Dark clouds gather over South Africa’s biggest employer

South Africa’s surprising gross domestic product (GDP) contraction in the third quarter of this year was largely driven by challenges in the agricultural sector.

On Tuesday, Stats SA announced that the 0.3% quarterly decline meant GDP expanded by only 0.4% in the nine months through September.

This means South Africa risks missing its 2024 economic growth forecast, which the National Treasury and the South African Reserve Bank have estimated at 1.1%.

The agricultural sector, which experienced its deepest slump in at least three decades, contributed significantly to the quarterly contraction.

The agricultural sector contracted 28.8% in the third quarter as drought curbed the output of crops such as corn, soybeans, wheat, sunflowers, and vegetables in parts of the country.

This contributed -0.7 of a percentage point to the negative national GDP growth.

AgriSA chief economist Kulani Siweya said this data may call for further analysis, but the organisation is aware that drought plagued the production of field crops such as maize, soya beans, wheat and sunflower.

“Adverse weather conditions also hindered the production of subtropical fruits, deciduous fruits and vegetables in parts of the country,” he said.

In 2023, AgriSA highlighted several other challenges that the sector faces, including the rapid growth in South Africa’s national minimum wage. 

“Unless the increases of the minimum wage in the agricultural sector are aligned with inflation, there is a real risk of the agricultural sector contracting with devastating effects for employment in the sector,” the organisation said.

It explained that the decline in the agricultural sector’s profitability is the result of rising input costs. Labour is the most significant of these costs, constituting 25% of all production costs. 

“For this reason, the national minimum wage constitutes a tremendous burden on the sector that is exacerbating the already crippling external pressures on farmers,” AgriSA said. 

“Industries like the sugarcane sector, for example, already face enormous increases in the cost of fertiliser due to the Russian invasion of Ukraine.” 

“At the same time, industries like citrus also face financial strains in relation to the cost of shipping for export goods due to South Africa’s failing road, rail and port infrastructure.”

NWU School of Business & Governance Professor Raymond Parsons said the third-quarter GDP contraction was unexpected and disappointing.

In addition, it confirms the extent to which South Africa’s growth prospects remain vulnerable to negative factors such as adverse weather conditions, weakened exports, and other lagging sectors. 

“The negative economic and other factors in Q3 2024 have clearly outweighed the positive ones,” he said. 

“To the extent that tough climatic circumstances have made agriculture the largest negative contributor to lower growth, there is potential for a future turnaround if weather conditions improve sooner rather than later.” 

He added that South Africa’s economic recovery is evidently slow and uneven.

Looking at the bigger picture, these negative growth trends confirm why the GNU policy of seeking higher, inclusive, job-rich growth must remain the overriding priority. 

“In particular, much higher levels of total fixed investment are needed,” he said. 

“High-frequency economic data remain mixed. The latest growth data suggests that the forecasts of already modest GDP growth in 2025 and beyond may have to be revised.” 

“The clear message of the 3Q2024 GDP figures is, nonetheless, to reinforce the need for both the public and private sectors to urgently expedite the implementation of growth-friendly economic reforms.”

This sentiment was echoed by AgriSA, which emphasised the importance of fostering a stable and conducive environment for agriculture to thrive.

“Looking ahead, it is vital that we enhance logistical efficiency, retain our current markets, and explore new export opportunities, particularly within BRICS+ countries,” Siweya said.

“We believe that, with the right policies and support, South African agriculture can lead in driving inclusive growth and job creation.”

The organisation also pointed out several positive developments in the agriculture sector that have happened over the past year.

“Thus far, what made 2024’s challenges unique was the combination of farm-level profitability amid a changing global order that is increasingly regionalised and protectionist in its trade positioning,” CEO Johann Kotzé said.

“The increasing emphasis on sustainable farming and climate adaptation is also spurring industries to reflect on the future of their market priorities.”