t t mboweni : the south african economy : an overview address by mr t t mboweni, governor of the south african reserve bank, at the school of economics awards evening, university of pretoria, pretoria, 8 july 2004. * * * world economic growth has gained momentum since the middle of last year and amounted to 3, 9 per cent for 2003 as a whole. early indications are that activity remained brisk in the first half of 2004, with china and india recording sparkling performances. the global economic recovery has created favourable conditions for higher commodity prices. however, consumer price inflation remained subdued in most parts of the world. global inflation concerns has, however, arisen due to the relatively high price of crude oil. a number of central banks already pre - emptively raised interest rates moderately to contain future inflation, but on balance the level of short - term interest rates remains relatively low. favourable export prices, low interest rates and growth - supportive fiscal policy assisted domestic economic activity and south africa has now experienced eighteen consecutive quarters of economic expansion. growth in south africa ’ s real gross domestic product picked up decisively in the first quarter of 2004 to a seasonally adjusted annualised rate of 3 per cent - more than double the pace attained in any of the four quarters of 2003. the acceleration in real output in the first quarter of 2004 was broad - based. real output in important sectors of the economy such as manufacturing and agriculture, which had contracted throughout 2003, increased markedly in the first quarter of 2004. platinum producers brought about an increase in the production of the mining sector, while construction activity expanded briskly and the tertiary sector again recorded a solid growth performance. preliminary indications for the second quarter of 2004 are that real manufacturing and mining production continued to increase. in contrast to the acceleration in domestic production growth, the pace of expansion in real gross domestic expenditure lost some of its earlier momentum in the first quarter of 2004. this was largely due to a much slower pace of inventory accumulation than in the fourth quarter of 2003. the pace of growth in real expenditure nevertheless continued to exceed the pace of growth in real production. real fixed capital formation recorded an exceptionally high rate of increase in the first quarter of 2004 as private business enterprises stepped up fixed capital outlays and as the south african airways acquired several aircraft. the increased production capacity flowing from investment expenditure gives good reason for optimism about future growth. growth in real household consumption expenditure also gained further momentum in the first quarter of 2004, supported by solid increases

investors questioned president de la rua ’ s proposed spending cuts and other economic measures designed to reduce argentina ’ s ballooning deficit. this package of measures, designed to achieve a zero fiscal deficit, was finally approved by argentina ’ s congress at the end of july 2001 after much debate. fears of a regional crisis in latin america, however, eased when horst kohler, the imf ’ s managing director, this week informed the executive board of the fund that he was prepared to recommend an augmentation of argentina ’ s current stand - by credit facility by approximately us $ 8 billion to about us $ 22 billion. similarly, turkey ’ s economy experienced considerable growth since 1994 but had entered a recession by 1999 as a result of tight fiscal policies and the earlier russian crisis. with high public deficits and a public sector making net payments of external debt after 1994, the pressure grew on turkey ’ s financial markets. the lack of depth of these financial markets and the volatile inflation rate paved the way for sustained high real interest rates. the high real interest rate paid on domestic debt therefore increased the borrowing requirements of the public sector. all this created a vicious circle of debt and interest payments, pushing turkey into an ever more difficult financial position. the deterioration of the public financial balance, the rise in domestic debt due to continued high real interest rates, the acceleration of inflation rates and the continuing economic contraction made it necessary to embark on a medium - term economic austerity programme. this programme was designed to free turkey from high inflation, restore macro - economic fundamentals and address structural weaknesses in the economy. for most of 2000, the government ’ s economic programme made good progress. consumer price inflation declined rapidly from 68. 8 per cent in january 2000 to 33. 4 per cent in february 2001, the lowest level since 1986. gnp growth also accelerated sharply from a contraction of 6. 1 per cent in 1999 to an expansion of 6 per cent in 2000. however, a severe banking crisis in late november 2000 was accompanied by a massive capital outflow. the crisis was triggered by liquidity problems in some medium - sized banks, which had positioned themselves aggressively for continued declines in interest rates. the underlying cause of the crisis, however, appears to be the significant deterioration in the current account and the delays in the privatisation programme which were causing interest rates to rise from september, and more markedly from around mid - november 2000. the severe liquidity squeeze and growing bank distress was accompanied by pressure on overnight