SA is mired in its first recession in 17 years and though the Reserve Bank is cutting rates aggressively, the short-term outlook for the economy remains dire.

Having been assured by SA's national treasury that SA would avoid a recession (mainly because of the stimulus of government's infrastructural programme), the nation was shocked that gross domestic product (GDP) contracted at a quarter-on-quarter annualised rate of 6,4% in the first quarter - the biggest quarterly contraction in 25 years.

The largest drag on SA's economic performance remains the manufacturing sector, which contracted at an annualised rate of 22,1%, reflecting a collapse in global demand for SA's exports.

SA's slowdown is broad-based. Only general government services, personal services and construction are still growing and all indications are this trend will continue during the second quarter, though the contraction should be less severe.

"At this stage, it appears that a protracted period of slow, below-potential growth is most likely with a weak recovery starting in late 2009 or early 2010," says Bank governor Tito Mboweni.

Most analysts expect SA's growth to be positive but weak in the second half of this year. The consensus is that the second quarter marked the trough of SA's downturn, but there is not a lot of confidence behind this view. Part of the reason is that the Bank's leading indicator declined by 15,1% in March - the largest year-on-year decline on record - implying that the economy will still be contracting in six months' time (August).

Moodys Economy.com warns that with household spending cooling, and with businesses reining in production and investment and cutting staff, SA's economic activity will be extremely weak through most of 2009. "Though looser monetary policy and a moderate recovery in external demand are expected to help put the economy back on track in 2010, growth will remain well below potential, muting job creation," it says.

The consumer is in bad shape. The global recession has caused a broad-based reduction in wealth worldwide.

In SA, falling house prices and weak asset markets are expected to keep restraining consumption expenditure, while tight credit conditions are curbing both consumption and investment.

Though some economists expect consumer spending to recover modestly over the next few months as households benefit from substantial interest rate relief, others warn that this trend is unlikely to be sustained as job losses begin to take their toll. In SA, job cuts are only starting to bite, but up to 250 000 could be lost over the year.

Independent economist Sandra Gordon warns of a "new era of frugality" in which the fear of job losses and inaccessibility of credit act as a powerful restraint on consumer spending - one that is likely to linger for months, if not years.

One thing is clear: growth, when it does come, will be too feeble to stop unemployment from rising. This shifts the emphasis to government policy where job creation is emerging as the number one priority and where the new establishment has (controversially) pinned its hopes on state-led industrial policy.

Though a lot depends on the pace and magnitude of the global recovery, the extent to which the new government is able to inspire confidence is also key. SA is unfortunate to be experiencing a political and economic transition simultaneously. In this environment, the margin for policy error is very small.