South Africa's gross domestic product will show growth of 3.5 percent this year and 2.5 percent or lower next year, Sanlam Investment Management economist Arthur Kamp predicted on Friday.

"These figures mask a sharp near-term slowdown and that third quarter growth numbers are likely to surprise on the downside," he said in a statement.

Kamp said South Africa's current account deficit was likely to shrink, either through rising corporate savings or lower investment spending.

"There are some structural supports for private sector fixed investment, but it is likely to slow.

"In fact, we are already seeing evidence of this in the Bureau for Economic Research survey for the manufacturing sector," he said.

Kamp predicted that the global slowdown would deepen into a world recession, with global growth at or below 2.5 percent next year.

Key economic theme in 2009

Disinflation, if not deflation, would become the key economic theme in 2009.

He said global markets had been in a panic phase since 15 September, intensifying the housing market and consumer-led slowdown which preceded the financial market turmoil.

The United States had a systemic and structural problem it would have to work out of the system in the next few years because of US households' decade of dissaving (using savings for current expenses).

"The consumer-led slowdown will intensify even further from here because the wealth effects were so important on the up leg and they are now faced with not only declining house prices, but also sharply lower equity markets."

In another sign that things were likely to get a lot worse before they got better, corporate spending was already slowing down.

"There is a notable decline in business spending on equipment in the developed world, and that we can expect to see a lot more contraction in business spending in the US, Italy, Spain and even Germany and France.

"Project delays will ultimately be followed by rising unemployment."

Much slower global growth

This would translate into much slower global growth, Kamp said, forecasting that the developed world could deliver very weak growth next year with emerging markets also recording much slower rates of growth than before the financial crisis.

He predicted that global growth would slow to an average 2.5 percent in 2009, which could be considered recession territory, with risk seemingly skewed to the downside.

For the world to recover from this recession, Kamp said developed markets would have to go through a painful period of recapitalisation and deleveraging (reducing the amount of debt held by a company)

The US housing market would need to stabilise, with delinquencies peaking and housing inventory levels declining. International credit markets would need to return to normalcy.

He envisaged a prolonged period of adjustment in the global household savings rate led by developed economies, and believed this could create some room for spending in emerging markets.

Emerging markets could benefit from improved terms of trade, where lower commodity prices resulted in improved real income growth.

Sapa