The recession in the South African economy, which had started in March 1989, deepened considerably in 1992 and then levelled off in the first half of 1993. Although the decrease in real gross domestic product was relatively small over this cyclical downward phase, the recession nevertheless affected the inhabitants of the country seriously because it followed a long period of low average economic growth. In addition, uncertainties arising from the process of constitutional negotiations, intermittent civil unrest and violence, a generally weak international economy and the widespread drought in 1991/92, prolonged the downturn in economic activity and increased its severity. Many people therefore became unemployed and insufficient new job opportunities were created: the number of people unemployed or involved in the informal sector of the economy rose to approximately 46 per cent of the economically active population in 1992 from about 39 per cent in 1988.Despite the severity of the recession, real gross domestic expenditure decreased only moderately, on account of the relative firmness of consumption expenditure. Real consumption expenditure of general government continued to rise in the economic downswing and as a ratio of gross domestic product it reached an all-time high in 1992. Real private consumption expenditure also increased in the initial stages of the downswing, but began to decline sharply from the beginning of 1991. Owing mainly to pre-emptive buying to avoid higher prices, it recovered somewhat in the first half of 1993. Consumer demand, however, remains fragile. Factors such as the decline in real personal disposable income, expected low salary and wage adjustments, job insecurity and the generally low level of consumer confidence are not supportive of a sustainable increase in consumption expenditure.The firmness of consumption expenditure was neutralised by sharp decreases in real fixed capital expenditure and in inventory investment. A general lack of confidence, the high percentage of unutilised production capacity, low international growth, the high rate of taxation and rationalisation and cost -cutting programmes led to a decrease of no less than 23 ½ per cent in real gross domestic fixed investment from the third quarter of 1989 to the second quarter of 1993. As a result of the need to replace ageing machinery and equipment and a strong export demand for manufactured goods, fixed investment in private manufacturing was maintained at a relatively high level.Notwithstanding the rising unemployment, the real remuneration per employee in the formal non-agricultural sectors increased at an average annual rate of 2 per cent in the downswing. The share of labour rewards in total nominal factor income therefore increased. The redistribution of factor income in favour of labour contributed to a high propensity to consume and a low propensity to save. It also had important negative implications for entrepreneurial motivation, innovation and investment, and therefore for the development potential and international competitiveness of the economy.At the same time, non-agricultural labour productivity increased at a rate that was considerably higher than its long-term trend growth. This was a sharp divergence from its cyclical behaviour in the previous two recessions when productivity contracted. The stronger growth in labour productivity over the period 1989 to 1992 was achieved not so much through a stronger commitment to work, but more by retrenching workers at a quicker rate than the decrease in output volumes. Even so, the rate of increase in the real remuneration per worker still exceeded the growth in productivity, with the result that real unit labour costs continued to increase.There are nevertheless very promising indications that the measured inflation rate is abating and that the country could be moving into an era of greater price stability. If it had not been for price increases associated with specific incidents, such as the Gulf War of 1990, the drought, the introduction of value-added tax and the