out by a strong bull run over the past three months. some other emerging markets, for example brazil, were affected much more severely than south africa. the question is often asked why was south africa left almost unimpaired by the east asian crisis? there are a number of reasons for this : firstly, it must be remembered that south africa had its own mini - crisis in 1996 when sudden capital outflows from the country forced a depreciation of the rand of more than 20 per cent, and the introduction of restrictive fiscal and monetary policies that reduced the growth rate in total domestic expenditure from 5. 0 per cent in 1995 to 2. 7 per cent in 1996, and 1. 4 per cent in 1997. at the time of the east asian crisis, south africa had just gone through a very painful downward economic adjustment period that satisfied foreign investors of our resolve to apply acceptable macroeconomic disciplines. secondly, the south african problems of 1996 were created by a cyclical disequilibrium, following from excessive rates of growth in total domestic expenditure, and this situation could be corrected fairly easily with the right kind of monetary and fiscal policies. in most of the east asian countries, the fundamental problems are more of a structural nature and will require longer and more painful adjustments to restore growth to previous levels. there are, nevertheless, a number of lessons to be learned by south africa from the east asian crisis. our country is also being integrated more and more into the global markets of the world and, as in the case of those countries, developments in south africa are also subject to the very critical surveillance of the international investors ’ community. at this stage, their critical monitors are being focused on : • • • • • • • the health and soundness of the domestic financial sector ; the openness and efficiency of the money and capital markets, and the market in foreign exchange ; the transparency, both of policies and of macroeconomic data made available by the authorities ; the quality of governance in both the public and the private sectors of the economy ; the macroeconomic policies followed in the country by the monetary and fiscal authorities, and in respect of labour and commodity markets ; the overall balance of payments situation, including developments in the current and in the capital accounts ; and the total outstanding foreign liabilities, with special reference to the vulnerability of the country for sudden outflows of capital. in recent months, foreign investors showed their satisfaction with the south african situation by continuing to increase their investments in south africa

of the target range for more than 20 months, accelerating from 7. 1 per cent in september 2010 to around 12. 0 per cent in august 2011. rising prices for food, petrol and electricity contributed 1. 1 percentage points, 1. 6 percentage points and 1. 0 percentage point respectively to the august reading, and greatly influenced what otherwise would have been a somewhat more benign inflation environment. core inflation has also edged up in recent months, although the overall underlying inflation trend appears relatively well contained for now. alongside the increase in inflation, inflation expectations, as measured by both the reuters survey of financial analysts, and the bureau for economic research, have adjusted higher towards the upper end of the inflation target range. whereas inflation expectations remain on average within the target range for the forecast period ending 2013 and as such appear to be relatively well anchored at present, future developments in this regard will require careful monitoring. nominal wage settlements, although well above the upper end of the inflation target range, have moderated. the average wage settlement rate in the first half of 2011 amounted to 7. 5 per cent, compared to 8. 2 per cent in 2010. nominal unit labour costs decelerated from 10. 7 per cent in the second quarter of 2010 to 5. 3 per cent in the first quarter of 2011, despite a marked decline in productivity. demand - side pressures are currently relatively subdued and not expected to exacerbate inflationary pressures in the short term. economic activity in south africa decelerated from 4, 5 per cent real gdp growth in the first quarter of this year to 1. 3 per cent in the second quarter. south africa is currently growing at below its potential growth rate, which we estimate to be around 3. 5 %, with an output gap of around 3 % in the second quarter of 2011. during this quarter the deceleration in economic activity was recorded across the agriculture, mining and manufacturing sectors, with only a marginally stronger performance recorded in the services sector. the combination of adverse weather conditions, industrial action and safety - related stoppages at certain mines contributed to this disappointing performance. high frequency data points to continued weak conditions in the mining, manufacturing and construction sectors and this is also reflected by declining business confidence, to well below the neutral level of 50. the manufacturing sector, which contributes about 15 per cent to gdp, contracted by 7 per cent year - on - year during the second quarter. the monthly manufacturing data and the kagiso purchasing managers ’ index (