Welcome to the launch of the Annual Economic Report 2012. I will give a brief overview of selected highlights from the report in the next few minutes, and then allow questions on its contents thereafter. Its embargo will be lifted at 10:00.

Allow me to caution you that this is not a session for questions related to the monetary policy stance of 19 July 2012 – we have the Monetary Policy Committee statement, media releases, Governors’ speeches and the Monetary Policy Forums that endeavour to do so.

The Annual Economic Report presents the broader macroeconomic context within which the South African Reserve Bank formulated its policies and conducted its operations in the past year. It also serves as background information to the Governor’s Address at the Annual General Meeting of Shareholders of the Bank, to be held in this conference centre on Friday, 27 July 2012.

My brief remarks will highlight four of the critically important factors that affected the South African economy over the past year. 

Firstly, is the international economic environment as observed worldwide, the global economy has been quite disappointing over the past year, with the greatest concerns raised with respect to the recalcitrant economic and political developments in the euro area. A number of actions have been taken to address these concerns, but significant doubts, even within the euro area, remain, raising the risk premia and clouding economic prospects.

With unsustainable fiscal deficit and high debt levels, it is clear that a strong dose of medicine has to be taken to address the current ailments. Voters are not taking the prescribed medicine; hence several governments have been replaced in the process. The eventual outcomes of the advanced economies’ predicament are difficult to predict.

Secondly, is the need for South Africa to regain international market share. South African exports used to be more than 1,5 per cent of total world exports in the early 1960s, but that share dwindled to around 0,5 per cent by the year 2000. Subsequently, the ratio has increased marginally to almost 0,6 per cent, but that has been brought about more by increases in the international prices of South Africa’s export commodities and less by growth in the quantities exported.  

South African export volumes remain far below their previous peak (reached in 2008 before the full impact of the global crisis took effect). This situation has to be improved, as is widely recognised. One way to do so is by changing the pattern of exports, increasing the share going to the economies with vibrant growth patterns and decreasing the share going to stagnant economies. Evidence has shown that South Africa has been doing so over the past decade, with the share of exports going to China, India and Africa rising as that going to Europe has been shrinking.

Thirdly, is the importance of the current infrastructure drive. Economic growth has been too slow and is expected to be so in the near term to make bold inroads into unemployment. Debottlenecking infrastructure has a key role to play in reinvigorating the South African economy. It has been recognised and given prominence in government’s plans, in the creation of the Presidential Infrastructure Co-ordinating Commission in 2011 chaired by the President, and in the President’s State of the Nation address early in 2012. 

However, capital spending (particularly the dismal performance of the private sector in the recent past) often lags the business cycle. The fixed investment ratio weakened considerably in the 1980s. It recovered partly in recent years but, overall, fixed capital formation remains around 19 per cent of gross domestic product levels. Several percentage points higher than 20 per cent would be needed to ignite the sustainable, strong growth and inroads into high unemployment which the country does not need.

Nevertheless, the public corporations in particular have raised their capital spending considerably since 2007, and further steps are being taken to ensure that the public sector plays its part fully in alleviating the infrastructure constraints to growth. The very slow growth in South Africa’s real capital stock (actually a decrease in the capital stock of the electricity, gas and water sector) has been converted into a visibly stronger pace of increase. The capital stock being added is, in many instances, not yet operational – it is only when the capital project reaches the stage where it starts to deliver that the bottleneck is really addressed – which will, in the case of electricity, be around 2013.

Fourthly and finally, is the inflation environment. Food and oil prices rushed higher in 2011, but these prices subsequently lost momentum. This was reflected in the level of consumer price inflation, which heated up in 2011, exceeding the upper limit of the target range of 6 per cent for a few months towards the end of the year and in early 2012, but moved to within the target range most recently.

Projections for the future path of inflation have also been revised downwards, and played a prominent role in the decision of the Monetary Policy Committee last week to reduce the repurchase rate from 5,5 per cent to 5,0 per cent per annum.

Thank you for your attention. You are welcome to direct your questions on the economy and the contents of the Annual Economic Report to me and my colleagues.