The international economy appeared to be recovering faster than expected from the shock of the Covid-19 pandemic and associated lockdown restrictions. More effective intervention by governments, central banks and others resulted in global growth of 6.2% in 2021. However, supply chain disruptions and macroeconomic deficits quickly eroded widespread confidence, while the Russian invasion of Ukraine compounded the impact of rapidly rising inflation rates.
Global growth of 3.4% in 2022 was well below the IMF forecast of 4.9%, while African growth stood at 3.9%. Central banks responded to decades of high inflation, with subsequent interest rate hikes, creating fears of stagnation. While the economic impact of the war in Ukraine was initially felt most acutely in Europe, tight global financial conditions, capital flow volatility and sudden shutdowns disproportionately affected economies most vulnerable to shocks – mainly emerging markets.
US Federal Reserve (Fed) interest rate hikes in 2022 saw most developing countries’ currencies depreciate against the US dollar, fueling inflationary pressures, while African sovereign debt issuance fell from US$6 billion in 2021 to US$20 billion in 2022. The Western banking crisis has exacerbated global volatility, adding to sovereign debt and foreign debt servicing costs.
This perfect storm of overlapping crises has been discussed recently Africa’s 2023 Development Prospects: Preserving Growth Resilience in a World of 'Polycrisis’ A report prepared by Dr Hippolyte Fofack, Chief Economist and Director of Research and International Cooperation at the African Export-Import Bank (Afreximbank). Persistent risks to long-term growth, such as climate change and trade wars, are now joined by geopolitical strains, the report argues, opening the door to a 'polycrisis’ world.
High levels of geopolitical risk dampen economic activity, lower equity returns and drive capital away from emerging markets. At the same time, the Ukraine crisis has shifted global concerns away from pandemic-related health issues and toward political, security, economic and financial risks. The report notes that the central bank’s monthly index of geopolitical risk in 2022 is at an all-time high—undermining economic growth and investor confidence.
The Sino-US trade war has raised tariffs and hit trade volumes, so the World Trade Organization cut its forecast for global trade growth for 2023 from 3.4% to 1%. „Trade restrictions have increased dramatically over the past year, and unlike the era of the 2008 financial crisis, there has been a growing commitment to international cooperation and a concerted effort to increase cross-border trade and expand manufacturing,” says Fofak.
The collapse of Silicon Valley Bank, the second largest bank failure in US history, has raised new challenges for the financial system and the global economy as a whole. The Afreximbank report argues that an increase in sovereign risk could affect balance sheets and credit appetite, hindering growth in countries where private investment and banks are not well capitalized.
Current high inflation rates in the US, UK and European Union have unexpectedly proved to be more persistent than analysts’ forecasts. Fofak argues that monetary authorities must balance fiscal stability with price stability at a time when stubbornly high inflation limits their ability to respond.
The opening of the Chinese economy from Covid lockdown measures could further fuel global inflation by dampening domestic demand and sharply accelerating growth in the world’s second-largest economy. With most Asian economies experiencing less severe inflation, Asia will account for 46% of total global GDP growth in 2023, with China contributing more than 19%.
African Development Projections
Against this difficult global backdrop, the Afreximbank report forecasts significant growth in Africa at 4.1% this year, roughly in line with other forecasts. This growth will be shared by both the continent’s resource-rich and resource-poor economies, but net energy exporting countries will benefit from higher oil prices. For example, Angola’s growth of 2.9% in 2022 is expected to rise to 3.5% this year, following four years of stagnation.
Nigeria is expected to generate reasonable growth of 3.2% as a result of improved security and oil production, and a rebound in agricultural production following last year’s devastating floods. On a more negative note, power shortages and other infrastructure shortfalls will keep South Africa’s growth from 2.1% in 2022 to less than 0.5% in 2023, while the South African Reserve Bank will continue to tighten more aggressively to counter historic levels of inflation.
East Africa is expected to be the fastest growing region at 5%, led by Rwanda (6.7%) and Uganda (5.9%). Only South Africa is expected to see GDP growth slow this year, from 2.5% to 2.1% in 2022, largely due to the stagnation of the South African economy. Taking the continent as a whole, over 80% of African countries are highly commodity dependent, limiting their trade opportunities.
Improving opportunities
Afreximbank expects the operating environment to be more favorable and conducive to growth in 2023. This is due to the expected depreciation of the US dollar, as the Fed is expected to start cutting rates later this year due to a fall in US market yields. . At the same time, Chinese GDP is forecast to expand by at least 5.5% in 2023, up from 3% last year. According to IMF research, a one percentage point increase in China’s domestic investment growth is associated with an average 0.6 percentage point increase in sub-Saharan countries’ export growth. Continued growth in remittances and geopolitical realignment of global supply chains will further enhance growth opportunities.
African economies are not passive in this situation, and a reduction in inflation can do much to boost growth levels now and in the coming years, with average inflation in Africa expected to decline from 14.5% in 2022 to 12.4% this year and 8.7% this year. % in 2024. The report highlights factors that could accelerate the continent’s growth, including: increasing infrastructure investment; Continuous structural change and diversification of sources of growth; improving the macroeconomic environment; and digitization.
With the digital economy expected to contribute nearly US$180 billion to the continent’s growth by the middle of this decade, Afreximbank is particularly confident that the digital revolution will increase productivity and competitiveness to drive investment. Also, the African Continental Free Trade Association (AfCFTA) will act as a factor in increasing the region’s competitiveness as global supply chains are realigned.
Outlook
The report explains how African growth prospects are tied to global factors such as key central banks tackling inflation; geopolitical risks and attendant supply chain disruption; risks of trade wars and fragmentation; conflict and growing insecurity; and climate change. It calls for strengthening international cooperation to develop shared solutions to global crises, including ending the Sino-US trade war.
The report acknowledges that the successful implementation of the AfCFTA will have a major impact on long-term African growth prospects, but that controlling inflation should be a priority in the immediate term. „Getting the right balance between containing inflationary pressures and stimulating growth is critical” for African countries, which have been hit hardest by aggressive monetary tightening on the global stage, it said.