No recession, but growth is glacial

South Africa may have narrowly avoided a recession, but the economy grew at its slowest pace since 2009 in the second quarter of the year, making further interest rate hikes look less likely over the next few months.

Economic output expanded 0.6% after falling 0.6% in the first quarter, official figures showed on Tuesday, which means that the country did not slide into a technical recession, defined as two quarters of contraction in a row.

But the pace of growth was well below consensus forecasts of an increase of 0.9% and for the first half of the year amounted to just 1.3%, with few signs that it will pick up significantly in the next few months.

Coupled with a sharper than expected fall in inflation during July, the poor outlook suggests that the Reserve Bank may refrain from raising interest rates again this year, despite the fact that it has made clear this is the direction of monetary policy.

"Given that South Africa is close to recession and there has been less evidence of inflation, I would argue that they will hold off in the short term," said Stanlib economist Kevin Lings.

The bank has raised its key repo rate by 75 basis points to 5.75% so far this year and made clear that it intended to gradually "normalise" the rate, which at present is below inflation.

Its decision to raise the repo rate by just 25 basis points at its last policy meeting in July - the smallest change in more than a decade - had fanned speculation that there would be further increases of that size this year. But inflation subsided to 6.3% in July from 6.6% in June, which suggests it may return to its official 3% to 6% target range sooner than anticipated.

Rian le Roux, chief economist at Old Mutual Investment, said evidence that the consumer was under mounting pressure and that inflation had peaked reduced the chances of hikes again this year, although the upward trend would resume next year as growth picked up and the US Federal Reserve began raising rates.

"This points to a slightly more benign outlook for interest rates in the near term," said Barclays Africa economist Peter Worthington. Nonetheless, he saw a better than even chance that the bank would raise the repo rate to 6% in September or November.

Statistics South Africa data showed that wholesale, retail and the motor trade fell 0.2% during the second quarter of the year - the first decline in five years. This highlights the fact that demand is very weak as consumers buckle under higher electricity, petrol and food costs and fret over the dismal employment outlook.

Business confidence has also plummeted in the face of strikes in the mining and manufacturing sectors.

Mining production fell 9.4% during the second quarter, easing from a 24.7% plunge in the first as the lengthy platinum strike ended. Manufacturing output also fell for the second quarter in a row, declining 2.1%, in step with figures showing that the sector shed 60000 jobs during that period.

Although the sector was likely to start recovering, growth in the third quarter was far from certain because output would be dampened by a prolonged strike in the metals industry during July, said Coenraad Bezuidenhout, executive director of the Manufacturing Circle, an industry body.

"There are many impediments which will slow recovery, such as water and electricity interruptions and weak demand in the economy," he said.

The fact that Europe, one of South Africa's main trade partners, failed to notch up any growth during the second quarter does not bode well for manufactured exports.

General government services - the economy's third-biggest sector - was the main driver of growth in the second quarter, rising 2.9%.

Nonetheless, the economy overall is stagnant and analysts expect growth to fall short of 3% again next year.