Growth in SSA decelerates substantially in Q1
Following the slowdown of the Sub-Saharan Africa (SSA) region in the final quarter of last year, latest GDP data show that the economy continued to disappoint in the first quarter of this year. According to a preliminary estimate, the region’s GDP expanded a weak 1.7% over the same quarter of last year, which was well below the 3.0% increase tallied in Q4. This year, most of the countries in the region have been hit my multiple shocks—low commodity prices, tighter financial conditions and shortages of food due to adverse weather conditions in the southern parts of the continent. Thus, it has become imperative for the SSA countries, in particular the commodity-exporting countries, to diversify their economies in order to reinvigorate growth.
Looking at individual countries in the region, in the first quarter, Nigeria’s economy contracted for the first time in over a decade amid low oil prices and a severe shortage of hard currency. In an effort to alleviate the scarcity of foreign currency while also shoring up international reserves, earlier this month, the Central Bank of Nigeria removed the peg of the naira against the U.S. dollar. The news caused the currency to depreciate sharply against the greenback. Elsewhere in the region, the slump in commodity prices has put severe strains on Angola’s economy and has also forced the government to seek for aid from the International Monetary Fund. The growth outlook appears dim for the region’s second-biggest economy. South Africa’s economy swung to contraction in Q1 due to a deterioration in the mining and quarrying sector, which suffered from severe droughts. Q1’s GDP figure is raising concerns that the economy might be headed towards a recession this year as the outlook for the manufacturing and mining sectors remains subdued amid weak demand from China and low commodity prices.
2016 outlook deteriorates amid lower GDP forecasts for Nigeria and South Africa
The SSA’s economy will likely decelerate again this year over last year’s increase. The main external threats that the region faced last year, such as subdued commodity prices and China’s slowdown along with domestic headwinds such as currency devaluations and political uncertainty, will weigh on growth this year as well.
This month, our panel of analysts downgraded the outlook for the Sub-Saharan Africa region and now expect the economy to expand 2.9% this year, which is down 0.3 percentage points from last month’s projection. This month’s outlook reflects downward revisions for 8 of the 13 countries surveyed, including Nigeria and South Africa. Conversely, projections were left unchanged for four economies, including Ghana and Tanzania. Kenya was the only country for which the outlook was revised up this month. For 2017, the panel foresees the SSA economy expanding 4.1%.
Cote d’Ivoire, Tanzania and Ethiopia, in that order, are expected to grow the fastest this year with GDP growth rates above 6.0%. Conversely, South Africa is likely to be the worst performer with a projected GDP expansion of 0.6% this year. Among the other major economies in the region, Kenya and Nigeria will expand 5.9% and 2.2%, respectively.
NIGERIA | Central Bank drops currency peg after economy contracts for the first time in over a decade in Q1
Governor Godwin Emefiele announced on 15 June that the Central Bank will drop its over-a-year-long currency peg to the U.S. dollar on 20 June. This policy was adopted in the midst of the plunge in oil prices early in 2015 and caused a severe shortage of hard currency that crippled the country’s economy. The consequences were severely felt across the economy and, in Q1, GDP contracted for the first time in over a decade. Meanwhile, the Niger Delta Avengers militant group continued their attacks on oil pipelines in recent weeks and, according to some sources, Nigeria is no longer Africa’s largest oil producer, a position which is now held by Angola.
While the adoption of a more market-determined foreign exchange will help stabilize Nigeria’s economy in the mid-term, the transition promises to be challenging. A much weaker naira has the potential to fan inflationary pressures and trigger a tighter monetary policy. Moreover, sabotages of oil infrastructure and persistent low oil prices are adding to an already cloudy economic outlook. FocusEconomics Consensus Forecast panelists forecast that the economy will expand 2.2% in 2016, which is down 0.5 percentage points from last month's projection. In 2017, the panel expects GDP growth to accelerate to 3.9%.
SOUTH AFRICA | Growth prospects remain fragile
South Africa’s GDP swung to contraction in the first quarter of this year, thus raising concerns that the economy might be heading towards a recession. GDP contracted a steep 1.2% over the previous quarter in seasonally adjusted annualized terms, which shocked the markets and marked the sharpest decrease in three quarters. The disappointing figure was due to decelerations in most of the sectors of the economy with mining and quarrying and agriculture recording the steepest contractions. Production in both sectors was negatively affected by severe droughts in the first quarter. The bleak GDP figures come as the government struggles to revive business confidence and investment, thus increasing the possibility of a credit downgrade to below investment grade. Moreover, the rand has been highly volatile in recent weeks amid heightened political uncertainty and a weak economic outlook.
The county’s outlook remains fragile as electricity and water supply constraints coupled with low commodity prices will weigh on growth. Moreover, the government’s failure to push forward with fiscal consolidation reforms might provoke a downgrade of the country’s credit rating to junk territory. This month, the FocusEconomics panel expects the economy to expand a weak 0.6% this year. For 2017, the panel projects growth of 1.3%.
ANGOLA | Government seeks IMF loan amid deteriorating public accounts
The slump in commodities prices has put Angola’s oil-dependent economy under severe pressure. The drastic deterioration in the public and external accounts have forced the government to cut the budget by 20% this year and seek financial assistance from the IMF. The government held its first talk with the Fund in mid-June and the IMF offered USD 4.5 billion in loans to be repaid in a period of 10 years, but the deal is not yet finalized. The organization stressed the importance of diversifying the economy to better absorb oil price shocks by empowering the private sector and improving transparency in the public sector. The warning comes amid reports that Sonangol, Angola’s state-owned oil company, has a USD 50 billion shortfall in its account due to years of chronic mismanagement.
Angola’s growth outlook continues to weaken as low oil prices pose significant challenges to government finances—oil constitutes approximately 95% of exports and 75% of fiscal revenues. Although oil prices have increased this year, they are not expected to reach the highs necessary to shore-up public finances. FocusEconomics panelists expect that GDP will grow 1.7% this year, which is down 0.2 percentage points from last month’s projection. Next year, the panel sees GDP growth picking up to 3.1%.
KENYA | Robust domestic demand will support the economy this year
Kenya’s economy expanded healthily last year as GDP was boosted by solid public spending and robust private consumption. That said, the fact that the budget gap widened to over 9.0% of GDP and the current account deficit remained elevated raised some concerns regarding the country’s macroeconomic stability. Against this backdrop, Finance Minister Henry Rotich’s June announcement that the government plans a budget gap of broadly 9.3% of GDP in FY 2016/2017 represents a reversal from earlier commitments to fiscal consolidation and is worrisome given Kenya’s large twin deficits. Meanwhile, protests by supporters of the opposition against the electoral body over alleged corruption and partiality turned violent in May and June and left at least five people dead. The turmoil threatens to undermine the ongoing recovery in tourism and increases the risk of violence surrounding the general elections scheduled for 2017.
Kenya is set for another solid expansion this year on the back of infrastructure projects, a pickup in domestic demand and looser monetary policy. However, macroeconomic imbalances and political instability represent downside risks. FocusEconomics Consensus Forecast panelists expect that GDP will grow 5.9% this year, which is up 0.1 percentage points from last month's forecast. Next year, the panel expects the economy to grow 6.1%.
INFLATION | Inflation jumps up in May
According to a preliminary estimate, inflation in the SSA region increased from 11.6% in April to 12.6% in May, thus hitting a multi-year high. Inflation increased in most of the countries in the region. A notable acceleration was recorded in Nigeria and Angola. In Nigeria, inflation reached the highest level in more than six years and it hit an over-eleven-year high in Angola. Electricity and water scarcity across the region, coupled with depreciating currencies, is keeping inflationary pressures elevated. The economic analysts we surveyed this month expect regional inflation to average 10.8% this year, which is up 0.3 percentage points from last month’s estimate. This month’s forecast was revised up for 5 of the 13 countries surveyed, including the region’s largest country, Nigeria. For next year, the panel projects inflation to moderate and tally 8.9%.
Written by: Dirina Mançellari, Senior Economist
June 22, 2016
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