October 2019 Monetary Policy Review

Chris Loewald: Head of Economic Research1 October 2019

October MPR: Achieving the mandate in a world of risks

2019/10/012

• Global risks – trade tensions and global recession

• Domestic risks – shocks to fiscal position

• Low and volatile domestic growth

• Inflation contained, near the middle of the target range

• The MPC has had some policy space, but risks constraining

Trade tensions collapse trade growth

2019/10/013

0

50

100

150

200

250

300

2000 2003 2006 2009 2012 2015 2018

Inde

x: Ja

n 20

16 =

100

, 6m

ma

US

Global

China

Source: Haver

Economic policy uncertainty

-4

-2

0

2

4

6

8

2014 2015 2016 2017 2018 2019

y/y

(%),

3mm

a

World trade

World trade (exports)Advanced economy exportsEmerging economy exports

Source: Haver

AE manufacturing suffering, with trade-focused economies slowing

2019/10/014

-4

-3

-2

-1

0

1

2

3

4

5

2016 2017 2018 2019

y/y

(%),

6mm

a

Industrial production

USEuro areaJapan

Source: Haver

0,00,51,01,52,02,53,03,54,04,5

Mar

-17

Dec-

17

Sep-

18

Jun-

19

Sep-

17

Jun-

18

Mar

-19

Jun-

17

Mar

-18

Dec-

18

Mar

-17

Dec-

17

Sep-

18

Jun-

19

South Korea Japan Germany US

y/y

(%)

GDP growth

While services sustain domestic consumption & jobs

2019/10/015

48

49

50

51

52

53

54

55

56

2015 2016 2017 2018 2019

Inde

x: <

50=

cont

ract

ion

Global PMI

Manufacturing Services

Source: Haver

7.5

2.2

3.7

0

2

4

6

8

10

12

14

2000 2003 2006 2009 2012 2015 2018

%

G3 unemployment rateEuro area Japan United States

Source: Haver

Output close to potential – probably no aggregate demand shortfall

2019/10/016

-6-5-4-3-2-101234

2005

2008

2011

2014

2017

2020

2006

2009

2012

2015

2018

2007

2010

2013

2016

2019

Japan United States Euro area

% o

f pot

entia

l GDP

G3 output gaps

Source: OECD

-5

-4

-3

-2

-1

0

1

2

3

4

2005 2008 2011 2014 2017

y/y

(%)

G3 GDP growth(PPP weighted)

Sources: Haver and SARB

Inflation nonetheless persistently below targets, with one major exception

2019/10/017

0,0

0,5

1,0

1,5

2,0

2,5

3,0

Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19

y/y

(%)

G4 targeted inflationUKJapanEuro areaUS

Source: Haver

Central banks insuring against growth risks with higher inflation

2019/10/018

Mar 15: QE launch

Mar 2016: TLTRO II

Apr 17: ECB reduces bond

purchases

July 2019: fresh stimulus mooted

Sep 19: ECB lowers deposit rate &

restarts QE-1,0-0,9-0,8-0,7-0,6-0,5-0,4-0,3-0,2-0,10,0

2015 2016 2017 2018 2019

2y go

v bo

nd y

ield

, %

German 2yr government bond yields

Sources: Bloomberg and SARB

Dec-15:Fed liftoff

Dec-16:2nd rate hike

Dec-18:Final Fed hike

Mar-19:Fed indicates

end of QT

Jul-19:‘Mid-cycle

adjustment’; end of QT

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

2015 2016 2017 2018 2019

2y go

v bo

nd y

ield

, %

US 2yr government bond yields

Sources: Bloomberg and SARB

Oct-17:Balance sheetNormalisation

(QT)

Strange times in financial markets – inverted yield curves, negative yields

2019/10/019

But risk aversion getting in the way of search for yield

2019/10/0110

1000

1050

1100

1150

1200

1250

1300

1350

1400

1450

Jan-16 Sep-16 May-17 Jan-18 Sep-18 May-19

US$/

fine

ounc

e

Gold price

Source: Bloomberg

1500

1600

1700

1800

1900

2000

2100

2200

2300

600

700

800

900

1000

1100

1200

1300

2015 2016 2017 2018 2019

IndexInde

x

Equity performance

MSCI Emerging Markets

MSCI Developed Markets(right-hand scale)

Source: Bloomberg

EM growth slumps again – no advantage over advanced economies

2019/10/0111

-1

0

1

2

3

4

5

6

2000 2003 2006 2009 2012 2016 2019

Perc

enta

ge p

oint

s

Sources: Haver and Citi Research

EM and AE growth differentials(excl. China)

Strong dollar part of the problem (who wants to win a currency war?)

2019/10/0112

Feb-02: 117

80

85

90

95

100

105

110

115

120

2000 2003 2006 2009 2012 2015 2018

Real broad dollar index

2010-14

average:

89

2016-19

average:

105

Source: US Fed via Haver Analytics

-10

-5

0

5

10

15

20-300

-200

-100

0

100

200

300

2010 2013 2016 2019

y/y (%)

Non-

resid

entia

l flo

ws,

US$

(bill

ions

)

Net capital flows

Broad US$ index (rhs - inverted scale)

Sources: IIF, Bloomberg and SARB

EM Capital flows and the dollar

Depreciation

Debt also part of the story, with big increases in borrowing…

2019/10/0113

50

55

60

65

70

75

80

85

90

95

2000 2003 2006 2009 2012 2015 2018

% o

f GDP

Emerging marketsEmerging markets (excluding China)

Sources: IMF and SARB

EM total credit to non-financial private sector

30

35

40

45

50

55

2000 2003 2006 2009 2012 2015 2018

% o

f GDP

Source: IMF

EM general government debt

With not much to show for all the new debt…

2019/10/0114

-8

-4

0

4

8

12

16

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

%

Investment growth

EM

EM ex-China

Source: World Bank

-2

-1

0

1

2

3

4

5

6

7

RUS CHN THA IND PHL ZAF IDN ARG TUR MEX BRA

%

pre-crisis

post-crisis

Sources: The Conference Board and SARB

Total factor productivity growth

SA similar to peers: more debt, less investment, weakening productivity

2019/10/0115

20

25

30

35

40

45

50

55

60

1960 1968 1976 1984 1992 2000 2008 2016

% o

f GDP

Government debt

Source: SARB

0

0

0

0

0

1

1

1

1

1

1

-10

-5

0

5

10

15

20

2000 2004 2008 2012 2016 2020

y/y

(%)

Investment growth

EM

EM excl. China

South Africa

Sources: World Bank and SARB

Higher taxes & higher spending

2019/10/0116

2021222324252627282930

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

% o

f GDP

National govt. finances

Total expenditure

Total revenue

Source: SARB

But renewed fiscal slippage, with bailouts for Eskom

2019/10/0117

-7

-6

-5

-4

-3

-2

-1

0

1

2

2001/02 2005/06 2009/10 2013/14 2017/18 2021/22

% o

f GDP

Budget balance

Sources: Bloomberg and National Treasury

Bloomberg consensus

Yield curve steep – despite lower short rates & inflation expectations

2019/10/0118

0

1

2

3

4

5

2010 2012 2014 2016 2018

%Sources: Haver, BER and SARB* Deflated by two year ahead inflation expectations

South African real 10y government bond yields*

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

10,0

2Y 3Y 15Y 20Y 25Y 30Y

%

Yield curves

September 2018

September 2019

Source: Bloomberg

With persistent external imbalances, largely interest payments to non-residents

2019/10/0119

Comparatively large current account deficit – despite a trade surplus

2019/10/0120

As interest offsets import compression, CAD unresponsive to weak growth

-4

-3

-2

-1

0

1

2

3

4-8

-6

-4

-2

0

2

4

6

8

1990 1995 2000 2005 2010 2015

% of potential GDP

% o

f GDP

Balance of payments and the business cycle

Current account balance

Output Gap (rhs, inverted)

Source: SARB

Wider Ygap in Q1 surprise, partially reversed with Q2 rebound

2019/10/0122

-4

-3

-2

-1

0

1

2

3

4

1990 1995 2000 2005 2010 2015 2020

% o

f pot

entia

l GDP

Source: SARB

Output gap

Volatility of growth data obscures trend

2019/10/0123

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

2000 2003 2006 2009 2012 2015 20188q

rolli

ng st

anda

rd d

evia

tion

Standard deviation of GDP growth rates

-3.1

3.1

-4

-3

-2

-1

0

1

2

3

4

Q1-15

Q3-15

Q1-16

Q3-16

Q1-17

Q3-17

Q1-18

Q3-18

Q1-19

qoq,

saar

, %

GDP growth

Near term potential low, adjusted for serial supply shocks

2019/10/0124

-1,0-0,50,00,51,01,52,02,53,03,54,0

2010 2012 2014 2016 2018 2020

y/y

(%)

GDP growth

Potential growth Actual growth

Platinum mining strike & load-

shedding

Drought Load-shedding

Sources: Stats SA & SARB

Demand and confidence factors both important in explaining weak growth

2019/10/0125

0

10

20

30

40

50

60

70

80

90

2000 2004 2008 2012 2016

% o

f firm

s list

ing

cons

train

t to

curr

ent

busin

ess a

ctiv

ity, 4

qma

Constraints in the manufacturing sector

Insufficient demandInterest ratesPolitical climate

More constraining

Less constraining

Sources: BER and SARB

2628

21

0

10

20

30

40

50

60

70

80

90

1990 1994 1998 2002 2006 2010 2014 2018In

dex

Business Confidence

Nominal GDP trend from lower real GDP & terms of trade, less from CPI

2019/10/0126

12.3

5.54.2

7.7

4,4

5,2

4,8

-5

0

5

10

15

20

Dec-

02M

ar-0

6Ju

n-09

Sep-

12De

c-15

Mar

-19

Mar

-01

Jun-

04Se

p-07

Dec-

10M

ar-1

4Ju

n-17

Sep-

02De

c-05

Mar

-09

Jun-

12Se

p-15

Dec-

18De

c-00

Mar

-04

Jun-

07Se

p-10

Dec-

13M

ar-1

7

Nominal GDP Real GDP GDP deflator CPI

y/y

(%)

Nominal GDP growth:Pre-crisis boom vs disinflation periods*

1.0

* Boom (business cycle upward phase, 1999Q3 - 2007Q3) vs disinflation period (2017 - date)Sources: Stats SA and SARB

CPI close to midpoint of target since mid-2017

2019/10/0127

0

2

4

6

8

10

12

14

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

y/y

(%)

Targeted inflation

Longest period ofinflation within target

Sep-03 - Mar-07:43 months

New record in one year:Apr-17 - Oct-20:

43 months

Outcomes temporarily below 4.5%, rising above early next year

2019/10/0128

4,24.4

4.14.3

5.3

4.9

5.25.0

3,0

3,5

4,0

4,5

5,0

5,5

6,0

2018Q1 2018Q3 2019Q1 2019Q3 2020Q1 2020Q3

y/y

(%)

Headline inflation

-0.3 -0.1-0.4 -0.2

0.80.4 0.7

0.5

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2019Q1 2019Q3 2020Q1 2020Q3

Perc

enta

ge p

oint

s

Inflation deviation from target midpoint

Food (17%)* Fuel (5%)Electricity (4%) Core inflation** (74%)Headline inflation (100%)

*Figures in brackets are CPI weights**Headline inflation excluding food, fuel and electricity

Core inflation subdued, with help from the exchange rate

2019/10/0129

Inflation expectations moderating – focus on trend & level

2019/10/0130

2

3

4

5

6

7

2010 2012 2014 2016 2018

%

Current year One year ahead

Two years ahead Five years ahead

Sources: BER and SARB

Midpoint

3–6% inflation target range

Surveyed inflation expectations*

* Average of labour, business and analyst expectations

0

1

2

3

4

5

6

7

8

9

2013 2014 2015 2016 2017 2018 2019

%

Market-implied inflation expectations

5y breakeven inflation rate

10y breakeven inflation rate

ULC gap closes as productivity catches up with wage levels

2019/10/0131

0

2

4

6

8

10

12

14

16

18

2007 2009 2011 2013 2015 2017 2019

Y/Y

(%)

Average nominal wage growth

Compensation of employees (national accounts) /employment (QES)

Total salaries and wages (QES) / employment (QES)

Sources: Stats SA and SARB

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2016 2017 2018 2019 2020 2021

Perc

enta

ge p

oint

s

Contribution to unit labour cost gap

Real wage gapProductivityUnit labour cost gap

Source: SARB

Services indexing to lower CPI outcomes, and housing inflation unusually low

2019/10/0132

0

1

2

3

4

5

6

7

8

9

2010 2012 2014 2016 2018

y/y

(%)

Services

Services excluding housing

Services: the housing effect

Sources: Stats SA and SARB

0

1

2

3

4

5

6

7

2012 2014 2016 2018 2020

y/y

(%)

Two-year-ahead inflation expectations (total surveyed)

Services

Sources: BER, Stats SA and SARB

Services inflation and inflation expectations*

Low housing inflation a mix of supply & demand

2019/10/0133

0

6

12

18

24

30

2010 2012 2014 2016 2018

% o

f tot

al sa

les

Downscaling for financial pressureUpgradingEmigrating

Source: FNB

Selected reasons for selling houses

1,5

2,0

2,5

3,0

3,5

4,0

2010 2012 2014 2016 2018

Real

12m

mov

ing

aver

age

(R b

illio

ns)

Residential buildings completed

Sources: Stats SA and SARB

SA inflation still high relative to peers

2019/10/0134

0

10

20

30

40

50

60

70

0-1 1.1-2 2.1-3 3.1-4 4.1-5 5.1-6 6.1-7 7.1-8 8.1-9 9.1-10 >10.1

Prop

ortio

n of

coun

trie

s (%

)

CPI inflation (y/y%)

Distribution of inflation (2019)

Emerging economies

Advanced economies

South Africa

Sources: IMF and SARB

Inflation pressure from public sector prices

2019/10/0135

0

1

2

3

4

5

6

7

8

9

2014 2015 2016 2017 2018 2019

y/y

(%)

Public and private CPI

Government CPI Headline excl. government CPI Headline CPI

Government CPI is a combination of Assessment rates; Water; Electricity; Petrol taxes; Trains; Motorlicence and registration fees; Communication; Education; University boarding fees; SABC TV licence; Lotto; Alcoholic beverages and tobacco; Non-alcoholic beverages: Soft drinks.Sources: Stats SA and SARB

Oil price collapse

Lower inflation provided some policy space

2019/10/0136

6,00

6,25

6,50

6,75

7,00

7,25

2017 2018 2019 2020 2021

%

Actual Mar 2019 May 2019Jul 2019 Sep 2019

Source: SARB

Evolution of the QPM repo path

4

6

8

10

12

14

16

18

2000 2003 2006 2009 2012 2015 2018

%

Interest rates

Repo rate

Prime lending rate

Source: SARB

Real repo mostly around the neutral rate

2019/10/0137

Risk feeding into neutral, constraining monetary policy

2019/10/0138

Conclusions

• Two big risks in the environment – trade and fiscal

• Short-run growth constrained, long-run dependent on investment

• Actual growth even lower, so output gap negative

• Policy steering inflation (& expectations) to the midpoint of the 3-6% range

• Lower inflation + lower risk = space for lower rates

2019/10/0139