Annual Economic ReportIntroductionThe global economy recovered hesitantly in 2002 after a sluggish growth rate had been recorded in 2001. World output growth is estimated to have accelerated from 2½ per cent in 2001 to 3 per cent in 2002. The outlook for the first half of 2003 was clouded by uncertainties related to the war in Iraq, which eventually broke out in late March 2003. This was aggravated by the outbreak of the Severe Acute Respiratory Syndrome (SARS) epidemic which was concentrated in the Asia Pacific region and parts of North America. The tourism and travel industries in particular were adversely affected due to fears of SARS.While economic activity in most parts of the world remained lacklustre during the past year, inflation was quite low, allowing central banks sufficient leeway to pursue accommodative monetary policies. In the United States, for instance, the Federal Funds target rate was eventually reduced to one per cent per annum, its lowest level in forty-five years. Simultaneously, fiscal policy was loosened quite substantially through a combination of increased government expenditure and reduced taxes. Most developed countries pursued expansionary macroeconomic policies; the combination of monetary and fiscal policy settings adopted in the United States is illustrated in the accompanying graph. Despite these policy measures, however, firm evidence of a resumption of sustained buoyancy in the major developed economies was still being awaited by mid-2003, even though some leading indicators had started to improve.These developments and concerns about the growth prospects of major industrialised countries had a significant impact on South Africa’s economic performance during the past year. Weakness in the world economy caused a reduction in the demand for South African exports, which in turn contributed to a slowdown in real gross domestic product growth. The recovery in the exchange value of the rand also reduced the international competitiveness of South African producers.Growth in South Africa’ s real gross domestic product peaked in the first half of 2002 and slowed down to an annualised 1½ per cent in the first half of 2003 – less than half its recent peak pace of increase in the first half of 2002. The slowdown was most severely felt in manufacturing and in the primary sectors, with real output stagnating or contracting in each of these sectors during the first half of 2003.Notwithstanding slower growth in real production over the past year, the growth in aggregate gross domestic expenditure remained fairly buoyant, recording annualised half-yearly increases of 4½ per cent in both the second half of 2002 and the first half of 2003. This development indicates strong support for production from domestic demand. Conversely, exports of goods and services have faltered from the second half of 2002, having previously been underpinned by the depreciation of the rand in the second half of 2001.All the components of final domestic expenditure continued to rise during the past year. Growth in real gross fixed capital formation, in particular, accelerated strongly during 2002 and reached an annualised rate of 9 per cent in the second half of that year. It decelerated to a still solid 8 per cent in the first half of 2003 as capital formation in agriculture receded on account of falling product prices and lower output volumes. Public corporations’ investment spending remained buoyant, while that of general government accelerated somewhat from low levels.Growth in household final consumption expenditure has remained firm despite the tighter monetary policy stance. Households maintained expenditure growth partly by increasing their use of bank credit. Government consumption expenditure growth accelerated slightly, signalling government’s greater emphasis on service delivery.While poor employment prospects continue to hound the South African labour market, comprehensive figures obtained from the 1996 and 2001 Population Censuses indicate an increase in overall employment of 470 000 persons between the two census