As long as the lid can be kept on simmering domestic inflation and the global environment stays benign, SA's growth, which has propelled consumer and business confidence as well as the JSE to record highs, should be sustained into 2008 and beyond.

A real GDP growth rate of 5% has been achieved in each of the past three years - a feat previously seen only in 1979-1981.

"The combination of this sustained, elevated growth performance with good macro policies and conviction about policy continuity has resulted in SA's economic performance being less volatile than many other emerging markets," says Standard Bank chief economist Goolam Ballim. "It has allowed local investments to enjoy several re-ratings over the past few years, attracting foreign interest in SA equities and pushing up the market cap of many companies."

All indications are that SA is likely to sustain 5% growth rates as the consumer spending boom of recent years gradually gives way to investment-led growth buoyed by huge infrastructure spending.

Household consumption growth rose from 6,6% in 2005 to 7,3% last year and almost 8% in the final quarter. But there has been a slight moderation in the consumption of interest-sensitive durable goods. Economists expect household consumption to slip to 5%/year over the next three years while fixed investment accelerates.

As a ratio to GDP, investment spending increased from around 15% in the early part of the decade to over 19% in the final quarter of 2006, which bodes well for growth.

However, a decline in SA's savings rate resulted in the current account deficit of the balance of payments widening to 6,4% of GDP in 2006, the worst in 20 years, despite a protracted commodity boom. Fortunately, good growth prospects have ensured adequate deficit financing. Since the beginning of this year, net nonresident purchases of bonds and equities have totalled R20,3bn.

But this big a deficit remains the economy's Achilles heel and places the SA Reserve Bank on a monetary policy tightrope. The Bank could improve the current account balance by raising the repo rate so as to limit imports. Yet it knows that if it tightens too much it risks harming growth prospects and risks capital flight, a falling rand and rising inflation. On the other hand, tighten too little and inflation may spiral out of control.

Most economists praise the Bank's deft touch in the current tightening cycle. Having raised the repo rate by 50 basis points at the four consecutive Monetary Policy Committee (MPC) meetings since June 2006, it paused in February and April to assess the impact, despite a deterioration in inflation. Investec economist Annabel Bishop says the Bank's apparent complacence may indicate a greater appetite for growth over the strict maintenance of CPIX within the target range.

Similarly, Sanlam economist Jac Laubscher says: "Apparently, the Bank has bought into government's agenda, which has economic growth as its highest priority. It clearly wants to avoid any action that could unnecessarily detract from the economy's growth performance."

The Bank now expects CPIX to peak just below 6% in the second quarter of 2007. (In February the expected peak was 5,6%). CPIX is expected to remain about 5,9% until the second quarter of 2008, and then decline to 5% (previously 4,7%) by the final quarter of 2008.

The risks are on the upside; but most economists believe the favourable medium-term inflation outlook should encourage the MPC to maintain a neutral policy stance throughout the year. The major external risk is a hard landing in the global economy which could cause a turnaround in the commodity boom.

Nazmeera Moola, at Macquarie First South, fears there will be a market correction. "As long as there is surplus global liquidity, the rand will be fine," she says. "So the question is: what could turn off the money taps? If that happens the key drivers of SA's economic success will become problematic. Something must eventually give us cause for pause, but what? "

Despite the risks, the Bank believes the outlook for global growth is positive and that inflation will remain under control.