The economy is testing its limits on both the up- and the downside. It appears to be cooking, but delve deeper into SA's stellar growth performance and two very different pictures emerge.

On the one hand, SA has been experiencing record levels of confidence and growth, spurred by a strong rand, record low inflation and interest rates, and a consumer spending boom.

On the other, strong domestic demand is being met by cheap imports and funded by rising debt levels. These factors have pushed the ratios of current-account deficit to GDP and of debt to disposable income to 20-year highs.

The economy is testing its limits, positively in terms of growth - which almost touched 5% last year, the fastest real annual growth since 1984 - and negatively in terms of the widening current account deficit. The upshot is that the risks to SA's economic recovery are mounting. Each month that the economy experiences growth in credit extension and consumer demand, a widening current account deficit and rising oil prices, the danger mounts that the Reserve Bank will respond to threats to its inflation target by raising rates.

The solution is more balanced growth. SA needs the export industries (manufacturing and mining) to recover to ease the potential balance of payments constraint, and to create jobs.

SA's prime economic challenge is to turn the current low-inflation, high-consumer growth momentum into a high fixed-investment, high employment-growth environment.

"To achieve sustained high growth, we need to not only increase infrastructural fixed investment, but also to increase the base of manufacturing activity," says Stanlib Asset Management economist Kevin Lings. "It is now time for the other key components of economic policy - industrial policy, labour policy, competition policy, trade policy - to play their roles to promote local industry."

Economists who are predicting sustained high levels of growth are confident that SA can make this structural leap. They insist that government's promised R372bn investment spending programme, coupled with its commitment to removing the obstacles to doing business, will shift the country's growth path from consumer-led to investment-led growth. This should force growth above 5% in 2007 and beyond. In addition, they predict that the consumer party will regroup, as investment creates new jobs and existing workers make ever greater use of abundant credit.

But for SA to pull this off will require a continuation of the global tailwinds that have fanned our growth performance over the past two years: robust global growth, surplus global liquidity, favourable sentiment towards emerging markets, strong commodity prices and a firm (but not overly strong) rand.

It's conceivable that the international environment will continue to play into SA's hands. One of the biggest threats, though, is that risk appetite for emerging market assets could begin to waver.

Standard Bank chief economist Goolam Ballim is confident that SA will continue to attract capital inflows (to cover the current account deficit) because of SA's combination of conducive macroeconomic policies, low economic growth volatility and favourable earnings prospects.

However, bearing in mind the dominance of equity portfolio investment in capital flows, SA cannot afford any faltering in its growth momentum. Also worrying from a long-term growth perspective is the rising indebtedness of households, because this goes hand in hand with a falling savings rate.

In the fourth quarter, the ratio of household debt to disposable income reached 65,5% - SA's highest level yet. At the same time, the average ratio of gross savings (made up of household, government and business savings) to GDP weakened from 14% to 13%. This is the lowest level of savings since 1949.

A poor savings situation has a negative effect on the financing of investment, and when taken together with SA's persistent structural problems, like inefficient infrastructure and the skills shortage, may prevent the economy from substantially realising its long-term growth potential.

The emerging consensus is that without a greater education and infrastructure effort, SA's growth ceiling is about 5%. To make 6% growth will take exceptional luck and effort.