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Capital expenditure continued to fulfil a pivotal role in supporting aggregate demand and at the same time paving the way for future growth by eliminating bottlenecks and bolstering capacity. While continuing to increase, real gross fixed capital formation registered the slowest rate of growth in more than six years in the final quarter of 2008. This reflected less buoyant growth in real fixed capital formation by public corporations and by general government. Private business enterprises broadly maintained the earlier pace of increase in real fixed capital expenditure in the fourth quarter of the year, supported, inter alia, by rising capital outlays in the coal mining sector. The level of inventories declined further in the final quarter of 2008. Weakening sales and production alongside relatively high interest rates resulted in a reduction in the level of inventories. With global demand waning, the volume of exports contracted significantly in the fourth quarter of 2008, while at the same time the prices of most export commodities declined. Import volumes also receded in the fourth quarter, the sharp decline in the international price of oil translated into significantly lower import values and dividends paid to non-resident shareholders in South African companies contracted. On balance, this resulted in a significant narrowing of the deficit on the current account of the balance of payments in the fourth quarter of 2008, to less than 6 per cent of gross domestic product. The deficit on the current account continued to be financed through savings from abroad amid less favourable conditions in world financial markets. Net capital inflows were lower in the fourth quarter of 2008 than in the third. The net inward movement in the fourth quarter was confined to direct and other investment, while net portfolio investment showed a substantial outward movement of capital. The overall balance of payments registered surpluses in each quarter of 2008, but with a smaller surplus in 2008 than in 2007, the effective exchange rate of the rand depreciated significantly, particularly during the first and the last quarters of 2008. Enterprise-surveyed data on employment indicated sustained job creation in the public sector during the first three quarters of 2008, but an abrupt reversal in the private sector during this period, from job creation to labour shedding. Average wage settlements nevertheless picked up to 9,8 per cent in 2008, partly in reaction to higher inflation outcomes. Despite successive steps to tighten monetary policy, inflation had been stubbornly high since 2006. Record-high commodity prices had pushed both producer and consumer price inflation to exceptionally high levels by August 2008. The collapse in commodity prices and in global and domestic demand thereafter started to slow the inflation spiral. By December 2008 the twelve-month CPIX inflation rate had moderated to 10,3 per cent, roughly three percentage points below its upper turning point in August  008. In January 2009 the reweighted, rebased and reconstituted new headline consumer price index for all urban areas, which was adopted as the new inflation target measure, recorded a twelve-month rate of increase of 8,1 per cent. With inflation outcomes and projected inflation improving significantly, the Monetary Policy Committee (MPC) at its meeting in December 2008 decided to reduce the repurchase rate by 50 basis points – the first reduction since 2005. At its February 2009 meeting, the MPC took the decision to lower the repurchase rate by a further 100 basis points. In both instances other money-market interest rates followed the repurchase rate to lower levels.

With the economy slowing, growth in the M3 money supply continued to decelerate in the final months of 2008 and in early 2009. On the other side of the banks’ balance sheet, loans and advances to the domestic private sector also continued to lose momentum. Most recently, growth in mortgage advances – for several years the mainstay of banks’ credit extension – decelerated abruptly, confirming the current weakness in the property market. No liquidity strains came to the fore in the South African money market over the past year and the amounts provided to the private-sector banks at the weekly refinancing tenders continued to fluctuate in normal fashion. Nominal house prices declined somewhat over the most recent twelve months, but receded considerably in real terms. South African share prices fell substantially to a recent low point in late November 2008 before recovering some of the lost ground up to early January 2009. In the subsequent seven weeks share prices declined again, reaching levels close to their lows in November. In February 2009 government, mindful of the deteriorating economic environment, and the need to bolster confidence, improve infrastructure and combat the negative impact of the slowdown, announced an expansionary Budget which provided for a national government deficit of 3,9 per cent of gross domestic product in 2009/10. Concurrently, the borrowing requirement of the non-financial public sector was projected to rise to 7,5 per cent of gross domestic product, almost double its value in the 2008/09 fiscal year. While recently, expansionary policies have been embraced by fiscal authorities in most parts of the world, South Africa was in a favourable position because it did not first need to design and gear up for new expenditure programmes, but had already embarked on a much-needed infrastructure drive that was gaining momentum.