AFRICANGLOBE – When the Organisation for Economic Co-operation and Development (OECD) released its African Economic Outlook earlier this year, it predicted Africa’s economic growth rate would rise to 4.5% this year and 5% next year, after growing only 3.5% last year. That would still have made Africa one of the world’s fastest growing regions. The 4.5% prediction was one percentage point below the OECD’s forecast a year previously. But its economists were still quite bullish about Africa and, with the world economy expected to improve, OECD economists expected that “Africa will soon be closing in on the impressive growth levels seen before the 2008-09 global economic crisis”. One wonders what they are thinking now.
At the height of the 2002-08 commodities boom, Africa was sustaining growth rates of well more than 5%. Even after the crisis, China’s continuing appetite for commodities helped to keep it relatively buoyant. The China story is now falling apart and the implications for the “Africa Rising” story will surely be significantly negative. China’s troubles could hit Africa, not only from the real economy side, in terms of trade flows, but also financially, in terms of capital flows. The severe effects on global commodities markets of China’s slowing economy, and its attempt to shift from an investment-led growth path to one driven more by consumption, have already been felt by Africa’s economies, evident in the downward revisions to growth forecasts.
Since those April/May updates, however, things have got worse in at least two ways. One is that China’s growth outlook is looking even weaker than before. Last week, Moody’s revised its forecast for next year down from 6.5% to 6.3%. That “makes a significant rebound in commodity prices in the near term unlikely”, says Moody’s. It was updating its forecast on the Group of 20, which it now sees growing only 2.8% next year, down from 3.1%. If they are hit this hard, how much more so will the China-driven commodities rout affect Africa’s economies.
It is a direct and an indirect effect — China has since 2009 been Africa’s largest trading partner, so its slowdown has a direct effect, but also an indirect effect on global commodities markets.
Large oil exporters such as Nigeria and Angola, once the darlings of investors, have taken some of the hardest hits to their budget balances and currencies, along with their growth outlooks. But a country like Zambia, whose exports are more than 60% copper, has been hit hard too.
Now that the commodities tide has gone out, it has been revealed just how little had been done to diversify many of Africa’s economies, or to tackle the structural constraints holding them back.
It is not just the commodities tide they have to worry about, though, but also the financial flows. Much of the foreign investment that was coming into Africa was commodities-linked, so that could slow. And slowing flows to emerging markets generally in response to the normalisation of US monetary policy also has an effect.
But the other big event has been China’s financial markets crisis and that could also surely affect capital flows to Africa. China is still far from being the largest foreign investor in Africa, if one looks only at green-fields projects or mergers and acquisitions. But China has played an increasingly dominant role in recent years in funding African infrastructure investment. Those flows could slow too.
For all that, Africa still has huge potential, with its rapidly growing working age population and huge relatively unexploited market of more than 1-billion people.
Now, if ever, is the time for its economies to implement structural reforms to speed up growth and cut poverty. But Africa could well remain the world’s second-fastest growing region this year and in the next few years.