China’s role in helping to drive Africa’s outperformance deserves more attention. Increased economic engagement between China and Africa has been closely linked with the latter’s outperformance over the last decade, although questions around causality remain.
China continued to grow strongly after its World Trade Organisation (WTO) accession in 2001. To many observers, demand for commodities to support China’s investment-led growth in turn fuelled African economic growth. A less-disputed observation is that China has almost singlehandedly helped to reverse a chronic and long-standing undervaluation of African assets. With China growing rapidly, investor perceptions of commodity-producing regions started to change. Sentiment changed. Africa benefited. What then, does slower trend growth in China – with GDP decelerating to a more sustainable pace – mean for Sub Saharan Africa (SSA)?
Growing middle class and credit markets
We believe there are a number of reasons to remain optimistic about Africa’s growth prospects. First, the overall growth momentum in SSA remains largely domestic. Although average SSA growth decelerated very slightly in 2011, in response to a slowdown in Europe, Africa’s largest trading partner, average regional growth has since accelerated. Medium-term forecasts (the International Monetary Fund’s as well as our own) all point to a recovery in trend GDP growth, driven mainly by domestic developments. A large number of African economies are growing off a low base. Domestic consumption from a newly emergent and ever-growing middle class will continue to be important to overall growth rates.
Sustained, positive credit growth trends are starting to emerge as a more important driver of African consumption. On average, credit growth is accelerating across our coverage markets in Africa. Unlike other more established emerging markets, there were few links between Quantitate Easing (QE)-induced inflows and domestic credit growth. Even the eventual completion of QE tapering, or a modest slowdown in China, should not impact credit growth meaningfully.
In Africa, a structural transformation in the depth and scale of financial intermediation is underway. Across many economies simultaneously, both consumers and businesses are experiencing a meaningful improvement in credit availability. The impact of this long-term, secular shift will likely more than offset any short-term concerns stemming from tightening of liquidity conditions in more mature economies. In the absence of a commodity price or trade shock on the scale of that observed in 2009, there is little reason to anticipate a meaningful change in credit growth trends in Africa.
Much room for exports to expand
Trade shares in the SSA region are not substantial, averaging only about 30 per cent of GDP. While individual economies have high commodity dependencies in their export profiles, economic growth does not depend solely on trade. At the margin, commodity prices do matter. But softer commodity prices might benefit some African economies, while hurting others.
Admittedly, a lot of additional growth momentum in Africa is coming from new resource exploration. East Africa, with its newly discovered hydrocarbon wealth, is a key example. Will such resource exploration stall because of a more subdued rate of growth in China? It is a bit of a stretch to think this.
Even a 7 per cent growth rate for China, if sustained for a decade, would be the equivalent of adding a whole, new ‘China’ to the global economy. Even in the event of China’s economy decelerating even more rapidly than this, the amount of incremental commodity demand from China will still be significant for SSA. Trade with other emerging regions is also growing, from an even lower base.
What does the actual record on trade show? Africa accounts for a small percentage of China's total trade, about 5 per cent, and Africa-China bilateral trade continued to grow, even as the pace of China’s overall trade growth slowed last year. In 2013, trade between China and Africa grew to US$210 billion from about US$198 billion a year before. This happened at a time when China’s trade with other regions was slowing more meaningfully. Compared with a base of only about US$7 billion at the end of the 1990s, Africa-China trade has come a long way.
The important point is that China’s demand for Africa’s exports is still growing. It is wrong to overstate the significance of a China slowdown on Africa-China economic engagement, let alone the impact on Africa’s overall growth prospects. Even a China growing more slowly will contribute to demand for African exports, and to African growth. Africa still has a sizeable trade surplus with respect to China.
While the decade following China’s WTO accession may have been all marked by significant strength in commodity prices, benefiting some African countries, the years ahead are likely to be characterised by commodity output gains, benefiting even more economies. Mature economy recovery, especially in Europe, will also help lift Africa’s prospects – as will the growing level of intra-regional trade.
African economies are not uniformly vulnerable to a China slowdown (although second order effects also matter)
|% Exports to China||% Imports from China||% Total Trade with China|
|Republic of Congo||39.0||13.4||31.7|
Source: Ministry of Commerce, China; Standard Chartered Research