A "SUSTAINED and worsening slowdown in domestic demand". That was one analyst's description of SA's economic situation following the release of depressed manufacturing activity figures for last month, but it might as accurately be applied to the world.

The global economy has sunk back into a funk, with consumers postponing purchases and manufacturers cutting back production in anticipation of another round of the international financial crisis. South Africa's purchasing managers' index (PMI), a key indicator of the industrial sector's view on the economy months into the future, has now fallen to its lowest in 10 months. The reading of 48,2 points last month, 5,4 points down from May, indicates that a contraction in manufacturing is on the way.

This gloomy outlook is supported by a spate of retrenchments in the formal sector recently, across a range of sectors from banking to pharmaceuticals to information and communication technologies as well as mining, which has been hit by declining commodity prices.

The primary cause of the domestic deterioration is undoubtedly the recession in Europe, which, as South Africa's main trading partner, is always going to have an inordinately large effect on local economic activity. But it is important that we do not fall into the lazy habit of attributing all bad news to outside forces that are, by implication, beyond our control.

As much as Europe's slow-motion disintegration and Asia's adjustment to the loss of its major markets for consumer goods affect us, so do a number of factors that are within our control. Administered prices are easy to gloss over in times of rising demand and increasing profits, but when consumers are cash-strapped and margins are tight they can mean the difference between hanging in there and having to retrench.

The PMI pullback also reflects Eskom's decision to "buy back" electricity from large industrial companies which, while it may have saved the country from unplanned power outages during the recent maintenance-induced squeeze on generation capacity, also cut manufacturing activity. Work stoppages and mine closures in the platinum industry have not helped matters, nor has the political and policy uncertainty caused by the ruling party's recent policy conference.

On the international front, last week's European Union summit prompted the obligatory market rally before reality reasserted itself. There is no silver bullet for the eurozone's structural problems, and it is astounding that traders still pin so much hope on such meetings. Within hours of the summit's outcome being announced, the viability of the proposed solutions was being questioned, and interest rates on sovereign debt crept up again.

The political and economic compromises needed to keep the eurozone intact will take years of haggling before they are implemented. The fact that the economies of some of the peripheral European countries are too badly broken to survive that long without either defaulting on debt or collapsing under the strain of civil unrest cannot change this reality. The monetary union is not necessarily doomed, but if it still exists five years from now it will be a very different beast.

The latest summit bought a little more time for the countries that are under most liquidity pressure, as has become the norm for such European crisis meetings. But this one may well turn out to be different in that headway was made for the first time on the structural reforms that are required before sovereign debt can be pooled, banks brought under centralised supervision, and a fiscal union achieved. Much has been made of German resistance to further integration, but the concessions allowed by Chancellor Angela Merkel last week indicate that her primary motivation is to avoid repeating the mistakes made when the single currency was launched almost 14 years ago.