The South African economy, the most industrialised economy on the African continent, has been struggling to gain momentum and has not grown by more than 2,5% a year since 2013. This is despite political changes, economic stimulus and recovery plans as well as investment drive in late 2017 and early 2018, as businesses and foreign investors seek real reforms.
Lately, the economy contracted more than expected by 3,2% q/q, (seasonally adjusted and annualised) in the first quarter of 2019, the biggest quarterly drop 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 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.
Low demand, fuel prices and Eskom to blame
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.
Negative growth rates for manufacturing
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% to the overall economic contraction during this period. Seven of the ten manufacturing subsectors, 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.
Decline in mining sector
The mining sector continued to contract, recording -10,8% in the first three months of 2019 compared to -3,8% in the last quarter of 2018. It contributed -0,8% to GDP growth, with decreased production reported for ‘other’ mining and quarrying (including diamonds), iron ore and coal. The strike in the gold subsector is likely to have contributed to the decline in the mining sector’s growth during this period.
Agriculture shows a downward trend
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% 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 subsectors 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 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.
Challenging weather has negative consequences
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 oilseeds are predominantly produced. As a result of the challenging weather conditions in these areas, plantings of summer grains and oilseeds were reduced by 4,4% year-on-year (y/y) during the 2018/19 production season to 3,68 million hectares.
The yields of major summer crops such as maize, soya beans and sunflower seeds were also negatively affected, and thus production is set to be down by 12,9% y/y, 15,9% y/y and 29,1% y/y to 10,90 million tons, 1,295 million tons, and 611 140 tons, respectively, according to the latest Crop Estimate Committee data. This could be mirrored in the agricultural economy data of the upcoming quarters.
Decline expected to continue
It is expected that the domestic agricultural sector will continue to contract in the next quarter. Expectations are 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 a contraction in the summer crops harvest could surpass any positive news that might arise from other agricultural subsectors this year, such as horticulture (especially citrus industry that 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 implies that agribusinesses are downbeat about business conditions in South Africa.
A bird’s eye view
Looking at a broader economy, 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 forecast 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. – Tebogo Mashabela, Land Bank
Tebogo Mashabela is an agricultural economist currently serving as a research analyst at Land Bank. He writes in his personal capacity and the views expressed in this article are his own and do not necessarily represent policy positions of Land Bank.