Lagarde turns up the lights and closes the bar as Africa arrives for the party
4 December 2014
‘Just as Africa seems ready to come to the dance floor, the lights come up, the bar runs dry, and everyone starts looking for their coats.' That's The Africa Report's colourful description of the gloomy impact on Africa of the latest downturn in the global economy, announced by ‘party-pooper-in-chief' Christine Lagarde, Managing Director of the International Monetary Fund (IMF).
She said at the Spring Meeting of the Bretton Woods Institutions in Washington in October that the world economy was threatened by a mediocre era of low growth for a long time.
The IMF revised almost all of its growth forecasts downwards from its previous forecast in July. It predicted that world output would grow only 3,3% in 2014 (down 0,1% from its July forecast) and 3,8% in 2015 (down by 0,2% from July).
The IMF also revised downwards its growth forecasts for almost all major economies or economic regions, with the notable exception of the United States (US), which would pick up significantly on the prior forecast for 2014 (from 1,7% to 2,2%) and remain on track in 2015 at 3,1%.
The Euro zone would remain firmly in the doldrums, Japan's growth prospects dropped quite precipitously (from 1,6% to just 0,9% in 2014 and from 1% to 0,8% in 2015). And the IMF also forecast that the big emerging markets - including South Africa's BRICS partners (Brazil, Russia, India and China) - which were already faltering in their performance as the global growth engines of last resort, would continue to do so.
For the many countries in Africa that depend on natural resources, the most worrying aspect of ‘the new mediocre' in economic growth, as Lagarde put it, is the continuing plunge in commodity prices, led by oil which has fallen 28% this year. Metal prices are down on average by about 25% over four years, including iron ore, which has plummeted by more than 40% this year alone.
The IMF has forecast growth in China of 7,4% in 2014 and 7,1% in 2015. ‘Europe or the US would kill for that,' Unilever Chief Executive Officer Paul Polman was this week quoted as saying. But of course African commodity exporters have for most of the 21st century been relying heavily on rates much higher than that, in double figures.
The Africa Report quotes Standard Chartered bank as forecasting that China-Africa trade is still likely to rise from $210 billion in 2013 to $215 billion in 2014, but the acceleration in growth is significantly down on previous years. But what happens in China over the next few years remains unpredictable; and even that forecast might be too positive.
Major mining firms like BHP Billiton, Vale and Rio Tinto are still pinning their hopes on China buying their products well into the next decade. But some analysts are suggesting that this has more to do with them having become hooked on Chinese demand over the last 12 years - on their dependence on the supercycle narrative - than on objective analysis.
Tao Dong, Chief Regional Economist for Asia at Credit Suisse Group was quoted by Bloomberg this week as saying the mining houses were ‘too optimistic,' because they did not understand that the nature of Chinese demand had changed.
China was moving from an investment-led to a consumer-led economy, and so there might be a substantial absolute drop in commodities demand, not just slower growth. ‘This is happening now. People are covering their eyes and refusing to believe that what is happening now is not just a cyclical story, but also a structural story,' said Dong.
The drop in Chinese demand, however bad it eventually turns out to be, is compounded by declining demand from Europe, where the European Commission has slashed its growth forecast for 2015 down a substantial 0,6%, from 1,7% to a mere 1,1%.
Particularly worrying is that the IMF cut its prediction for growth in Europe's manufacturing powerhouse, Germany, from nearly 2% to just 1,4% in 2014; and from 1,7% to 1,5% in 2015.
And Japan, another major market for commodities, has also proved to be a major disappointment as Prime Minister Shinzo Abe's promising efforts to pull the country out of its long slump have now faltered.
The US has emerged as the rather unexpected saviour of global growth prospects, with the IMF raising its forecast for growth there in 2014 from 1,7% to 2,2% - and predicting 3,1% growth in 2015. For Africa as a whole, though, this is not necessarily such good news. Much of the US growth is on the back of its shale-gas-based energy self-sufficiency, which has meant declining oil imports from Africa.
To the extent that the long decade and more of demand for commodities from the emerging markets in particular drove African growth - and the Africa Rising narrative - both the growth and the narrative are now in question.
In May the African Development Bank forecast that Africa's average growth would pick up from 4% in 2013 to nearly 5% in 2014, and 5% to 6% in 2015. Sub-Saharan African growth would fare better, rising from 5% in 2013 to 5,8% in 2014. Demonstrating just how much of a drag the South African economy now is on the continent, the bank's forecast for sub-Saharan African growth without South Africa in 2014 was 6,8%.
But the African Development Bank based its forecasts on the earlier, more optimistic forecasts of economic growth in the industrialised and emerging economies. The IMF's October forecast for growth in sub-Saharan Africa was lower, at 5,1% - down 0,4% on its own July forecast and a considerable 0,7% on the African Development Bank's expectations.
The other gloomy event since the bank's forecast has been the Ebola outbreak in West Africa, knocking some US$3 billion off the growth prospects of the three worst-affected countries, Sierra Leone, Liberia and Guinea, according to some forecasts and affecting also its regional trading partners. Liberia's growth, for instance, which had averaged 8% over the past seven years, ground to a halt when the epidemic hit.
So is the Africa Rising story receding into history, to become just a chapter in a bigger book? African Development Bank President Donald Kaberuka insists not, because he believes too much emphasis has been put on the contribution of commodities to the continent's brighter economic prospects.
‘What has driven growth in Africa is not just exports. It is investment and domestic demand. Growth in services like construction is increasing in response to our demographic dynamics,' he told The Africa Report. Africa was investing in itself, he said, pointing to a fourfold increase in intra-Africa trade over the past decade.
And, of course, for countries that don't export oil, like South Africa, the plunge in the oil price is good news, helping the balance of trade.
Optimistically, the drop in global demand could help shift Africa from its historic dependence on raw materials towards greater development of value-added products, a shift it has long aspired to.
But whether it is ready for such a shift is a moot point.
Peter Fabricius is Foreign Editor, Independent Newspapers, South Africa.
This article first appeared in ISS Weekly, the online newsletter of the Institute for Security Studies.
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