The business environment in South Africa would remain challenging in the months to come, with the country's gross domestic product (GDP) expected to show a 2% decline for 2009, Credit Guarantee Insurance Corporation senior economist Luke Doig asserted.

Doig questioned whether the country had reached the "bottom of the cycle" following the release of a number of negative economic indicators in recent weeks.

South Africa entered its first recession in 17 years in the first quarter of the year, when its GDP contracted by 6,4%, on the back of a 1,8% decline in GDP for the fourth quarter of 2008.

The country's manufacturing output also declined by a record 21,6% in April, with Economists.co.za director Mike Schussler commenting, on Wednesday, that the country had effectively lost about five and a quarter years of production growth, which was not a very good space for South Africa to be in.

This was the lowest annual decline on record, Nedbank economist Carmen Altenkirch commented.

"[These figures] provides the starkest evidence of the precipitous decline in the domestic business cycle," Doig noted.

The Kagiso Purchasing Managers Index (PMI), which was a key measure of manufacturing activity, had, on the other hand, improved to 37,3 index points in May, after recording a record low of 35,6 points in April.

"[The PMI] should manage to eke out further gains in the months ahead, commented Doig.

He explained that, while three of the nine subindices of the PMI had perpetuated their poor performance in April, with employment and purchasing commitments remaining subdued, reflecting weak demand and a lack of short-term confidence, the expected business conditions had indicated a net optimism for the first time since September last year.

"But, this does not mask the pain that many are experiencing," he added.

Doig expected a 3,4% contraction in GDP in the third quarter of the year, despite local demand starting to "marginally" recover, with lower interest rates starting to take effect.

He added that an apparent stabilisation in the global economy could also assist in the recovery.

However, "outlandish" labour union wage demands would do little to help businesses, Doig noted.

Further, he suggested that cognisance should rather be taken of the efforts made by heavy equipment manufacturer Bell Equipment and vehicle manufacturer Volvo to reduce potential retrenchments.

He explained that Bell's management have taken pay cuts to reduce potential retrenchments, while Volvo had introduced shorter working hours and gross wage cuts to reduce the number of redundancies it had to make.

"Everyone needs to have their hand on the tiller now from a productivity perspective, as well as making sacrifices. Attempts to provide ideological solutions to problems need to take account of the tax burden," he added.

Doig expected further cost pressures to also occur in the short term, saying that fuel price under recoveries of nearly 40 c/l for petrol and 31 c/l for diesel, underlining these fears.

However, Doig was confident that the country would be "in a much healthier state" by the time the 2010 FIFA World Cup starts in a years time.