Morocco's economy expands 2.4% in 2012, dragged down by drought-weakened agriculture sector

Fourth quarter national income account data from Morocco's High Planning Commission (Haut-Commissariat au Plan: HCP) confirms Morocco's lacklustre 2012 growth record. Annual real GDP growth slowed to 2.4% last year, well-below growth in 2011 of 5.0% – which was the highest in the region. Supply-side data show that the economy expanded just 2.0% during the fourth quarter – the weakest figure on the year – as lower agricultural output continued to weigh heavily on headline growth. Indeed, the agriculture sector – which accounts for some 16% of total economic output in typical years – contracted 8.5% during 2012, resulting in a negative contribution to headline GDP of more than one percentage point and reducing its share of total output to near 14%. Non-agriculture sectors, albeit a mixed bag, performed comparatively much better expanding in aggregate by 4.5% in 2012. Growth during the fourth quarter, however, proved weaker than expected, suggesting that the economy is still struggling as yet to recapture upward growth momentum.

Last year, Morocco's critically important agriculture sector – by far the largest employment sector – never recovered following a sharp 13.3% quarter-on-quarter (q/q) contraction during the first quarter of the year – the byproduct of low rainfall levels. While quarterly growth turned positive and accelerated in subsequent quarters, growth has been far too weak to make-up for the dismal first quarter performance. As such, data from the fourth quarter show the sector at depressed output levels, about 9% below the fourth quarter of 2011. In fact, the sector's total output fell to its lowest level since 2008, the year following a severe drought that slashed output of the country's staple cereal crop and led to a burgeoning import bill. Last year's drought proved less detrimental to the sector's growth, however, as the 2007 drought caused the sector's output to collapse by more than 20%.

Among the non-agriculture sectors, the telecoms sector did the most to support growth, expanding in real terms by 17.4%. Total industry – including mining, water & electricity, construction and manufacturing – on the other hand grew more sluggishly at 2.4% led by water and electricity sector growth of 9.1%, but dragged down by a 2.2% decline in mining activity. Construction growth was a meagre 0.1% on the year according to the HCP data and witnessed a sharp 5.7% contraction during the fourth quarter compared to a year earlier. Overall, compared 2011, total industry growth slowed by roughly one percentage point last year. Meanwhile, there were some bright spots. Business and personal services sector growth accelerated to 4.5% in 2012, from 3.1% a year earlier, while even the hotels and restaurant sector posted positive growth, albeit low growth at 0.6%. Growth in the services sector – in particular the tourism industry – is important given that it is the fastest growing employment sector in the country. Yet likely the most telling sign of the economy's struggles, the retail sector expanded just 1.9% last year, down from 4.4% in 2011, indicative of the weaker household consumption figures and depressed consumer sentiment.

Expenditure-side GDP figures from HCP show that strong government consumption during 2012 went some way towards offsetting weakening household consumption. Full-year figures show household consumption growth slowed to 3.7% last year, compared to higher government consumption growth of 5.4%. During the fourth quarter, government consumption was especially strong at 6.9% against tepid household consumption growth of just 2.0%, according to HCP. IN fact, on a quarterly basis, household consumption declined by1.0% during the last three months of the year, whereas government consumption kicked up 2.9% q/q, the data show. Nonetheless, household consumption is a considerably larger piece of GDP, at between 60-70%, compared to government's share between 15-20%, making softer household consumption exceedingly difficult to offset through higher government consumption growth alone.

Household consumption, as well as consumer sentiment, is closely linked to the agriculture sector's health given that the sector accounts for roughly 40% of Morocco's total employment. Last year's drought reduced incomes and depressed consumer sentiment which in turn adversely affected consumer spending. That said, while household consumption remained weak during the fourth quarter, the HCP's sentiment index recorded its first quarterly increase since the third quarter of 2011, potentially a leading indicator for improving household consumption on the horizon. Lastly, the HCP data showed real exports declined by 1.0% last year, feeling the effects of weak external demand out of the Eurozone, although exports posted positive growth of 2.2% during the fourth quarter. Meanwhile, imports registered full-year growth of 1.3% in 2012, a marked slowdown from growth in 2011 of 5.0%, but against decline exports the trade balance remained a net drag on growth.

Outlook and implications

Weighed down by the agriculture sector's deep contraction last year, the Moroccan economy is expected to rebound this year as the critical sector recovers, supporting broader economic activity. Given agriculture's large role in the economy, positive growth has the potential to translate into a healthy consumer spending boost, and in turn – if sufficiently strong – result in increased hiring in the private sector and higher wages. Rainfall levels so far this year have been sufficient, lowering the likelihood of another low-yielding crop year; however, April rainfall levels will prove decisive in determining the harvest's yield potential. IHS Global Insight's outlook assumes average rainfall levels, which we project will result in an agriculture sector expansion of about 5% this year – a good turn around, but in our view still a conservative forecast, given that growth could be as high as 10% if output recovers to 2010 levels. Household consumption will be the prime beneficiary with growth accelerating to near 5%, which by our projections will boost headline GDP growth to 4% this year. Yet, considerable headwinds to growth will persist, most notably in regards to Morocco's external sector given the ongoing weakness in the Eurozone – Morocco's main trading partner. Beyond merchandise trade, the Eurozone economies are a crucial source of both tourist receipts and remittances flows – both of which underpin the consumption habits of many Moroccan households. IHS Global Insight expects the Eurozone to suffer another shallow recession this year, which will doubtless have knock-on effects in Morocco where so much of the external sector is reliant on Eurozone demand. Another headwind, more noticeable in the medium-term, but potentially beginning to have an effect this year, is the government's efforts towards fiscal consolidation. Slower government consumption growth suggests that private consumption growth will need to accelerate to maintain the headline rate – albeit fiscal consolidation efforts will focus largely on reforming the subsidy system, which makes it probable that private consumption will be hindered by reforms which raise costs.