* Economy sank into recession last quarter
* Traders struggling, consumers bemoan rising prices
* Recession piles pressure on Zuma as ANC fractures
By Olivia Kumwenda-Mtambo
JOHANNESBURG, June 12 (Reuters) - South Africa's recession took economists by surprise, but for clothing shop owner Hans Setlhabi the gloomy numbers confirmed what he already knew - chronic unemployment and lofty inflation have shattered consumer confidence.
"I wasn't surprised to hear about the recession. I saw that the economy was going down last year," said 38-year old Setlhabi, staring at shelves piled high with clothes offered at discount prices.
"People don't have money and for those who come in, they buy cheaper items and not the expensive ones."
South Africa sank into recession for the first time in eight years in the first quarter, hit by weakness in consumer sectors such as wholesale, retail and accommodation.
The economic turmoil is piling pressure on President Jacob Zuma, who faces calls to step down from within the ruling African National Congress (ANC) as a string of corruption scandals, party infighting and sky-high unemployment erode public support ahead of elections in 2019.
The persistence of poverty and joblessness 23 years after the end of apartheid is also stoking anger, with unrest dubbed "service delivery protests" -- taking place frequently.
Unemployment is at a 14-year high of 27.7 percent.
The government's response to the gradually building economic crisis is due to be laid out later this week when Finance Minister Malusi Gigaba briefs the media how he will address the economic challenges.
Economists had expected the economy to expand, helped by a recovery in mining and agriculture, but surprise contractions in the rest of the economy led it to shrink.
Rising unemployment, high interest rates and a drop in purchasing power after a drought last year have all driven consumer prices up and hammered consumer confidence.
"I used to go into a shop and fill a trolley with groceries to last my family a month but that's not happening anymore," said 68-year old Mabule Modiba, a retired salesman who recently started driving a taxi to make ends meet.
"I thought I was done working, but now I also have to look after my grandchildren because my kids don't have jobs."
South Africa's inflation rose to 7 percent early 2016, breaching the central bank's target of 3-6 percent, but has now eased to 5.3 percent as food price rises slow.
The Treasury has said the recession introduced "significant downward bias" to this year's growth estimate of 1.3 percent, up from 0.3 percent in 2016. It means growth is more likely to fall than rise.
It also said that any policies introduced to combat the recession would be made within the current budget framework, in which South Africa aims to cut its budget deficit to 3.3 percent of national output in the next three years from the current 3.8 percent.
To stem falling voter support for the ANC, Zuma has vowed to redistribute economic wealth to the poor, but this will be almost impossible with an economy contracting.
The ANC lost major cities in its worst ever local election results last year and opposition parties are becoming increasingly confident of ousting the party of Nelson Mandela at a parliamentary vote in 2019.
"What (the recession) does do is show what is at stake," Nomura analyst Peter Attard Montalto said.
"If there can’t be reform, we are on this path where the ANC will lose power because they cannot create jobs."
Unbridled lending fuelled a consumer frenzy that helped the South African economy grow by an average 5 percent a year in the five years before the 2009 recession.
But stricter lending rules since 2015, which require borrowers to produce bank statements and proof of income before retailers can grant them in-store credit accounts, have excluded some from buying on credit.
Results from clothing and furniture retailers such as Mr Price, Truworths and The Foschini Group show they have lost a combined total of 1 billion rand ($78 million) in sales since new rules were implemented.
Active credit accounts fell to 54 million in the first three months of the year, from a high of nearly 58 million in 2015.
"Consumers had to become conservative and try to live within their means, given the high risk that the economic environment could deteriorate further," said Elize Kruger, an economist at NKC African Economics.
There is no relief in sight for traders like Setlhabi after a central bank official said cutting interest rates was not the answer to dragging South Africa out of recession.
"I don't see myself surviving if the economy doesn't pick up," Setlhabi said.
"If nothing changes in the next two to three years, then I will have to sell the shop."
$1 = 12.8976 rand Additional reporting by TJ Strydom and Olwethu Boso; Editing by Joe Brock/Jeremy Gaunt