The agriculture sector enters into a technical recession

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File picture: Tim Wimborne

South African economy avoided technical recession by bouncing back by more than expected in the second quarter of 2019, recovering all the ground lost in the contraction during the first quarter of 2019. The economy grew by 3.1% (quarter-on-quarter, seasonally adjusted and annualised) in the second quarter of 2019, after contracting by a revised 3.1% in the preceding quarter on the back of load-shedding. On a year-on-year (y/y) basis, the economy expanded by 0.9% in the second quarter of 2019 compared with 0% in the previous quarter.

The economic growth in the second quarter of 2019 was largely driven by the good performance of the mining sector, which recorded growth of 14.4% (the strongest growth since 2016) during this period, compared with contraction of 10.8% in the first quarter of 2019. Mining contributed one percentage point to GDP growth during the period under review, with increased production reported for iron-ore, manganese, coal and platinum.

The other sector that made sizeable contribution to the economic growth in the second quarter of 2019 was finance. The finance sector grew by much more than expected on the back of increased activity in financial intermediation, real estate and business services. It grew by 4.1% in the second quarter, compared with 1.1% in the preceding quarter and contributed 0.9 of a percentage point to GDP growth.

All sectors of the economy grew in the second quarter of 2019, except agricultural, construction and transport sectors. Although South Africa’s economy recovered from the previous quarter’s economic performance, this was not the case with the agricultural sector. As was widely expected, the agricultural sector entered into a technical recession after contracting by 4.2% in the second quarter of 2019, following a contraction of a revised 16.8% in the first quarter of 2019 (see Figure below). It contributed negative one percentage point to the growth of the economy during the period under review.

The agricultural sector’s contraction in the second quarter was mainly on the back of the lower production activity of field crops and horticultural products during this period. This was as a result of unfavourable weather conditions, especially in the summer grain areas in the central and western parts of the country, during planting season which resulted in poor field crop harvest.

According to the latest Crop Estimate Committee (CEC)’s 7th production forecast, all summer grain crops yields are expected to be down in 2018/19 season compared with last season, except for sorghum which is expected to record a growth of 28.1% y/y. Maize, soybeans and sunflower seed production are expected to be down by 11.9% y/y, 24.0% y/y and 21.0% y/y, to 11.02 million ton, 1.17 million tons and 680 940 tons, respectively during the 2018/19 production season. Groundnuts and dry beans are also expected to go down by 66.9% y/y and 4.3% y/y to 18 880 tons and 66 355 tons, respectively during the same period.

Given the latest contraction in agricultural activity in the second quarter of 2019, it is expected that the agricultural sector is likely not to perform better in 2019 when compared with 2018. This is supported by the Agbiz/Industrial Development Corporation (IDC) Agribusiness Confidence index, which shows that sentiments across the domestic farming environment is low and negative. 

The Agribusiness Confidence Index, which has historically proved to be a good indicator of the growth path of the agricultural economy, has been rather unstable in the most recent quarters, easing to 44 points in the second quarter of 2019, from 46 points in the first quarter of 2019. This is below the neutral 50-point mark and reflects the negative perceptions held by agribusinesses about South Africa’s agricultural business climate.

Estimates are that the agricultural sector is likely to contract by between 1.8% and 2% y/y in 2019 largely underpinned by generally poor summer grains and oilseed harvest in the 2018/19 production season. The sector is only likely to start seeing good performance early in 2020 as there are good prospects of higher-than-average rainfall in the 2019/20 summer season.

Regarding a broader economy, the better-than-expected improvement in economic growth in the second quarter suggests that overall economic growth in 2019 might come in at around 0.8%, with weak global demand set to be a drag on South Africa’s growth in the second half of the year. This growth rate is still miserably insufficient to address the myriad of challenges facing our country, such as the high unemployment rate, poverty and severe inequality.

In order to boost the domestic economic growth path to a higher viable level to address challenges mentioned above, structural impediments to economic growth need to be addressed as a matter of urgency. A strategy discussion document recently released by National Treasury is a step in the right direction in boosting the growth of the economy, since it makes practical recommendations. However, the negative reaction to the discussion document by trade unions within the tripartite alliances such as Cosatu and the SACP who are unhappy that they were not consulted suggests that government will face challenges in implementing the recommendations.

 

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.