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Under these circumstances inflationary pressures dissipated in most parts of the world. At the same time, numerous countries continued with their efforts to support aggregate demand by means of unparalleled infusions of fiscal and monetary stimulation. Up to the first quarter of 2009 this did not seem to have had the desired effect. Most recently, however, there have been some improvements in a limited subset of indicators, suggesting that the pace of decline in global demand may be decelerating. Nevertheless, against the backdrop of uncertain global financial markets it remains too early conclusively to confirm the arrival of a turning point in global aggregate demand.


After the South African economy had recorded its first contraction in ten years in the final quarter of 2008, economic activity contracted further – and at a considerably worse pace than before – in the first quarter of 2009, confirming that the domestic economy was in a recession. The manufacturing and mining sectors were the most severely affected followed by the finance, real-estate and business services sector. While virtually all subsectors in manufacturing were adversely affected by the further deterioration in both global and domestic demand conditions, it was the basic metals and transport equipment subsectors that suffered the largest setbacks. Significantly reduced demand for basic metal and mineral products as well as lower international commodity prices weighed heavily on output in the mining sector. This was compounded by the first contraction in the real value added by the tertiary sector since 1992, largely on account of a decline in real output of financial services, thereby resulting in all three of the major sectors – primary, secondary and tertiary – recording negative real growth in the first quarter of 2009.


A slower pace of increase in the number of civil servants was more than offset by the purchase of aircraft as part of the defence procurement programme, resulting in a firm increase in real final consumption expenditure by general government in the first quarter of 2009. At the same time, real gross fixed capital formation, although still increasing, rose at a slower pace than before. Subdued economic conditions and low levels of business confidence resulted in a further reduction in the rate of growth in real capital spending by the private sector, although such growth remained marginally positive. Real capital expenditure by general government also recorded a lower, but still positive, real growth rate in the first quarter. By contrast, the infrastructure drive led to a somewhat stronger pace of real capital formation by public corporations.


Real final consumption expenditure by households receded further in the first quarter of 2009 as this sector’s real disposable income contracted for the third consecutive quarter. The decline in real spending was broad-based, involving all the major categories of goods Quarterly Bulletin  purchased by households. Real inventory levels also shrank further in the first quarter, consistent with the declining volume of sales in the economy and relatively tight financial conditions, but the decline was considerably smaller than in the preceding period.


The further deterioration in the real output of South Africa’s most important trading-partner countries adversely affected export volumes during the first quarter of 2009. In addition, the domestic demand for imported goods also declined, albeit not by as much as the contraction in merchandise exports. As a result, the deficit on the trade account of the balance of payments widened once more to a level similar to that recorded in the first quarter of 2008, when exports were restrained by a shortage of electricity. This deterioration was only partly offset by an improvement in South Africa’s terms of trade and lower net dividend payments to non- resident investors, which were related to the slowdown in domestic production and declining company profits. Overall, the deficit on the current account of the balance of payments widened to 7,0 per cent of gross domestic product in the first quarter of 2009.


South Africa continued to record capital inflows on the financial account of the balance of payments in the first quarter of 2009, albeit at a slightly slower pace than before. Softening risk aversion towards assets in emerging-market economies – including South Africa – resulted in an inflow of portfolio investment capital, in sharp contrast to the large outflow recorded in the previous quarter. Foreign direct investment into the country also contributed to the overall net inflow of capital. The slight moderation in the inflow of capital alongside the widening deficit on the current account of the balance of payments led to a slowdown in the pace of reserve accumulation during the first quarter of 2009.


The contraction in global demand and the slowdown in domestic output contributed to a moderation in formal non-agricultural employment growth during 2008, with the number of jobs actually falling in the final quarter of the year. Over the past year, public-sector employment remained fairly buoyant while private-sector employment initially lost momentum and then began to contract.


Year-on-year rates of targeted consumer price inflation moderated further in the opening months of 2009, but nevertheless remained above the inflation target range of 3 to 6 per cent. Food price inflation remained stubbornly high, particularly at the level of the consumer. The deceleration in producer price inflation continued, consistent with the slowdown in global inflation, the contraction in global demand and declining commodity prices.


It was decided to increase the frequency of meetings of the Monetary Policy Committee (MPC) to monthly meetings – with the exception of July 2009 – in order to monitor and respond appropriately to the rapidly changing economic environment. The improved medium-term outlook for inflation and the widening output gap allowed the MPC to lower the repurchase rate by a cumulative total of 450 basis points over the past six months, bringing it to a level of 7,50 per cent after the committee’s May 2009 meeting. Other short-term money-market interest rates emulated the trend in the repurchase rate.


Notwithstanding a significant decline in financing cost, there was a sharp deceleration in the growth in banks’ loans and advances extended to the private sector and in the broadly defined money supply (M3) during the first four months of 2009. This was largely attributable to the deterioration in household and corporate income and expenditure growth, somewhat lower inflation, negative wealth effects, and the effects of tighter credit conditions that prevailed for the greater part of 2008 and 2009.


The daily liquidity requirement of the private-sector banks and the amounts provided by the South African Reserve Bank (the Bank) at the weekly refinancing tenders continued to fluctuate in a normal fashion during the past six months, with no indication of any liquidity strains being experienced in the South African money market. Private-sector banks continued to utilise their cash reserve accounts and occasionally their standing facilities with the Bank to accommodate the daily liquidity fluctuations. The Bank scaled down its purchases of foreign currency in the first five months of 2009.


Prescribed interest rates, maximum finance charge rates and interest rates on the RSA government fixed-rate retail bonds trended downwards in recent months. However, bond yields fluctuated higher from December 2008, influenced by increased bond issues, gains in international oil prices, stubborn inflation and movements in the exchange value of the rand. The break-even inflation rate trended upwards from the beginning of February 2009, partly reflecting changes to the pricing of inflation-linked bonds as a result of the recently introduced headline consumer price index (CPI) measure.


The supply of public-sector bonds in the domestic primary bond market increased in the first part of 2009, while corporate bond issues by the private sector continued on a downward trend. Trading activity in the secondary share market was relatively subdued in early 2009 as participants remained cautious about market conditions. Alongside these lower trading volumes, financial derivatives trading on the JSE Limited (JSE) also declined in the first five months of 2009.


Non-resident investors sold South African bonds on a net basis, but actively bought shares in the first quarter of 2009. House prices registered nominal declines in the first few months of 2009, while the total assets of non-bank financial intermediaries declined further as the secondary effects of the global financial meltdown became more evident.


More than a decade of fiscal prudence created the necessary space for fiscal policy to respond to the current global financial crisis and its fallout in a countercyclical manner. In part this happened automatically, with tax revenues beginning to fall short of budgeted projections as a result of the slowdown in economic activity. In combination with higher government expenditure, the decline in tax revenues eventually caused a sizeable national government budget deficit to be recorded in 2008/09. Extending the analysis to the nonfinancial public sector as a whole, there was also a significant widening of this sector’s cash deficit in 2008/09 as the larger national government budget shortfall was reinforced by an increase in the borrowing requirement of public corporations in order to co-finance the public-sector infrastructure programme.