African growth story is still on the move

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African growth story is still on the move

4:11 CAT | 17 May 2016

In 2010, the McKinsey Global Institute described African economies as “lions on the move”. Today, despite the collapse of global commodity prices and the political shocks that slowed growth in North Africa, the continent’s economic lions are still moving forward.

Africa achieved average real annual gross domestic product (GDP) growth of 5.4% between 2000 and 2010, adding $78bn annually to GDP (in 2015 prices). But growth slowed to 3.3%, or $69bn, a year between 2010 and last year.

New research from the McKinsey Global Institute that will be published in October shows that the shine has not come off Africa’s growth story, but it has become more nuanced.

The deceleration in growth since 2010 has been concentrated in two groups of economies — oil exporters and northern countries rebuilding after the political convulsions of the Arab Spring. The economies of Egypt, Libya, and Tunisia did not grow at all between 2010 and last year, in stark contrast to average annual growth among the three economies of 4.8% in the previous decade.

The rate of growth among oil exporters such as Algeria, Angola, Nigeria and Sudan fell sharply, to 4% from 7.1%. Productivity growth also declined in these two sets of economies. The annual rate of productivity growth in the Arab Spring countries fell from 1.7% to 0.6%, and in Africa’s oil exporters, from 2.6% to 0.4%.

Resilience and GDP growth

The rest of Africa maintained stable rates of GDP and productivity growth in the past five years. Real GDP grew at an annual rate of 4.4% a year, virtually the same as it was in 2005-10. Productivity grew at a compound annual rate of 1.7% during the same period, consistent with 1.6% from 2000-10.

The resilience of large parts of Africa in the face of challenging conditions reflects the continuing diversification in many economies. Between 2010 and 2014, services generated 48% of Africa’s GDP growth, up from 44% in the preceding decade. Growth in Africa’s manufacturing sector has been low at 4.3% a year between 2010 and 2014, but utilities and construction achieved significant expansion to ensure that industry overall generated 23% of Africa’s growth, up from 17% in the preceding decade.

Resources made a negative 4% contribution to growth between 2010 and 2014, compared with 12% during the previous decade.

In the long-term, three powerful positive trends are likely to sustain Africa’s growth. First, its young population and growing labour force is a valuable asset in an ageing world. In 2034, Africa is expected to have the world’s largest working-age population of 1.1-billion.

There have been 21-million new formal, wage-paying jobs created in the past five years, and 53-million in the past 15. Stable jobs grew at a rate of 3.8% between 2000 and last year, 1% faster than growth in the labour force. This is still far from the job-creation trajectory Africa needs to fuel future growth, but it is progress.

Second, Africa is still urbanising and much of the economic benefit lies ahead. Productivity in cities is three times as high as in rural areas and, in the next decade, an additional 187-million Africans will live in cities, according to the United Nations.

This urban expansion is contributing to rapid growth in consumption by households and businesses. Household consumption grew at a 4.2% compound annual rate between 2010 and last year — faster than the continent’s GDP growth rate — to reach $1.3-trillion last year.

We project Africa’s consumers will spend $2-trillion by 2025. But companies will need to gather detailed market intelligence on the whereabouts of the most promising consumer markets. Only 75 cities accounted for 44% of total consumption last year.

Consumers

Nigerian consumers alone may account for up to 30% of Africa’s consumption growth in the next decade. Other segments to target include households earning more than $20,000 per annum in SA and Morocco, two of Africa’s most diversified economies with a large consumer base, or those earning $5,000-$20,000 in the fast-growing economies of East and West Africa. Third, African economies are well positioned to benefit from rapidly accelerating technological change that can unlock growth and leapfrog the limitations and costs of physical infrastructure in important areas of economic life.

East Africa is a global leader in mobile payments. The penetration of smartphones is expected to hit the 50% mark in 2020, from only 2% in 2010.

In sub-Saharan Africa, cellular-enabled, machine-to-machine connections are expected to grow about 25% per annum to 30-million by 2020, according to GSMA Intelligence, changing the game in sectors from healthcare to power. Spending on infrastructure has doubled in the past decade, and is now 3.5% of GDP.

Foreign direct investment reached $73bn in 2014, up from $14bn in 2004. Africa has 700 large — and increasingly pan-African — companies earning revenues of more than $500m. These companies together boast $1.4-trillion in revenues, and many continue to grow extremely fast.

Large companies in utilities, transportation and healthcare have achieved double-digit revenue growth in domestic currency terms between 2008 and 2014.

Undoubtedly, policy makers will need to grapple with significant challenges ahead. As the price of oil and other commodities has fallen, Africa’s finances have deteriorated: the continent ran a weighted average budget deficit of more than 6.9% of GDP last year, from only 3.3% of GDP five years earlier.

In 2010, Africa was running a small current account surplus of 0.4% of GDP; by last year, that had turned into a deficit of 6.7%. Several countries are in talks for financial assistance, including Angola with the International Monetary Fund (IMF) and Nigeria with the Chinese government.

Political instability is also more prevalent. The number of violent incidents measured by the Uppsala Conflict Data Program jumped from 858 in 2010 to 2,022 in 2014.

Most of Africa was booming five years ago — 25 of the top 30 economies had accelerated their growth from the previous decade. This year, however, the number of countries whose growth was similar or quickening halved to 13 — Botswana, Cameroon, Côte d’Ivoire, the Democratic Republic of the Congo, Ethiopia, Gabon, Ghana, Kenya, Madagascar, Namibia, Senegal, Tanzania and Zimbabwe — and the six largest economies experienced slowing growth, partly reflecting lower resource prices and the Arab Spring.

This mixed picture means that companies and investors assessing Africa’s potential need to be specific about the growth and stability of individual countries.

We measured three aspects of stability: macroeconomic stability, economic diversification, and political and social stability. Three distinct groups of countries emerges from this.

Growth stars

About one-fifth of Africa’s GDP comes from countries we call growth stars, with high rates of growth and a high score on stability. These countries, among them Côte d’Ivoire, Ethiopia, Kenya, Morocco and Rwanda, are not dependent on resources for growth, and are reforming their economies and increasing competitiveness.

The second group, the unstable growers that account for 43% of Africa’s GDP, experienced high growth rates in the past five years, but achieved lower scores on stability. This group of countries includes Angola, the Democratic Republic of the Congo, Nigeria and Zambia, which need to diversify their economies away from resources, to improve their security, or stabilise their macroeconomies.

And then there are the slow growers that accounted for 38% of GDP last year including SA, Madagascar, Egypt, Libya and Tunisia.

The imperative now is for policy makers and businesses to work together to accelerate economic reforms and strengthen the fundamentals that underpin growth. One key will be to diversify exports and national revenue sources to eliminate the volatility that arises when resource prices change considerably. This is critical to increasing Africa’s ability to finance its own development by better mobilising domestic resources through improved tax and customs collections and encouraging more savings.

This will require countries to increase pension provisions, expand access to banking and financial services and deepen their capital markets.

Better planning critical

Better planning of urbanisation is critical to unlocking the growth opportunity in full and to make African cities competitive. A stronger focus on expanding power supply and electricity is needed to solve the number one challenge to the business environment.

Improving educational systems to develop the skills needed now and into the future is vital, as are further efforts at regional integration of manufacturing and trade and improving physical and digital infrastructure.

The economic and political turbulence in parts of Africa in recent years has been a shock, but it has not derailed the growth story. The IMF forecasts that Africa will be the second-fastest growing region in the world between this year and 2020, with annual growth of 4.3%.

What the past five years have proved is that Africa’s economic lions need to improve their fitness to make the most of their potential and continue their march towards prosperity.

By: Domininc Barton and Acha Leke

Barton is the global managing partner of McKinsey & Company and co-chair of World Economic Forum on Africa. Leke is a senior partner in the Johannesburg office and leads the McKinsey Global Institute in Africa