Johannesburg — NEWS of an unexpectedly sharp fall in SA's current account deficit, seen as the economy's Achilles heel, is welcome but unlikely to be sustained when the recession eventually ends.

A barrage of dismal data on the poor state of domestic demand from the Reserve Bank yesterday also did nothing to suggest what would fuel an expected recovery in growth.

The Bank's chief economist, Monde Mnyande, was upbeat on the outlook for the economy, saying there were a number of "green shoots" and "encouraging signs".

But there was little in the Bank's September quarterly bulletin to back his remarks. Consumer spending, disposable income and the broadest measure of domestic demand are all contracting at rates last seen in the mid-1980s, the data showed.

Investment slowed to a near-halt in the second quarter of this year, rising by just 0,1% -- its lowest pace since the fourth quarter of 2001.

"Where is the growth going to be coming from? What will lead the recovery of SA's economy?" asked Razia Khan, head of Africa regional research at Standard Chartered.

Mnyande said he agreed with forecasts the economy would contract about 2% this year -- the same pace as in its last recession in 1992.

Analysts believe that economic output will either stabilise or notch up some growth in the third quarter of this year. But nobody is expecting a rebound of any note -- a Reuters poll yesterday showed that analysts expect growth of 2,3% next year, quickening to 3,7% in 2011.

"The return of confidence, both internationally and domestically, is a prerequisite for a sustainable improvement in the economy," said Standard Bank in a research note.

The Bank's bulletin showed household debt declined to 76,3% of disposable income in the second quarter from 76,8% in the previous quarter. But this is still not far from its peak of 78,2% in the first quarter of last year.

Debt service costs as a percentage of disposable income also dipped, to 9,5% from 10,9%. That reflects the effect of a cumulative five percentage point fall in lending rates since December.

With jobs still in jeopardy after about 475000 redundancies in the first half of this year, analysts believe consumers will opt to reduce their debt rather than spend more freely over the coming months. Business is also likely to remain wary, leaving the onus of growth firmly on the government's R787m infrastructure spending programme.

"The worst of the recession is probably over, but the recovery is expected to be slow and patchy," said Nedbank in a research note.

"Overall, the local economy should start to grow in the final quarter of this year and show further improvements in the run-up to the World Cup." But Nedbank said that the "bleak picture" that the bulletin painted of the economy showed scope for another half percentage point cut in interest rates.

Ironically, an economic rebound will quickly end the benign trend in SA's balance on the current account, its broadest measure of trade in goods and services.

The shortfall narrowed to 3,2% of gross domestic product in the second quarter from 7% in the first quarter -- much more sharply than expected . The main reason for that was that imports dived 15,5% in volume terms as local demand waned, while exports dipped by just 2,8%. That produced SA's first quarterly trade surplus in three years. However, as demand picks up, so will imports.

"This current account number is likely to be the best in the cycle," said Rand Merchant Bank economist John Cairns. "We expect the trade deficit to turn back into deficit this quarter and to slowly worsen."

The deficit's service component will also worsen as company profits rise and dividend outflows pick up.