he first quarter real GDP figures (Q1, 2016) released by Statistics South Africa came out worse than market expectations. They reflected a contraction of -1.2% quarter-on-quarter (q/q) due to weakening economic activity in the mining, electricity, transport and agriculture sector.

The agricultural sector remained in recession, based on a negative growth of -6.5% q/q, after having contracted by -6.7% q/q in the previous quarter. However, this came as no surprise as the Agbiz/IDC Agribusiness Confidence Index already indicated that the sector is under pressure – presented a -15% q/q contraction in Q1, 2016 (figure 1).

160608_Confidence and GDP

Figure 1: Agbiz/IDC Agribusiness Confidence Index and GDP (Agriculture)

Source: Statistics South Africa, Agbiz Research

The South African agricultural sector has been in recession since last year, with the key driver largely being the ongoing drought. On crop production, the area planted with summer crops decreased by 22%, to 3.2 million hectares from 4.1 million hectares in 2015. Additionally, the total summer crops production is expected to drop further by 27% y/y to 8.7 million tons.

Looking ahead

Agricultural GDP growth is likely to remain in recession in Q2 and Q3 of 2016 due to the aftermath of the current drought. Additionally, there are also external factors that seem to be constraining growth in the sector, such as expected rise in financing costs, low investment levels, as well as policy uncertainty. In the Agbiz/IDC Agribusiness Confidence Index, policy uncertainty, was noted as one of the key constraining factors in the agricultural and agribusiness sector, as it limits investments.

That said, we expect a slight recovery in Q4, 2016 as weather conditions continue to improve. There are indications that the current El Nino is transiting to La Nina. In fact, the US National Ocean and Atmospheric Administration indicates that the possibility of La Nina occurrence towards the end of this year has increased from 50% to 75%. This weather event might lead to above-normal rainfall, consequently replenish soil moisture which is favourable for livestock and crop production.

Agbiz economists
Wandile Sihlobo wandile@agbiz.co.za
Tinashe Kapuya tinashe@agbiz.co.za

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