* Third-quarter growth lowest since recession
* Auto strikes lead to contraction in factory output
* Mining sector rebounds after strikes
* Weak rand limits scope for monetary policy loosening
By Stella Mapenzauswa
JOHANNESBURG, Nov 26 (Reuters) - South Africa's economy grew in the third quarter at its slowest pace since a 2009 recession, dragged down by a contraction in manufacturing after weeks of strikes in the automotive sector.
The data backs the argument for further easing of already historically loose monetary policy although price pressures emanating from a sharply weaker rand leave the Reserve Bank little room to manoeuvre.
The bank said in its monetary policy review on Tuesday it was concerned about upside risks to inflation from the softer rand and may need to take "appropriate action" if there was a significant risk to the medium-term outlook, suggesting it's next move may actually be a hike.
Strikes at the operations of BMW, Ford, Toyota and General Motors caused a slump in manufacturing output in the third quarter, underscoring the structural problems of labour in Africa's biggest economy.
Gross domestic product grew by just 0.7 percent in July-September, Statistics South Africa said on Tuesday, compared to a revised 3.2 percent quarter-on-quarter expansion in the second quarter and its worst performance since the second quarter of 2009 when the economy was in recession.
Economists expect a slight improvement in the fourth quarter performance, reflecting an end to the industrial action.
The third-quarter data, which lagged analysts' forecasts for a 1.2 percent expansion, suggests economic growth this year could be even lower than already pessimistic official predictions for around 2 percent.
"The data shows growth is weak on significant strike-related work stoppages, falling confidence levels, slowing consumer spending due to high indebtedness and moderating growth in real disposable incomes," said Investec economist Annabel Bishop.
BMW said in October the labour situation in South Africa remained "inherently unstable" and stood by its decision to freeze expansion plans in a country beset by a myriad of economic problems.
Manufacturing, which contributes 15 percent to South African output, fell by 6.6 percent in July-September over the previous quarter, although this was offset by an 11.4 percent rebound in mining, which was recovering from its own labour turmoil.
"The failure of South Africa to run at its potential economic growth rate, and so full employment, is an ingrained structural problem of poor education outcomes, labour rigidities and insufficient job creation," said Bishop.
The rand weakened after the GDP data, while longer-dated government debt yields edged up.
LABOUR LAWS DETER EMPLOYMENT
Critics say stringent labour regulations tilted in favour of workers are a deterrent to employment, undermining efforts to slash a jobless rate of about 25 percent.
South Africa has one of the most unionised labour forces in the world, leading to wage increases that have outstripped productivity gains over the past decade.
A series of above-inflation wage settlements, a wide current account deficit and concerns about eventual normalising of U.S. monetary policy have helped push the rand 20 percent weaker against the dollar since January.
The rand's depreciation may be underpinning exports, which rose about 12 percent in the first nine months of this year compared to a year ago.
However, the weak currency has also forced the Reserve Bank to keep interest rates at four-decade lows of 5.0 percent, including at its last policy meeting of the year last week, rather than cutting them to boost economic growth. Its last move was a 50 basis point cut in July 2012.
"The continued weakness of the rand against the U.S. dollar throughout the course of 2013 means that the Reserve Bank's hands are tied," said Capital Economics analyst Shilan Shah.
"In fact, the notably hawkish tone of the monetary policy committee last week suggests that it could even make moves towards policy tightening next year."
The Reserve Bank last week cut its forecast for economic growth this year to 1.9 percent from 2.0 percent, while the Treasury has slashed its February forecast and now predicts 2.1 percent growth, compared with 2.5 percent last year.