. the possibility of a slowdown in china poses further risks, not only to the growth recovery in the advanced economies, but also to emerging markets in general. trade and investment linkages with china have increased markedly in recent years, and a slowdown could adversely affect these trends. an important channel of transmission of a slowdown is already being felt by commodity exporters through the impact on commodity prices, particularly industrial commodities. the nature of the reaction function of the chinese authorities and possible stimulus packages is still uncertain. complicating the outlook are the challenges faced by the chinese banking sector, in particular the shadow banking sector, which has the potential to reinforce the slowdown. more positively, the outlook for the advanced economies appears to be improving, but already some doubts have arisen regarding the strength of the recovery following a generally disappointing first quarter. from a south african perspective, although the recovery in the uk appears to be sustained, we are particularly concerned about the slow pace of recovery in the rest of europe, which remains an important destination for our manufactured exports. the outlook for emerging markets, by contrast, has deteriorated in recent months, and there is a risk that a generalised slowdown in these economies could undermine the recovery in the advanced economies. how has south africa fared against this challenging backdrop? following the initial announcement by the us fed regarding possible tapering, the rand was one of the currencies most negatively affected. the rand was at around r9, 00 against the us dollar at the beginning of may 2013, and depreciated to around r10, 00 against the dollar following the initial tapering announcement. it then followed a volatile depreciating trend, reaching its weakest point of r11, 39 against the dollar immediately after the january mpc meeting. since then it has followed an appreciating, but volatile trend, to reach a recent high of around r10, 50 in early april. we expect this pattern of volatility to continue, as the hesitant move towards us monetary policy normalisation proceeds, with markets being overly sensitive to any data coming out of the us. for example, last week ’ s non - farm payrolls data came in slightly lower than expected. this disappointing news for the us was seen as good news for emerging markets, and the rand, along with the brazilian real, appreciated by over one per cent in response. underlying these volatile movements in the exchange rate was the changing pattern of capital flows. during 2012

achieving sustainable optimum economic growth and development. recent improvements in the current account of the balance of payments, the firmer exchange rate of the rand, the increased inflow of foreign capital, and the rise in official foreign exchange reserves, provide sufficient evidence to the effect that the serious danger of a collapse in south africa ’ s external economic relations a year ago has been successfully averted. moreover, there are encouraging, although as yet still only tentative, signs, emanating from both the production and the expenditure sides, that the economy recovered slightly during the second quarter of 1997. this preliminary indication is also confirmed by some hopeful signs that the inflationary pressures which arose from the economic imbalances experienced last year are now subsiding. at the same time, however, the overall financial situation still provides reason for concern, particularly in view of the continued high rates of increase in bank credit extension and in broad money supply. for reasons that will be explained in more detail below, the monetary authorities must persist with their vigil against the threat of overall financial instability that can only lead to stagflation in due course. there are many examples in the world today, both among industrial and emerging economies, where this lesson is again being learnt the hard way after years of reluctance to apply appropriate but unpopular short - term disciplinary monetary policies in a timely fashion. the reserve bank is not prepared to consider any short - term expediencies and implement monetary policies that will in the long term lead to serious disruption of financial stability. the country just cannot afford unsound monetary policies for short - term gain. such policies would gradually undermine the value of the rand and lead to an eventual collapse of the financial system, with serious adverse implications also for the level of real economic activity. recent economic developments the reserve bank ’ s annual economic report released this morning serves as a background to the following brief summary of major economic developments over the past twelve months : a year of economic consolidation the pattern of developments in real economic activity over the past twelve months can best be described as the outcome of a necessary process of consolidation after three years of positive growth. the rate of expansion in gross domestic product reached a seasonally adjusted and annualised rate of 31½ per cent in the second half of 1996, but then slowed down to only 1 per cent in the first half of 1997, indicating a lower rate of growth for the full calendar year of 1997 compared with that experienced during any one of the past two years. during the first