African GDP growth sliding towards 17-year low

Economic growth in sub-Saharan Africa could lag behind that of the world as a whole this year for the first time since the millennium, exacerbating poverty.

Capital Economics, a consultancy, forecasts that growth in sub-Saharan Africa will slide to just 2.9 per cent this year, down from 3.5 per cent last year according to estimates by the International Monetary Fund, which would be the weakest rate of growth since 1999.

The macroeconomic research house forecasts that global growth will come in at 2.8 per cent (using its own estimates of Chinese growth) or 3 per cent (based on official Chinese growth data), raising the prospect of sub-Saharan Africa falling behind the rest of the world for the first time since 2000.

Moreover, this underplays the true impact. Sub-Saharan Africa’s meagre top-line growth is likely to be almost wiped out by population growth of 2.5 per cent this year, according to IMF forecasts, leaving per capita growth virtually flat. In contrast the planet as a whole should still see a meaningful rise in per capita gross domestic product, given population growth of 1.2 per cent.

Sub-Saharan Africa’s two largest economies, Nigeria and South Africa, which between them account for more than half of the region’s GDP, are in danger of seeing declines in per capita GDP this year.

Capital Economics is pencilling in top-line growth of 2 per cent in Nigeria, less than the 2.8 per cent population growth estimated by the IMF, although a consensus forecast collated by Bloomberg does point to GDP growth of 3.7 per cent.

The consultancy envisages growth of 0.5 per cent in South Africa, where even the consensus forecast of 0.9 per cent is below mooted population growth of 1.6 per cent.

“That’s something that people don’t look at enough,” says John Ashbourne, Africa economist at Capital Economics. “If Nigeria grows at 2.8 per cent they are just treading water. In China population growth is essentially nothing, so even if growth is not as good as it was, you still get per capita growth of 5 per cent or so.”

Worse still, Mr Ashbourne says the risks to his “bleak forecast” lie “almost entirely to the downside”, and growth will only reach his 2.9 per cent threshold “if acute crises are avoided”. “In sum, the much-vaunted ‘rise’ [of Africa] seems to have stalled,” he adds.

Yvonne Mhango, sub-Saharan economist at Renaissance Capital, is similarly downbeat, saying: “The risk that we are going to see growth slower than we have seen previously, at least since the millennium, is significant, largely due to the two largest economies in the region.

“The growth numbers have underperformed since last year, and there is nothing to suggest we will see a recovery this year.”

The IMF is widely expected to revise down its 2016 growth forecasts at its spring meetings next week. In January, it said it expected global growth to be 3.4 per cent this year, with sub-Saharan Africa expanding at 4 per cent.

Capital Economics expects growth to slow this year in six of sub-Saharan Africa’s 10 largest economies, headed by a sharp slowdown in Angola, which this week became the third African country to request a bailout from the IMF, following in the footsteps of Ghana and Mozambique.

Of the remaining quartet, only Ghana and Kenya are expected to see a meaningful pick-up in activity in 2016, as the first chart shows.

Mr Ashbourne believes the “lingering effect” of last year’s falls in commodity prices will continue to undermine growth, particularly in Angola “which has yet to make a serious adjustment”, and Zambia “where mining firms cut production midway through 2015” — even though Capital Economics’ downbeat forecast is predicated on global commodity prices recovering “somewhat” this year, suggesting matters will be worse still if they do not.

As the second chart shows, over the past 20 years sub-Saharan Africa’s GDP growth rate has closely followed the change in its terms of trade (the ratio of export prices to import prices), which has deteriorated of late thanks to tumbling commodity prices.

This broad problem has been exacerbated by a series of country-specific issues.

South Africa is suffering from falling mine output, a severe drought and a mounting political crisis that saw President Jacob Zuma subjected to an impeachment vote this week.

Mr Ashbourne says these headwinds “will batter the South African economy this year” and that a technical recession — two successive quarters of negative growth — is a “real possibility”.

He believes inflation, currently 7 per cent, will hit double digits later this year due to rising food prices, a result of a “once in a century” drought, and the weak rand, a result of the political crisis.

This in turn will prompt the Reserve Bank to raise interest rates by 75 basis points to 7.75 per cent over the course of year, weighing heavily on growth, he fears.

In Nigeria, Mr Ashbourne believes demand will be hit by policymakers’ “botched response to the country’s slow-burning balance of payments crisis”, whereby the imposition of currency controls to defend the naira has led to a severe shortage of dollars to pay for imports.

Ms Mhango also describes the situation as “pretty serious”. “If you look at Nigeria you see fuel shortages, it’s hard to come across FX and if you can it’s not at the rate that is being published by the central bank [of about 200 naira to the dollar]”, she says.

“We are likely to see smaller enterprises taking a hit from that. Electricity is in short supply and unemployment will pick up.”

Ms Mhango says South Africa is increasingly being wracked by public sector strikes, while across much of the continent the economic slowdown is likely to result in “a build-up of frustration, falling disposable income and government employees seeing delays in receiving their wages”.

Both Capital and Renaissance believe Ivory Coast, Ghana and Kenya will be among the few regional bright spots this year, however.

Mr Ashbourne says Kenya is likely to be Africa’s fastest-growing large economy for the next few years, aided by lower oil prices (as a net importer) and high levels of infrastructure investment.

He sees growth in Ghana firming to 4 per cent this year, before jumping to 7 per cent in 2017 as the government continues to cut the fiscal deficit, stabilising the currency and bringing inflation under control, thus creating space for the Bank of Ghana to loosen monetary policy.

In neighbouring Ivory Coast, a combination of rising gold production, new discoveries in the oil sector and government investment projects, such as a metro line in Abidjan, the economic capital, should allow growth to edge up to an impressive 8.5 per cent this year, Mr Ashbourne believes.

Ms Mhango is upbeat about prospects for reform and investment in Ivory Coast following October’s re-election of President Alassane Ouattara, who engineered an impressive economic turnround in his first term in office.

Original Article By: FT