Agriculture among key sectors that contributed to contraction of the economy

©Thitiwat Junkasemkullanunt via 123RF

Lately, the economy contracted more than expected by 3.2% (quarter-on-quarter), seasonally adjusted and annualised in the first quarter of 2019, the biggest quarterly fall in economic activity in more than a decade, since the first quarter of 2009 when the economy contracted by 6.1% largely due strain from the global financial crisis.

The surprisingly steep economic contraction in the first quarter of 2019 followed two successive quarters of expansion of 2.6% and 1.4% in the third and fourth quarters of 2018, respectively.

Although almost all sectors of the economy contracted in the first quarter of 2019 (except government services; personal services; as well as finance, real estate and business services sectors) when compared to the fourth quarter of 2018, the biggest contributors to the economy’s contraction during the first quarter of 2019 were manufacturing; mining and trade, catering and accommodation (as a result of the underlying slowdown in consumer spending growth), and to some extent the agricultural sector.

Most analysts blame low demand, sharp rising fuel prices and Eskom’s load-shedding seen in February and March this year, for the contraction of several sectors, more especially the manufacturing, mining and agricultural sectors and ultimately the economy.

Eskom struggled to keep power supply to the economy in February and early March, resulting in the deepest electricity outages in a decade, knocking business and investor confidence to multi-year lows.

Manufacturing experiences negative growth

Manufacturing fell sharply by 8.8% in the first quarter of 2019, from 4.5% in the last quarter of 2018. It contributed -1.1 of a percentage point to the overall economic contraction during this period. Seven of the ten manufacturing sub-sectors, including petroleum, chemical products, rubber and plastic products; motor vehicles, parts and accessories and transport equipment; wood and wood products, paper, publishing and printing divisions, reported negative growth rates during the first quarter of 2019.

The mining sector continued to contract, recording -10.8% in the first three months of 2019 compared with -3.8% in the last quarter of 2018.

It contributed -0.8 of a percentage point to GDP growth, with decreased production reported for ‘other’ mining and quarrying (including diamonds), iron ore and coal. The strike in the gold sub-sector is likely to have contributed to the decline in the mining sector’s growth during this period.

Agricultural economy spiral

The agricultural sector also surprisingly contracted by 13.2% in the first quarter of 2019, following a growth of 7.9% in the last quarter of 2018. It contributed -0.3 of a percentage point to the contraction of the economy during the first quarter of this year.

The downward agricultural economy was also reflected by employment data in the first quarter of 2019 where agricultural employment declined by 12,000 to 837,000 during this period, from 849,000 in the last quarter of 2018. The sub-sectors that faced a notable reduction in employment were field crops and livestock, partly due to a reduction in area plantings on the back of unfavourable weather conditions in the case of field crops.

The agricultural sector’s contraction was mainly due to a drop in the production of field crops and horticulture products. This is in line with the data that is coming out of key horticultural industries that harvested during the first quarter of the year.

For example, it is estimated that wine grapes harvest was down by about 2% from 2018, which was already down by around 14% from a long-term average harvest. Agricultural conditions were also challenging in large parts of the country due to drier weather conditions over the past few months, especially in the grain growing areas. This was the case in the central and western parts of the country, where summer grains and oilseed are predominantly produced.

Production negatively affected

As a result of the challenging weather conditions in these areas, plantings of summer grains and oilseed were reduced by 4.4% year-on-year during the 2018/19 production season to 3.68 million hectares.

The yields of major summer crops such as maize, soybeans and sunflower seeds were also negatively affected, and thus production is set to be down by 12.9% year-on-year, 15.9% year-on-year and 29.1% year-on-year to 10.90 million tonnes, 1.295 million tonnes, and 611,140 tonnes, respectively; this, according to the latest Crop Estimate Committee data.

This could be mirrored in the agricultural economy data of the upcoming quarters.

It is expected that the domestic agricultural sector will continue to contract in the next quarter.

The expectation is that the impact of a lower summer crop harvest will be more apparent in the upcoming quarters’ data, and could, in the end, lead to a contraction in South Africa’s agricultural economy this year.

It is expected that contraction in the summer crops harvest could surpass any positive news that might arise from other agricultural sub-sectors this year such as horticulture (especially the citrus industry which is performing well), and that South Africa’s agricultural economy could contract in 2019.

This is supported by the Agbiz/IDC Agribusiness Confidence index, which remains in contractionary territory, having eased at 46 points in the first quarter of 2019. This is below the neutral 50-point mark, and implied that agribusinesses are downbeat about business conditions in South Africa.

Lower growth levels expected

Looking at a broader economy, a weak manufacturing data in the current quarter raises the risk that the economy may slip into the second recession in successive years.

Given this, and the latest contraction in the first quarter of 2019, it is now doubtful that the economy will reach a 1.4% and 1.0% growth in 2019, as forecasted by the National Treasury and South African Reserve Bank, respectively.

Lower growth levels expected in 2019 will, therefore, be insufficient to make a meaningful dent in the reduction of unemployment, poverty and/or severe inequality, which have persisted for more than two decades since the democratic dispensation.