the advanced economies have been through this process are on a path of sustained recovery. the us economic recovery appears to be taking hold, with a clearer path of fiscal consolidation and stronger bank and corporate balance sheets. households deleveraging has also occurred, and the housing market has shown signs of improvement. however, severe weather conditions earlier in the year resulted in a contraction in the first quarter, and it will be difficult for the economy to achieve the 2, 8 to 3, 0 per cent growth forecast recently by the us fed. nevertheless, the underlying strength appears to be there, and the market consensus is for an annual growth rate of around 2, 5 per cent. the uk economy also appears to have moved to a sustained recovery path, with growth of around 3 per cent expected this year. unfortunately, the outlook for the eurozone, an important export market for south africa, is much less favourable. although the region has emerged from recession, growth is expected to be anaemic, with continuing concerns about deflation, particularly in some of the european periphery. consequently, the ecb has taken significant measures in an endeavour to stimulate growth in the region. the german economy appears to be sound, but france has recently slowed down significantly. although the japanese economy recorded strong first quarter growth of 5, 9 per cent in anticipation of bis central bankers ’ speeches the introduction of consumption taxes, this is not expected to be sustained, and the outlook remains uncertain with an annual growth rate expected to be around 1, 5 per cent. the mixed signals emanating from the advanced economies have important implications for emerging markets, including south africa. the abnormally low interest rate environment in the advanced economies, coupled with quantitative easing, led to an almost undiscriminating wall of money flowing into emerging markets. these flows suddenly reversed following the announcement by the us fed in may last year that it was considering tapering its programme of quantitative easing. the initial impact on emerging market bond and foreign exchange markets was severe, particularly those markets which were relatively open and liquid, including south africa. the uncertainty surrounding the timing and speed of tapering resulted in a highly volatile period for emerging markets. when tapering was eventually confirmed in december last year, attention then focused on the timing and speed of us policy normalisation, which is the increase of the policy rate from the zero bound to more “ normal ” levels. so while tapering is steadily continuing, and is expected to be completed later this year, there is a

the deterioration in inflation expectations was also reflected in the increase in the breakeven inflation rates, measured by the spreads between the yields on south african cpi inflation - linked bonds and conventional nominal bonds of the same maturity. if the deterioration in inflation expectations were to continue, it would be a cause for concern given the critical role of expectations in the price and wage formation process. the economy has continued to grow at a robust pace, with quarter - on - quarter annualised real gdp growth accelerating from 3, 5 per cent in the first quarter of 2005 to 4, 8 per cent in the second quarter. this acceleration was attributed in part to the strong increase in the real value added by the manufacturing sector, which appears to have recovered from the contraction in the first quarter. the utilisation of production capacity in manufacturing, having fallen back in the previous two quarters, picked up again in the second quarter of 2005. the physical volume of manufacturing production continued on an upward trend in the third quarter and the most recent value of the investec / ber purchasing manager's index ( pmi ) also indicates that the recovery in this sector has continued, although at a more moderate pace. most other sectors have also remained buoyant and the composite leading business cycle indicator shows a favourable growth outlook. this positive growth performance had a positive effect on employment. according to the quarterly employment statistics survey, formal non - agricultural employment increased at an annualised quarteron - quarter rate of 7, 6 per cent in the second quarter of this year. over the past year this reflects an increase of 84, 000 employees. domestic demand shows few signs of significant moderation and all components of final demand grew at a healthy rate in the second quarter. new motor vehicle sales reached new record highs in september, although there was a moderate slowdown in the growth of motor vehicle sales which increased by 25, 3 per cent over the year. the strong domestic demand has been underpinned by low nominal interest rates, higher real incomes and increases in asset prices. share prices on the jse limited, for example, reached new record highs, and since the previous mpc meeting the all - share price index increased by 4 per cent. the vigorous demand was financed in part by increased borrowing, and the household debt ratio continued to rise in the second quarter. household debt as a percentage of disposable income rose from 60 per cent in the first quarter to 62 per cent in the second quarter of 2005. however, because of