GROWTH in household spending and private sector investment both slowed in the first quarter of this year, adding to evidence that the recovery will moderate in the months ahead, figures from the Reserve Bank showed yesterday.

There is widespread concern that the negative effects of Europe's sovereign debt crisis and weakening domestic demand will constrain the South African economy's pace of growth more than anticipated this year. It is expected to subside to 2,8% from 3,1% last year.

This could prompt the Bank to cut interest rates again, but this is seen as unlikely unless global conditions worsen significantly. Falling inflation bolsters the case for easier monetary policy.

The pace of expansion in household spending, the economy's main engine, slowed to 3,1% in the first quarter from 4,6% in the previous quarter, according to the Bank's June quarterly bulletin, released yesterday.

This was in step with a moderation in growth of disposable income, which fell to 3,2% from 4,7% over the period.

Johan van den Heever, deputy research head, said the Bank was likely to revise inflation forecasts lower as a result of recent figures pointing to an improved outlook. There would probably be a "slightly better outcome", he said at the release of bulletin.

Inflation subsided to 5,7% last month from 6,1% in April, bringing it comfortably inside the Bank's 3%-6% official target range.

"Poor global prospects will hurt consumer confidence and increase worries about job security," Nedbank said in a note after the release. "This, together with higher inflation on essentials, will contain consumer spending."

A sharp fall in growth of retail sales, which edged up 1% year on year in April after 6,7% in March, drives home this message.

The Bank's data also showed that growth in investment in the economy - including spending by private companies, the government and state-owned enterprises - slowed to 5,3% in the first quarter of this year from 7,2% in the previous quarter.

The decline was led by the capital spending of private business, which decelerated to 1,8% from 6,2% over the same quarter. This could deteriorate further due to a drop in business confidence.

"This more sedate pace of increase in capital outlays was particularly evident in the mining, manufacturing and trade sectors," the Bank said. The three sectors together account for about a third of economic output and 40% of formal employment.

The slowdown in private investment was countered in part by faster growth in spending by public corporations, which accelerated to 13,1% in the first quarter from 9,6% in the previous quarter. This largely reflected increased capital outlays on projects in the electricity and transport sectors.

The bulletin showed that the debt position of households improved slightly during the first quarter. Household debt as a ratio of disposable income edged down to 74,7% from 74,8%, while debt service costs were stable at 6,7% of disposable income.

"The lower ratio of indebtedness and trends in consumer spending and income suggest that many consumers continued to use their disposable income to reduce their outstanding financial commitments rather than increase their spending on final goods and services," the Bank said.

Wage growth moderated sharply in the final quarter of last year, slipping to 6% from 8,8% in the third quarter. This helped to reduce growth in unit labour costs, a key inflation indicator, to 5% from 8,4%, the Bank said.