Annual Economic ReportIntroductionGlobal economic growth gathered momentum from the second half of 2003, with the United States growing briskly alongside a particularly strong acceleration of activity in China, India and elsewhere in Asia. The upturn also started spreading to Japan. Early indications are that prospects for the euro area, South Africa’s most important trading partner, have also improved somewhat in the first half of 2004. Most transition economies experienced strong growth, with some benefiting from higher oil export revenues. Africa recorded a growth rate of some 4 per cent in 2003, which was the highest in four years.While global consumer price inflation accelerated very little in 2003 and early 2004, concerns regarding international oil prices intensified during this period. Against the background of rising global demand for oil and concerns about lack of spare production capacity, oil prices rose to more than US$40 per barrel by early August 2004 – levels last observed around October 1990 in the build-up to the first Gulf War.The recovery in global economic activity contributed to the commodity price boom in the latter part of 2003 and into 2004. However, the full benefits of this bull market in commodities eluded some of South Africa’s exporting firms, partly as a result of the recovery in the exchange rate of the rand. Accordingly, the growth in South Africa’s export volumes remained subdued, but import volumes rose considerably.Real economic growth in the domestic economy decelerated to only 2 per cent for the year 2003 as a whole. Production volumes in manufacturing contracted, partly due to the weakness of demand in the euro area and the decline in international price competitiveness experienced by domestic producers. Output in agriculture fell back as a result of poor climatic conditions and relatively low product prices.In the first half of 2004 growth in South Africa’s real gross domestic product picked up decisively to an annualised rate of more than 3 per cent. Lower interest rates, a growth-supportive fiscal policy stance and higher international prices for export commodities raised business as well as consumer confidence and was translated into higher real output. All the main economic sectors recorded increases in output in the first half of 2004. Platinum production continued along a strong upward trajectory. In manufacturing the increases in production were mainly a response to the strength of the domestic market, since export volumes were subdued. Real value added in the construction sector also rose briskly, consistent with buoyant demand for buildings and structures. Transport, storage and communication services displayed the strongest growth among the tertiary sectors.While domestic production volumes were weak in 2003 but recovered in early 2004, real domestic expenditure rose strongly throughout this period. Household consumption benefited from rising real disposable income, lower interest rates and attractive prices of imported items, while government consumption rose on account of the adoption of a somewhat more expansionary fiscal programme incorporating improved service delivery and the procurement of a number of corvettes for the South African Navy. Fixed capital formation was supported by the enhanced affordability of imported capital goods, lower interest rates, strong business confidence, and the higher priority assigned to infrastructural development in public-sector programmes. A sizeable expansion of the fleet of the South African Airways also contributed to the acceleration in fixed capital formation.Nevertheless, the ratio of fixed investment to gross domestic product in South Africa remained low relative to that of many other developing countries and to investment levels needed to obtain high growth. Enhanced levels of capital formation, allocated to economically efficient and sustainable ventures and projects, would go a long way towards strengthening the job-creating capacity of the economy.Underpinned by stronger increases in real gross domestic expenditure than i