The 1984 Annual Economic Report focused on the relatively short, but vigorous, economic upswing from the second quarter of 1983 to the middle of 1984. At the time, it was explained that, in'theface of adverse extraneous developments, this essentially consumption based upswing proved to be unsustainable because of growing imbalances in the economy, such as a deteriorating balance of payments on current account, a weakening of the rand and accelerating inflation. The Report also listed the additional remedial policy measures introduced early in the second half of 1984 to bring about a much needed adjustment in the economy. This year's Report reviews the progress that has been made towards achieving this adjustment, firstly in terms of correcting short-term imbalances, and secondly in terms of effecting structural changes aimed at promoting sustainable growth and employment creation in the longer term.Adjustment in the economy commenced almost instantaneously and was triggered by an abrupt substantial decline in real gross domestic expenditure, and in particular in the private and government consumption components, in the third quarter of 1984. This decline in consumption partly represented a natural downward correction of spending from its exorbitant level in the preceding quarter and partly a response to the more restrictive policy stance. Real gross domestic expenditure fell further during the ensuing three quarters and by the middle of 1985 the decline from the second quarter of 1984 had accumulated to 9 per cent.This real expenditure decline naturally exerted a contractionary influence on real output growth. At the same time, however, an accelerating increase in real exports promoted higher levels of real output in export sectors and in this way served to cushion the effect of the fall in real domestic demand. On balance, these two off-setting forces brought about a decline of 2112 per cent in real gross domestic product between the second quarter of 1984 and the corresponding quarter of 1985. The contradictory forces at work were also reflected in an uneven distribution of the decline in real output among the different sectors of the economy. Those that are mainly dependent on export demand achieved a much better output performance than the others relying more on domestic demand. As might be expected, the contraction of real output was accompanied by a considerable increase in unemployment.The downward adjustment of real gross domestic expenditure was reflected in an appreciable decline in the volume of imports, which supplemented the strong real export growth and helped to bring about a substantial improvement in the balance of payments on current account. In the fourth quarter of 1984 the current account moved into surplus and by the second quarter of 1985 the surplus had grown to a seasonally adjusted annualised figure of R5,4 billion. It was not before the second quarter of 1985, however, that the overall balance of payments recorded a surplus. Previously, during both the fourth quarter of 1984 and the first quarter of 1985 a large net outflow of short-term capital had occurred. As a reflection of the overall balance of payments surplus as well as a somewhat weaker US dollar, the effective exchange rate of the rand achieved a significantly greater degree of stability in the second quarter.Despite the success achieved in eliminating excess demand, the rate of inflation, as measured by the consumer and production price indices, continued to accelerate during the twelve months up to the middle of 1985. This was largely the delayed result of the earlier demand inflation and the accompanying depreciation of the rand up to January 1985, and was fully in accordance with official prognostications.In terms of short-term objectives, therefore, the adjustment in the economy had by the middle of 1985 succeeded in bringing about a substantially improved balance of payments, a more stable exchange rate of the rand and prospects of an imminent peak and subsequent decline in the rate of inflation. Moreover, expectations had arise