in households ’ real disposable income and lower interest rates. tax reductions and relatively high wage settlements supported growth in real disposable income. expenditure on durable and semi - durable goods increased at a brisk rate. real government consumption expenditure also rose further mainly on account of the acquisition of another corvette. preliminary indications for the second quarter of 2004 are that growth in real gross domestic expenditure probably remained fairly strong. solid consumer confidence and buoyant retail trade sales point towards this conclusion, as well as a quarter - on - quarter rate of increase of 3, 6 per cent in new vehicle sales. formal non - agricultural employment declined at an annualised rate of 1, 7 per cent in the first quarter of 2004. both the public and private sectors experienced declines. nominal remuneration per worker rose at a year - on - year rate of 9, 4 per cent over the same period. overall labour productivity increased at a year - on - year rate of 3, 3 per cent in the first quarter of 2004 containing unit labour cost to a yearon - year rate of increase of 5, 9 per cent. notwithstanding the recovery in world economic growth, the volume of south african exports contracted further in the first quarter of 2004. however, the value of exports increased on account of the marked improvement in the prices of south african export commodities. import volumes also declined somewhat in the first quarter of 2004 because of a decrease in crude oil imported. accordingly, the deficit on the current account of south africa ’ s balance of payments receded slightly to 1, 6 per cent of gross domestic product. at this level it was easily financed by inflows of direct and portfolio investment. preliminary information for april and may 2004 indicates a possibly slightly weaker trade balance in the second quarter of 2004. however, in the second quarter of 2004 the proceeds from the republic of south africa ’ s global bond issue of $ 1 billion supported investment flows into south africa. in the first half of 2004, the reserve bank continued its accumulation of foreign exchange reserves and the strengthening of its international liquidity position. the potential impact of these transactions on domestic money - market liquidity was sterilised by means of open - market operations. the exchange rate of the rand against a basket of currencies strengthened by 16 per cent in the year ending december 2003 and, on balance, appreciated by a further 8, 2 per cent in the six months to the end of june 2004. this appreciation occurred despite the setback to international prices

in time since the launch of the euro, due to the past declines in short - term market rates ( see chart 8 ). intra - euro area sovereign spreads, as well as euro area sovereign cds spreads, have narrowed further, in some cases to pre - lehman levels, until very recently, when a few have widened again. looking ahead, the prospects for euro area government bonds continue to be surrounded by persistent uncertainty about future macro - financial developments. upward risks to yields could stem from a further unwinding of flight - to - safety and flight - to - liquidity flows. in addition, slower than expected growth might increase the financing needs of euro area governments and bond markets might face difficulties in absorbing higher government bond issuance. euro area equity markets continue to recover from the severe decline experienced during the financial crisis, supported by market optimism about the economic recovery and diminishing risk aversion. valuation measures based on price / earnings ratios using long - term trailing earnings figures suggest that the markets are not particularly overvalued ( see chart 9 ). alternative valuation measures, based on expectations of future earnings, provide different signals. moreover, risks for stock market prices remain, in particular those associated with an economic recovery that could turn out to be weaker than expected by markets. the euro area banking sector let me now turn to euro area financial institutions, starting with the large and complex banking groups. conditions in the euro area banking sector have improved markedly in the first three quarters of 2009, on account of better - than - expected macroeconomic news and the concomitant rebound in the financial markets. the euro area banking sector has also benefited from the various financial system support measures and the macroeconomic policy stimulus. the earnings and profitability of euro area major banks have recovered significantly, and across the board, in the first three quarters of 2009, after a dismal performance in the second half of 2008. nevertheless, the dispersion of profitability across lcbgs continues to be wide ( see the left side of chart 10 ). the examination of individual revenue categories sheds more light on the factors explaining euro area lcbgs ’ recent favourable performance ( see the right side of chart 10 ). net interest income has been an important driver of the improved bank performance, on account of the steeper yield curve and wider operating margins. the tightening of credit standards, the gradual pass - through of lower policy rates to lending rates and declining competitive pressures in the credit market have all contributed to