Johannesburg — THE economy was likely to grow at 2,7% this year, and there might be an interest rate cut next month if pending electricity price hikes were lower than expected, the Bureau for Economic Research (BER) said yesterday.

Its growth estimate is well above the latest official forecast for output to expand 1,5% this year, but that is set to be revised higher when the Treasury unveils its 2010 budget tomorrow.

The forecast from the BER - one of SA's most respected research institutions - is bang in line with market consensus, which sees the economy growing at about 2,6% this year.

"The growth recovery is expected to continue in 2011, but at a projected 3,5%, growth is expected to remain significantly below the 5% mark reached between 2004 and 2007," the BER said.

In its economic outlook for the first quarter of the year, the BER said it had not changed its growth forecast for this year from the previous quarter, despite revising down its estimates for consumer spending and investment.

This would be offset by a stronger pick-up in local exports, spurred by an improved global growth outlook this year, it said. A rise in company inventories would also help buoy growth.

SA emerged from recession in the third quarter of last year, boosted largely by a recovery in factory output. But that is being driven by demand for exports from SA's main trade partners.

Spending by South African households, the economy's main engine, is widely expected to stay weak after severe job-shedding last year and the heavy costs of servicing debt.

BER economist Hugo Pienaar said consumer spending for this year was likely to rise 1,6%, after a contraction of about 3,5% last year -- the first fall since SA's last recession in 1992.

But that estimate is well below the BER's forecast in October of a 3% increase. "It stems to a large degree from a weaker employment outlook; we expect employment in the formal sector to be flat this year," Pienaar said.

Figures released by Statistics SA last week showed the economy shed nearly 900000 jobs last year, although the haemorrhage stopped in the final quarter. But a modest pick-up in jobs towards the end of the year was in the informal, unskilled sector of the economy and Stats SA described it as unsustainable.

The BER revised its investment forecast for SA down to a fall of 0,9%, versus 0,2% in October.

"We're not saying there will be no public investment, but the pace will fall this year," Pienaar said.

Inflation is expected to ease to an average 5,3% this year from 7,1% last year, before accelerating to 5,9% next year -- still inside the official 3%-6% target range. This assumes Eskom will raise its power tariffs by 30% over each of the next three years.

The BER expects interest rates to be held steady for the rest of this year, then raised by one percentage point early next year. But if the tariff hikes granted to Eskom later this month are in line with the Reserve Bank's assumption of 25%, and if official data show weak fourth-quarter growth, there could be "a further 50-basis-point rate cut in March", Pienaar said.