Sub-Saharan Africa: SSA decelerates further in Q2 amid low commodity prices and domestic headwinds
September 21, 2016
Following the deceleration of the Sub-Saharan Africa (SSA) region in the first quarter, the economy continued to disappoint in the second quarter. According to a preliminary estimate, GDP expanded 1.2% on an annual basis in the second quarter, which came in below the 1.7% increase observed in the previous quarter. The reading marked the slowest increase in over six years. Growth was constrained by subdued commodity prices, security threats, a slowdown in the region’s main trading partners and adverse weather conditions, in particular in the southern part of the continent.
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The majority of the SSA economy, in particular the region’s oil producers, continues to be negatively affected by subdued commodity prices, making it imperative for governments to introduce policies that aim to diversify their economies in order to reinvigorate growth. Relatively low commodity prices coupled with growing economic imbalances and the withdrawal of foreign capital pose risks to growth prospects going forward. In the second quarter, the Nigerian economy contracted for the second consecutive quarter on an annual basis. Disruptions in oil production resulting from militant attacks, the currency devaluation and ongoing struggles due to subdued oil prices hurt the economy and caused GDP to contract at a much sharper rate than in the first quarter.
The region’s silver lining in the second quarter was South Africa, which rebounded and grew at the fastest rate in over a year. The economy benefited from a surge in manufacturing production and a rebound in the mining and quarrying sector. In the wake of the good news, the rand gained strength against the U.S. dollar. However, the currency remains relatively weak due to the ongoing threat of political uncertainty and the risks of a possibly imminent credit downgrade.
2016 growth prospects downgraded for fourth consecutive month
SSA’s economy is expected to decelerate this year and growth prospects continue to weaken on the back of low prices for raw materials. This, coupled with multiple domestic challenges, is keeping the region’s growth rate below its potential. This month, our panel of analysts downgraded SSA’s outlook for the fourth consecutive month and they now expect the economy to expand 2.0% this year, which is down 0.2 percentage points from last month’s estimate. For 2017, our panel expects the SSA region to regain momentum and expand 3.6%.
This month’s cut to the region’s 2016 economic outlook reflects a downward revision for 5 of the region’s 13 economies including Angola and Nigeria—the region’s biggest economy. Our panel upgraded its forecasts for 4 countries, including Kenya and Mozambique, while the estimates for the other 4 countries were left unchanged.
Cote d’Ivoire, Tanzania and Ethiopia are projected to grow the fastest in the region this year at rates of above 6.0%. By contrast, the region’s two largest economies, Nigeria and South Africa, are forecast to expand only a meagre 0.1% and 0.3%, respectively. Angola, another big player in the region, is expected to grow 1.6%.
NIGERIA | Economy contracts again in Q2 as oil production falls
Nigeria’s economy fell into recession in Q2, contracting 2.2% annually (Q1: -0.4% year-on-year). Falling oil production mainly caused the slump, as attacks by militants on oil-related infrastructure caused output to plunge from 2.11 million barrels per day (mbpd) in Q1 to just 1.69 mbdp in Q2. Import restrictions, a persistent foreign currency shortage, subdued oil prices and the depreciation of the naira also restrained GDP in Q2. Weakness likely carried over into Q3: the PMI fell to a record low and business sentiment moderated in August. A recent report from OPEC suggests that oil production remained subdued in July and August, although an announcement in late August from the militant group responsible for most attacks that it had ceased hostilities sparked hopes that output may have begun to recover in September. Meanwhile, the government approved plans for external borrowing from several lenders in September, including the World Bank, China and Japan.
Depressed oil prices, uncertainty about oil production, tightening monetary policy, low investor confidence, power shortages and elevated macroeconomic imbalances are all dragging on Nigeria’s economy. Following the release of Q2’s dismal GDP data, our panelists turned more pessimistic about the 2016 growth outlook and downgraded it by 0.3 percentage points. They now see GDP expanding just 0.1% this year. For 2017, they project a pickup to 2.8% growth.
SOUTH AFRICA | Economy avoids recession in Q2 due to manufacturing activity rebound
South Africa’s economy rebounded in the second quarter, thus allaying fears of a recession. GDP grew an annualized 3.3% in the three months through June, which contrasted Q1’s decrease. The expansion reflected an improvement in all sectors of the economy with a notably strong rebound in the manufacturing sector, which accounts for more than 10% of the economy. In the wake of the good news, the rand strengthened against the U.S. dollar. However, the currency remains relatively weak amid uncertainty over a cabinet reshuffle. Political turmoil coupled with external economic headwinds will likely limit growth in the second half of the year. In August, the manufacturing PMI remained in negative territory and business confidence recorded yet another low reading. Moreover, increased political infighting and weak economic growth pose a risk to the country’s sovereign credit rating.
The political landscape has been shaken up by the local elections held in August and this will force the governing ANC party to be less complacent when it comes to enacting pro-growth reforms. Despite Q2’s economic rebound, severe droughts across the country, political uncertainty and low commodity prices will limit growth this year. The FocusEconomics panel expects the economy to expand a meagre 0.3% this year, which is unchanged over last month’s estimate. For 2017, the panel projects growth of 1.2%.
ANGOLA | Growth prospects remain grim in H2
Angola remains mired in a deep state of fiscal distress, suffering lackluster performance in its all-important oil sector. Dwindling oil revenues have severely affected the public and external accounts, while government debt has surged on the back of increased borrowing costs. In addition, lower oil earnings have translated into a plunge of foreign currency inflows and prompted the Central Bank to devaluate the kwanza against the U.S. dollar multiple times. The weak currency has been hampering economic performance in import-dependent sectors and prompting inflation to soar. On 5 September, President José Eduardo dos Santos replaced Finance Minister Armando Manuel with Archer Mangueira, a well-known face to international investors as the head of Angola’s Capital Markets Commission. The decision came after talks with the IMF regarding medium-term funding stalled in July over the conditions the loan would be subject to, which were supported by the former finance minister but rejected by other senior figures in the government.
As oil revenues constitute approximately 95% of exports and over 66% of fiscal revenues, the country’s growth prospects will remain grim as long as oil prices stay subdued. Analysts expect GDP to grow 1.6% in 2016, which is down 0.2 percentage points from last month’s forecast. In 2017, they see the economy growing 2.6%.
KENYA | Important infrastructure projects sustain growth this year
Kenya’s economy expanded a solid 5.9% in Q1 and likely continued on a robust growth track thereafter. Growth is being sustained by several infrastructure projects, including a new container terminal at the Mombasa port that is expected to increase its cargo capacity by 50%, which is also crucial for Kenya’s plan to become an oil producer and exporter in 2017. Increased tea output in H1, coupled with the ongoing recovery in the tourism sector, is supporting exports and foreign reserves. That said, September’s reintroduction of an interest rate cap, which limits how much lenders can charge for loans, risks hampering growth in the medium term as it might curb lending and investment. In the political arena, September’s approval of an electoral reform—which allows the replacement of current election officials and the audit of votes by an independent organization—eases the risk of a violent and dubious general election scheduled for next year.
Kenya’s outlook is rosy and the country is set for a fast expansion this year, mainly thanks to infrastructure development, even though insecurity associated with terrorism and huge twin deficits still bear risks. Our panelists see GDP growing 6.0% this year, which is up 0.1 percentage points from last month's forecast. Next year, the panel expects GDP growth to slow to 5.9%.
INFLATION | Inflation jumps to near eight-year high in August
According to a preliminary estimate, inflation in the SSA economy increased from 12.8% in July to 13.2% in August, hitting the highest reading in nearly eight years. The jump came on the back of a higher inflation rate in Nigeria, the region’s biggest economy. Accelerations were also recorded in Angola, Ghana and Mozambique. The currency weakness as well as energy and water shortages are the main drivers of mounting inflationary pressures in the region. Conversely, inflation moderated in six countries including Ethiopia and Kenya.
Panelists participating in this month’s FocusEconomics Consensus Forecast expect regional inflation to average 12.1% in 2016, which is down 0.1 percentage points from last month’s estimate. The downward revision reflects adjustments to the inflation forecasts of 5 of the 13 economies surveyed, including Nigeria and South Africa. Panelists see inflation receding to an average of 10.0% in 2017.
Written by: Dirina Mançellari, Senior Economist