The chapter examines the recent macroeconomic developments in Africa and provides a forecast for 2013 and 2014. This is based on detailed country analysis and projections as described in Part Three of this report. The chapter looks at the demand and supply conditions which are affecting Africa’s growth. It also describes the development of commodity prices and inflationary pressures in African countries and discusses how monetary and fiscal policies have responded to the various challenges.
The economic outlook for Africa remains favourable despite headwinds from the global economy. Growth has remained relatively broad-based, with oil production, mining, agriculture, services and domestic demand as the main drivers, mitigating the adverse effects from global turbulences. But growth has remained subdued in several countries due to poor export performances and political and social tensions. On average, and excluding the distortions by volatile gross domestic product (GDP) developments in Libya, Africa’s economic growth was 4.2% in 2012 and is projected to accelerate to 4.5% in 2013 and further to 5.2% in 2014. This forecast assumes a gradual improvement of global economic conditions.
Africa’s economy continues to show a high degree of resilience against global economic turbulences. However, the growth momentum has eased in countries with strong links to global markets and also in those where political and social tensions have increased. With a gradual recovery of the global economy, the continent’s average growth of gross domestic product (GDP) is likely to amount to 4.8% in 2013 and 5.3% in 2014. In 2012 Africa’s growth was higher at 6.6%. But this was due to the rebound of oil production in Libya. Excluding Libya, Africa’s growth was 4.2% in 2012 and is projected to accelerate to 4.5% and 5.2% in 2013 and 2014 respectively (Figure 1.1).
Resource-rich countries continue to benefit from relatively high commodity prices although easing of global demand has reduced price levels. Good harvests have boosted agricultural production in many countries and also helped to mitigate adverse effects of high international food prices on consumers. Africa’s oil exports increased significantly as Libya resumed production.
The outlook is subject to risks due to the fragile international environment and country-specific problems. Two years after the Arab revolutions, political and social tensions continue in Egypt, Libya and Tunisia. While output is gradually recovering in Egypt and Tunisia, and in Libya oil production is close to pre-revolution level, unemployment remains high in the region and political transition is slow and contentious. Some countries in northern and western Africa have also been adversely affected by the political and military conflict in Mali. In South Africa, growth was dampened by the global slowdown and labour unrest.
Figure 1.01 Africa´s Economic Growth (%)
The weakness of the international environment also constrained African economies although short-term prospects appear favourable. The assessment of the economic situation by African participants in an international poll has deteriorated during 2011 and 2012. However, in the first quarter of 2013, for the first time since the end of 2010, both the assessment of the current situation and the prospects for the next six months have improved (Figure 1.2).
Figure 1.02 Africa Assessment of current Economic Situation and Expectations for the next six months
A main reason for the deterioration of economic conditions during 2011 and 2012 was that export markets of African countries have weakened in advanced countries and – to a lesser extent – also in emerging countries (Box 1.1). While Africa’s trade with emerging countries has gained in importance with increased share in total Africa’s exports, advanced countries continue to be the most important export markets. In 2011, one-third of Africa’s merchandise exports went to the European Union (down from 37% in 2006) and more than 11% to the United States against 16% in 2006, while exports to China increased to around 10% of total exports from around 6% in 2006 and exports to India rose to 6% in 2011 from around 4.5% in 2006. The exposure to developments in the various regions of the world is, however, quite different across the continent.
North African countries – like several other countries, which depend on European markets and have relatively high shares of total exports in GDP – are particularly exposed to the weakness of the European economy. In 2011, exporters in Tunisia, Libya, Botswana, Cape Verde and the Seychelles shipped around 70% or more of total exports to the European Union. In Algeria, Morocco, Cameroon, Ghana, Mauritius, Mozambique and Sierra Leone, export shares to Europe amounted to between 50% and 60%. In many other African countries, Europe remains the most important export destination despite its declining share. South Africa, whose major trading partner is the European Union, was affected by the crisis in the euro area. The volume of merchandise exports to the euro area declined sharply in the first half of 2012. While this trade had provided a positive contribution of 0.2 percentage points to GDP growth in the first half of 2011, its growth contribution in the corresponding period in 2012 was -0.6 percentage points; this contraction explains a good part of South Africa’s poor growth performance during this period (OECD, 2012).
In several other countries, however, China has become the most important export market, notably in the Democratic Republic of the Congo (DRC), Congo Rep., Sudan, Angola, Mauritania and Zambia, while the United States is the most important export destination for Chad and Lesotho. In Guinea-Bissau, the bulk of exports (90%) go to India.
The detailed macroeconomic forecast for Africa and its regional groupings is presented in tables 1.4a and 1.4b at the end of this chapter.
Box 1.1. Global economic conditions will improve only slowly 01 The information presented here is largely based on the OECD Economic Outlook No. 92, November 2012, the World Economic Outlook update of the IMF, January 2013, and the World Bank Global Economic Prospects, January 2013, but has been updated as far as possible.
The recovery of the world economy in 2010 from the deep recession of 2009 was followed by more moderate growth in both 2011 and 2012. The main reasons for the ongoing weakness of the world economy were the deepening crisis in the euro area, sluggish growth in other main advanced economies, notably the United States and Japan, and more subdued growth in emerging countries such as China, India and Brazil. The permanent quantitative easing measures in the United States, Europe and Japan demonstrate how difficult it is to regain sustained growth after the financial crisis. But the risk that the global economy could fall into another recession has become smaller. Indeed leading economic indicators point to some improvement. However, there is growing concern that excessive liquidity created by stimulus measures in advanced countries could lead to new bubbles in asset markets and a fall of exchange rates below their market-based levels. This could in turn trigger competitive devaluations and new trade protectionism. The assumption of this African Economic Outlook is that such risks can be avoided and the global growth and world trade will accelerate gradually during the course of 2013/14. Our forecast for Africa assumes that world output growth will remain modest in 2013 at around 3.5% (after 2.9% in 2012) and accelerate to above 4% in 2014. World trade volume growth is projected to recover gradually from around 3% in 2012 to 4%-5% in 2013 and 6%-7% in 2014. However, these projections are lower than pre-crisis levels. From 2004 to 2007 annual growth of world output and world trade had been around 5% and around 9% respectively. The gradual recovery of world trade should benefit Africa’s exporters.
The euro area fell into recession in 2012 with GDP declining by 0.4%. The preceding two-year recovery period was short-lived and tepid (with GDP rising by 1.9% in 2010 and 1.5% in 2011 after the decline by 4.3% in 2009). GDP is expected to stagnate in 2013 or decline slightly and positive growth of 1%-1.5% is only expected in 2014. Only then, six years after the downturn has started, will GDP have regained its 2008 level. The euro area continues to struggle with weak confidence due to the ongoing sovereign debt and banking crisis in several countries. This and the fiscal restraint are reducing domestic demand while weak global trade depresses export demand. The weak aggregate demand makes the task of reducing fiscal deficits more difficult. High-debt economies are also trying to regain growth by restoring competitiveness through lower wages (i.e. internal devaluation). While this should help growth in the longer term it reduces domestic demand in the short term. Within the euro area Greece suffers the deepest and longest recession. By the end of 2013 its GDP will be more than 25% below the level in 2007. The crisis in Greece has also affected the banking system in Cyprus, pushing the country to the brink of bankruptcy. Among the countries which have been most seriously hit by the debt crisis, Italy, Spain and Portugal were also in recession in 2012. The recession in these countries is likely to continue in 2013. However, in Ireland, which was also in crisis, the emergence from recession was faster and is now achieving moderate growth. In Germany, GDP increased in 2012 by close to 1% while in France and in the United Kingdom GDP stagnated or declined marginally. The period of low growth is projected to continue in these countries in the first half of 2013 with some acceleration in the second half of 2013 and in 2014.
The US economy has gradually recovered in 2012 driven mainly by private consumption and the turnaround in the housing market. Growth was, however, restrained by various temporary factors such as losses in agricultural production due to the drought and disruptions caused by Hurricane Sandy. The poor export performance and, towards the end of 2012, the risk of a large fiscal squeeze (the so-called fiscal cliff) dampened business confidence. While the largest part of the fiscal cliff has been averted by a compromise between the Democrats and the Republicans, the remaining fiscal drag remains substantial, as temporary stimulus measures expired at the beginning of March 2013. Further compromises between the political parties are needed to put fiscal policy on a sustained medium-term consolidation path without unduly restraining aggregate demand in the short term. It is expected that the recovery will remain
sluggish with GDP growing by around 2%-2.5% in 2013 and 2.5%-2.75% in 2014. The Federal Reserve continues to boost the economy by keeping its policy interest rate at 0%-0.25% and to increase liquidity by buying bonds. The Fed stated that it would continue these policies until the labour market improves substantially.
In Japan, aggregate demand was boosted in the first half of 2012 by reconstruction spending in response to the great earthquake and tsunami in March 2011. However, after reconstruction spending waned and world trade weakened the recovery stalled. Growth of GDP is projected to decline to around 1% in both 2013 and 2014 from about 2% in 2012. The Bank of Japan is expected to continue with expansionary policy to boost economic growth.
In China, growth has slowed down in 2012 to below 8%, from 9.3% in 2011 and 10.4% in 2010. The deceleration was mainly due to a weakening of exports and of domestic demand as the government took measures to cool inflationary pressures. Nonetheless, at current growth rates, China’s economy remains robust, parrying off earlier fears of a hard landing of the Chinese economy. While international forecasters are expecting for 2013 growth of 8%-8.5%, China’s government in March 2013 set a lower growth target at 7.5%, unchanged from 2012. In future, the demand pattern is expected to gradually shift towards consumption and services rather than commodity-intensive production. This could reduce global demand for commodities, thereby adversely affecting African commodity exporters. Similarly, with rising domestic wage pressures, Chinese firms could look for more investment in manufacturing sectors abroad. This could also help African countries to diversify their economies.
India’s growth declined in 2012 to around 5% from 6.9% in 2011 and 9.6% in 2010. The decline was attributed to a combination of weakening of world trade and domestic uncertainties. Weaker domestic demand and the depreciation of the exchange rate reduced imports and lowered the current account deficit. However, high inflation and the widening of the fiscal deficit limit the room for expansionary monetary and fiscal policies. It is expected that higher agricultural production together with positive effects of recent structural policies and improved external conditions could lead to higher growth of about 6.5% to 7% in 2013/14.
Latin America’s growth slowed in 2012 to around 3%, after 4.3% in 2011 and 6% in 2010. The slowdown was caused by weaker export markets, including in China, and by country specific factors. The average rate of growth in Latin America is expected to gradually recover to 3.5% in 2013 and 4% in 2014 as world trade recovers and domestic weaknesses subside. In Brazil, the region’s largest economy, growth contracted further in 2012 to around 1%, down from 2.7% in 2011 and 7.5% in 2010. The economy continued to suffer from domestic policy uncertainties, weak global conditions and a loss of competitiveness as capital inflows had led to an overvalued exchange rate. It is expected that strong monetary and fiscal stimulus coupled with supply-side reforms will gradually lift growth to 3.5% to 4% in 2013 and 2014.