Sub-Saharan Africa on the rise

Long on promise but short on results, sub-Saharan Africa is once again showing signs of strong economic growth and the emergence of consumer economies. Could this be Africa's century?

As the United States and eurozone economies continue to struggle to achieve steady growth and the hype about the emerging markets turns to concern, many multinational corporations are evaluating sub- Saharan African economies for potential consumer markets, as well as sourcing opportunities. Although sub-Saharan Africa has not resolved such long-standing problems as political instability and corruption, the social and economic fundamentals in some of these countries are starting to change for the better.

Recent evidence of the fragile predicament of emerging economies points to the end of the BRIC (Brazil, Russia, India, and China) "party." Meanwhile, the US economy is faring better than the northern tier of the eurozone economies, while in the southern tier, Portugal, Italy, Greece, and Spain have serious economic downside risk. Many emerging, as well as advanced, economies are facing ageing populations, low fertility rates and, in the case of Germany and Japan, a shrinking workforce. (See the article "The Global Recovery Is on Track, but Risks Abound.")

In the midst of this weak economic performance and troubling demographic dynamics comes an interesting surprise: strong economic growth and improving socioeconomic conditions in sub- Saharan Africa. The improving social and economic fundamentals in many sub-Saharan African nations are at odds with the West's dated image of Africa and have placed the continent on many multinationals' radar screens.

In past years, much of the news from Africa, especially the sub- Saharan countries, has concerned political instability, the AIDS and HIV epidemic, famine, civil strife, and war. However, economic data suggests that conditions may be improving. IHS forecasts that between 2013 and 2017, sub-Saharan African economies are likely to outpace every major regional economic bloc, except China, in both real GDP and population growth. Indeed, real GDP growth for sub-Saharan Africa is likely to be 4.9% in 2013 and to average 5-6% annual growth between 2014 and 2022. In contrast, real annual GDP growth for the global economy is expected to be in the 2.5-3.9% range between 2013 and 2022. (See figure below.)

Sub-Saharan Africa's demographic indicators are also improving: HIV infection and infant mortality rates are falling, while life expectancies are on the rise. During the past 20 years, infant mortality in the region dropped markedly, while fertility rates declined only modestly, leading to a baby boom in the region. Currently, 40% of the sub-Saharan population is 14 years old or younger. However, over the next 30 years, assuming fertility rates keep declining, the working-age population is expected to grow significantly faster than total population, setting the demographic pillar for an economic leap.

A concern is that sub-Saharan Africa's growing labor force is a ticking 'time bomb' that could be triggered by a lack of job growth. In 2012, while the world's unemployment rate stood slightly above the 9% mark, joblessness approached 14% in 11 of the most populous sub-Saharan African economies. More than half of all Africans aged 15 to 24 are unemployed, and 40% of working-age women are without a job. An increase in women's participation is widely considered a necessary driver of economic growth.

African nations have acknowledged that neither current growth rates nor political stability can be expected in the future without higher youth employment. In 2009, the leaders of the 54 member states of the African Union labeled the next 10 years as the "African Youth Decade," and issued a plan of action aimed at "accelerating youth empowerment for sustainable development," notably by reducing youth unemployment by two percentage points every year. On a positive note, the rapid increase in young Africans' education levels during the past 20 years might help bridge the current mismatch between demand and supply of qualified labor. (See figure below.)

Commodity boom fuels growing middle class

From the late 1980s to the early 1990s, only about 5% of African nations were considered to be democracies; today, only a handful of the 55 African states do not have a multiparty constitutional system. On the heels of this political liberalization has come greater encouragement of foreign investment, mostly for commodity and mineral extraction, which has contributed to economic growth in the sub-Saharan African nations. (See the article "Africa's new energy frontier: The promise and the peril.")

But there is more than just commodity extraction driving sub-Saharan Africa's growth. Consumer market opportunities have also emerged-largely as a result of the commodity boom. Robust growth in the number of middle-income households is helping drive consumer spending at well over double the 1.9% growth expected for 2013 in the United States. During 1990-2012, the number of households earning US$20,000-80,000 a year increased faster in 11 of the most populous sub-Saharan African economies than in Brazil and Russia. (See figure below.)

Beyond commodity-driven economic growth, reduction in income inequality, increasing job stability, and increasing education levels have also fueled the expansion of Africa's middle income class. The growth of this segment means that many African households have gained the ability to own a car, buy their first refrigerator, or send their first child to college. Many more Africans are purchasing their first television or cell phone, or are starting to utilize consumer conveniences such as disposable diapers. (See chart below.)

The rising middle-income class has repercussions beyond the consumer goods industry. Middle-income consumers are more likely to buy their home, save more, put their children in private schools, and purchase health insurance. This new-found middle class is bound to have a profound impact on future international trade and investment patterns and should also reduce the external dependency of Africa's economies.

The big 'ifs'

There are several caveats to keep in mind when describing sub-Saharan Africa as the 'new' emerging market of the 21st century. Several decades ago, the outlook appeared to be similarly promising, as several African nations-Cameroon, Côte d'Ivoire, Ghana, Kenya, and Nigeria-entered the international economic community only to suffer financial contraction and tremendous political instability. Sub-Saharan Africa is still plagued by poor infrastructure, a high percentage of its population in poverty and, in many nations, fragile economic and political fundamentals and ethnic tensions. Sub-Saharan Africans still spend approximately 40% of their consumer outlays on food, and local economies are only a drought or rapid increase in world food prices away from devastation.

Still, with the region's robust population growth, high fertility rates, new consumer market opportunities, and the beginnings of a new middle class, there is reason for optimism. As Africa's economies develop, more companies are starting to consider sourcing raw materials and finished goods from the continent. The region should be carefully monitored and evaluated against others such as China, which it lags well behind, especially in per-capita terms. Nevertheless, it boasts considerable potential as a growth market.

Chris G Christopher Jr. Director of US Macroeconomics and Global Consumer Markets, IHS Economics

Samuel Champanhet Senior Economist, Global Consumer Markets, IHS Economics.