Africa Growth Prospects for 2018
Dr. Hippolyte Fofack - January 2018
- Africa’s is expected to grow at an average rate of 4.0 percent in 2018 after rebounding up from 3.4 percent in 2017 resulting from a combination of positive external and internal influences.
- Loose monetary and fiscal policies in the advanced economies and the return of synchronized global growth are all aiding Africa’s economic resurgence. Domestic demand growth and rising intra-regional trade are underpinned by a supportive macroeconomic environment helped by reforms carried out by African governments.
- However, there are challenges which threaten the regions continued resurgence related mainly to the pace of monetary policy normalization and the growth and the trade dynamics between the US and China—the two largest economies which together account for about 40 percent of global growth and more than 22 percent of global trade.
- The correct route for Africa’s economic strength in the medium—and long term is to deepen the economic integration and structural transformation of African economies, to speed efforts to address infrastructure bottlenecks and to accelerate the diversification of exports.
Africa’s economic growth prospects are looking brighter for 2018 with an average forecast of 4.0 percent on 2017. Growth rebounded in the second half of 2016 and strengthened further in 2017, achieving a growth rate of 3.4 percent, up from 2.9 percent the year before. Growth in 2018 will be supported by increasing investment in a context of firming commodity prices, a growth acceleration in Eastern and Northern Africa, and a rebound in the largest economies in the region. The improvement follows successive downward revisions to growth forecasts following the contraction in global demand and the end of the commodity super-cycle which raised fears of global uncertainty and recession, especially in highly oil-dependent economies. Africa’s improving economic growth prospects are supported by a combination of external and internal influences.
Weak global inflation is keeping monetary policies on an accommodative path which is sustaining investment and this is likely to persist in the near term. Lower inflationary expectations in the advanced economies stem from the spillover effects of reduced commodity prices and broader slack in labour markets. While labour market slack persists, especially in those OECD countries where stubbornly high unemployment rates suggest that the “Phillips curve” relationships still operate, this is likely to act against monetary tightening. Monetary divergence between economies is also expected to act in favor of continued accommodative monetary policies. In the US, the Federal Reserve has raised the target range of the federal funds rate three times in the course of last year, but central banks in other leading economies are still in a stimulus mode. This, in part, reflects the persistent challenges of attaining the inflation target and full employment objectives in countries alluded to above.
For example, the European Central Bank committed to extend the bond-buying programme it adopted after the global financial crisis to lower longer-term interest rates out on the yield curve and combat the growing threat of deflation across the Eurozone well into 2018, perhaps to cement the region’s ongoing economic recovery. Similarly, as long as inflation is below the institutional target, the Bank of Japan is likely to stick with its yield curve control regime. In the same vein, and despite the risk associated with rising sovereign and corporate debt, the People’s Bank of China is likely to continue with some level of easing of monetary policy in order to remain on a strong growth trajectory if the government is to meet the stated policy objective of doubling the country’s real GDP over the decade ending 2020
Global Economic Expansion
The most important and direct driver sustaining Africa’s accelerating growth perhaps is an environment of synchronized global economic expansion. Global growth picked up in the second half of 2016 and accelerated last year to reach 3.7 percent (up from 3.2 percent in 2016), firming commodity prices in the process, and is forecast to strengthen.
In the short term, a combination of easy money and supportive fiscal policies will probably sustain the global economy on a self-reinforcing trajectory of accelerating growth – rising to about 4 percent in 2018. This could sustain global demand in the short—and medium term, especially with the expected rebound in leading emerging economies such as Brazil, Nigeria and Russia, but also as a result of the synchronized and broad-based nature of economic expansion. For the first time in more than a decade, growth acceleration has been witnessed in the overwhelming majority of countries around the globe, including both advanced and developing economies. Although emerging markets and developing economies are still the leading drivers of global growth, the strong performance achieved over the last few quarters has been largely due to the synchronized upturn in economic activity and growth acceleration in developing, but also advanced economies, especially following the recent cyclical upswing in Europe (see Figure).
Real GDP Growth (% yoy )
Internally, Africa’s forecast growth acceleration reflects strengthening domestic demand lifted by softening inflation and a supportive macroeconomic environment. African governments have been able to undertake difficult economic reforms. Exchange rate adjustments have stabilized most currencies in real effective terms and large reductions in public spending have been made including drastic and permanent cuts in energy subsidies, despite the social welfare implications. These reforms have reduced the macroeconomic management challenges and debt overhangs associated with twin deficits in the past. In consequence, debt-to-GDP ratios remain relatively low across the region, significantly below world averages, and current account deficits are narrowing, even in hard-hit oil-exporting economies. This has occurred despite the growing number of countries taking advantage of accommodative international capital market conditions to issue sovereign bonds.
The successful implementation of economic reforms has strengthened macroeconomic stability driving growth-supporting investment. Reforms are also enabling countries in the region to either sustain robust rates of economic growth or shorten the length of recessions triggered by the contraction in global demand and exposure to recurrent adverse commodity terms of trade shocks (more recently illustrated by the end of the commodity super-cycle). After the relatively weak performance achieved in 2017, especially in some of the leading natural resource-dependent economies, growth is forecast to strengthen in the region’s largest economies—Angola, Egypt, Nigeria and South Africa.
For instance, in Nigeria (Africa’s biggest crude oil producer) where exports of crude oil account for approximately 70 percent of government revenue and 90 percent of foreign exchange earnings, economic growth which contracted by 1.6 percent in 2016—the country’s first recession in more than two decades—rebounded in the second quarter of 2017. The economy grew at an annualized rate of 1.0 percent in 2017, after five consecutive quarters of economic contraction, starting in the first quarter of 2016. The country’s growth is forecast to strengthen further with aggregate output expanding by more than 2.5 percent in 2018, on the back of increasing investments, rising oil production and labour inputs.
The increased economic resilience of the region and the acceleration in growth has also been helped by the asymmetric nature of the external shocks it has faced. The collapse in oil prices was a negative shock for leading oil-exporting countries, but it also improved the macroeconomic environment and external sector in a number of oil-importing and energy-intensive economies. Some of these countries are drawing on oil windfalls to finance the large-scale infrastructure investments which are driving output expansion and sustaining the region on the path to structural transformation. According to the most recent forecast, two of the top five fastest-growing economies in the world are African: Ethiopia and Côte d’Ivoire, which achieved growth rates of 8.5 percent and 7.7 percent respectively, were the second and third fastest-growing economies in the world in 2017.
But the resilience of African economies is also attributable to a number of other factors, most notably growing cross-border trade and investments which are reducing the exposure of the region to adverse global volatility and external shocks. A growing number of African industrialists are playing an increasingly important role in the process of economic growth and investment. In particular, they are injecting the patient capital required to drive the process of structural transformation and mitigate the risk of sudden stop and capital outflows triggered by the challenging global environment of rising uncertainty and volatility. Most recent estimates place annual intra-regional investment at US$15 billion, over 24 percent of total foreign direct investment into the region. Moreover, cross-border investment undertaken by African entrepreneurs and industrialists is directed primarily towards labour-intensive manufacturing industries which are both growth and welfare-enhancing.
Africa’s forecast growth acceleration is also a reflection of increasing diversification of both the destination of exports and sources of growth. A growing number of countries in the region have taken steps to accelerate the structural transformation of their economies and to boost intra-African trade. It used to be said “when Europe sneezes Africa catches a cold”, in part reflecting the level of structural dependency of African economies which for a long time into the post-independence era were appended to Europeans’. The rise of developing market economies, especially those in Asia, and expanding intra-regional trade has enabled Africa to sustain robust rates of economic growth in the post-great recession even as Europe was undergoing one of the longest deflationary periods, fueled by fiscal and a sovereign debt crisis.
Despite the favourable global economic and financial environment there are number of downside risks. In particular, accelerating the pace of tightening of global financial conditions could decrease the risk appetite and exacerbate capital outflows. At the same time, a shift towards inward–looking policies could derail the improving global economy through investment and trade channels. In the short and medium term, the materialization of these risks will depend on both the pace of monetary policy normalization and the growth and the trade dynamics between the US and China—the two largest economies which together account for about 40 percent of global growth and more than 22 percent of global trade.
Sustaining the rate of economic expansion in China is the first challenge. Last year’s unexpected growth reacceleration in China drove the turnaround in industrial production and trade, leading to the mild recovery in commodity prices and putting the world economy on a path to rising growth acceleration. China’s growth is particularly important for the Africa region where primary commodities continue to account for the lion’s share of trade and growth, with oil-exporting countries alone accounting for more than 50 percent of aggregate GDP.
The second challenge which could affect the growth outlook in China, is geopolitical in nature and relates to the potential implications of protectionist policies for global and African economies. A shift towards inward-looking trade policies in advanced economies could reduce cross-border trade and investment flows exacerbating capital outflow pressures on developing markets. At the same time, it could put downward pressures on commodity prices and weaken the current global growth momentum. In the short term with economic confidence growing across most of the developed world this is unlikely, but such a scenario cannot be ruled out completely. The dynamics of commodity prices and global demand still depends largely on China—Africa’s single largest trading partner and the global industrial powerhouse which accounts for almost 50 percent of world’s total metal consumption. Should protectionist policies lead to a trade war, then the potential implications for African and global economies could be significant if these policies result in sustained contraction in global demand and trade.
The third challenge relates to the dynamics of the business cycle in the US. The increase in wages and the steady decline in profit margins off peak levels recently witnessed in the US could well suggest that the US economy is transitioning from the mid—to the late-cycle phase after a decade of uninterrupted economic expansion. However, the relatively steep yield curve and continued supportive credit conditions in a context of weak inflation suggests that this transition could be slow and even long. This favorable short-term outlook for the US economy is further supported by implied earnings growth estimates from stock prices which point to strengthening growth after the overhauling of the US tax system last December.
In this context, the biggest downside risk to the forecast growth acceleration in the short term is largely geo-political and hinges on the dynamics of the trade relationships between China and the US. Against this background, strengthening the existing framework for bilateral cooperation and policy coordination between the two leading drivers of global growth and trade to ensure a stable flow of goods and services and continued expansion of global value chains will be essential if the world is to remain on the current trajectory of synchronized global expansion and forecast growth acceleration.
Perhaps the synchronized growth acceleration witnessed over the last few quarters has been largely due to the positive externalities inherent with concurrent growth acceleration enjoyed by both the US and China.
If a rising tide is destined to lift all boats, then the combined effects of two rising tides is likely to be even more significant and broad-based. In the short term, robust and strong economic growth in both China and the US is good for global growth and will sustain the forecast growth acceleration in Africa and globally. In the medium—and long term, deepening the ongoing process of economic integration and structural transformation of African economies, speeding ongoing efforts to address infrastructure bottlenecks and accelerating the diversification of exports are all essential to sustain the current growth momentum. These will all mitigate the exposure of the region to recurrent adverse commodity terms of trade shocks, to global volatility and the reversal in capital flows which could be triggered by monetary policy normalization in advanced economies.