Annual Economic Report Introduction During the past year-and-a-half the global financial environment remained generally accommodative and the world economy expanded briskly, recording a growth rate of some 5 per cent in 2004 with projected growth of between 4 and 4½ per cent in 2005. While global economic growth moderated somewhat in the second half of 2004 and the first half of 2005, real income still advanced at a fairly rapid pace. The stronger world economy and high international commodity prices contributed to an acceleration in growth on the African continent to a rate which also amounted to around 5 per cent in 2004 – the highest in eight years. Various tensions and concerns clouded the economic horizon, some of which moved closer to resolution during the year under review. In the United States the authorities gradually raised the target rate for federal funds from around mid-2004, mindful of the harmful side-effects of maintaining unsustainably low short-term interest rates. With global policy interest rates in general at relatively low levels over the past eighteen months, longer-term interest rates in the major markets were also subdued. Credit spreads narrowed, with riskier domestic borrowers and emerging-market countries able to borrow on relatively favourable terms. Under these comparatively liquid circumstances, lending expanded briskly and the prices of shares and especially of houses surged in many parts of the world. Over the past year-and-a-half the current-account deficits of the United States and some other countries widened further, while current-account surpluses continued to grow in a number of other countries, including some oil-exporting countries and China. In July 2005 the Chinese authorities replaced the eight-year-long peg of the yuan to the US dollar with a system of managed floating and allowed their currency to appreciate somewhat – an important step in the process of reducing some of the imbalances, stresses and strains in the world economy. The sharp increase in international commodity prices, especially oil prices, contributed to a moderate increase in inflation in most countries since the beginning of 2004. Crude oil prices more than doubled from the beginning of 2004 to August 2005 in the face of strong global demand, geopolitical tensions and concerns regarding possible disruptions of oil production in some countries. While the prices of many other international commodities receded somewhat from their upper turning points in early 2004, prices remained high. Nevertheless, global consumer price inflation picked up very little. In Africa, average consumer price inflation receded from more than 10 per cent in 2003 to a single-digit level in 2004. The performance of the South African economy in recent times seems to be more solid and consistent than before. In fact, the business cycle has been in an upward phase for 71 months since September 1999, making this the longest upswing in the recorded economic history of South Africa. Real gross domestic product registered twenty-three quarters of uninterrupted increase and rose at an average annualised rate of 3½ per cent over this recovery, signifying an appreciable increase in real production per capita. The growth momentum over the past year-and-a-half was sustained by strong domestic expenditure, alongside the stronger world economy and generally favourable terms of trade. From 3½ per cent in the first half of 2004, real output growth picked up to an annualised rate of 5 per cent in the second half before reverting to 4 per cent in the first half of 2005. The services sector was the mainstay of the economic expansion, maintaining momentum throughout the past year-and-a-half while reflecting the strength of domestic expenditure. Overall mining output also expanded strongly, although gold output continued its secular decline. Strong demand for residential and non-residential buildings, complemented by some infrastructural development projects, underpinned brisk growth in the construction industry. Manufacturing output rose significantly duri