GROWTH OUTLOOK: Under pressure

Posted April 30, 2015

By Claire Bisseker

The International Monetary Fund (IMF) has slashed its growth outlook for Africa due to the sharp fall in oil and other commodity prices, as well as the slowdown in China’s economic activity on which so many African countries’ growth depends.

However, some economists feel the IMF’s 2015 growth forecast for sub-Saharan African countries of 4,5% (down from 5,8% in January) is still too bullish given the serious trade and fiscal shocks they are experiencing.

John Ashbourne, the Africa economist of London-based Capital Economics, expects growth across sub-Saharan Africa to fall to just 3,7% this year — a 16-year low.

The main reason for his divergence from the IMF is that Capital Economics expects much weaker growth in Africa’s major oil exporters. He is forecasting growth of 4% in Nigeria (against the IMF’s 4,8%) and just 1,5% in Angola (against the IMF’s 4,5%) as these countries deal with adverse terms of trade shocks which will force them to undertake severe fiscal tightening. Ashbourne feels the IMF is also overly optimistic in forecasting growth of 3,5% for Ghana and 6,7% for Zambia, two countries that have approached it for help as they unwind significant macroeconomic imbalances. He says: "Both face painful economic adjustments and we believe growth will fall below the IMF’s forecasts."

Most oil importers are also having their growth forecasts trimmed as the favourable impact of lower oil prices is being offset by lower commodity export prices and weaker growth in their trading partners. The effects of slower growth in China in particular are being felt across all emerging markets (EM).

On a 12-month rolling basis, exports to China are now falling in Latin America (-10% y/y), the rest of emerging Asia (-5%), emerging Europe (-3%) and Africa (-7,5%), according to Capital Economics.

Commodity-driven EMs have been especially hard hit since China’s slowdown has been concentrated in the property sector where output is particularly commodity-intensive, explains Neil Shearing, Capital Economics’ chief EM economist. This has contributed to lower commodity export volumes and prices. Zambia’s fall in exports to China is equivalent to nearly 3% of its GDP, he estimates, while this has shaved 0,5%-1,5% off the GDP of other major commodity producers like Malaysia, Venezuela, SA, Indonesia and Brazil (see graph).

"One implication is that even if policymakers in Beijing manage to stabilise domestic conditions, China is likely to provide far less of a prop to growth in the rest of the emerging world over the coming years," says Shearing.

Martyn Davies, CEO of Frontier Advisory, argues the opposite. In a recent blog for the World Economic Forum he says the structural changes China is experiencing as it moves away from investment-led to consumption-driven growth offer opportunities.

His argument is that rising wage inflation and production costs are beginning to force China’s manufacturers up the value chain. This will force Chinese firms to relocate their operations to lower-cost economies.

According to Davies, studies show that wages for unskilled workers in China are set to increase fourfold and the country could shed up to 85m labour-intensive manufacturing jobs within the next decade.

"If this opportunity is seized by progressively reformist African states, they could well be on the cusp of a 19th-century style industrial revolution — generating jobs and creating new industries," writes Davies.

But, he says, despite rising costs in the SA manufacturing industry, there has been little evidence of SA manufacturing firms shifting to lesser-cost African economies, except perhaps clothes production to Lesotho. Davies warns that if African economies do not build enabling environments to attract manufacturers, they could lose this boon to competitive Asian destinations .

Shearing challenges the view that Africa could benefit from China’s rebalancing act, noting that Korea and Thailand have also suffered as China has slowed. The Philippines and Taiwan are the only EMs from which exports to China have expanded over the past year, and in both cases the pace of growth has fallen dramatically.

Financial Mail




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