The South African economy is in the early stages of recovery, Moody's Economy.com said on Friday, adding that it was expected to be primarily export-led in the near term.

"With joblessness on the rise, domestic demand will remain subdued into 2010," Moody's Economy.com said.

It added that the transition from tentative recovery to solid growth would be mired by high unemployment and weak domestic demand.

"South Africa faces a slow, difficult recovery, and the return to self- sustaining growth is still some ways off," the group said.

Moody's Economy.com pointed to the latest results of the SACCI business confidence index, which revealed that the South African economy was in the early stages of recovery.

Well below year-ago levels

A composite of 13 indicators, the index jumped 2.5 percent m/m to 85.5 in September. Though it remains well below year-ago levels, the index has gained 8.4 percent since its low in March.

Major contributors to the monthly increase were retail sales volumes, new vehicle sales, gold and platinum prices, and the volume of manufacturing output. Only a few components were net drags: the real value of building plans, private sector credit growth, and import and export volumes, Economy.com said.

"A clear upward trend in business confidence is a prerequisite for a durable recovery. Although not a driver of growth, business confidence generally reflects the conditions under which businesses make investment and employment decisions. Restored confidence implies faith that customers will purchase what businesses produce," it said.

Recovery to be export-led

"South Africa's economic recovery is expected to be primarily export-led in the near term. Therefore, the pace at which business confidence improves will, in large part, be dictated by the strength of the global recovery. With joblessness on the rise, domestic demand will remain subdued into 2010," the group continued.

"However, the aggressive inventory liquidation earlier in the year has created scope to boost manufacturing output in coming months as businesses start to replenish depleted stocks.

"While the inventory swing and improving external demand will help lift the economy out of recession, the transition from tentative recovery to solid growth will be complicated by high unemployment and weak domestic demand. South Africa faces a slow, difficult recovery in the near term, and the return to self-sustaining growth is still some way off," Economy.com concluded.

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