Date: 24/06/2010
Source: South African Reserve Bank
Title: SARB: Mnyande: Remarks by the chief economist and advisor to the SARB governor at the launch of the June 2010 Quarterly Bulletin

Since the release of the previous Quarterly Bulletin in March 2010, the
Research Department of the South African Reserve Bank (the Bank) has
continued to monitor and analyse the local and global economic developments
and their impact on the various sectors of the South African economy. This
June 2010 Quarterly Bulletin published today will attempt to look backwards
at the trends of various economic indicators and most importantly highlight
the recent economic developments. While these are adequately covered in this
review, it is also crucial to reflect on the strengths and weaknesses of the
domestic economy, and highlight some forward-looking issues.

The information in this publication confirms that the South African economy
has undergone nine consecutive months of recovery supported both by domestic
and international demand. The further recovery in the first quarter of 2010
reflected the continued resurgence in most sectors of the economy, with
mining playing a remarkable role alongside electricity, water and commerce.

The further increase in production during this quarter has marked the
slowest pace of inventory depletion since the start of the economic recovery
in June 2009, but was not strong enough to elevate the capacity utilisation.
While these positive developments are most applauded, some concerns remain
about the durability of this vigour going forward. The sustainability of
this recovery is largely dependent on the sentiment of the various
counterparties of the domestic economy and the developments in the global
economy.

Domestically, the onsite inspection in some production sites revealed that
capacity utilisation levelled around 60 per cent in some sections of the
manufacturing sector last year and around 30 per cent in the first quarter
of this year. On average though, capacity utilisation has advanced
marginally to 79,6 per cent in the first quarter of this year, from 78,8 per
cent in the fourth quarter of 2009. The Kagiso Purchasing Managers Index
(PMI), as measured in May 2010, fell to 51,1 was weighed down by a decline
in the four of the five sub-indices.

The under-utilisation of capacity in the manufacturing sector beyond the
first quarter of 2010 was in harmony with the decline noted in the PMI since
March 2010. Another sentiment indicator, namely the RMB/BER Business
Confidence Index (BCI), also reverted and trended downwards when the level
of confidence in all the five sectors that is, retail, vehicle trade,
building, manufacturing and wholesale dropped during second quarter of 2010.
The decline in these indices, however, does not imply new lows more than the
normalisation to the long-term levels proceeding the boom period.

The views of the business sector on the economy could partly explain how the
increase in public-sector employment was more than countered by a rise in
the unemployment rate in the private sector. Employment in the formal
non-agricultural sectors of the economy, as reported by Statistics South
Africa, decreased by 79 000 persons from December 2009 (an estimated 8 163
000 employees) to March 2010 (an estimated 8 084 000 employees). Tormenting
as the country's sticky unemployment state of affairs is - where jobless
growth seems to have settled between 23 and 25 per cent, in both the boom
and recessionary periods, one should point out that not one or two
quarter/s, but a number of years of sustained strong growth is needed to
address the country's unemployment predicament. Furthermore, one has to call
serious attention to the fact that an environment of financial stability and
low inflation is fundamental to facilitating real progress with growth and
employment.

Notwithstanding the moderation in the above-mentioned sentiment indicators,
the consumer confidence index survey revealed that the level of confidence
among consumers remained broadly unchanged in the second quarter of 2010
after increasing significantly in the first quarter. The enthusiasm of a
certain segment of consumers was largely responsible for the strong growth
in real domestic expenditure in the first quarter of 2010. Thus, real final
consumption expenditure by households picked up sturdily, with purchases of
semi-durable and durable goods progressing at double-digits. Expenditure by
households was mainly encouraged by acceleration in the growth rate of
disposable income, relatively low interest rates and inflation and positive
wealth effects rather than credit extended to them by the banks. On the
contrary, the credit related to mortgage advances inched upwards further
signalling positive sentiments of households and ultimately pushing the
house prices higher.

The muted level of bank loans and advances to the domestic private sector
alongside hesitant business confidence was reflected in the contraction of
real capital outlays in the private sector. This contraction was, however,
partly cushioned by the increased capital expenditure in areas such as
construction, telecommunications and accommodation, partly in anticipation
of the expected influx of tourist during the 2010 FIFA World Cup. Such
expenditure, together with the acquisition of military aircraft by the
general government, raised the value of merchandise imports high enough to
reverse the surplus on South Africa's trade balance into a deficit. As a
consequence, the balance on the current account of the balance of payments
as a ratio of gross domestic product deteriorated to 4,6 per cent in the
first quarter of 2010. While the increase in final demand is expected to
gradually spread throughout the rest of the sectors of the economy, the
balance on the current account is still projected to deteriorate further, to
around 4,9 per cent for calendar year 2010.

Acting in a broadly countercyclical way, the government maintained its
expenditure levels, allowing the budget deficit to widen further in the
previous fiscal year as tax revenue receded on account of the comparatively
subdued levels of economic activity. Most recently there were signs of a
moderate increase in tax collections, consistent with the economic recovery
starting to gain traction.

On the international front, the rebound in domestic economy portrayed the
benefits arising from strong growth in China and India that continued to act
as a catalyst to global economic activity, international trade and commodity
prices. The real growth rates in China, Japan and India stood firmly at
around 11, 0 per cent, 5, 0 per cent and 9, 0 per cent respectively. The
United States economy seemed to be well under way with minimal dependence on
the stimulus aid. While this has been viewed as positive for local exports,
particularly those in the mining sector, the instability in the economic
situation in Europe emanating from the fiscal and sovereign debt challenges
partly affected the trade between South Africa's domestic manufacturers and
their European trading partners. The volume of exports destined to Europe
contracted visibly in the first quarter of 2010 after increasing robustly in
the previous quarter. The effects of the contraction in the overall volume
of merchandise exports were, nonetheless, partly offset by continuous
improvement in South Africa's terms of trade.

While the rise in international commodity prices partly improved the trade
conditions of domestic producers, the prices of shares on the JSE Limited
also advanced in the first quarter but peaked in mid-April 2010 on account
of the developments in Greece. The stability measures implemented by the
European authorities to deal with the sovereign debt crisis improved the
global investor sentiment towards developing countries. The change in the
sentiment became evident when the level of activity in the JSE Limited
rebounded somewhat.

Following this, both the nominal and the real effective exchange rate of the
rand trended higher, further exerting downward pressure on inflation by the
Bank. It should be noted that the developments in the exchange rate of the
rand are scrutinised beyond the impact on inflation. The stability and the
market determined equilibrium level of the exchange rate that is sound for
efficient resource allocation and sustainable growth is more important going
forward and very difficult to ascertain.

Briefly, on outlook, the annual Gross Domestic Product growth forecast as
presented at the most recent Monetary Policy Committee meeting was reported
as 2,7 per cent in 2010 and 3,6 in 2011. This growth outlook was underpinned
by the improved outlook in household consumption expenditure as indicated by
the resurgence in retail sales and motor vehicle sales in particular. The
anticipated improvement in consumption expenditure is consistent with the
cumulative reduction of 550 basis points in interest rates since 2008.
However, adverse effects related to job losses and high electricity prices
could still constrain spending by households and disposable income. Gross
fixed capital formation is expected to be largely supported by capital
expansion projects by public corporations such as Transnet and Eskom over
the near term.

The growth outlook may gain further momentum from the recovery in the
manufacturing sector as indicated by the improvement in both the global and
domestic PMIs relative to the low base from 2009. The recovery in domestic
economic growth appears to be confirmed by the recent rising trend in the
composite leading business cycle indicator of the Bank. The main risks to
the growth outlook are seen to emanate from possible adverse global economic
developments, especially in the euro area with their associated sovereign
debt developments.

The CPI forecast of the Bank indicates that inflation pressures remain
relatively benign and the latest figure for May 2010 shows a further
moderation to 4,6 per cent from April's 4,8 per cent. CPI inflation is still
expected to reach a low point in the third quarter of 2010. The improved
outlook for inflation is supported by the moderation in inflation
expectations during the second quarter of 2010 as reported by the Bureau for
Economic Research inflation expectation survey that was published earlier
this week. CPI inflation expectations on average declined from 6, 5 per cent
to 6,3 per cent in the second quarter of this year. Food price inflation is
expected to remain subdued and the decline of petrol prices during June and
possibly July will further help to alleviate inflationary pressures in the
near term. However, rising administrative prices may still pose a risk to
the inflation outlook.

With these opening remarks, I have highlighted the main issues in the
Quarterly Bulletin with the detailed information available in the
publication itself. The authors will also provide more clarity and the past
quarterly insights in their presentations.

Thank you