ORDINARILY, falling inflation and the prospect of an interest rate cut later in the year would be met with unmitigated delight from the business community, even if individuals on fixed incomes were less sanguine.

But when it comes to matters monetary, the devil is invariably in the detail, and in this case the detail is the reason for the declining upward pressure on consumer prices. Rather than lower imported inflation, as was the case during the last downward phase of the interest rate cycle in the early 2000s, the main causes now appear to be falling demand and a slowing economy.

There is ample evidence to support a pessimistic economic outlook and justify the fact that the money market seems to be pricing in a rate cut before the end of the year. Some of the reasons are domestic, but the main concern remains the state of the international economy.

Consumer prices rose by 5,7% in May compared with the same month last year, the lowest rate since September and firmly back within the Reserve Bank's target range, which means the rate hike some expected this year is now out of the question. The main inflation drivers last month were administered prices, petrol and food. This implies that inflation and interest rates might have dropped earlier had government not fumbled in areas such as electricity generation, and also that inflation is set to fall further in the coming months.

Last month's inflation was spurred in part by a 28c/l petrol price hike, but a sharp decline in dollar oil prices due to expectations of lower global demand led to a 55c/l fuel-price decline earlier this month, and it seems a similar drop is on the cards for next month. This, along with lower food prices worldwide, should help suppress inflation for some time to come.

The global outlook has also darkened considerably in recent weeks due to political uncertainty in Europe and indications of more bad news from the euro zone. Nor are the US and China looking particularly economically healthy, with Chinese growth faltering and the US Federal Reserve again being forced to boost the economy by injecting yet more liquidity. This has cheered equity markets and should strengthen the rand, which will add to the downward pressure on inflation.

However, data released in Europe yesterday point to the downturn in the private sector becoming more entrenched as demand, employment and business confidence continue to drop.

As our biggest trading partner, Europe's woes are already affecting us. First-quarter gross domestic product (GDP) growth came in at 2,7%, down from 3,2% in the final quarter of last year, and full-year growth is expected to be equally lacklustre. T he Reserve Bank revealed yesterday that the current-account deficit widened to 4,9% of GDP in the first quarter, the biggest it has been in more than three years, as the trade account of the balance of payments deteriorated. Spending growth by the government and households also slowed, indicating tightening purse strings in anticipation of a tough second half.

SA's trade balance could deteriorate further, even if Europe does not experience the economic meltdown many fear if the currency union breaks up.

But if there is a repeat of the 2008 financial crisis, this time with Europe at the centre, SA will be in trouble. Our exports to the European Union plunged 35% in the year after the global economic collapse, to ?10,4bn in 2009 from ?16,3bn the previous year. As a result, GDP growth slipped from 5,1% in the first quarter of 2008 to minus 2,7% in the third quarter of 2009.

As Finance Minister Pravin Gordhan told Parliament recently, SA and Europe are inextricably linked: if they are in trouble, so are we. At least we still have scope to cut interest rates to ease the pain - Europe and the US no longer have that option.