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Annual Economic Report Introduction The economic recovery which started in the second quarter of 1993 began to show signs of hesitation in the second half of 1995 and the slightly weaker growth tendency, which then became evident, lasted throughout 1996 and the first half of 1997. From the second half of 1996, declining real gross domestic expenditure strengthened the popular presumption that the recovery had lost some of its earlier vigour and that the economy had entered a downward phase of the business cycle. Notwithstanding this evidence pointing to a slowdown in the economy, the level of real gross domestic product in the first half of 1997 was still approximately 2 per cent higher than in the first half of 1996. The overall growth rate slowed down slightly, but the economy was still expanding. A technical analysis of business cycle developments could find no conclusive evidence that the recovery had run its course and that the cycle had passed through an upper turning-point. In fact, the majority of indicators sensitive to business-cycle movements are still rising faster than their long-term trend growth. Output growth in the non-primary sectors also showed remarkable resilience in the second quarter of 1997. Weaker growth in production in the first half of 1997 was predominantly confined to the primary sectors of the economy. Whereas robust growth in agricultural production buoyed overall economic activity in 1996, the return of agricultural output to volumes more attuned to the long-term growth trend of the agricultural sector had a generally contractionary effect on overall economic growth. Mining output was also lowered sharply during the past thirty months as gold-mining production declined to its lowest level in forty years. In contrast, the value added of the non-primary sectors was still expanding over the past eighteen months, albeit at somewhat less vigorous rates than during 1995. The slowdown in general economic activity was confined more to a deceleration in aggregate domestic demand than in aggregate production. Total real spending in the domestic economy began to decline in the third quarter of 1996 and kept on declining until the first quarter of 1997, but then increased moderately in the second quarter. Growth in real private consumption expenditure and real gross domestic fixed investment tapered off in 1996 and the first half of 1997, while cutbacks were made to net inventory investment. In typical counter-cyclical fashion, real consumption expenditure by general government expanded in 1996 and the first half of 1997. This neutralised the potentially contractionary effects of slower growth in aggregate private-sector spending to some extent. The projection of government spending for the remainder of the current fiscal year nevertheless indicates that the growth in consumption expenditure by general government will not be maintained at the high levels of the past eighteen months. One of the key assumptions of the macroeconomic strategy for Growth, Employment and Redistribution, namely a gradual reduction of government consumption expenditure relative to gross domestic product, is therefore likely to be attained. The upward thrust in spending by general government over the past eighteen months was also responsible for a further weakening of the domestic savings rate. The domestic savings rate fell short of the contemporaneous investment rate, as well as of the investment rate required for boosting output growth to a level that would effectively confront the problem of unemployment. One way of relaxing the constraint of inadequate domestic saving on long-term economic growth is to attract foreign saving by creating a more investor-friendly environment in South Africa. A stronger savings effort by the public sector is a key element in the process of bringing about such an investor-friendly environment. Stronger output growth in the non-primary sectors of the economy in the second half of 1996 had a mildly positive influence on the overall level of formal-sector employment in the fourth quarter of 19