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.

How to unblock the SA economy

There is no way to dress it up - 0.6% growth after a quarter of contraction means South Africa is squandering its potential. Three of the country's leading economic thinkers discuss what can be done.

Kevin Lings, chief economist at Stanlib

The government could embrace the concept of "ready-to-go" projects - infrastructure-related projects that can start reasonably quickly (ideally within six to nine months), can be funded through existing budgets, will meet local infrastructure needs and can be completed in two years.

Typically, these projects do not require extensive engineering design or a protracted environmental assessment.

The growing constraints on government finance, which is reflected in rising debt levels as well as the recent credit rating downgrades, suggest that many large infrastructure projects could be initiated and potentially fast-tracked using private-public partnerships.

These have proved successful in the renewable energy sector, and it would appear that the private investor community has an appetite to invest in such projects.

Adrian Saville, chief investment officer at Cannon Asset Managers

There are three key ingredients. First, the government needs to produce the infrastructure spend that is in the pipeline, which is taking a long time to materialise. The beauty of that spend is that it has very high backward and forward linkages, a large spillover effect and it is productive spend. The installed infrastructure stays behind and facilitates business, and builds the competitive capabilities and capacity of the economy and businesses that operate in it.

Second, we live in one of the fastest-growing regions of the world, but we do relatively little business with our neighbours. On the policy front, the visa restrictions for travel with Kenya impede doing business with neighbours.

South Africa seems to be very good at getting in its own way. It has impressive capabilities to contribute to the development of the region and our businesses have the prospect of playing a very big role.

Third, we need to improve the ease of doing business. For every new piece of legislation that is ushered in, two have to be ushered out.

If you put these three ingredients together, it is well within the country's capability to get to 6% growth, which will be inclusive because it will foster an environment in which small businesses are built, and smaller businesses are the engine of job creation.

Azar Jammine, chief economist at Econometrix

Foremost, South Africa has to improve its educational outcomes. Everything else would fall into place if people were better educated.

They would be more employable, be able to produce more and, as a consequence, the country would be less reliant on imports.

If people were more employable and productive, they would earn more. As a result, we would not have the adversarial labour relations that are engulfing South Africa.

If people were better educated and better trained, they would have a greater proclivity to set up their own businesses - and small businesses proportionately create far more jobs than big businesses.

Improved cooperation between public and private sectors is also desperately needed. In particular, the public sector needs to recognise that the private sector has a higher proportion of skills and that it is only through the combination of these two that progress can be made.

SA granted a much-needed respite at the fuel pump

Fuel prices will fall on Wednesday thanks to a drop in the price of crude oil and the relative stability of the rand-dollar exchange rate.

The Department of Energy said on Friday the price of petrol would drop by 67c a litre and that of diesel by 25.38c a litre.

The government lowered the slate levy from 4.38c/litre to zero, but it approved an increase of 4.2c/litre in the retail margin for pump attendants and cashiers to get a 9% pay rise.

Econometrix chief economist Azar Jammine said that although the economy continued to be fragile, and the current account deficit remained a concern, global factors were conspiring to keep the fuel price and inflation stable.

This means that the respite may not be fleeting - but Jammine says we're riding our luck.

"If the rand and oil price stay where they are, we could expect very little change in October. There's unrest in the Middle East, yet the oil price has remained subdued. This is partly because exports from Libya have picked up," he said.

Jammine said it would appear that the US, Saudi Arabia, UAE and Kuwait had agreed to raise supplies. - Brendan Peacock