Sub Saharan Africa Economic Outlook June 2018

Sub-Saharan Africa: Economic Snapshot for Sub-Saharan Africa

June 18, 2018

Growth picks up at the start of 2018


A preliminary set of data revealed that Sub-Saharan Africa’s (SSA) economy gained some traction at the start of 2018. Regional GDP increased 3.0% year-on-year in the first quarter, slightly above the 2.7% increase in the fourth quarter of 2018. Higher commodity prices and solid domestic demand are expected to be buttressing regional growth, although activity was subdued overall in Q1 amid slowdowns in regional giants Nigeria and South Africa.


Looking at the individual economies more closely, the recovery stuttered in Nigeria in the first quarter, with growth losing steam. Despite an improved performance in the critical energy sector, contractions in the construction and trade sectors, along with subdued activity in agriculture and services, weighed on growth as fuel and foreign exchange rate shortages likely hampered momentum. Meanwhile, activity slumped notably in South Africa in the period, coming in at the weakest rate since Q3 2016. The slowdown was broad-based across the economy, with the key manufacturing and mining sectors performing poorly.


Although national accounts data is not yet available for the other economies in the region, more frequent economic indicators suggest that momentum gained steam in Kenya in the first quarter, while Ghana continued to grow at a robust pace. Softer price pressures and more accommodative monetary policy likely supported activity in Ghana, while a stable political scene and improved weather conditions aided growth in Kenya.


On the political front, several East African countries revealed their fiscal year budgets in recent weeks, highlighted by a record nearly KES 3 trillion budget in Kenya. Kenya’s budget seeks to walk a difficult tightrope of facilitating economic development while also reducing the large fiscal deficit. However, it remains to be seen if the revenue measures will be enough to meet the government’s ambitious targets, given low tax collection in the past. Meanwhile, Tanzania revealed a cut to the corporate tax rate for new companies in its budget, as it tries to spur economic activity. Uganda’s government announced a 13.0% rise in public spending, supported by a combination of higher taxes, including VAT, income tax and excise duties, and increased public borrowing.


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Regional growth forecast held steady although challenges to outlook persist


The Consensus Forecast for the Sub-Saharan African economy was left unchanged this month and regional GDP is now seen growing 3.5% in 2018. Although firmer commodity prices and recoveries in the region’s largest economies should support stronger activity in 2018 compared to 2017, several challenges to the outlook exist. Many economies are burdened with high debt loads, making them especially vulnerable to fluctuations in the global financial market, while a sharp slowdown in China’s growth momentum could dent activity in the region and demand for the continent’s mineral resources. In 2019, growth is seen accelerating to 3.7%.


This month’s unchanged outlook for the region was driven by unchanged forecasts for five economies, including Angola and Kenya. Meanwhile, five economies had their projections downgraded, including Ghana, Nigeria and South Africa. Three economies saw their forecasts lifted.


Ethiopia is expected to be the fastest growing economy in SSA this year, expanding 8.1%, followed by Cote d’Ivoire (7.2%) and Ghana (7.1%). On the other hand, the region’s major players are expected to be at the other end of the spectrum. Angola’s economy is seen growing 1.9%, South Africa’s economy is also seen expanding 1.9% and Nigeria’s GDP is projected to increase 2.5%.


NIGERIA | Growth slumps in Q1


The recovery stalled at the start of 2018, with growth inching down after hitting a two-year high in the fourth quarter of last year. A weak performance by the non-oil sector drove the slowdown, as fuel shortages and slower growth in the agricultural and services sectors weighed on activity. However, a stronger expansion in the oil sector helped offset the sluggish non-oil economy in Q1. More recent economic data suggests that the economy is regaining some lost momentum in the second quarter: The PMI hit a new record high in May, and oil prices remained firm in April and May. That said, the long-delayed implementation of the budget for 2018 will hinder the legislation’s boost to economic momentum this year. Despite being passed in May, the president has still not signed the budget into law and is only expected to do so on 19 June.


The economy is seen gaining steam this year thanks to higher oil prices and improved foreign exchange rate liquidity. However, political uncertainty ahead of February’s elections and security concerns in the oil producing region, Niger Delta, continue to pose risks to the growth outlook. FocusEconomics panelists expect GDP to increase 2.5% in 2018, which is down a notch from last month’s projection. Next year, growth is seen rising moderately to 2.9%.              


SOUTH AFRICA | Ramaphoria hit by unexpectedly severe contraction in Q1


South Africa’s economy shrank in annualized terms at the outset of the year, highlighting the economic hurdles facing Cyril Ramaphosa, who ascended to the country’s top post in February. Weaker mining and manufacturing output, along with a sharp decline in agricultural output, contributed to the slowdown—the sharpest contraction since the depths of the financial crisis. Moreover, the first-quarter reading left analysts speculating whether “Ramaphoria”, the bounce in economic sentiment that followed the new president’s appointment earlier this year, had worn off. As it stands, confidence remains high, but both consumers and firms are facing headwinds: Inflation rose in April on the recent VAT hike, while the emerging-market selloff has bruised the rand and is set to swell the cost of imports. Meanwhile, manufacturing has been shaky in recent months and business conditions stagnated in May as output suffered from product shortages.


Full-year economic prospects look set to ride out the recent sluggishness of industrial output. Moreover, greater political stability and recent calls to maintain the country’s credit ratings—despite Fitch and S&P Global confirming junk status—bode well for the economy. Higher real wages should support stronger household spending this year, while the government’s push to attract investment should help bolster capital outlays. Nevertheless, fiscal slippage and a slow reform agenda will constrain growth over the medium term. FocusEconomics analysts expect growth of 1.9% in 2018, down 0.1 percentage points from last month’s estimate, and 2.1% in 2019.


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ANGOLA | Downbeat data rolls in for 2018


A swift economic recovery in early 2018, following a prolonged recession over the past two years, does not seem likely, according to available economic indicators. Despite improving marginally from the previous quarter, the economic climate indicator remained well-entrenched in negative territory in Q1, where it has been for over two years. Downbeat sentiment was largely related to a deterioration in the country’s key industries: Confidence in both the extractive and manufacturing industries slipped further into negative territory. Moreover, and despite slight improvements from Q4, sentiment in the construction and trade sectors remained strongly pessimistic. Meanwhile, the government’s recently introduced macroeconomic stabilization program, focused on improving the business environment through deficit reduction and debt consolidation, as well as greater exchange rate flexibility, has been positively received by international investors.


The economy should emerge from recession this year, on the back of rising prices for the country’s top export commodities. Fiscal consolidation measures and the transition away from a pegged exchange rate, coupled with the government’s commitment to reducing the public debt, should furthermore fuel investment growth. Nevertheless, the short-term outlook remains relatively bleak. FocusEconomics panelists see GDP expanding 1.9% in 2018, which is unchanged from the previous month’s forecast, and 2.3% in 2019.


KENYA | Government lifts interest rate cap, boding well for lending


Recent data signals that the economy has expanded at a resilient stride throughout the second quarter amid growing investor confidence. Although it fell from the previous month, the PMI remained high in May, indicating that business conditions in the private sector remained upbeat. Easing credit conditions and an accommodative monetary policy stance have buoyed private consumption and encouraged higher investment. Meanwhile, favorable weather conditions have continued to fuel growth in the agricultural sector. On 14 June, the government unveiled a record-high budget for the upcoming financial year beginning 1 July, along with an income tax bill that repealed the long-standing interest rate cap on commercial bank loans. The budget will be aimed at substantial fiscal tightening, while seeking to lift growth under the president’s “Big Four” plan.


The economy is expected to accelerate this year, thanks to the fading impact of the drought, increased investment and a continued expansion in the agricultural sector. Private consumption should be supported by more favorable credit conditions stemming from the removal of the interest rate cap. Moreover, completion of phase one of the standard gauge railway between Mombasa and Nairobi should help curb import demand and narrow Kenya’s current account deficit. While the return to political stability will lift confidence, substantial fiscal tightening could limit the pace at which the economy will expand. FocusEconomics analysts project GDP growth of 5.5% in 2018, which is unchanged from last month’s forecast, and 5.8% in 2019.


MONETARY SECTOR | Inflation continues to recede in May


Preliminary data revealed that inflation continued its downward climb in May, reaching a new over two-year low. Regional inflation came in at 9.4%, down from April’s 9.7% reading. Lower price pressures were observed in several economies, including Angola and Nigeria.


Moderating inflationary pressures allowed the Central Bank of Ghana to slash its policy rate in May, bringing it down to an over four-year low. However, still-high price pressures in Angola and Nigeria caused policymakers to remain on hold in recent weeks. Meanwhile, Kenya and South Africa’s Central Banks decided to hold rates unchanged following previous cuts earlier in the year.


The Consensus Forecast for regional inflation in 2018 was again left unchanged this month for a second consecutive publication. Inflation is seen averaging 10.3% this year. In 2019, our panel expects regional inflation to recede and average 9.2%.


Angela Bouzanis


Senior Economist 


 

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