dampening the stimulative effect of lower central bank policy rates. as asset prices adjusted to more realistic levels, the implied negative wealth effect reigned in consumption and banks ’ appetite for lending. the gradual reduction of excess housing inventories delayed any recovery in residential construction. we did observe these developments in south africa, even though the pre - 2008 degree of private - sector leveraging had fallen short of what was seen in many developed economies, and as a result, the adjustment required was somewhat less brutal. for a while, the recovery in prices of south africa ’ s commodity exports, a direct consequence of asia ’ s strong recovery in 2010 and early 2011, partly offset the impact of these internal adjustments. higher commodity prices boosted the profits of resource exporters ; they allowed for some recovery in overall employee compensation ; and as the higher terms of trade encouraged a trade - weighted appreciation of the rand, they further boosted real disposable income via a decline in imported inflation. it was no coincidence that growth in south africa in 2010 and 2011 was strongest in the consumer sector, and in particular goods consumption. but even this “ safety valve ” seems to be gradually closing. south africa ’ s terms of trade have now declined for three consecutive quarters up to the second quarter of this year. the most obvious impact of this deterioration has been on the current account deficit, which increased from 3. 3 per cent of gdp on average in 2011 to as much as 6. 4 per cent in the second quarter of 2012, the largest shortfall since the third quarter of 2008. but economic growth has also borne the brunt from poorer terms of trade, as well as slowing global demand, domestic work stoppages, and business concerns over the long - term supply of energy and skilled labour. at the time of the september mpc meeting, the reserve bank projected gdp growth to decelerate to 2. 6 per cent this year from 3. 1 per cent in 2011, and to re - accelerate to 3. 4 per cent in 2013, but warned about possible downside risks to this forecast. the room for fiscal support is closing how can policymakers respond to extended low growth? in most cases, it would be futile, and indeed erroneous to try and prevent some of the adjustments mentioned above. healthier bank and household balance - sheets, more reasonably valued assets, and the end of demand - supply mismatches in the real estate sector are conditions necessary for a more solid, sustainable recovery.

. this figure, however, still includes credit extended to local authorities. a refined version of the definition of bank credit extension to the private sector, excluding local authorities, indicates a growth of only 12. 4 per cent over the twelve months up to december 1997. be that as it may, the reserve bank remains concerned about the high level of bank credit extension in south africa over the past three years. bank credit extension is the main source of money creation, and the increase of 17 per cent in the m3 money supply last year raised the level of the total money supply to gross domestic product to 60. 2 per cent in the fourth quarter of 1997, compared to 56 per cent a year earlier. with a low income velocity of circulation at this stage, there is always the danger that idle money can easily be activated in spending on real goods and services. it is accepted, however, that a number of structural changes affected the developments in the major financial aggregates over the past few years which require discreet interpretation of the meaning of the observed changes. the almost explosive increases in the volume of transactions in the financial markets, for example, may have contributed significant amounts to both bank credit extension and the money supply. total turnover in the secondary bond market increased by 41 per cent in 1997 to an aggregate amount of r4, 269 billion. the number of shares traded on the johannesburg stock exchange almost doubled from 1996 to 1997, whereas the total value of transactions increased by 77 per cent to r207 billion. less spectacular, but also significant, increases were registered in the markets for derivatives and for foreign exchange. financial market operators obviously needed more cash ( money ) against the inflated turnovers. however, no central banker should ever become complacent about excessive increases in bank credit extension and in the money supply. even if such increases do not have any visible or proximate effect on real spending or inflation, the excessive amount of money, once it has been created, can easily be redirected, at some inopportune future time, into spending on goods and services. what is of even more importance, is that excessive growth in the banking sector, relative to real economic growth, can lead to a systematic decay in the health and soundness of the financial system. ample evidence of the dangers of persistent excessive expansion in the financial aggregates can be found in the recent frustrating experiences of many countries in south - east asia. it is, however, true that the excessive increases in bank credit extension and