The 1985 Annual Economic Report mainly concerned itself with the major adjustments that had been made by the South African economy during the year to June 1985 in eliminating the excess demand that had been allowed to arise in the course of the mini-boom of 1983-1984. The Report noted, in effect, that by the second quarter of 1985 this adjustment process had substantially been completed: domestic demand no longer exerted undue pressure on available resources, considerable surpluses had been restored to the balance of payments on current account, and the exchange rate of the rand had shown a marked degree of stability during the first six months of the year. The Report also observed that, in the light of the appreciable cooling-down of the economy that had already been experienced, some room had been created for the restimulation of consumption and investment expenditure, and noted the initial monetary policy steps that had been taken in that direction. Although referring to the early consequences of the socio-political unrest, the Report was published before imposition of the "standstill" on certain foreign debt repayments and subsequent events.This year's Report records that the marked downward movement of the economy that accompanied the adjustment process, did indeed come to an end in the second quarter of 1985. The encouraging recovery that commenced in the third quarter of 1985 and was confirmed in the fourth quarter, did not, however, build up sufficient self-sustaining momentum to continue smoothly through the first half of 1986. The recovery, in fact, faltered in the first quarter of 1986 before regaining some lost ground in the second quarter. Present indications nevertheless are that the South African economy has consolidated its earlier advances and is now in the process of moving on to somewhat higher levels of expenditure and output. Because of its earlier vacillations, however, the recovery is unlikely to result in growth of the real gross domestic product during the calendar year 1986 of more than 1112 to 2 per cent.After four successive quarters of declines, real gross domestic expenditure revived significantly in the third quarter of 1985. It fell back in the fourth quarter, however, despite a continued moderate rise in real private consumer spending. The subsequent acceleration of the rate of increase in total real domestic expenditure in the first three months of calendar year 1986 was based essentially on a sharp rise in real government consumption expenditure in the final quarter of fiscal 1985/86, and on a marked decline in the rate at which real inventories were being drawn down in most sectors of the economy. Neither of these two forces, however, continued to exert a comparable stimulative effect in the second quarter of 1986. As a result of these various developments,the real gross domestic product rose encouragingly in both the third and fourth quarters of 1985 but fell back in the first quarter of 1986 before recovering marginally in the second quarter.A disturbing feature of expenditure trends in the year to mid-1986 was the behaviour of real gross fixed capital formation, which continued on the downward course on which it had found itself since the first quarter of 1982. Largely as a result of this generally poor investment performance and of continued paring of inventories, the volume of imports uncharacteristically was approximately13 ½per cent lower in the four quarters of the current recovery to mid-1986 than in the four quarters of the preceding recessionary period to mid-1985.This tendency towards lower real import levels was reinforced by the effect of the declining exchange value of the rand on relative import prices. Aided by relatively stable prices of import goods in foreign currencies, and accompanied by a sustained strong South African export performance, this decline in import volumes resulted in continuing large surpluses on the balance of payments on current account. Barring any strongly adverse future developments, the current account surplus for the calendar year 1986 may pl