Citadel chief economist Dave Mohr says growth in SA’s economy is likely to slow to 2,5% next year from 3 % this year as domestic consumption slows

Growth in sa’s economy is likely to slow to 2,5% next year from 3 % this year as domestic consumption slows, Citadel chief economist Dave Mohr said yesterday.

His estimate is well below most independent forecasts and official predictions that growth will accelerate next year. The Treasury sees economic output growing 3,4% next year after a 3,1% rise this year, while the Reserve Bank expects growth to nudge up to 3,2% from 3%.

However, Mr Mohr said: "Looking into 2012, prospects for an accelerating economic recovery do not look very promising." The "fundamentals for consumption spending have deteriorated", he said.

Consumer spending, the economy’s main engine, has been the main driver of its recovery from recession in 2009.

Mr Mohr believes part of the reason for weaker consumption spending is a slowdown in growth in the government’s wage bill, which accounts for about a quarter of compensation in the economy.

Spending on social benefits was also set to rise at a slower pace, reflecting the government’s limited fiscal space.

In the private sector, salary and wage increases were likely to be sustained at about 8%, but rising inflation would erode disposable income, Mr Mohr said.

At the same time, growth in fixed investment, the economy’s other engine, was unlikely to gather momentum in the year ahead.

"Given the severity of the economic recession, it will take a while before private fixed investment picks up," he said. "We need more local demand before there is expanding productive capacity."

But the main reason for slow growth in fixed investment was underspending by municipalities, according to Mr Mohr.

"Public corporations should grow their investment spending, but government seems unable to get their infrastructure development programme restarted after the World Cup," he said.

International developments indicated that the economy was unlikely to receive much of a boost from global demand and commodity prices, Mr Mohr said.

Global growth is slowing while Europe, SA’s main trade partner, is sliding into a recession as its sovereign debt crisis deepens.

But weakness in the rand should provide some relief for exporters and some protection for producers supplying the domestic market, Mr Mohr said.

He sees the currency as "fairly valued" at about R8 to the dollar.

Inflation was likely to hover between 6% and 6,5% next year — above its official 3%- 6% target.

Normally this would prompt the Reserve Bank to increase interest rates. However, the Bank has made it clear that it is also concerned about the fragile state of the economy.

Mr Mohr sees the Bank raising rates in the second half of next year as inflation accelerates.

The main drivers of price pressures would not be food and fuel but factors such as new vehicle prices, which would be affected by the weaker rand.

Rising rental costs would also play a big role, he said.