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Contents Page

1. Introduction

2. Global Historical Trends and Outlook

3. South African Macroeconomic Picture

3.1 GDP per capita & Income Distribution

3.2 Expenditure on GDP

3.3 Current Account

3.4 Unemployment

3.5 Inflation and changes in Monetary Policy

3.6 Sovereign Risk

4. Conclusion

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1. Introduction

• The Parliamentary Budget Office (PBO) welcomes new and returning Members of Parliament.

• This eighteenth edition of the PBO’s Quarterly Economic Brief (QEB) is the first edition for the Sixth Parliament.

• The QEBs form part of the regular outputs from the PBO based on its ongoing research and analysis that supports the oversight work of the Members of Parliament and their Committees.

• In particular, the PBO supports the implementation of the Money Bills Amendment Act by undertaking research and analysis for the finance and appropriations committees.

• This first edition of the QEB for the Sixth Parliament is an expanded version, that provides more insight into important economic indicators, such as household consumption and debt, unemployment and investment.

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2. Global Historical Trends and Outlook

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Understanding how the growth and changes in the Finance Sector has

affected global and domestic aggregate demand is fundamental in understanding

the Macro Economy…..

5

The Great Recession (2008/09)and its aftermath

• Increased global financial liquidity during the pre-crisis period

• Capital (including in South Africa) was allocated towards

Speculation in financial & real estate markets;

Household-debt driven consumption;

More non-financial corporations income & profits from financial

activities;

Share buybacks and other manipulations to keep share prices high

• After the global financial crisis quantitative easing (QE) kept

capital flowing from developed to emerging markets.

• Concern that liquidity supported financial and real estate

asset prices but not real fixed investment.

• The impact of the global financial crisis and Great Recession

still persists more than a decade later.

6

Current global macroeconomic trends

• 2018 pointed to worrying issues in the global economy:

Trump tax changes supported short-term growth in the US

that kept global growth at 3.6% in 2018;

Financial market volatility & sharp market corrections;

Expectation of recession in USA within next 18 months and

further Chinese slowdown;

Global Industrial production down and trade volumes

declining since early 2018;

Growth in 2019 expected at 3.3% by IMF and 3.2% by the

OECD;

Growth expectations for 2019 have already been revised

downwards.

7

Contributions to change in world

gross product growth, 2017 to 2018

8

GDP growth forecasts and revisions for 2019Source: United Nations Department of Economic and Social Affairs,

World Economic Situation and Prospects as of mid-2019

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Current Global macroeconomic trendsRisks to the global outlook:

• Ongoing trade disputes:

Tariffs and retaliations pose serious threats to operation of global value chains;

Medium-term impact on productivity may affect longer-term growth prospects;

• Trade is important because it supports:

economies of scale;

access to inputs, technology and knowledge;

Diversification.

• Financial stress and volatility

• Poor European performance

• Brexit fallout

• Political instability in Europe and elsewhere

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Global GDP growth per capita, 2018

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3. South African Macroeconomic Picture

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Perc

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Rm

illio

n (

2010 p

rices)

GDP and percentage change in GDP

(Real 2010 prices)

GDP in 2010 prices Percent change in GDP (RHS) 13

Sector value added percentage contribution

to the first quarter GDP decline

Small positive contributions to

GDP from:

• Business services (0.2%),

• Government (0.2%) and

• Personal services industries

(0.1%)

Three main contributors to

the first quarter decline in

GDP were:

• manufacturing (-1.1%),

• mining(-0.8%), and:

• trade industries(-0.5%)14

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Rands (

2005 p

rices)

3.1 GDP per capita and percentage

change in GDP per capita (Real 2005

prices)

GDP per capita Percentage change in GDP per capita (RHS)15

Snapshot of South Africa’s Socioeconomic Indicators

Unemployment

2019, Q1:

Official: 27.6%

Broad: 38.0%

Youth: 39.6% (O), 51.5%

(B)

Poverty

Headcount at 30,4 million

(55.5% of the

population), 2015 (upper-bound poverty line of R992 per

person per month in 2015 prices)

Inequality

Income: 2014 Gini of 0.69 (High Level Panel)

Wealth: 95% of wealth

owned by 10% (Orthofer

2016)

Concentration of market

power

Woods et al (2018):

Dominant firms in 294

distinct prod mkts

Vert. integration >199416

0%

10%

20%

30%

40%

50%

60%

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80%

90%

100%

1993 1996 2000 2005 2008 2010 2014

Perc

enta

ges

Income distribution by quintiles, World Bank,

1993, 1996, 2000, 2005, 2008, 2010, 2014

highest 20% fourth 20% third 20% second 20% lowest 20%

Indication of income and expenditure levels for quintiles

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3.2 Expenditure on GDP

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Rb

illio

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Components of GDP

(Real 2010, Rbillions)

Household consumption Gen. gvt consn

GFCF (Investment) Net exports (X-M) 19

Sector contribution to first quarter GDP decline (-3.4%)

-10%

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0%

5%

10%

15%

20%

March2017

June2017

Sept2017

Dec2017

March2018

June2018

Sept2018

Dec2018

March2019

% c

hange q

ua

rter-

on

-qu

art

er Household consumption Government consumption

Investment Expenditure on GDP

*data is seasonally adjusted and annualised Data: Stats SA

• 3.4% contraction in 1Q 2019 from 1.6 expansion in 4Q 2018

• Growth recorded on Government Consumption (1,3%), Import (4,8%) and Change in Inventory (5,3%)

• Decline recorded on Household Consumption (0,8%), Investment (4,5%) & Export (26,4) 20

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Household debt, debt service and savings as

percentages of household disposable income

Saving to disposable income Household debt to disposable income

Debt-service cost to disposable income 21

0%

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90%

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Total credit extended by all monetary

institutions as percentages of GDPNet credit extended tothe gov. sector

Loans and advances -Other loans andadvancesLoans and advances -Mortgage advances

Loans and advances -Leasing finance

Loans and advances -Instalment sale credit

Bills discounted

Investments

Loans and advances -Of which: Tohouseholds 22

0

5

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Perc

enta

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Gross fixed capital formation as a

percentage of GDP (source: WDI)

Lower middle income Middle income South Africa

Upper middle income High income

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0%

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90%

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Credit extended to private businesses &

fixed investment (as a percentage of

GDP)

Priv bus enterprises GFCF Total credit extended to the private sector24

0%

5%

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20%

25%19

90

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Gross fixed capital formation (investment) as a percentage of GDP

Total Gross fixed capital formation Gen Government

Public corporations Private business enterprises 25

0%

2%

4%

6%

8%

10%

12%

14%

199

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Net acquisition of financial assets and

net capital formation of private

businesses as percentages of GDP

Net acquisition of fin assets by corp bus enterprises

Net capital formation - Private business enterprises

Source: SARB26

14%

66%

20%

86%

JSE TOP 50 & SHARE OF CROSS LISTED COMPANIES IN TOP 50 IN 2017

Rest of JSE

23 of top 50 were cross listed

Rest of top 50 (not cross listed)

Top 50

Disconnect between financial markets and real economy in SA

SA operations small part

of global operations, 2017

Naspers 5,5%

Richemont 8,0%

BAT 18,0%

South32 10,0%

Anglo American

PLC 7,0%

27

0%

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100%

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350%199

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Fixed capital stock as percentage of GDP

(2010 Rmillions)

General gov. Public corporations Private business enterprises 28

3.3 Current Account

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-8%

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Components of current account as

percentages of GDP

Net services recepts Income receipts - income payments

Current transfers (net receipts +) Trade balance

Balance on current account 30

Quarterly changes in the balance of the current account (as a percentage of GDP)

• The deficit on the current account of the balance of payments increased to R110 billion in the first quarter of 2019. It increased from 2.2% to 2.9% of GDP from the fourth quarter of 2018 to the first quarter of 2019.

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3.4 Unemployment

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Annual unemployment rate – official (2008 – 2018)

• The unemployment rate increased from 22,5% in 2008 to 27,1% in 2018

• The unemployment rate for all categories, except Black African was lower in 2018 than in 2014

• Black African account for more than 75% of the total labor force followed by colored (7,5%) 33

Number of employed and unemployed ('000s) 2Q 2018 1Q 2019 2Q 2019

Labour force 22 370 22 492 22 968

Employed 16 288 16 291 16 313

Formal sector 11 320 11 220 11 172

Informal sector 2 828 2 933 3 048

Agriculture 843 837 842

Private households* 1 296 1 301 1 251

Unemployed - official 6 083 6 201 6 655

Unemployed – broad** 9 634 9 994 10 226

Not economically active 15 462 15 791 15 465

Discouraged job-seekers 2 864 2 997 2 749

Other (not economically active) 12 598 12 793 12 716

Labour Statistics (Data: Quarterly Labour Force Survey, Stats SA)

Note:

* Private houesholds refers to domestic workers

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Unemployment rates (percentages) 2Q 2018 1Q 2019 2Q 2019

Official unemployment rate (narrow) 27,2% 27,6% 29,0%

Broad unemployment rate* 37,2% 38,0% 38,5%

Unemployment Rates - Gender

Male - official 25,3% 26,1% 27,1%

Female - official 29,5% 29,3% 31,3%

Unemployment Rates - Race

Black African - official 30,1% 31,1% 32,7%

Coloured - official 23,3% 22,2% 22,5%

Indian/Asian - official 10,4% 11,4% 11,2%

White - official 8,0% 6,6% 7,4%

Youth***

Unemployment rate - official 38,8% 39,6% 41,1%

Unemployment rate - broad** 50,4% 51,5% 52,0%

Labour Statistics (Continued)

Notes:

*The broad unemployment rate includes discouraged job seekers

**Youth is defined as age 15 - 3435

Sector contribution to employmentQuarterly Employment Survey (QES)

6 060

4 515

-835

-1 352

-8 719

-3 395

5 800

19 083

4 487

9 564

-2 351

-22 788

66 794

2 415

56 994

-39 733

-60 000 -40 000 -20 000 - 20 000 40 000 60 000 80 000

Mining

Manufacturing

Utilities

Construction

Trade

Logistics

Finance and Business services

Comm, social and personal servcies

change in employment year-on-year (1Q 2019)

change in employment quarter-to-quarter (1Q 2019)Data: QES, Stats SA

• Employment increased by 75 381 jobs (a 0.8% increase in employment) in first quarter of 2019 compared to the same quarter in 2018

• Finance and business services and trade were the largest contributors whereas Community, social and personal services and construction made the largest negative contribution, year-on-year.

• Quarter-to-quarter, community, social and personal services created the most jobs whereas trade shed the most

Note: QLFS and QES data cannot be compared due to their key methodological differences

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3.5 Inflation and changes in Monetary Policy

• Headline consumer price inflation (CPI) for all urban areas, increased from 4% in Jan.

2019 to 4.5% in May 2019 .

• Inflation on food & non-alcoholic beverages increased from 3.1% in Jan. 2019 to 3.2% in

May

• In their press statement released on the 18th of July 2019, the Monetary Policy

Committee (MPC) of the South African Reserve Bank reduced the repo rate by 0.25% to

6.5% with effect from the 19th of July 2019. 37

3.6 Sovereign risk

Yield on SA 10-year bond

• Fitch, which rates SA sovereign debt negative, changed its outlook from stable to

negative

• Moody’s the only ratings agency that still rates sovereign domestic currency debts as

investment grade.

• A downward revision from Moody’s will see SA move to sub-investment grade, and

trigger a sell-off of SA government bonds by foreign institutional investors.

• Yield on SA government debt also

improved (interest rate declined)

• Yield worsened (increased) in July

2019 after announcement of

additional fiscal support for Eskom

• And, because lower than

estimated revenue collection may

prompt more debt issuance this

year.

• Many developed countries currently have very low interest rates and some even have

negative interest rates on bonds

• Emerging market bonds now attract more buyers and yields improved (rates have

dropped)

Credit Rating

38

4. Conclusion• The South African economy is faced with a severe

problem of low aggregate demand.

• The factors influencing aggregate demand are:

• Household consumption has been constrained over

the past decade because: Poor households suffer from high levels of poverty and

unemployment

Affluent households remained highly indebted after

their pre-global financial crisis binge

• Private and public investments have been insufficient

to support growth and dent unemployment;

• Government fiscal consolidation over an extended

period constrained its spending and investment;

• Low global demand since the crisis affected SA

exports 39

Conclusion

As a result:

• We expect household consumption, private business

fixed investment and exports to remain constrained.

• We expect that a weak global economy may very

likely exert further downward pressure on South Africa’s

economic performance.

• Government’s consumption and investment spending

choices may have a very important and large impact

not only on public finances but on the economy as a

whole.

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