Macroeconomic Prospects

Africa’s economy should see a rebound in 2012 after popular uprisings and political unrest brought overall economic growth down to 3.4% in 2011.

The continent is recovering from the global crisis of 2009 and this should be sustained even though a new global slowdown is constraining Africa’s growth. With the gradual recovery of North African economies, Africa´s average growth is expected to rebound to 4.5% in 2012 and to 4.8% in 2013. The international environment will remain difficult in the near term.

While keeping an eye on new economic storm clouds in Europe, Africa must keep its focus on reforms that encourage growth and ease the social tensions that set off the Arab revolutions and caused North Africa´s Gross Domestic Product growth to decline by 3.6 percentage points to near stagnation in 2011.

In Egypt there was a 3.3 percentage point fall to growth of below 2% in 2011, and in Tunisia by 4.2 percentage points to negative growth of around 1%. In Libya, civil war brought oil production to a standstill and GDP shrank by more than 40%. In Côte d´Ivoire, post-election conflict caused GDP to decline by almost 6%. Another major political event was the secession of South Sudan from Sudan. As a result Sudan lost most of its oil revenue and there is still disagreement between the two countries about their disengagement, including tariffs and fees on oil transportation to markets.

Parts of East Africa were hit by a severe food crisis and the African consumer had, in general, to cope with imported inflation due to higher food and fuel prices.

The weaker international environment also took a toll on African economies. This can be seen in the deterioration during 2011 of the quarterly economic assessment by African participants in an international poll. In the first quarter of 2012 this assessment slightly improved (Figure 1.1).

Given all these shocks the decline of Africa´s average growth in 2011 to 3.4% (from 5% in 2010) was relatively moderate. The growth loss came from the disruption in North Africa. Sub-Saharan Africa continued to grow by more than 5%.

The African continent continues to benefit from relatively high growth in emerging economies, such as China and India, which have become more and more important for Africa´s trade and investment[1]. While this is helping Africa to become more resilient, these countries cannot fully compensate for the adverse effects from advanced countries and their expansion has recently also slowed (Figures 1.2 and 1.3 and Box 1.1 ; the detailed macroeconomic forecast for Africa and its regional groupings is presented in Annex Tables 1.a and 1.b at the end of this chapter).

Commodity prices have declined from their peak and some prices are likely to further decline due to weaker demand and increased supply. But most commodity prices are expected to remain at favourable levels for African commodity exporters. Growth will be boosted in some countries by new oil fields coming on stream.

The shadow comes from a worsening of the debt crisis in Europe causing lower global growth. This would further weaken Africa´s export markets, depress commodity prices and undermine Africa´s recovery.

With Africa´s population annual growth above 2%, GDP per capita is expected to increase on average by 2% to 2.5% in 2012/13. From 2009 to 2013, annual per capita growth will amount to about 2%, down from about 3.5% in the preceding five-year period. In many countries growth will not be sufficient to significantly reduce poverty. Lifting growth and improving the inclusiveness of growth remains a main challenge in most African countries.

The quick recovery of the world economy in 2010 from the deep recession of 2009 has been followed by more moderate growth in 2011. GDP growth slowed significantly in advanced countries in 2011 and global growth is expected to remain subdued in 2012. In the first half of 2011 world economic activity was affected by the Japanese earthquake and tsunami and the temporary surge in oil prices after the Libyan civil war. While these temporary effects subsided in the second half, consumer and business confidence suffered from unsolved fiscal and financial market problems in Europe and the United States. While some countries, notably in the euro area periphery, suffered from high interest rates due to high risk premiums, long-term interest rates of sound sovereigns remained historically low. This also reflects risk aversion of savers and investors and the expectation that low growth in advanced economies will continue. A sharper slowdown of the global economy has so far been prevented by fairly strong growth, although even that is becoming more subdued in emerging economies, notably China and India.

The slowing of the global economy has hit some African countries, notably those whose main export markets are in Europe and the United States. Our forecast for Africa assumes that world output growth will slow to 3%-3.5% in 2012 (from 3.8% in 2011 and 5.2% in 2010) and to recover gradually to close to 4% in 2013. World trade volume growth is projected to slow from around 7% in 2011 to less than 4% in 2012 and to accelerate again to around 5.5% in 2013. This projection implies that growth of global output and trade will not return to pre-crisis levels. From 2004 to 2007 annual growth of world output and world trade had been around 5% and around 9% respectively. But in the course of 2012 and into 2013 world economic activity is expected to strengthen and provide positive growth for Africa´s exporters. Because of weaker global demand, commodity prices have declined from their peak levels of early 2011. The decline should gradually end with most commodity prices remaining significantly above the average levels of the five years before the global 2009 crisis.

Europe’s growth weakened in 2011 and is expected to slow further in 2012 before picking up in 2013. Europe continues to suffer from fiscal restraint, slowing foreign demand, and, in particular, a loss of confidence due to turmoil in financial markets. Attempts to contain the contagion from the Greek debt crisis to other euro member countries, notably Italy, Portugal and Spain, have not been fully successful and risk premiums on government bonds have increased in some countries to unsustainable levels. Governments have imposed additional austerity programmes and added financial firepower to restore financial market stability by purchasing government bonds (so-called quantitative easing policy). There is no easy way out of the crisis, as financial markets are demanding more progress to cut sovereign debt while at the same time demand is weakening which makes this task more difficult. Furthermore, European banks need to increase their capital but banks in some countries are faced with capital flight. The European Central Bank has been very active raising liquidity and this, at least temporarily, reduced risk premiums in some countries. However, the Greek economy remains trapped in a debt crisis, economic decline and austerity programmes. In February 2012, the Greek parliament approved a new austerity programme to get additional financial support from the International Monetary Fund (IMF) and the European Union (EU). The successful restructuring of Greek sovereign debt in March significantly reduced the debt level and has paved the way for another EU-IMF rescue package of 130 billion euros. A default has been averted for the time being. While there is still a risk that Greece and, perhaps, Portugal could face a controlled default within the monetary union or that euro area could break apart altogether, these are not the most likely outcomes. Indeed, recently there have been positive signs in the European economy and in Germany business confidence has been improving. It is expected that in 2012 the euro area will record slightly negative growth before strengthening again in 2013. But the financial crisis could have long-lasting adverse effects on European growth as countries struggle to restore fiscal sustainability. This could also affect Africa´s growth as Europe is an important trading partner and aid donor.

The US economy also lost momentum during 2011 as the positive effects of the stock cycle ran out. Private consumption was restrained by the high indebtedness of private households, high unemployment and high energy prices. Despite expansionary fiscal measures by the government, real public consumption and investment declined as states and local authorities cut spending. While the housing market remained depressed, aggregate demand was boosted by higher business investment and an improvement of the foreign balance. Growth accelerated towards the end of the year, boosted by an inventory build-up. With labour market performance also improving, confidence strengthening and house building increasing again, the risk of a new recession has waned. Growth is expected to amount to about 2% in 2012 and accelerate gradually in 2013. Fiscal policy is assumed to follow a moderately restrictive course aiming to reduce the high fiscal deficit while not putting the recovery at risk. The Federal Reserve continues to boost the economy by keeping its policy interest rate at 0%-0.25% and increase the monetary base by its quantitative easing policy. The Fed stated that economic conditions, notably low rates of resource utilization and low inflation, are likely to require an exceptionally low federal funds rate at least through 2014.

In Japan, the huge earthquake and tsunami in March 2011 disrupted the economy and has, according to official estimates, caused damage of around 3.5% of GDP. Growth rebounded in the following months helped by reconstruction spending, but towards the end of the year weakened again so that 2011 GDP declined by more than 2%. The government has postponed a planned fiscal consolidation and is instead increasing infrastructure investment. This is supplemented by private investment by firms and households to repair the damage. The central bank has stepped up its expansionary measures by increasing purchases of government bonds and other financial assets. It also intervened in foreign exchange markets to weaken the high yen exchange rate and stimulate exports. It is expected that GDP will moderately increase in 2012 boosted by public and private investment and the gradual recovery of private consumption.

In 2011, China has again achieved high growth of 9.2% (down from 10.4% in 2010) despite headwinds from weaker growth in advanced countries and the tightening of monetary policy to combat inflationary pressures. Investment remained strong and private consumption accelerated, benefiting from higher wage growth and some fiscal measures. Export growth moderated although China´s firms continued to increase their shares in export markets. Import volume growth also declined but with import prices rising faster than export prices, terms of trade continued to deteriorate and China´s current account surplus declined significantly. Inflation peaked at above 6% by mid-2011 and then declined to about 4%. Towards the end of 2011 the risk of a major economic slowdown due to global weakness increased and China´s industrial production declined for the first time in three years. This raised fears of a hard landing for the economy and the central bank responded by cutting the bank reserve ratio by 50 basis points. It is expected that subdued global activity will moderate China´s growth in 2012 to about 8.5% before accelerating slightly in 2013. According to its 2011-15 plan, China plans to shift the pattern of growth from exports and investment towards consumption and from manufacturing towards services. Over the medium and longer term China´s growth would then become less commodity-intensive which would mitigate global commodity demand. This could adversely affect African commodity exporters. But at the same time, and with appropriate policies, Africa could become more interesting for manufacturing firms from China and elsewhere, helping to diversify African economies.

India´s growth slowed in 2011 from almost 8% in the first quarter to about 6% in the fourth quarter. The service sector continued to drive growth but manufacturing lost steam. While foreign demand slowed, domestic demand remained strong, boosted by private and public consumption and public infrastructure investment. Due to some moderation of food prices and tighter monetary policies, inflation declined below 7% towards the end of 2011. Some progress has been made with fiscal consolidation. The public sector deficit has declined from 9.5% in 2009 to below 7% in 2011 and the central government deficit to below 5%. Good monsoon rainfall is expected to boost agriculture in the near term but export growth will weaken due to lower global demand. It is expected that in 2012 growth will weaken slightly but accelerate again in 2013.

In 2011, Latin America´s economies benefited from high commodity prices and thriving domestic demand. At the same time demand from advanced countries slowed and strong exchange rates, caused by capital imports, and wage pressures undermined competitiveness. Measures to weaken exchange rates -- by intervening in exchange markets and by temporarily restraining capital imports to mitigate appreciation pressures -- were only partly successful. The average rate of growth of Latin America is expected to slow to 3.6% in 2012 (down from 4.6% in 2011) and to accelerate again to about 4% in 2013. Brazil´s economy slowed sharply in the second half of 2011 prompting the government to announce stimulatory measures. The central bank cut interest rates to prevent a further weakening of the economy. It is expected that growth will remain subdued at about 3% in 2012 but accelerate again to about 4% in 2013. Over the past two decades Brazil’s growth has become more inclusive and the poverty rate has been halved thanks to high employment growth and effective social policies.