May 27 (Bloomberg) -- South Africa's economy grew at the slowest pace in more than six years in the first quarter as a power shortage slashed output in the mining industry.

Expansion slowed to an annualized 2.1 percent from 5.3 percent in the previous three months, Pretoria-based Statistics South Africa said in a report today. The median forecast of 17 economists surveyed by Bloomberg was for growth of 2.6 percent.

Eskom Holdings Ltd., the state-owned power utility, cut electricity supplies in the first quarter, forcing miners including Anglo Platinum Holdings Ltd., the world's largest producer of the metal, to close their South African mines for five days in January. At the same time, consumer spending on big ticket items waned following four interest rate increases last year.

``The figures are grim,'' said Dennis Dykes, chief economist at Nedbank Group Ltd., South Africa's fourth-largest bank. ``The consumer side will remain under pressure given the higher interest rate environment and power problems are still a factor. We're in a cyclical downturn that will extend into next year.''

The rand fell to 7.7573 against the dollar as of 5 p.m. in Johannesburg from 7.7413 before the data was released.

Mining output fell an annualized 22.1 percent, the biggest decline since the second quarter of 1967 and after dropping 1.7 percent in the fourth quarter, the statistics office said. Manufacturing, which accounts for 16 percent of the economy, slid 1 percent, compared with expansion of 8.2 percent.

Mining

``The biggest impact for the contraction in mining came from the lack of electricity, while production at platinum and diamond mines was also cut by flooding,'' Joe de Beer, executive manager of national accounts at the statistics office, told reporters in Pretoria today. ``There is a definitely a slowdown in the economy.''

Manufacturers, such as ArcelorMittal South Africa Ltd., Africa's largest steelmaker, were asked to reduce power consumption last quarter, while Eskom's scheduled power outages to cities shut restaurants and shops.

Eskom, which supplies 95 percent of the country's power, has cut electricity supplies after the government delayed its plan to expand. The power shortage will probably last for seven years, according to the utility, while it spends 343 billion rand ($44.3 billion) to build new power plants.

Undermining Targets

Higher borrowing costs, the electricity shortage and a possible recession in the U.S. are undermining government goals to boost growth to 6 percent by 2010 and cut the unemployment rate to 14 percent by 2014, from 23 percent currently.

Growth will probably slow to 2.9 percent this year, Dykes said, down from 5.1 percent in 2007, and lower than the government's forecast of 4 percent.

The Reserve Bank increased its benchmark interest rate by 2 percentage points to 11 percent in the second half of last year as inflation stayed above the 3 percent to 6 percent target range. The rate was raised by another half point in April and central bank Governor Tito Mboweni has indicated that further rate increases are on the cards.

The retail, hotels and restaurants industry expanded an annualized 3.6 percent in the first quarter, compared with 2.1 percent in the previous three months. The finance and retail estate industry, the biggest industry in the economy with a weighting of 20 percent, grew 4.9 percent, down from 8.5 percent, the statistics office said.

``There is some slowdown because of higher interest rates, but we don't think it's enough,'' said Fanie Joubert, an economist at Efficient Group in Pretoria. ``Given the inflation environment, we're still going to see further interest rate increases.''

Construction

Construction growth exceeded 14 percent for a third consecutive quarter, expanding 14.9 percent, according to the statistics office. The industry has benefited as the government steps up spending on railways, power plants and stadiums in preparation for the 2010 FIFA World Cup.

Agriculture surged an annualized 12.5 percent in the first quarter, after gaining 10.4 percent in the previous three months, the statistics office said. The sector may expand by more than 10 percent this year because of better harvests, de Beer said.

South Africa's corn crop is forecast to rise 54 percent to 11 million tons this year, according to the government's Crop Estimates Committee. Farmers will plant 19 percent more land with wheat this season to take advantage of rising prices, the government said on April 24.

To contact the reporters on this story: Nasreen Seria in Johannesburg nseria@bloomberg.net; Vernon Wessels in Johannesburg at vwessels@bloomberg.net.

Last Updated: May 27, 2008 11:05 EDT