Annual Economic Report Introduction The global economic setting continued to be favourable during the past year. World economic growth was strong in 2006 and is expected to broadly retain its momentum in 2007. At the same time, individual country growth rates have gradually become more uniform with fewer outliers as economic policy frameworks have become more focused on sustainability and soundness. The fact that aggregate growth was more consistent also contributed to individual countries’ economic stability, as did the continued strength of commodity prices. A broadly similar observation may be made with regard to inflation: In recent years global average inflation has reached fairly low levels, while the dispersion of individual country inflation rates has also narrowed considerably, with the exception of a small number of outliers. Although consumer price inflation remained moderate in most parts of the world over the past year, the prices of commodities remained high and capacity pressures intensified. A sustained increase in oil prices not only impacted directly on inflation, but also encouraged the diversion of agricultural products to the production of bio-fuels, thereby contributing to an acceleration in food price inflation. Under these circumstances, quite a number of central banks tightened their monetary policies further in order to contain inflation. A number of risks remained in the background. Global current-account imbalances continued, but during the past year the United States (US) dollar depreciated significantly against most major currencies, probably contributing to the containment of the deficit on the US current account. Risk premia imbedded in the prices of financial assets rose from very low levels, with a number of events triggering an enhanced awareness of risk among market participants and resulting in a rather abrupt repricing of risk. Probably the most important events of this kind were the turbulence in emerging markets in May 2006 which strengthened international investors’ preference for investment in the more mature markets; the fall in share prices in China in February 2007 and the resulting correction in numerous markets; and the strains developing around the risky “sub-prime” segment of the mortgage market in the US, which led to a loss of confidence in counterparties and culminated in a reduction of liquidity in the credit markets and a sharp decline in global share prices in August 2007. Although the effect of the first two events soon petered out, it remains to be seen how the most recent disruption will impact on wealth, confidence, expenditure and economic activity in general. In a number of economies central banks viewed the turbulence to be severe enough to warrant injections of liquidity into the financial markets. Africa again recorded a robust rate of economic expansion in 2006, registering a real growth rate of roughly 5½ per cent for the third successive year. Against a background of favourable commodity prices, sustained global growth, debt relief, improved economic policies and a stronger emphasis on infrastructural development, it is projected that the economic upswing will maintain its solid momentum in 2007. Replicating the global growth trajectory, real economic growth in South Africa came to approximately 5 per cent in each year from 2004 to 2006 and broadly retained this momentum in the first half of 2007. This solid performance seems likely to sustain the current economic upswing which started in September 1999. Having persisted for approximately 8 years, the upswing is twice the length of the previous longest expansionary phase of the business cycle. It has also contributed to a favourable reassessment of the country’s potential growth rate. Viewed from the production side, the most consistent growth in the economy over the past year and a half was recorded in the services sector. Telecommunication services continued to expand briskly, bolstered by improvements in technology and price reductions in some areas. Lively conditions in the financial and real-estate