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At the same time, global inflationary pressures remained subdued. Despite recent increases in the prices of crude oil and other commodities, the level of such prices was, on balance, substantially below the level twelve months earlier. With global inflation not a strong concern, policy interest rates remained low.


In South Africa the economy recorded another negative real growth rate in the second quarter of 2009 – the third successive quarterly contraction. However, the pace of contraction in the first quarter of 2009 had been worse than in the second quarter, suggesting a moderation over time of the recessionary forces in the economy. Stimulatory monetary and fiscal policies were pursued by the South African authorities over the past nine months in an attempt to support domestic demand, and were reinforced by similar policies elsewhere in the world, which indirectly started to stabilize demand for South African exports. Nevertheless, as in the first quarter of 2009 the three main sectors – primary, secondary and tertiary – each recorded a contraction in real value added in the second quarter.


The largest negative contribution to growth came from the manufacturing sector, with widespread contractions in the various subsectors, the most prominent declines being in the manufacturing of chemicals, and wood and paper products. Agricultural production also declined in the second quarter when a smaller maize crop was harvested than in the previous season, while livestock production edged lower. By contrast, real value added in mining recovered somewhat in the second quarter of 2009, led by production of platinum group metals and diamonds.


Real household consumption expenditure weakened further in the second quarter of 2009 alongside declining real disposable income and high levels of household debt. The decline was most severely felt in the purchases of durable goods. Growth in real final consumption expenditure by government slowed in the second quarter as spending on defence declined and real spending on compensation of employees decelerated. Fixed capital formation increased at a slower pace in the second quarter from a high base set in the first quarter, with public corporations in particular recording very high levels of capital spending.


Alongside a subdued level of sales, the level of real inventories receded further in the second quarter of 2009, at a substantially faster pace than in the first quarter. Whereas in the final quarter of 2008 and first quarter of 2009 both the volume of imports and that of exports fell markedly, the strong contraction in imports continued in the second quarter of 2009, but the volume of exports registered only a marginal decrease. Owing mainly to these volume changes, the trade balance reversed into a surplus. In addition, a moderate narrowing of the shortfall on the country’s services, income and current transfer account with the rest of the world was registered. As a result, the deficit on the current account of the balance of payments narrowed significantly to 3,2 per cent of gross domestic product. This deficit was financed through a combination of direct and portfolio investment inflows. Foreign direct investment in South African telecommunications enterprises rose further, while non-resident interest in South African shares and debt securities picked up alongside an improvement in sentiment towards emerging-market assets in general.


In the market for foreign exchange sentiment towards the rand improved on account of smaller trade deficits and renewed non-resident interest in investment in South Africa. Accordingly, the effective exchange rate of the rand appreciated significantly, particularly in the second quarter of 2009, and subsequently fluctuated around firmer levels.


The firmer external value of the rand contributed to an improved outlook for inflation. Furthermore, despite an upward trend in many international commodity prices since early 2009, almost all commodity prices remained well below their peak levels in mid-2008. Accordingly, producer price inflation not only slowed but in recent months the level of producer prices actually declined. This also started to work through to consumer price inflation, with the targeted rate of inflation decelerating to 6,7 per cent in July 2009. However, wage settlements and unit labour cost increases remained high in the first half of 2009.


The Monetary Policy Committee (MPC) of the South African Reserve Bank (the Bank) first reduced the repurchase rate in December 2008 and subsequently lowered it further in several steps; the most recent being a reduction of 50 basis points announced in August 2009. This brought the cumulative reduction over the past nine months to 5 percentage points and the level of the repurchase rate to 7 per cent per annum. Other interest rates in the money market remained well aligned with this policy rate.


In the capital market bond yields continued to reflect market participants’ inflation expectations, which had recently improved, as well as expectations of a considerable increase in issues of bonds by the government and public corporations in the near future, as the infrastructure programme gains further momentum while tax revenue is constrained by subdued levels of economic activity.


In the first eight months of 2009 expectations of an improvement in the global economy, although fragile, were reflected in rising share prices in markets around the world. This also extended to South Africa, where share prices recovered some of the earlier losses suffered in 2008. By contrast, subdued conditions and negative wealth effects characterised the real-estate market, with nominal house prices declining in recent months.


Growth in the broadly defined M3 money supply and in banks’ loans and advances to the private sector decelerated further in the first half of 2009, with quarter-to-quarter growth in both these aggregates becoming negative in the second quarter of the year. This reflected the impact of weak activity levels and generally tight economic conditions, accompanied by low levels of business and consumer confidence.


In the period April to June 2009 the borrowing requirement of the public sector increased notably compared with the situation a year earlier, led by the borrowing needs of national government and public corporations. The national government budget deficit widened considerably not only on account of tax revenue shortfalls in the wake of the recession but also due to deliberate efforts to step up service delivery, infrastructure spending and transfers to the needy. The deficit continued to be easily financed, primarily through the issuing of Treasury bills and bonds in the domestic market, but also through tapping foreign sources of finance through the issue of foreign currency-denominated South African government bonds in international markets.