiliary services, with banking activity benefiting from an increase in fee and other income.
Similar to the contraction in real GDP, real gross domestic expenditure (GDE) also decreased in the third quarter of 2021, but at a slower pace of 0.7%. Final consumption expenditure by households contracted sharply and subtracted the most from growth in real GDP in the third quarter, whereas expenditure by general government increased marginally. Real gross fixed capital formation remained broadly unchanged in the third quarter, while the depletion of real inventory holdings slowed markedly. Real net exports subtracted from overall economic growth in the third quarter of 2021, as real exports decreased at a faster pace than real imports.
Real final consumption expenditure by households contracted by 2.4% (9.1% annualised) in the third quarter of 2021, as real spending on durable, semi-durable and non-durable goods declined, while spending on services remained broadly unchanged. Consumer spending was disrupted by the civil unrest in July, with the decrease also consistent with the decline in the real disposable income of households in the third quarter of 2021, alongside higher unemployment and the sharp fuel and electricity price increases. The seasonally adjusted level of real spending in the third quarter of 2021 was still lower than before the onset of the coronavirus disease 2019 (COVID-19) pandemic, reflecting the severity of the pandemic and related lockdown restrictions on the purchasing power of households.
Household debt increased at a slower pace in the third quarter of 2021, consistent with the modest decrease in nominal spending. Consequently, the ratio of household debt to nominal disposable income increased marginally to 67.8% in the third quarter of 2021, from 66.7% in the second quarter. Households’ net wealth increased further in the third quarter of 2021, as the increase in total assets outweighed that in total liabilities. Household assets increased despite the 3.0% decline in the FTSE/JSE All-Share Index (Alsi) in the third quarter – marking the worst quarterly performance since the first quarter of 2020. Domestic share prices were largely affected by negative global economic factors and mirrored the decline in share prices on international bourses. Thereafter, the Alsi recovered strongly to an all-time high on 1 December 2021.
Real gross fixed capital formation remained broadly unchanged in the third quarter of 2021, as reduced capital outlays by private business enterprises and general government were offset by increased fixed investment by public corporations. By asset type, investment in transport equipment subtracted the most from overall real gross fixed capital formation, while capital spending on machinery and other equipment increased. The seasonally adjusted level of real gross fixed capital formation in the third quarter of 2021 was still significantly lower than before the onset of COVID-19.
The weak recovery in employment after the initial outbreak of COVID-19 experienced a severe setback in the third quarter of 2021, as total household-surveyed employment decreased significantly. Formal employment decreased markedly along with broad-based job losses.
This outcome was likely impacted by the July civil unrest in Gauteng and KwaZulu-Natal, which also lowered the response rate of the Quarterly Labour Force Survey (QLFS) significantly.
This probably exacerbated the sharp increase in the not economically active population, led by a significant increase in the number of discouraged work seekers and those who could not search for work due to other reasons. The number of unemployed South Africans also decreased in the third quarter of 2021 and together with the sharp contraction in employment resulted in a notable decline in the total labour force. Consequently, both the labour force participation rate and the labour absorption rate decreased. The seasonally adjusted unemployment rate increased from 34.1% in the second quarter of 2021 to 34.5% in the third quarter, while the expanded unemployment rate increased sharply to 46.6% over the same period.
Year-on-year growth in nominal remuneration per worker in the formal non-agricultural sector accelerated significantly, from 3.6% in the first quarter of 2021 to 10.1% in the second quarter, largely due to the artificially low base in private sector remuneration per worker a year earlier during the initial hard lockdown. Marginal growth in public sector remuneration per worker over the same period reflected the non-implementation of the annual public sector wage increase in 2020 to curb the large government wage bill amid unforeseen COVID-19 spending priorities.
Labour productivity growth in the formal non-agricultural sector of the economy accelerated markedly, from 3.0% in the first quarter of 2021 to 18.2% in the second quarter, as the substantial year-on-year rebound in output outweighed that in employment. Conversely, the change in nominal unit labour cost in the formal non-agricultural sector reverted from a year-on-year increase of 0.6% in the first quarter of 2021 to a decrease of 6.8% in the second quarter. The changes in labour productivity and nominal unit labour cost largely reflect base effects from the second quarter of 2020, when output was much more severely impacted by the COVID-19 lockdown restrictions than employment and remuneration.
Domestic inflationary pressures increased in recent months, with both headline consumer and final manufactured producer price inflation accelerating to above the midpoint of the inflation target range. This largely reflected a surge in fuel and raw material prices as well as higher food and electricity prices. Headline consumer price inflation accelerated to 5.0% in September and October 2021, while final manufactured producer price inflation accelerated to 8.1% in October, due to significant increases in fuel and food prices. Intermediate manufactured goods price inflation accelerated to an all-time high of 20.4% in October 2021, mainly reflecting supply chain disruptions and increased demand as the global economic recovery gathered momentum.
In an environment of subdued consumer demand, core inflation remained relatively well contained at 3.2% in October, despite accelerating steadily from April 2021.
South Africa’s trade surplus with the rest of the world narrowed notably in the third quarter of 2021, though remaining sizable in a historical context. The value of net gold and merchandise exports decreased as export volumes declined sharply, while the value of imports remained broadly unchanged as higher prices were offset by lower volumes. With the price of merchandise imports increasing much more than that of exports, South Africa’s terms of trade deteriorated in the third quarter of 2021.
The value of mining, manufacturing and agricultural exports declined in the third quarter of 2021. Manufacturing exports decreased the most, weighed down by vehicles and transport equipment, chemical products as well as textiles and articles thereof. This largely reflected the impact on national port operations of the cyberattack on Transnet in July. Mining exports were dragged down by platinum group metals (PGMs) as the prices of these metals declined markedly.
Lower agricultural imports were fully countered by higher mining and manufacturing imports in the third quarter of 2021. The slight increase in mining imports could be attributed to a recovery in crude oil imports and a further increase in the importation of other mineral products, especially diesel. The value of manufacturing imports moved broadly sideways in the third quarter of 2021, as lower imports of vehicles and transport equipment, articles of cement and stone as well as processed food and beverages were fully countered by higher imports of other manufactured products, especially chemicals.
The narrowing of the trade surplus exceeded that of the deficit on the services, income and current transfer account in the third quarter of 2021, resulting in the surplus on the current account of the balance of payments narrowing from 5.1% of GDP in the second quarter of 2021 to 3.6% of GDP in the third quarter. The smaller income deficit in the third quarter of 2021 resulted from a decrease in net dividend payments as gross dividend receipts increased more than payments. The services deficit also narrowed further due to an increase in gross travel receipts as the number of foreign tourists visiting South Africa increased steadily from the exceptionally low levels in 2020, with higher gross receipts from passenger fares also contributing.
The net outflow of capital on South Africa’s financial account of the balance of payments more than halved to R32.5 billion in the third quarter of 2021, from R109.6 billion in the second quarter. On a net basis, direct investment and other investment recorded inflows, while portfolio investment, financial derivatives and reserve assets registered further outflows. In the third quarter of 2021, the financial account of the balance of payments was impacted significantly by both the Naspers Ltd and Prosus N.V. share exchange and the Special Drawing Rights (SDR) allocation to member countries by the International Monetary Fund (IMF).
South Africa’s total external debt increased from US$164.7 billion at the end of March 2021 to US$170.6 billion at the end of June, due to an increase in rand-denominated debt as the market value of non-resident bond holdings increased as well as net purchases of domestic rand-denominated bonds by non-residents. By contrast, foreign currency-denominated external debt decreased slightly over this period.
South Africa’s positive net international investment position (IIP) decreased further from the end of March 2021 to the end of June, as the value of foreign assets decreased more than foreign liabilities. The lower value of foreign assets reflected decreases in all functional categories, except for portfolio investment, which increased as most major international stock market indices increased in the second quarter of 2021. The decline in foreign liabilities resulted from decreases in all functional categories, except for direct investment.
The nominal effective exchange rate (NEER) of the rand decreased by 4.5% in the third quarter of 2021, after increasing significantly since the first outbreak of COVID-19. In the third quarter of 2021, the NEER was negatively affected by the domestic civil unrest in July, rising concerns about the impact of new COVID-19 outbreaks on the global and domestic economic recovery, a more hawkish monetary policy stance in the United States (US) and the decline in international commodity prices. The NEER declined further by 5.4% in October and November 2021, impacted by concerns over rising global inflation and in anticipation of tighter monetary policy in the US and Europe as well as some domestic factors, including continued electricity load-shedding, uncertainty surrounding the outcome of the local government elections and the detection of a new COVID-19 variant in South Africa in November 2021.
South African government bond yields trended higher from mid-June 2021 and increased markedly further from early-September, along with higher international bond yields.
The increase in domestic bond yields during the latter part of 2021 reflected higher consumer price inflation, the depreciation in the exchange value of the rand, net sales of domestic government bonds by non-residents and concerns about when monetary policy tightening will commence in advanced economies.
Growth in the broadly defined money supply (M3) accelerated somewhat in the third quarter of 2021, after slowing sharply in the first half of the year. Relatively stable growth in household deposits and a turnaround of the pronounced contraction in the deposits of financial companies supported growth in M3 in the third quarter. The divergence in deposit growth across the different maturities since the start of the national lockdown in March 2020 mostly abated when lockdown conditions became less stringent.
Year-on-year growth in total loans and advances extended by monetary institutions to the domestic private sector accelerated slightly between March and October 2021, after slowing markedly since the onset of the national lockdown. The gradual lifting of lockdown restrictions boosted the demand for loans by companies in particular, although growth remained subdued. Credit extension to the household sector grew at a faster pace than to corporates and has remained fairly stable since June 2021, supported largely by mortgage advances. The demand for credit might be affected somewhat by the increase in the repurchase (repo) rate by 25 basis points to 3.75%, effective from 19 November 2021.
National government continued to account for most of the public sector’s cumulative net funding in the domestic primary bond market thus far in 2021. However, net bond issuance by national government was 28.7% less in the first 11 months of 2021 than in the same period of 2020, as improved revenue collection reduced the need for funding. Local governments and public corporations recorded net redemptions over this period.
The preliminary non-financial public sector borrowing requirement decreased significantly in the first half (April–September 2021) of fiscal 2021/22 compared with the first half of the previous fiscal year. This largely reflected the much smaller cash deficit of national government and the social security funds. All other spheres of general government as well as the non-financial public corporations recorded cash surpluses over this period.
National government finances improved further in the first half of fiscal 2021/22 as revenue collections far outpaced expenditure growth. The year-on-year increase in revenue of 41.4% over this period was broad-based among the different tax categories, with corporate income tax collection increasing strongly. The 2021 Budget Review projected an increase of 9.3% in revenue to R1 352 billion for full fiscal 2021/22, which was revised higher to R1 483 billion in the 2021 Medium Term Budget Policy Statement (MTBPS). National government expenditure increased at a slightly slower pace than anticipated in the 2021 MTBPS over this period.
Despite the smaller cash book deficit, national government’s gross loan debt increased by 11.9% year on year to R4 158 billion as at 30 September 2021 (68.6% of GDP). The 2021 MTBPS envisaged total gross loan debt of R4 314 billion (69.9% of GDP) at the end of fiscal 2021/22.