We were recently chatting to one of our Standard Bank Group economists, Jeremy Stevens, who was in South Africa to address clients and investors on economic developments in Africa, the world’s second-biggest economy. Here are some of his points we picked up on.
A hard economic landing in China would have profound negative effects on the commodities-driven African economies. The continent should be equally concerned about developments in China as well as the sovereign debt fragilities in Europe.
While fears of a downturn in the Chinese economy mount, some analysts point to the strong possibility of a sub-7% GDP growth. In relative terms, most observers consider this figure to amount to a hard landing for China’s economy. An estimated likelihood of a hard landing scenario now stands at about 15%.
Africa would be the hardest hit because of its dependence on commodity exports to China.
Africa’s economic growth in the past five years has been closely tied to China’s fortunes and as a result the continent should be watching economic developments in China closely. Africa should be very concerned because its economies are now more sensitive to any developments in China.
China has become the biggest investor in Africa and the continent’s most significant trading partner, so whatever happens in China matters a lot to Africa.
China’s economic growth has been gradually slowing down from the highs of 11% experienced a couple of years ago. In fact, the Chinese authorities recognise the need to end the growth-at-all-cost model of yesteryear. The developments in China were an indication of an economy that has matured, but also become difficult to manage.
The risks of a sharper fall in the Chinese economy are now more elevated. China could hit the speed bump much earlier than we all expected, and there is no doubt that this would hurt Africa and other emerging markets the most.
With South Africa being the most externalised economy on the continent and because of its close trade ties with China, it could be hurt the most if the “hard landing” scenario occurs.
Commodity export volumes will fall, which would affect the trade balance and our ability to finance the current account deficit. The rand can be expected to depreciate; investor sentiment would become negative, and equities markets would feel the pinch.
African economies need to diversify more and stop being overly reliant on commodity exports in order to mitigate any cyclical and structural risks in the global economy.
