Address by Mr TT Mboweni,Governor of the South African Reserve Bank,at the dinner for Heads of Foreign Missions,Pretoria,1 December 2003  RECENT ECONOMIC DEVELOPMENTS   1. Introduction Dean of Diplomatic Corps - Ambassador AlzubeidiMembers of the Diplomatic Corps, Ambassadors and High CommissionersRepresentatives of: the United Nations System - Mr OhiorhenuanThe European Union - Ambassador LakeThe International Labour Organisation - Dr Andoh The World Bank - Mr OmarForeign Affairs - DDG: Africa, Ambassador MamaboloManagement & Staff of the South African Reserve BankLadies & Gentlemen As a relatively open developing economy, South Africa was again affected considerably by world economic conditions during the past year. The weak and fragile global economic recovery impacted on domestic economic growth, low world inflation contributed to a decline in domestic inflation and substantial financial inflows led to a further recovery in the external value of the rand. 2. International economic developments Global economic activity suffered a setback in the second half of 2002 when business confidence was detrimentally affected by revelations of corporate accounting malpractices, a further decline in stock exchange prices and a threat of war against Iraq. In the first half of 2003 equity prices began to rise somewhat and the war in Iraq was concluded without severely impacting on oil production. Yet the international economy continued to move at a sluggish pace, with the result that most analysts downgraded their initial forecasts for world growth in 2003. More recently there have been encouraging signs that the macroeconomic environment has improved somewhat. Production growth in the United States of 8,2 per cent in the third quarter of 2003 seems to confirm that the much-anticipated economic recovery is gaining momentum. This acceleration in the pace of growth impacted favourably on the demand for labour, causing the US unemployment rate to edge lower to 6 per cent in October 2003. The real gross domestic product of Japan also increased at stronger-than-expected rates during 2003, while growth in China remained high. A strong domestic demand, improved export performance and fiscal and monetary policies in the rest of Asia are expected to support growth in the rest of this continent. In contrast economic activity in the euro area was weaker than expected in the second quarter of 2003, but indicators for this region indicate that economic activity could firm somewhat in the coming months. Rising net exports and real exchange rate developments are expected to lead to a modest recovery in Latin America. Global inflation remains low and monetary and fiscal policies were eased in most advanced economies during the past two years. However, with the recent acceleration in economic growth, some authorities have begun with a less lenient policy stance. The Reserve Bank of Australia and the Bank of England have both recently increased their official central bank rates by 25 basis points. Both central banks cited the pickup in economic activity and increasing household borrowing as the main reasons for the tightening in their monetary policy. An important further characteristic of the global economic environment in the past two years has been a considerable weakening in the external value of the United States dollar. In particular during the current year this has affected the currencies of most developing countries because of substantial financial inflows into these countries. 3. Domestic production and expenditure Although domestic growth is expected to benefit from the improvement in the global economic environment in the coming months, the weakness in international economic growth impacted severely on domestic production. Having recorded a high rate of 5 per cent in the second quarter of 2002, real output growth in the South African economy slowed down progressively in the next four quarters to a mere ½ per cent in the second quarter of 2003. In the third quarter of 2003 the growth in production rose somewhat to an annualised rate of 1