The number of central banks raising their policy interest rates during the first eleven months of 2004 exceeded the number lowering them; the United States and China counted among the large economies facing higher short-term interest rates. Sustained large deficits on the current account of the United States' balance of payments and on its federal government budget contributed to further depreciation of the US dollar against other key international currencies during the course of 2004. The impact of the considerable increase in the dollar price of crude oil in international markets - the price occasionally exceeded 50 US dollars per barrel in October 2004 - was therefore softened when translated into these comparatively strong currencies. Nevertheless, higher energy prices, buoyant commodity prices and smaller output gaps (as actual production edged closer to potential output in most parts of the world) resulted in a modest acceleration of inflation in a number of the major economies.

The latest South African national accounts estimates reflect improved coverage of economic activity which has lifted the measured level of nominal gross domestic product by some 3.1/2 per cent in recent quarters. Growth in real gross domestic product has also been raised on account of the revisions and rebasing to 2000 as base year. For instance, the average real growth rate from the second quarter of 1999 to the second quarter of 2004, which had amounted to 2,9 per cent per annum on the previous basis of measurement, has now been revised to 3,4 per cent. Firm growth over the medium term demonstrates the underlying resilience of the South African economy and the tangible benefits flowing from the country's commitment to sound economic policies.

Growth in real gross domestic product picked up further in the third quarter of 2004 to an annualised rate of 5.1/2 per cent - the fifth successive quarter in which real growth accelerated. All the main sectors recorded strong growth in the third quarter of 2004. Real agricultural production expanded as field crop and horticultural output rose briskly. In mining, firm increases in production volumes in areas such as platinum, diamonds and coal more than neutralised the reduction in output of the gold industry. Manufacturing production expanded further on account of robust growth in domestic demand and in export demand for some categories of manufactured goods. In the tertiary sector sturdy growth was recorded in most subsectors, with transport, storage and communication, commerce, and financial and business services displaying the highest growth rates.

Growth in real gross domestic expenditure decelerated considerably in the third quarter of 2004. Real final consumption expenditure by households gained further momentum and was accompanied by an increase in household debt. General government's real final consumption expenditure displayed very little growth. The tempo of growth in real fixed capital formation halved in the third quarter of 2004, as some aircraft were sold (but their services reacquired under operational lease agreements) by South African Airways. Having been boosted by an exceptionally strong increase in oil stocks in the second quarter of 2004, real inventories recorded a more subdued increase in the third quarter; accordingly, the ratio of inventories to production remained almost unchanged from the second to the third quarter.

Enterprise-surveyed employment in the formal non-agricultural sectors of the economy recorded uninterrupted increases in each of the four quarters to June 2004, resulting in a cumulative employment gain of about 196 000 workers or 3,1 per cent. The increase in employment came mainly to the fore in the number of private-sector rather than public-sector employees. This increase was also corroborated by the results of the latest Labour Force Survey.

Real output per worker increased slightly during the year to the second quarter of 2004. With nominal remuneration per worker rising by 7,6 per cent over the same one-year period, the cost of labour per unit of output rose by 7,1 per cent.

Inflation in the prices of goods remained low, contributing to moderation of the inflation process in general. The production prices of imported goods declined by 0,3 per cent over the year to October 2004 as the recovery in the exchange rate of the rand continued. At the production level domestically produced goods recorded a year-on-year rate of price inflation of 2,7 per cent in October 2004, slightly less than in CPIX goods prices. However, twelve-month CPIX services price inflation amounted to 6,3 per cent over the same period, pushing CPIX inflation up to 4,2 per cent. CPIX inflation has nevertheless remained in the 3-to-6-per-cent target range since September 2003, i.e. for 14 successive months, as the strengthening of the exchange rate of the rand and the sustained disciplined stance of monetary policy moderated price pressures.

Relatively favourable global economic conditions were accompanied by buoyant commodity prices and a further marginal improvement in South Africa's terms of trade. This resulted in a moderate improvement in South Africa's export performance and accordingly a somewhat smaller deficit on the current account of the balance of payments in the third quarter of 2004. At the same time, an inflow of investment capital was recorded - the sixth successive quarterly net inflow - to an amount exceeding the deficit on the current account. This left the country with a surplus on the overall external account and an increase in net holdings of international reserves over the period, and contributed to an increase of 10 per cent in the weighted exchange rate of the rand from the end of 2003 to the end of November 2004. Other factors reinforcing the positive sentiment towards the rand in the market for foreign currency included positive pronouncements by two international credit ratings agencies regarding South Africa's credit ratings, the relatively attractive domestic interest rates, subdued inflation, evidence of rising growth rates and the improvement in the terms of trade.

The M3 money supply recorded brisk rates of growth in each of the first three quarters of 2004, consistent with the strength of domestic production and final expenditure. Positive wealth effects on account of rising prices of real estate and financial assets also supported the demand for money. Banks' loans and advances to the domestic private sector benefited from these positive wealth effects. Mortgage credit and instalment sale and leasing finance grew exceptionally briskly as house prices continued to climb and as consumers' high confidence levels and lower interest rate costs were translated into the acquisition of vehicles and other durable items. However, overdrafts and other advances displayed little growth as household and corporate cash flows were improving on account of the lower interest rate environment, while some companies also made more extensive use of foreign funding.

Money-market interest rates generally moved in step with the Reserve Bank's repurchase rate, declining after the largely unexpected reduction in the repurchase rate in August 2004 and then moving broadly sideways. On occasions when the exchange rate of the rand strengthened or when lower-than-expected inflation data were released, the more forward-looking money-market rates indicated expectations of further policy easing in the near term. Long-term bond yields declined further during the second half of 2004, largely in response to the more benign inflation environment.

Despite the expected impact of a stronger rand exchange rate on corporate profitability in the export and import-competing industries, domestic share prices rose considerably in the second half of 2004. Share prices reached an all-time high on 29 November 2004 as firm commodity prices, strong consumer expenditure and the announcement of higher investment in infrastructure, supported investor sentiment.

The South African government again demonstrated its commitment to the pursuit of sound fiscal policies with the release of the Medium Term Budget Policy Statement in October 2004. The fiscal projections provide for a somewhat higher main budget deficit, peaking at 3,5 per cent of gross domestic product in fiscal 2005/06, but fully within the boundaries of sustainability. The public corporations have been mobilised, together with public-private partnerships, to step up investment in infrastructure.

The South African economy appears to have adjusted to the combination of a stronger world economy, favourable terms of trade, lower interest rates and less restrictive fiscal policies by stepping up real expenditure and production. In the process employment is also starting to increase, while inflation remains subdued under the current configuration of policies and exogenous factors. In such an economic environment the South African Reserve Bank will continue to remain vigilant in the battle against inflation. Change in this configuration is inevitable with the passage of time; this underlines the need for robustness and prudence in the economic conduct of households and businesses alike.