SA’s economy feels the effects of crippling drought
The South African economy grew by 0.2% in the third quarter of 2016. Although this is the second straight quarter of growth for the year‚ it is down by 3.1 percentage points compared to the previous quarter.
The largest contributors to gross domestic product (GDP) growth was mining and quarrying‚ general government services, and finance‚ growing by 5.1%‚ 1.8% and 1.2% and contributing 0.4 percentage point‚ 0.3 percentage point and 0.2 percentage point to growth respectively. Marginal growth was also noted in the personal services‚ construction and transport sectors.
In contrast‚ the manufacturing industry‚ electricity (including water and gas) and the trade industry all contracted significantly compared to the previous quarter. The manufacturing industry contracted by 3.2%‚ compared to 8.1% expansion the previous quarter. The electricity sector shrank further by 2.9%‚ compared to a 1.8% decline in the second quarter while the trade industry recorded its first contraction for the first time since the second quarter of 2015‚ declining by 2.1%.
Due to the impact of drought‚ the agriculture industry posted its seventh consecutive quarter of economic decline since the first quarter of 2015. The sector’s quarterly contribution to the GDP declined by more than 14 percentage points from R77.8m in the first quarter of 2015 to R66.8m in the third quarter of 2016. The 0.3% decline in the third quarter of 2016 for the sector was mainly a result of a decrease in the production of horticulture products.
The country’s slow growth in the third quarter can be associated with the decline in the agricultural sector. It is the impact of drought on the agricultural sector that is slowing the entire economy given the sector’s robust backward and forward linkages with other sectors.
Apart from having had an adverse effect on the production output of major crops and livestock in the country‚ the impact of drought has also had adverse effects on the financial position of the farmers‚ and on other organisations that are linked to and do business with farmers such as financial institutions and/or insurance companies‚ inputs and machinery suppliers‚ government and consumers at large. Agricultural exports have declined significantly while food inflation keeps jumping the maximum target level and food prices are rising continuously. Consequently‚ this leads to sluggish economic growth and increased pressure on the fiscus.
Due to the slow economic growth‚ SA is consistently struggling to create employment much needed by thousands of capable and willing job seekers in the country in both the formal and informal sectors. As a result‚ SA has one of the highest unemployment rates in the world, especially among young people — currently standing at about 27%. Given the rate at which SA’s economy is growing‚ it is not surprising that it is sitting with this staggeringly high unemployment rate. If SA is to bring down unemployment‚ typically it must achieve a yearly growth rate of at least 2%. A 0.2% growth is not nearly enough to create jobs — instead, it will simply result in significant further job losses‚ which is currently happening.
Domestic food prices
Many people are wondering how high or low food prices will be in 2017. The direction of food prices will depend greatly on how much rain the country is going to get for the rest of the season. In recent weeks‚ SA has received a quite substantial amount of rain and, according to the weather service, there is more expected. If more rains fall‚ more ground will get planted and yield will be significantly higher compared to the previous production season. Currently‚ the country still has enough food supply; however‚ if the dry spell continues food exports will continue on a downward spiral‚ imports and food inflation will rise and, consequently, food prices will increase further.
However‚ if the weather conditions become favourable as predicted by the weather service‚ there will be significant improvement in production in the current season going into 2017. Subsequent to the improvement in production‚ consumer price inflation — which was standing at 6.6% in November (significantly higher than the central bank’s target of 3% to 6%) — should start moderating in the second or third quarter of 2017. This will greatly benefit consumers as it will lead to a downward movement in food prices.
While lower food prices will certainly bring some relief to consumers in the coming year‚ the economy remains extremely vulnerable to global shocks such as oil prices and possible policy changes in the US prompted by the incoming Donald Trump administration.
Although it is unclear at this stage what policy direction the new administration will take‚ sentiments from different sources suggest that the Trump administration is likely to push policies that might not be favourable to emerging market economies such as SA. This particular sentiment comes as a result of Trump’s trade proposal during his election campaign where on the foreign policy front he has suggested a more protectionist footing.
Unfortunately‚ if Trump succeeds at convincing congress to adopt his trade proposals‚ the impact of that decision might lead to seriously consequences for SA in the form of the African Growth and Opportunity Act (Agoa) trade agreement which must go under a strict review on an annual basis, checking compliance with its eligibility requirements. Following the annual review‚ the US president has the authority to withdraw‚ suspend or limit duty-free treatment for certain items (on 60 days’ notice) on any country following noncompliance.
Although the Agoa trade agreement is set to be in place at least until 2025‚ it is uncertain at this stage what will happen next year when the new US president facilitates the reviewing process.
Agoa plays an important role in the economic development of the South African economy. Moreover‚ Agoa has been responsible for facilitating the establishment and promotion of thousands of jobs by several industries (of which agriculture, especially the fruit industry, is part of) that benefit from trading on a preferential basis with the US. It is therefore concerning that there is uncertainty relating to the trade policy environment emanating from the change of government in the US.
The agricultural sector is key to the long-term development of the South African economy. Therefore‚ preferential access to markets such as the US provides crucial stimulation to the deteriorating South African economy.
• Hamlet Hlomendlini is Agri SA’s senior economist.