South Africa's economic growth is expected to contract by 2% this year - the country's weakest performance since 1992, the Bureau for Economic Research (BER) said on Tuesday.

However, the country, which entered its first recession in 17 years this year, could expect "fairly muted" economic growth of 2,7% in 2010.

The South African economy contracted by 6,4% in the first quarter of 2009, on the back of a 1,8% decline in the final quarter of 2008, and the BER said that it was likely that the second-quarter gross domestic product (GDP) might have contracted again.

The BER said that manufacturing output, which plunged by 25% in the last two quarters, might have fallen again in the second quarter, while the retail sector also remained "deep" in negative territory.

The National Treasury also said in May that second-quarter GDP growth was expected to contract, but that it would be of a smaller magnitude than the 6,4% decline in the first quarter of 2009.

(Statistics South Africa will release the second-quarter GDP figures in mid-August.)

The BER said that expects "mild" GDP growth to return in the third quarter of the year.

Meanwhile, the bureau said that it did not expect any further interest rate reductions, with the repo rate expected to remain unchanged at 7,5% for the foreseeable future.

The Monetary Policy Committee reduced the repo rate by 450 basis points between December and May.

"In light of recent double-digit wage settlements in a number of sectors and indications that the worst of the domestic recession may have passed, the BER is of the opinion that there will not be any further interest rate reductions," economist Hugo Pienaar said.

However, he said that the South African Reserve Bank (SARB) might consider cutting the repo rate later in 2009, if consumer spending continued to deteriorate and if inflation slowed faster than expected.

Consumer price index (CPI) inflation moderated to 8% year-on-year in May, down from the high of 13,7% in August.

"While services inflation - a key driver of underlying inflation - is expected to remain at an elevated level, the BER projects a continued moderation in headline earnings as consumer food prices catch up with the sharp easing of agriculture and manufactured food prices."

However, inflation will still remain above the country's target of between 3% and 6% until February next year, and would only fall below 6% in the second quarter of 2010.

The BER expects CPI inflation to average 7,4% in 2009, before easing to an average of 5,8% in 2010.

The BER also said that it expected a significant drop in the August petrol price, on the back of a strong rand exchange rate and the recent fall in the oil price back towards $60/bl.

The petrol price could decline by more than 20c/litre next week, it stated.