normalisation of policy rates and the end of the asset purchase programme in the us, the high - yielding emerging market economies ’ securities has lost their appeal somewhat. bis central bankers ’ speeches a further channel of transmission for quantitative easing has been through exchange - rate movements. capital inflows, particularly portfolio inflows, to emerging market economies have resulted in the appreciation of some emerging market economies ’ currencies. however, according to the imf, the overall impact on emerging market economies was generally positive. it further argues that the positive spill - over effects from the relatively stronger demand in advanced economies, as well as from the lower costs of capital, cheaper sovereign financing and higher equity prices, outweighed the negative effect of currency appreciation. some of the positive net effects of quantitative easing on emerging market economies were, however, reversed following the “ tapering ” announcement in may 2013 which triggered changes in us policy expectations. some evidence suggests that the announcement has likely reduced market participants ’ risk appetite for investing in emerging market economies. indeed, many emerging market economies experienced a sharp withdrawal of private capital inflows and increased financial market volatility. the impact has, however, increasingly become differentiated among economies. countries with stronger fundamentals, deeper financial markets and a tighter stance on capital flows and macro - prudential policies, prior to tapering, seems to have experienced less volatility. south africa was among the emerging market economies strongly affected by the us fed ’ s tapering announcement. as in other emerging market economies, portfolio inflows slowed from may 2013 and turned to outflows in the second and fourth quarters of 2013 and again in the third quarter of 2014. the exchange rate of the rand has also been volatile. although some of this volatility can be explained by the changing expectations of the timing of the first us interest - rate increase, domestic idiosyncratic factors were also at play, including weak growth projections, large twin deficits, a sizable share of foreign holdings in rand government debt and downgrades of south africa ’ s credit ratings. the flexible exchange - rate system and robust macro - prudential policies in south africa have, to some extent, served as a buffer in offsetting some of the negative spill - overs. market perceptions of a possible delay in us normalisation, coupled with the european central bank action, have changed global market risk sentiment and improved the prospects for capital flows to emerging markets over the short - term. this, however

global growth outlook is likely to persist for some time, and we need to be mindful that the prevailing financial crisis has already lasted five years, with no end in sight, the challenges facing the domestic economy are daunting. but not all of our problems can be ascribed to these global factors. there are numerous underlying structural problems in the economy which are exacerbated, but not necessarily caused, by these global developments. in line with the weak and deteriorating global outlook, the bank has been progressively downgrading its economic growth forecasts over the past year. growth in 2012 is expected to average around 2, 7 per cent, down from 3, 1 per cent in 2011. the most recent forecast for bis central bankers ’ speeches 2013 is a growth rate of 3, 8 per cent, but the risks are seen to be on the downside. according to reuters, the market consensus forecast for 2013 is 3, 3 per cent. growth rates of this order of magnitude will not have an appreciable impact on south africa ’ s unemployment rate which currently stands at 24, 9 per cent. it is instructive that during the high growth years between 2004 – 2007, when growth averaged around 5 per cent, unemployment declined to 21, 9 per cent but this was quickly reversed following the crisisinduced recession in 2009. so if these patterns are to be repeated, we would need a number of years of significantly higher growth than we are currently expecting simply to get back to pre - crisis levels of unemployment. however, the sustainable growth rate itself is constrained by the potential output of the economy, which, in turn, is determined by capacity and other structural constraints. at a simple level that implies that if we have unemployed resources or spare capacity in the economy, output can be increased in a non - inflationary manner. research done in the bank prior to the crisis showed that the potential output growth of the economy was between 4 and 4, 5 per cent. since the crisis, that has declined to around 3, 5 per cent. this decline may have been due in part to some destruction of capacity and we also now know that growth will be constrained by the lack of adequate electricity provision until sometime next year at the earliest. i should note that this does not imply that a growth rate in excess of 3, 5 per cent would necessarily be inflationary. currently the economy still has a negative output gap, which we estimate to be around 3, 5 per cent, which is indicative