Notwithstanding this increase, growth in the aggregate gross domestic product has evidently slowed down from the levels attained in 1995. Although the gross domestic product was still expanding in the first half of 1997, the average growth rate over the past six quarters appears to have been lower than the long-term growth potential of the economy.

The renewed expansion of economic activity in the second quarter of 1997 originated in the secondary and tertiary sectors. Manufacturing output rose strongly in response to the increased demand for exports of manufactured goods from South Africa. This had multiplier effects on other sectors of economic activity especially the transportation and communication sectors benefited from the high activity level of the manufacturing sector. The growth in the combined secondary and tertiary sectors consequently accelerated from an annualised rate of 2 per cent in the first quarter of 1997 to 3½ per cent in the second quarter, thereby raising the level of overall gross domestic product to about 2 per cent higher in the first half of 1997 than in the first half of 1996.

Whereas the growth rate in real gross domestic product decelerated, but still remained firmly positive, the rate of change in real gross domestic expenditure already turned negative from the third quarter of 1996. Even though total real gross domestic expenditure increased again slightly in the second quarter of 1997, it was still lower than in the second quarter of 1996. The rates of expansion in real private consumption expenditure and in real gross domestic fixed investment have generally slowed down since the first half of 1996, whereas inventory levels were reduced by businesses in an attempt to improve the return on total assets. In contrast, real consumption expenditure by general government increased at rates well in excess of those of the other components of real gross domestic expenditure.

The disparate movements in the growth in gross domestic product and in gross domestic expenditure over the past year established a healthier balance between aggregate supply and demand in the domestic economy. In fact, real gross domestic expenditure fell below real gross domestic product in the fourth quarter of 1996 and remained so in the ensuing two quarters. This had the beneficial effects of reducing inflationary pressures in the economy and creating a smaller deficit on the current account of the balance of payments. Inflation, as reflected in changes in production and consumer prices, declined again in the second quarter of 1997. Nominal remuneration per worker in the non-agricultural sectors of the economy, especially in the private sector, has generally tended to increase at diminishing rates since the beginning of 1996. The tightening of monetary policy in 1996 when the rand was weakening, apparently averted a potentially harmful spiral of wage and price increases and repetitive depreciations of the rand.

The better balance established between aggregate supply and demand also resulted in slower growth in the domestic demand for imported goods, and provided a strong thrust in the supply of goods available for export. The relative slack domestic demand created capacity to meet the increased international demand for South African manufactured goods. This adjustment was assisted by the decline in the exchange rate of the rand during 1996, which increased the price competitiveness of exporters and domestic import-competing industries. The growth in the value of merchandise exports accordingly made a notable contribution to the contraction of the deficit on the current account of the balance of payments to just 0,6 per cent of the gross domestic product in the second quarter of 1997.

The better macroeconomic balance in South Africa also encouraged a strong inward movement of capital into the economy. Long-term international capital inflows in the form of portfolio investments in securities issued by public-sector bodies, bolstered by non-resident participation in the partial privatisation of Telkom, were predominantly responsible for the unprecedentedly high surplus on the capital account of the balance of payments in the second quarter of 1997. The monetary sector experienced an increase in non-resident foreign currency and rand-denominated deposits as non-residents became increasingly active in the domestic foreign-currency and other financial markets and also sought resources to serve as collateral for securities-lending operations between non-residents and local institutional investors.

The surplus on the overall balance of payments in the second quarter of 1997 had as a further consequence a sizeable improvement in the gold and foreign reserves of the country for the third quarter in succession. The outcome of this was that the country's gross international reserves at the end of the second quarter of 1997 were the equivalent of 9½ weeks' worth of imports of goods and services. Despite the more positive sentiment created in the foreign currency markets by the higher level of international reserves, the strength of the United States dollar and the downgrading of emerging-market investments caused the rand to lose value against the dollar during the second quarter of 1997. This depreciation notwithstanding, the rand has still increased in value on a trade-weighted basis against the major currencies from the beginning of 1997.

The growth in the broadly defined money supply slowed down slightly in the second quarter of 1997, but remained well above the upper limit of the money growth guideline range. Despite this slowdown, the ratio of broad money supply to gross domestic product in the second quarter of 1997 was at its highest level since 1980. This high ratio partly reflected the strong liquidity preference of the general public and the high activity levels in the South African securities markets. It simultaneously held the potential threat of an undue expansion in domestic demand, with accompanying inflationary consequences, if these money balances were deployed in the goods markets.

Although net credit supplied by the monetary sector to the government sector declined in the second quarter of 1997, the claims of the banks on the private sector increased at an accelerated pace. The rise in overall domestic credit extension was also the main statistical counterpart of the continued expansion of the money supply. A number of reasons may be put forward to explain the strong expansion of bank credit to the non-bank private sector. These included increased borrowing from banks by local authorities and rapidly expanding turnovers in the domestic securities markets. Irrespective of the causes behind this expansion, the continued extension of bank credit at a rate grossly unrelated to economic growth potential will eventually raise inflationary pressures in any economy.

Bond yields generally declined in the first eight months of 1997 as expectations of improved overall financial stability, lower inflation and imminent reductions in Bank rate abounded. The relative strength of the rand and the attractive yields available on South African bonds elicited interest from non-resident investors, which reinforced the downward tendency of bond yields. Positive investors' sentiment also prevailed in the share market where prices rose over the first eight months of 1997 after a rather extended period of consolidation had been experienced in 1996. The prices of gold-mining shares, however, declined fairly substantially in the second half of 1996 and the first half of 1997.

Money market conditions eased considerably in the second quarter of 1997 as the amount of borrowing at the accommodation window of the Reserve Bank declined against the backdrop of a large increase in the Bank's net foreign assets. The Reserve Bank allowed the market to unfold in this manner and money market interest rates declined throughout the second quarter and the first two months of the third quarter. The yield curve accordingly drifted lower, becoming extremely flat in the area beyond three years. The steep inversion of the curve inside the three-year maturity area could indicate expectations of imminent declines in official money-market lending rates, whereas the flatness of the curve in the area beyond three years might indicate some scepticism about a sustained move towards lower inflation in the longer run.

The primary bond market was still dominated by public-sector organisations. Virtually all capital raised in the first half of 1997 through issues of fixed-interest securities was intended for the financing of public-sector bodies. The amount of funding acquired through these means was also substantially more than during the corresponding period of 1996. When private-sector companies ventured into the primary capital market, their activities were exclusively confined to the share market. As was the case in the primary bond market, new issues in the primary share market in the first half of 1997 were substantially more than in the first half of 1996.

The high levels of activity in the securities markets redounded to the formal derivatives markets and the turnover of options and futures contracts increased strongly. The demise of centralised marketing arrangements for agricultural products brought with them sizeable increases in the trade of maize commodity futures. Activity in the real-estate market recovered somewhat from the low levels of the second half of 1996, but was still rather subdued compared with trading conditions in 1994.

The public-sector borrowing requirement, i.e. the deficit before borrowing of general government and all non-financial enterprises in the public sector, increased in rand value and as a percentage of gross domestic product from the first quarter of fiscal 1996/97 to the first quarter of fiscal 1997/98. Of concern was the fact that this deterioration in the public finances occurred essentially at the level of the national government and that the Exchequer deficit in the first four months of fiscal 1997/98 amounted to almost 45 per cent of the deficit envisaged for the fiscal year as a whole. Government dissaving persisted in the second quarter of 1997, thereby aggravating the dearth of domestic saving. A substantial portion of domestic investment requirements had to be financed by means of a net inflow of capital from abroad in the second quarter of 1997.

The aggregate level of employment in the formal sectors of the economy declined again in the first quarter of 1997. According to current estimates regarding the size of the economically active population, less than half of the workforce was gainfully employed in the modern sectors of the economy. The urgency of this problem was reaffirmed by the announcement of a Presidential Jobs Summit to be held soon. At this summit the causes of high unemployment as well as other issues that may lead to the resolution of this seemingly intractable problem will be discussed.