Johannesburg — RESERVE Bank governor Tito Mboweni has suggested it is time to be a bit more upbeat on SA's economic outlook as there are "tentative signs" the worst of the global recession may be over.

"The general prognosis is we should begin to be a bit positive ... things are not as bad as they were," he said yesterday.

SA's situation was still "a bit difficult", but hopefully the fiscal and monetary stimulus provided to the economy would help, he said.

Mboweni was speaking at the release of the Bank's twice-yearly monetary policy review, after returning from talks at the Bank for International Settlements in Basel.

The Bank's review painted a gloomy picture for the economy this year, but indicated inflation would continue to subside, suggesting interest rates could fall further.

The review did not say whether SA would slip into recession this year, as most analysts expect.

But it made it clear that "adverse" global conditions would persist for "some time", with a "palpable threat" of worsening, which would mean more negative fallout for SA.

"There is a general expectation that domestic growth will be quite disappointing in the first two to three quarters of 2009 due to weaker domestic and international conditions," the Bank said.

"The global and domestic economic slowdown has had a significant moderating impact on the inflation outlook."

Prospects of lower inflation give the Bank scope to cut interest rates again to help kick-start the flagging economy after a cumulative 3,5 percentage point reduction since December. Its next policy meeting is in two weeks, and another cut in the repo rate, which stands at 8,5%, is expected.

Growth would improve "moderately" next year and in 2011, the Bank said. SA's economy shrank 1,8% in the fourth quarter of last year, its first contraction in nearly a decade. The pace of decline is likely to have quickened in the first quarter of this year.

"Recent indicators suggest that the economy, and the manufacturing sector in particular, is likely to remain under pressure for some time," the Bank said.

Factory output and retail sales, which account for nearly a third of economic output, have plunged at record rates so far this year.

Growth in the real disposable income of households was set to remain "subdued" after contracting in the third and fourth quarters of last year, the Bank said.

But infrastructure spending by the government would help underpin investment, the other engine of economic growth.

Consensus forecasts from a Reuters poll yesterday predict SA's economy will shrink 0,6% this year, worse than estimates of a 0,3% fall last month. That would mark the country's first recession since 1992, but is quite modest relative to the contraction of 1,3% which the International Monetary Fund expects for the global economy this year.

"Inflation is expected to continue to trend downwards," the Bank said. The "output gap", which is the difference between potential and actual growth, would help keep prices low.

The Bank's review played down the risks to SA's near-term inflation outlook, which it said has deteriorated due to upward pressure from wage settlements and administered prices, especially for electricity.

Inflation has exceeded its 3%-6% target range for two years, and rose to 8,5% in March, the most recent month for which official figures are available.

Mboweni defended SA's policy of inflation targeting, which is being questioned by labour unions. New Finance Minister Pravin Gordhan has said the policy is up for debate, but that it will stay in place. Mboweni also criticised commercial banks for keeping the spread between prime lending rates and the repo rate at 3,5 percentage points, saying that it was the first time in 10 years he was making this public.

"Moral suasion hasn't worked. It's time for all of us to cry out and beg about that differential," he said.

Mboweni appeared to be referring to the margin on prime lending rates that the banks charge their customers.

The Bank revealed more details about its latest inflation forecasts, presented to the monetary policy committee last month.

Inflation, as measured by the annual rise in the consumer price index, was likely to decelerate to an average rate of 6,2% in the third quarter of this year, the Bank said.