Key messages

• Slower growth and greater inflation pressure will raise the risk of ‘stagflation’ in a number of economies, including Africa’s resource producing economies.
• Commodity exporters, such as Nigeria and Angola are vulnerable. Despite the recovery in commodity and oil prices, future revenue gains are unlikely to offset the past losses.
• Without renewed growth and economic transformation, countries facing high inflation may also suffer an accumulation of unwanted external and domestic liabilities.

‘Stagflation’ risks could rise

According to the International Monetary Fund (IMF), recent global manufacturing activity and global trade is showing some signs of recovery. The start of 2017 saw world trade volumes expand by an average 10% annualised rate, compared to only 2% at the start of 2016. Industrial production grew too, at a 5% rate compared to a 0.3% contraction at the start of 2016. Yet the IMF’s recovery forecast for 2017 is likely to be too optimistic, particularly for undiversified emerging and resource-dependent developing economies.

The 20% rebound in oil prices since August 2016 will help commodity exporting countries. However, the current rebound is not sufficient to offset past revenue losses and unlikely to support economic transformation. Inflation pressure has also been heightened, owing to both commodity price developments and domestic factors. At 17%, emerging economies’ producer price inflation has risen even higher than the global average, which stands at 12% year-on-year, according to the IMF. Given this, some economies may see an uptick in both growth and inflation. But for those economies that have not engaged in economic transformation, a combination of slower demand and higher inflation, or ‘stagflation’ could be on the horizon.

Overly loose macroeconomic policies can also create a stagflationary environment. The risks of stagflation are important: it could lead to weakness in much needed productivity-enhancing investments and may indicate an over-optimistic IMF forecast for Africa’s growth prospects more broadly. Commodity exporters, such as Nigeria and Angola look particularly vulnerable. The rise in commodity and oil prices has contributed to better growth; and yet, this is likely to be short-lived given their lack of diversification and economic transformation.

Impact on resource producers

Despite its upbeat global growth outlook, the IMF warned that the risks for lower growth and higher inflation were not necessarily reflected in the moderate upturns forecast for Africa’s larger economies in 2017. The global economy is facing potentially damaging structural and institutional changes through increased protectionism and eroding global institutional coordination. In this uncertain context, emerging markets and developing economies may find themselves operating in a less supportive external environment. Appropriate and timely country-level policy responses will be essential for African economies to successfully engage in and pursue long-term transformative growth.

For commodity exporters, such as Nigeria and Angola, the rise in commodity and oil prices since August 2016 has contributed to a recovery in their revenues. However, these gains are unlikely to offset the past losses, which suggests the period ahead will be one of difficult continued adjustment. The additional challenges of weak external positions, rising debt and depreciated currencies will affect other commodity exporters too, such as Ghana and Zambia, heightening stagflation risks and damaging investment prospects. It is not clear that these price rises, though inflationary, are enough to generate sustained growth and investment to facilitate economic transformation.

Further still, some commodity and oil exporters continue to show a wide gap between their growth and inflation rates. For example, Nigeria has seen its growth rate drop to -1.5% in 2016 from 2.7% in 2015, while Angola saw no growth in 2016 following a 3% growth rate in 2015. Meanwhile, inflation has increased in both Nigeria – from 9.5% in 2015 to 19% in 2016 – and Angola – from 14% in 2015 to 42%, according to the IMF. There has been a recent recovery following the 50% collapse in oil prices between 2014 and 2015. However, the terms-of-trade have not improved substantially, while rising interest rates in response to inflationary currency depreciations suggest weaker growth prospects, rather than a recovery in 2017.

Mitigating difficult global conditions ahead

Significant risks associated with stagflation include the accumulation of unwanted external and domestic liabilities, which culminate from export and revenue losses in the absence of renewed and sustained growth. This would hurt the investment climates in Africa’s emerging and developing economies, given the likelihood of high borrowing costs. Debt accumulation would also hurt the ability of these economies to attract foreign investment to initiate or follow-through with productivity-enhancing investments essential for economic transformation. For economies that have recently increased their sovereign debt issuance significantly, stagflation could even lead to more defaults.

African economies could look to mitigate these risks in a number of ways. Governments could strengthen their institutional frameworks to streamline investment processes. This will enable them to more easily facilitate inward long-term investment, rather than speculative flows. Economies with large current account deficits that are also undiversified and not yet engaged in significant transformation, should look at measures to reduce imports of non-investment goods, albeit temporarily. In economies such as Angola’s, fiscal consolidation is needed more than the current election-related spending pledges. Finally, this series has previously argued strongly for exchange rate flexibility in Nigeria to support exports and mitigate investment uncertainty.

Without these mitigating measures, the slower growth in export and fiscal revenue combined with past borrowing, risks contributing to a poor investment climate. And without attempts to stabilise respective domestic macroeconomies, efforts at economic transformation could slow alongside weaker growth and elevated inflation.