Africa's Economy

Economist Intelligence Unit writes:

It should do well next year, if commodity prices stay high

The African economy is set for a fourth consecutive year of above-average growth, according to the World Bank's 2007 Global Economic Prospects, released on December 13th. Sub-Saharan GDP is forecast to increase by 5.3% in 2007—maintaining the average recorded over the 2004-06 period—and when South Africa (the region’s largest economy by far) is excluded, average growth rates are even more impressive, at 5.6% a year since 2003.

In 2006, oil exporters led the way with average growth of 6.9%, while (small) oil importers managed average expansion of 4.9%. Growth was broadly based, with one-third of the countries registering growth of more than 5%; indeed, only six states experienced declining incomes per head. This list includes two oil exporters, Gabon and Congo (Brazzaville), along with Eritrea, Swaziland, the Seychelles and Zimbabwe.

The World Bank attributes Africa’s “robust” economic expansion to favourable international conditions, improved economic policies in Africa itself, accelerated regional exports (to China especially), and higher commodity prices, most notably for oil and metals. Unfortunately, manufactured exports were hit by “intense competition from China and India”, and although both the US and the EU re-introduced quotas on Chinese clothing and textile exports to their markets, Sub-Saharan Africa’s clothing and textile exports to the US fell 17.3% while those to the EU were down 16.9%.

Going forward, growth in oil-exporting countries is projected to accelerate in line with increasing capacity in Angola (where output is expected to rise 20%) and Equatorial Guinea (up 8%), along with the normalisation of output levels in Nigeria, where production has been disrupted by civil strife in the Niger Delta. Average growth in oil producers is projected at 7.5% in 2007 and more than 7% in 2008, but depletion of existing oilfields will reduce GDP growth in Congo (Brazzaville) by one percentage point.

In the regional economic powerhouse, South Africa, growth will slow to less than 4% as higher interest rates affect domestic demand while inflation and rand depreciation accelerate. However, the World Bank does not anticipate serious problems in the country because rand depreciation should boost exports, notably in mining and manufacturing, while public-sector infrastructural investment will rise in the run-up to the 2010 World Cup.

The Bank expects growth in oil-importing countries to remain strong in 2007, at around 4.9%, due to improved rainfall in East and West Africa, and higher levels of investment and government spending as a result of debt relief and increased aid inflows; over the medium term, meanwhile, infrastructural investment should reduce the costs of doing business in Africa.

On the downside, lower world commodity prices will damp down growth while farm production will be hit by high fertiliser prices. Equally, while increased Chinese demand for cotton and reduced price subsidies in the US and EU should benefit cotton producers in West Africa, African manufacturers of clothing and textiles will most likely continue to lose market share to China and India.

Inflationary pressures are expected to subside as oil and other commodity prices weaken, but in South Africa inflation is expected to nudge above 6% in the first half of 2007 before slowing in the latter part of the year. Inflation is projected to slow to 4.6% in 2007 from 5.8% in 2006, before picking up slightly to 5% in 2008.

Despite lower oil prices in 2007-08 strong GDP growth and lower non-oil commodity prices will mean a further deterioration in the region’s current-account balance, which will deteriorate from surpluses of 0.8% of GDP in 2005 and 0.3% this year to a marginal deficit of 0.2% in 2007 and 0.9% in 2008.

Because Africa is so reliant on commodity exports, it is the region most vulnerable to any decline in energy and mineral prices. Overall agricultural prices are projected to fall marginally (by 1%) in 2007 and 3% in 2008. However, if oil prices remain high some agricultural prices are likely to rise, because higher oil prices increase the economic viability of biofuel, thereby generating additional demand for products like sugar and maize. The World Bank believes that metal prices have peaked and will decline in 2007-08, while oil prices are expected to slip to around US$53/barrel by 2008 (although they will remain highly volatile).

The African countries that are most vulnerable to a commodity price shakeout are oil and mineral exporters. But because the envisaged commodity price slowdown is only modest the overall impact on African growth is unlikely to be much more than 0.5%, reducing regional growth to 4.75% in 2007; in addition, countries that do not rely on oil/metal exports or are oil importers will actually be better off. In other words, unless there is an unexpectedly sharp fall in commodity prices 2007 looks set to be another good year for Sub-Saharan economies.

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