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SA Reserve Bank Releases SA Economic Quarterly Update

SA Reserve Bank Releases SA Economic Quarterly Update

24 December 2020 – Domestic economic growth, in both nominal and real terms, rebounded significantly in the third quarter of 2020 with the easing of the coronavirus disease 2019 (COVID-19) lockdown restrictions. This follows the unprecedented contraction in the second quarter at the height of restricted economic activity to curb the spread of COVID-19. South Africa’s real gross domestic product (GDP) accordingly increased at an annualised rate of 66.1% in the third quarter of 2020 after the revised contraction of 51.7% in the second quarter – representing both the largest contraction and rebound since quarterly records began in 1960. Despite the strong rebound in the third quarter, real GDP was only at a level similar to that in the first quarter of 2013.

The turnaround in economic activity was broad-based and underpinned by brisk increases in the real output of the primary, secondary and tertiary sectors. Following a fourth successive quarterly contraction in the second quarter of 2020, the real gross value added (GVA) by the primary sector increased markedly in the third quarter, supported by a significant rebound in the real GVA by the mining sector and a further sizeable increase in real agricultural output.

The continued expansion in agricultural output reflected favourable weather conditions as well as the bumper maize and citrus harvests. The rebound in mining production was broad-based and reflected the easing of the lockdown restrictions, supported by higher international commodity prices and increased demand from China, in particular.

The strong rebound in the real output of the secondary sector resulted largely from increased manufacturing production and, to a lesser extent, increased construction activity as well as increased activity in the sector supplying electricity, gas and water. Although the improvement in manufacturing output was evident in all subsectors, food, and in particular beverages, contributed significantly to the increase as restrictions on the sale of alcoholic beverages were lifted in mid-August.

The real GVA by the tertiary sector also rebounded in the third quarter of 2020 but by a slightly smaller magnitude than the contraction in the second quarter. Economic activity increased meaningfully in almost all of the tertiary sectors in the third quarter, with the exception of government and personal services which expanded only slightly. The real output of the commerce sector expanded notably, driven by a strong rebound in the output of the wholesale, retail and motor trade subsectors. The real GVA by the catering and accommodation subsector increased at a slower pace, impacted by continued restrictions on travel and cross-border tourism as most international borders remained closed.

Real gross domestic expenditure (GDE) rebounded from a revised contraction of 42.9% in the second quarter of 2020 to an annualised increase of 23.7% in the third quarter, emulating the recovery in real GDP. Real final consumption expenditure by households rebounded strongly alongside a lesser increase in real gross fixed capital formation, while the de-accumulation of real inventory holdings continued at a much faster pace. Real final consumption expenditure by households and the real net exports of goods and services contributed the most to growth in overall real GDP in the third quarter of 2020.

The rebound in household consumption expenditure in the third quarter of 2020 resulted from sizeable increases in real outlays on durable, semi-durable and non-durable goods, which reflected resurgent demand from a very low base as restrictions on the sale of these goods were lifted. Spending on consumer services recovered at a slower pace, impacted by the remaining restrictions on large social gatherings and international travel, with consumers likely redirecting some of their service-orientated budgets to meet pent-up demand for goods. The turnaround in real expenditure by households was consistent with the rebound in real disposable income in the third quarter of 2020, notwithstanding rising unemployment and low consumer confidence.

Household debt increased in the third quarter of 2020 following an unprecedented decline in the second quarter. However, household debt as a percentage of nominal disposable income decreased from 86.5% in the second quarter of 2020 to 75.7% in the third quarter, as the increase in household disposable income exceeded that in debt. Households’ net wealth increased further in the third quarter of 2020, albeit at a slower pace, as the increase in total assets outweighed that in total liabilities. The value of household assets increased despite the FTSE/JSE All-Share Price Index (Alsi) remaining broadly unchanged in the third quarter of 2020 after it recovered notably in the second quarter.

Real gross fixed capital formation also increased in the third quarter of 2020, but by much less than the contraction in the second quarter. Real capital investment by both private and public sector corporations recovered somewhat with the easing of COVID-19 restrictions. Gross fixed capital formation by general government, which was somewhat less affected by the national lockdown restrictions, increased at a slightly slower pace in the third quarter as capital investment in emergency infrastructure increased at a slower rate. Although fixed investment spending increased across most asset classes in the third quarter, the long-term downward trends persisted, with the level of overall real gross fixed capital formation still well below that of a year earlier.

South Africa’s national saving rate improved substantially from 11.1% in the second quarter of 2020 to 15.9% in the third quarter. This resulted largely from increased saving by the corporate sector and a slower rate of dissaving by general government. The saving rate of households also increased marginally in the third quarter.

Household-surveyed employment increased by a seasonally adjusted 506 000 in the third quarter of 2020 following a sharp decline of 2.2 million in the second quarter. Total employment was nevertheless still 10.3% below the level of a year earlier as the effects of COVID-19 and the related lockdown restrictions dealt a severe blow to the already weak labour market. Counterintuitively, South Africa’s official unemployment rate initially declined notably from 30.1% in the first quarter of 2020 to 23.3% in the second quarter, before escalating to 30.8% in the third quarter. This reflected the movement in the second quarter of a large number of people from the employed and unemployed categories to the inactivity in searching for jobs category – as those people who lost their jobs during the lockdown as well as many of those who were already unemployed were prohibited from actively searching for employment – and subsequently out of inactivity in searching for jobs in the third quarter as the lockdown restrictions were eased.

Growth in the formal non-agricultural nominal remuneration per worker reverted from an increase of 4.4% in the first quarter of 2020 to a decrease of 2.6% in the second quarter – the lowest on record. The combination of COVID-19-induced salary reductions, much lower salary increases, wage freezes as well as substantially lower bonus, overtime and commission payments exerted significant downward pressure on nominal remuneration growth. Labour productivity in the formal non-agricultural sector of the economy contracted by the sharpest rate ever of 11.8% in the second quarter of 2020, while growth in nominal unit labour cost accelerated markedly to 10.3% over the same period. However, the unprecedented contraction in output due to the COVID-19 lockdown restrictions has detracted from the informational content of these macroeconomic indicators.

Headline producer and consumer price inflation both accelerated in recent months from historical lows in May 2020. This resulted largely from the slower pace of decline in fuel prices and as the downward bias of the lockdown-induced imputations of some prices in the consumer price index dissipated. Consumer food price inflation accelerated in October 2020 following the earlier increase in agricultural food prices. Domestic inflationary pressures nevertheless remained fairly muted amid the recessionary conditions.

The value of South Africa’s net gold and merchandise exports surged to an all-time high in the third quarter of 2020, along with a more muted increase in merchandise imports as global trade recovered following the easing of COVID-19 lockdown restrictions and the related rebound in economic activity. As a result, South Africa’s trade surplus widened significantly to 9.0% − the largest ratio of GDP since the third quarter of 1988. Mining, manufacturing and agricultural exports all increased strongly in the third quarter of 2020, boosted by higher international commodity prices, increased global demand and an improvement in loading rates at domestic ports. The value of merchandise imports increased, although by a much lesser extent than exports, in the third quarter of 2020 and remained well below the level of a year earlier, reflective of weak domestic demand.
 
The larger trade surplus coincided with a significantly smaller shortfall on the services, income and current transfer account, which resulted largely from a significantly smaller deficit on the income account, as South Africa recorded a first quarterly dividend surplus in almost 25 years. As a consequence, the balance on the current account of the balance of payments switched from a deficit in the second quarter of 2020 to a notable surplus of 5.9% in the third quarter − the largest surplus as a ratio of GDP since the third quarter of 1988.

The net flow of capital on South Africa’s financial account of the balance of payments reflected a larger outflow of R38.6 billion in the third quarter of 2020, following a revised outflow of R24.0 billion in the second quarter. On a net basis, direct investment, portfolio investment and reserve assets recorded outflows during the third quarter, while financial derivatives and other investment recorded inflows. Portfolio investment flows largely reflected non-resident net sales of South African equities as well as the acquisition of foreign portfolio assets by South African residents. Other investment inflows largely reflected long-term loans extended to the general government by non-residents to combat the effects of COVID-19. These inflows also boosted the level of South Africa’s international reserve assets in the third quarter of 2020.

South Africa’s positive net international investment position (IIP) increased significantly in the three months to the end of June 2020, following a substantial increase in the value of foreign assets and a much smaller increase in that of foreign liabilities. The second consecutive large quarterly increase in the market value of South Africa’s foreign assets resulted mainly from increases in direct and portfolio investment, following a surge of 20.0% in the United States (US) Standard & Poor’s (S&P) 500 Index as well as an increase in the value of resident ownership of dual-listed companies domiciled abroad.

The nominal effective exchange rate (NEER) of the rand decreased significantly during the onset of the COVID-19 pandemic in the first quarter of 2020, but then stabilised during the subsequent two quarters, similar to most other emerging market currencies. The NEER then increased in October and November 2020, supported by improved global sentiment towards emerging market currencies following the release of positive economic statistics in the US and the outcome of the US presidential elections.

Private sector banks’ actual daily liquidity requirement varied relatively widely in the third quarter of 2020, with the low of R25.7 billion in July 2020 reflecting a considerable decline in the demand for funding at the weekly main refinancing auctions as private banks experienced periods of surplus liquidity. Although the weekly main refinancing amount on offer was increased from R45.0 billion to R50.0 billion as from 4 November when the South African Reserve Bank (SARB) started to unwind some of the liquidity measures previously implemented, the under-subscription of the weekly main refinancing auctions persisted as banks continued to experience surplus liquidity. Domestic short-term money market interest rates continued to trend gradually lower after the most recent reduction in the repurchase (repo) rate in July 2020.

The robust growth in the broadly defined money supply (M3) during the national lockdown moderated somewhat in recent months, owing to the deposit growth of households levelling off somewhat since July 2020, while that of the corporate sector slowed decisively in October, specifically that of financial companies. By contrast, growth in total loans and advances extended by monetary institutions to the domestic private sector decelerated further in the third quarter of 2020, led by a marked deceleration and then a contraction in loans to companies.

South African government bond yields increased between early June 2020 and early October, reflecting concerns regarding the resurgence of COVID-19 infections globally and a sell-off of emerging market bonds. Subsequently, bond yields declined somewhat to the end of November as the exchange value of the rand appreciated and consumer price inflation remained subdued, even though the 2020 Medium Term Budget Policy Statement (2020 MTBPS) projected a significantly larger budget deficit and slower debt consolidation. Bond yields increased marginally after the downgrade of South Africa’s sovereign credit rating by two rating agencies on 20 November 2020.

The public sector’s net issuance of listed bonds in the domestic primary bond market increased by 51.3% year on year to an all-time high of R474 billion in the first 11 months of 2020. This resulted from funding pressures and substantial national government debt issuance due to revenue shortfalls, COVID-19-related spending and the financing of distressed state-owned companies, among other factors. By contrast, private sector companies redeemed bonds over the same period, as funding needs reduced significantly given the weak economic activity due to the national lockdown.

The preliminary non-financial public sector borrowing requirement doubled to R369 billion in the first six months of fiscal 2020/21 compared with the same period of the previous fiscal year. This reflected the significantly larger cash deficits of both national government due to continued revenue shortfalls and the social security funds due to COVID-19 relief payments. In financing the borrowing requirement, the total gross loan debt of national government increased sharply by 20.3% year on year to R3 714 billion (75.2% of GDP) as at 30 September 2020. The 2020 MTBPS projected total gross loan debt to increase to 81.8% of GDP by the end of fiscal 2020/21, and even further over the medium term to 92.9% of GDP in fiscal 2023/24. Source (SA Reserve Bank)