Global economic outlook gloomy, but unchanged for sub-Saharan Africa

The global economic outlook is gloomy, but unchanged for sub-Saharan Africa, according to the International Monetary Fund’s flagship World Economic Outlook report. However, the global risks flagged provide clues for Africa’s next big challenge.

According to economic research group, Oxford Economics Africa, the July update of the International Monetary Fund (IMF) report seeks to provide a cautious navigation of troubled global waters, while there has been little change on the surface to the African outlook.

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Global risks in economic outlook

The spectrum of global risks flagged by the IMF in its economic outlook however warrants a deep delve into the external backdrop, providing cues to Africa’s next big challenge. The title of the World Economic Outlook (WEO) report, “Gloomy and More Uncertain”, is indeed an accurate depiction of the tone of the report.

The IMF says in the report that several shocks hit a world economy already weakened by the pandemic, with higher-than-expected inflation worldwide triggering tighter financial conditions, a worse-than-anticipated slowdown in China, reflecting Covid-19 outbreaks and lockdowns and further negative spill overs from the war in Ukraine.

After noting that global output contracted during the second quarter of this year due to the direct and passthrough effects of downturns in China and Russia, the IMF revised its global growth forecast for 2022 lower to 3.2%, a 0.4ppt reduction from the growth forecast presented in the April edition. This is also a substantial slowdown from the 6.1% expansion estimated for 2021.

“However, the global growth projection of the IMF remains a touch above our own forecast which, at 3.0% for 2022, falls at the more conservative end of the analyst spectrum,” Oxford Economics Africa says.

The IMF’s GDP growth forecast for sub-Saharan Africa was unchanged from its April forecast for the global economic outlook, with the region projected to expand by 3.8% this year. However, despite the unchanged outlook for sub-Saharan Africa, the IMF took the knife to some major advanced and emerging market regions’ growth projections, slashing US output growth for 2022 by 1.4pts to 2.3%, China’s GDP growth by 1.1pts to 3.3% and the eurozone by 0.2ppt to 2.6%.

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China’s slowdown

Among the risk factors the IMF highlighted in the WEO, Oxford Economics Africa noted the pillar called “China’s slowdown persists”. The IMF foresees widespread lockdowns under the zero-Covid-19 strategy and delayed price and balance sheet adjustments in the property sector that may cause “a sudden, wider crisis or a protracted adjustment with broader macro-financial spill overs.”

Apart from high direct trade ties, the indirect exposure of African countries to China’s growth dynamics is substantial and transmits primarily through the commodity price mechanism. Here Oxford Economics Africa notes the IMF’s salient downside risk assessment but retains a more optimistic outlook on its growth prospects of 4.0% in 2022 than that of the IMF’s baseline of 3.3%.

The WEO emphasises that “taming inflation should be the first priority for policymakers” although it acknowledges that increasing prices continue to squeeze living standards worldwide. The IMF also admits that “tighter monetary policy will inevitably have real economic costs” but argues that delay will only make these costs worse..

The IMF projects global inflation to average 8.3% this year, outpacing Oxford Economics Africa’s forecast of 7.7%, despite the IMF maintaining a lower forecast on US inflation of 7.7% for 2022.

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Debt distress in fragile economies in economic outlook

Another downside risk factor the IMF flagged relates to debt distress in fragile economies. The IMF warns that “the resulting increase in borrowing costs will, without corresponding tighter domestic monetary policies, put pressure on international reserves and cause depreciation vs. the dollar, inducing balance sheet valuation losses among economies will dollar-denominated net liabilities.

The IMF also warns in the WEO that “the current situation poses a threat not only to economic, but also to social stability.” The IMF’s downside scenario of rising food and energy prices causing widespread hardship, famine and unrest, may materialise in the Horn of Africa due to adverse weather that will cause even more food insecurity in 2023.

Oxford Economics Africa says while one could sigh with relief that the brunt of the gloom is not directed at Africa, it would be a dismissal of the substantial spill-over risks related to uncertainty in advanced economies.

“Downside risks to the (already gloomy) baseline is introduced by the policy complexities of global stagflation, further disruptions to China’s growth recovery and Russia-centred geopolitical developments.”

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Severe potential implications for Africa

The group says the potential implications for Africa are severe and centre around external environment-induced debt distress, social discontent with surging living costs and domestic policy response and the fiscal quandary of populism pressures and weakening investor appetite.

Therefore, the group maintains a more conservative outlook on sub-Saharan growth of 3.3% for 2022 than envisioned by the IMF, partly due to lower growth forecasts for Nigeria (2.8% compared to the IMF’s projection of 3.4%) and South Africa (1.9% vs. 2.3%).

“The political and social complexities of these countries, which have both executed unpopular-but-required monetary policy tightening actions, mean that policymakers will need to balance the risks to structural inflation and financial system stability with labour market and fiscal challenges.”

External headwinds will test the resilience of the domestic institutional and policy foundation but are not to blame for Africa’s crumbling economic walls, the group points out.

“These challenges need to be addressed on policy level. We also think that external headwinds will start to quiet down in coming months, encompassing a peak in policy tightening (Q3) while the expected easing of supply-chain factors mean that global commodity price reprieve should become more overt by Q4.”

The group further said that the lagged effects of policy tightening on consumer consumption, weaker capacity for government expenditure and softer commodity price environment will strain growth recovery in 2023, with a much lower forecast on GDP growth (3.2%) than the IMF (4.0%) for 2023.

“On a continental level, we think that the next big wave to hit Africa will relate to the new debt cycle. However, as illustrated by Ghana, a proactive approach to manage upcoming debt maturities could mean that a crisis is not necessarily inevitable.”