Analysis: The Growth Outlook for Africa

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The global economy started the year on a weak note on the back of bad weather conditions in the United States, financial market turbulence and the conflict in Ukraine. As a result, global growth projections for 2014 as a whole have been revised downward from 3.2 percent at the beginning of the year to 2.8 percent now.

However, growth is expected to pick up pace during the 2nd semester of 2014 and world GDP is projected to grow by 3.4 percent in 2015 and 3.5 percent in 2016. The bulk of the acceleration in the global recovery will come from highincome countries with the US in the driving seat and to a lesser extent Europe.

The outlook for developing countries is for a flat growth in 2014. This marks the third year in a row of sub-5 percent growth and reflects a more challenging post-crisis global economic environment. However, the outlook for 2015 and 2016 is brighter for developing countries with GDP expected to grow by 5.4% and 5.5% in 2015 and 2016 respectively.

With the expected improvement in the economic outlook of high-income countries, their weight in global growth will increase from less than 40% in 2013 to 50% in 2015. As a result, developed countries import demand is also projected to gradually rise from 1.9% in 2013 to 5.0% in 2016. Similarly, growth in exports from developing countries is set to rise from 3.7% in 2013 to 6.6% in 2016. Hence, the projected growth in the export of developing countries will act as a good cushion to expected tightening in global financial conditions. Note also that most of these economies are operating at close to potential, having recovered from the financial crisis.

Developed countries based tail risks to the global economy have been largely faded, reflecting the restructuring that has already taken place in the US and also Europe, though a lot remains to be done. However, the challenges still facing developed economies include fiscal sustainability and an orderly exit from unconventional monetary policy, deflation risks in Europe and the need for structural reforms to boost productivity growth.

As to Africa’s role in the world economy, it derives, to a great extent, from its growing economic importance to the rest of the world: in international trade and as a destination for international investment.

Indeed, the high growth that many countries in sub-Saharan Africa (SSA) have enjoyed in recent years has been supported by strong growth in the largest emerging market economies particularly China.

This year, economic growth in the SSA is projected to pick up from 4.9% in 2013 to 5.5%.  This acceleration reflects, amongst others, improved prospects in a large number of countries in the region, including most oil exporters but also several low-income countries and fragile states.

Economic activity in the region continues to be underpinned by large investments in infrastructure and mining and maturing investments. This solid near-term outlook is nonetheless subject to downside risks.

The downside risks represent a combination of both exogenous as well as domestic factors. External factors such as lower growth in China would lead to some countries in the region to face lower export demand; a grim outlook for some commodity prices would have adverse implications for further mining investment for these commodities and tighter global financial conditions.

Besides, the region may face a slowdown or even reversal of private flows as the highly accommodative monetary policies of advanced economies adopted in the wake of the global  financial crisis are rolled back. In addition, fiscal policy, adopted in the region to counter the impact of the global financial crisis, has remained on an expansionary footing despite growth levels reverting to pre-crisis levels.

The normalization and tightening of monetary policy in the US and advanced economies are a source of concerns for the African region, especially for frontier market countries. Given the illiquid nature of these markets, this could put pressure on asset prices, interest rates, and exchange rates (e.g. : strongest foreign exchange market pressure was felt in Ghana where its currency depreciated by over 20% from mid-May 2013 to end- January 2014 and reserves fell by more than 10%). These pressures not only put strain on the banking and financial systems but also depress domestic demand and increase inflation. Moreover, this will increase the costs of borrowings and refinancing risk for governments.

Against this backdrop, it is imperative for African countries to pursue structural reform and sustain macroeconomic stability through policies to finance currently elevated fiscal and external current account deficits, while allowing the exchange rate to adjust as appropriate. In addition, greater transparency, public and private good governance as well as stability should be amongst the top priorities of the agenda of African leaders in order to accelerate diversification, boost employment creation, and support further regional integration, which would in turn boost inflows into the region.

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