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Weak SA growth, Ebola weigh on otherwise strong African growth prospects

Olivier Blanchard

Olivier Blanchard

7th October 2014

By: Terence Creamer

Creamer Media Editor

  

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Ebola in West Africa and continued weak growth in South Africa – the continent’s second largest, but most advanced economy – were weighing down an otherwise positive outlook for sub-Saharan Africa, the International Monetary Fund’s (IMF’s) latest World Economic Outlook (WEO) showed.

Growth in sub-Saharan Africa was 5.1% in 2013, and the latest WEO said activity remained strong in the first half of 2014, with 5.1% growth forecast for 2014 as a whole, rising to 5.8% in 2015.

This upbeat assessment was being overshadowed, though, by “the dire situation in Guinea, Liberia and Sierra Leone”, where the Ebola outbreak was exacting a heavy human and economic toll.

“In addition, in contrast to robust activity in much of the region, growth in South Africa has remained lackluster, dragged down by protracted strikes, low business confidence, and tight electricity supply. The significant depreciation of the rand has so far resulted in only a limited amount of much-needed external adjustment,” the report stated.

SA OUTLOOK CUT AGAIN

In a repeat of what was now an entrenched pattern, the IMF cut its growth outlook for South Africa for 2014.

Having projected growth of 2.3% in April and 1.7% in July, the latest WEO lowered the 2014 growth projection for South Africa to 1.4%. Similarly, its outlook for 2015 was reduced from 2.7% in July to 2.3% in October.

“In South Africa, a muted recovery is expected to take hold only in 2015, as improving labour relations allow inventory rebuilding and gradually stronger net exports to off set the drag from financial tightening.”

By contrast, activity in Africa’s largest economy, Nigeria, had been “resilient” despite poor security conditions and a decline in oil production earlier this year. The West African economy was forecast to grow by 7% this year and by 7.3% in 2015.

However, the WEO cautioned that, should the Ebola outbreak become more protracted or spread to more countries, the consequences for economic activity in the West African region could be “dramatic”.

Confirmation of South Africa’s weak growth outlook came as government reaffirmed that the economy would “take centre stage” during its current term, with 5% growth being targeted by 2019.

President Jacob Zuma confirmed this week that the Presidential Business Working Group to discuss joint action for economic growth would meet on October 24 in Pretoria. In addition, a National Labour Relations Indaba would be convened in November to interrogate the root causes of South Africa’s prevailing hostile labour relations environment.

The IMF was forecasting world growth of 3.3% in 2014, down 0.1 of a percentage point from its July forecast and 0.4 of a percentage point lower relative to the April 2014 WEO. Its 2015 global outlook has also been reduced by 0.2 of a percentage point to 3.8%.

Chief economist Olivier Blanchard said the number hid “very different evolutions”, with some countries having recovered or nearly recovered, while others were still struggling.

“In emerging market economies, lower potential growth is the dominating factor. For emerging market economies as a whole, potential growth is now forecast to be 1.5% lower than it was in 2011,” he said.

But in this area, too, there were divergent expectations, with China maintaining high growth, despite the fact that its economic rebalancing was likely to imply slightly lower growth overall. The IMF expected the Chinese economy to expand by 7.4% this year and 7.1% in 2015.

India had also recovered from its relative slump and growth was expected to exceed 5% again. But the outlook for Russia, Brazil and South Africa was weaker, with Russian only expected to expand by 0.2% in 2014, while Brazil was only expected to growth by 0.3%.

The fortunes among advanced economies were similarly divergent, with Blanchard arguing that the US and the UK were “leaving the financial crisis behind and achieving decent growth”. The US was expected to expand by 2.2% in 2014 and by 3.1% next year.

“Growth in the euro area nearly stalled earlier this year, even in the core. While this reflects in part temporary factors, both legacies, primarily in the south, and low potential growth, nearly everywhere, are playing a role in slowing down the recovery,” he added.

The IMF said that there were still a number of downside risks to the economic projections provided in the WEO, highlighting that geopolitical tensions in Ukraine and the Middle East had the potential to “affect the world economy in a major way”.

Also of concern was the potential fallout from the unwinding of quantitative easing and any further stalling of the recovery in the euro area.

Blanchard argued that, in most countries, specific structural reforms could help. “The challenge, for both advanced and emerging market countries, is to go beyond the general mantra of ‘structural reforms’, to identify which reforms are most needed, which reforms are politically feasible.”

He added that the challenge for policymakers was to “re-establish confidence, through a clear plan to deal with both the legacies of the crisis and the challenge of low potential growth”.

Edited by Creamer Media Reporter

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