Many people are questioning whether Africa’s economic advances are running out of steam. Five years ago, growth was accelerating in almost all of the region’s diverse economies, but recently their paths have diverged. Some countries have continued to grow fast while others have experienced a marked slowdown as a result of lower resource prices and higher sociopolitical instability. Despite this, the continent’s fundamentals remain strong, but African governments and companies will need to work harder to make the most of its potential.
Africa’s real GDP grew at an average of 3.3% a year between 2010 and 2015, considerably slower than the 5.4% from 2000 to 2010. However, this average disguises stark divergence. Growth slowed sharply among oil exporters and North African countries affected by the 2011 Arab Spring democracy movements. The rest of Africa posted accelerating growth at an average annual rate of 4.4% in 2010 to 2015, compared with 4.1% in 2000 to 2010. Africa as a whole is projected by the International Monetary Fund to be the world’s second-fastest- growing economy to 2020.
The region has robust long-term economic fundamentals. In an aging world, Africa has the advantage of a young and growing population and will soon have the fastest urbanisation rate in the world. By 2034, the region is expected to have a larger workforce than either China or India. So far, job creation is outpacing growth in the labor force. Accelerating technological change is unlocking new opportunities for consumers and businesses, and Africa still has abundant resources.
Spending by consumers and businesses today totals $4 trillion. Household consumption is expected to grow at 3.8% a year to 2025 to reach $2.1 trillion. Business spending is expected to grow from $2.6 trillion in 2015 to $3.5 trillion by 2025. Tapping consumer markets will require companies to have a detailed understanding of income, geographic, and category trends. Thriving in business markets will require them to offer products and develop sales forces able to target the relatively fragmented private sector.
Africa could nearly double its manufacturing output from $500 billion today to $930 billion in 2025. Quarter of the potential could come from Africa based companies meeting domestic demand. Today, Africa imports one-third of the food, beverages, and similar processed goods it consumes. The other one-quarter could come from more exports. The rewards of accelerated industrialisation would include a step change in productivity and the creation of six million to 14 million stable jobs over the next decade.
Corporate Africa needs to step up its performance to make the most of these opportunities. The continent has 400 companies with revenue of more than $1 billion per year, and these companies are growing faster, and are more profitable in general than their global peers. Yet Africa has only 60% of the number of large firms one would expect if it were on a par with peer regions. Their average revenue, at $2 billion a year, is half that of large firms in Brazil, India, Mexico, and Russia, for instance. No Africa owned company is in the Fortune 500.
Companies looking to grow across the continent should develop a strong position in their home market, use that as a base for expanding into markets well beyond their immediate region, adopt a long-term perspective and build the partnerships needed to sustain success over decades, and be ready to integrate what would usually be outsourced. They should look for opportunities in six sectors that McKinsey Global Institute finds have white space and have high growth, high profitability, low consolidation, and invest in building and retaining talent.
- Wholesale and retail
- Food and agri-processing
- Health care
- Financial services
- Light manufacturing
- Construction
Governments will have to play a stronger role in unleashing renewed dynamism. Six priorities emerge from this research: mobilise more domestic resources, aggressively diversify economies, accelerate infrastructure development, deepen regional integration, create tomorrow’s talent, and ensure healthy urbanisation. Delivering on these six priorities will require the vision and determination to drive far-reaching reforms in many areas of public life— and capable public administration with the skill and commitment to implement such reforms.
In 2010, the McKinsey Global Institute’s report on the African economy, highlighted a quickening of Africa’s economic pulse and a new commercial vibrancy. Real GDP had grown at 4.9% a year between 2000 and 2008, more than twice its pace in the 1980s and 1990s, making Africa one of the most rapidly growing regional economies in the world. With growth in 27 of the 30 largest economies accelerating compared with the previous decade, Africa was clearly on the rise. But six years on, growth has slowed significantly. Between 2010 and 2015 Africa’s overall GDP growth averaged just 3.3%.
Is Africa’s renaissance losing its vigor?
There is no doubt that the region’s overall growth performance has been dragged down in recent years by a sharp slowdown in particular economies. The economies of Egypt, Libya, and Tunisia were badly affected by the political turmoil of the Arab Spring, and Africa’s oil exporters were left vulnerable to the decline in oil prices. However, the rest of Africa continues to enjoy strong growth; the African story is diverging.
Regardless, the fundamentals across the whole continent are strong, and long-term growth projections are good. The region is expected to enjoy the fastest urbanisation of any region in the world, and to have a larger workforce than either India or China by 2034. It also has a huge opportunity to leverage internet and mobile technology, and still has abundant resources.
Despite recent shocks and challenges, Africa’s household consumption and business spending are both growing strongly, offering companies a $5.6 trillion opportunity by 2025. Africa’s manufacturing sector today underperforms those of other emerging economies.
However, output could expand to nearly $1 trillion in 2025 if Africa’s manufacturers were to produce more to meet domestic demand from consumers and businesses, and work with governments to address factors hindering their ability to produce and export goods.
To achieve this potential will require Africa’s companies to step up their performance. Africa is home to 700 companies with revenue of more than $500 million per year, including 400 with revenue above $1 billion. However, the region has a relatively small number of large companies. It needs more. The top 100 African companies have been successful by building a strong position in their home market before expanding, adopting a long-term perspective, integrating what they would usually outsource, targeting high-potential sectors with low levels of consolidation, and investing in building and retaining talent.
Governments will need to address productivity and drive growth by focusing on six priorities emerging from this research: mobilise more domestic resources; aggressively diversify economies; accelerate infrastructure development; deepen regional integration; create tomorrow’s talent; and ensure healthy urbanisation. This agenda will require a step change in the quality of African leadership and governance, and active collaboration between the public and private sectors.
Key economic indicators for Africa point to slowing growth—in common with other major emerging markets. Between 2010 and 2015, GDP grew at 3.3% a year, sharply slower than the 5.4% average annual growth rate between 2000 and 2010. Annual productivity growth also slowed between these two periods, from 2.3% in 2000–10 to 0.8% in 2010–15. Foreign direct investment and other capital flows into Africa have leveled off, a far cry from the period from 2005 to 2010 when such flows had tripled.
At the same time, savings have fallen steeply from a peak of 27% of GDP in 2005 to 16% in 2015. It has become increasingly difficult for African countries to compensate by tapping global debt markets. The continent’s average debt-to-GDP ratio rose from 40% in 2011 to 50% in 2015, still relatively low by global standards. However, sovereign debt yields have risen sharply in many countries. The pan-African average budget deficit in 2015 exceeded 6% of GDP.
However, closer analysis shows that this rather disappointing combination of indicators tells a misleadingly negative story. The overall slowdown in Africa’s growth largely reflects economic deterioration in two distinct groups of countries: North African countries caught up in the turmoil that followed the democracy movements collectively known as the Arab Spring, and oil exporters affected by the sharp decline in oil prices. Together these two groups account for nearly three-fifths of Africa’s combined GDP.
As a group, Egypt, Libya, and Tunisia did not grow at all between 2010 and 2015, having grown at an average rate of 4.8% over the previous decade. The rate of growth among oil exporters Algeria, Angola, Nigeria, and Sudan fell sharply from 7.3% to 4.0% between the two periods. Productivity growth also declined in these two groups of economies, from 1.1% to 0.3% in the Arab Spring countries and from 3.9% to 1.4% in Africa’s oil exporters.
In the rest of the continent, GDP growth accelerated to an average annual rate of 4.4% in 2010–15 from 4.1% in 2000–10. Productivity grew at a consistent compound annual rate of 1.3% over both periods. Since 2010, GDP growth has accelerated in around half of the largest 30 economies and decelerated in the other half. The decelerating economies include the continent’s six largest — Nigeria, Egypt, South Africa, Algeria, Morocco, and Angola — while the accelerating countries include Botswana, Cameroon, Côte d’Ivoire, Democratic Republic of Congo, Ethiopia, Gabon, Ghana, Kenya, Madagascar, Namibia, Senegal, Tanzania, and Zimbabwe.
This variance is a reminder that Africa is a diverse regional economy and that countries on the continent remain vulnerable to economic, social, and political shocks. To better gauge stability at the country level, McKinsey Global Institute has developed an African Stability Index that we hope can help businesses and investors understand their portfolio risk and help policy makers understand and address their own countries’ vulnerabilities. The index highlights the diverging growth and stability trends that economies in the region have been experiencing since McKinsey Global Institute published its first report on Africa’s economies in 2010.
Three distinct groups emerge from the index.
Stable growers
These countries, which accounted for 19% of Africa’s GDP in 2015, posted average GDP growth of 5.8% a year between 2010 and 2015— higher than the 2.9% a year global average over this period—and demonstrated relatively high levels of stability. This group includes Botswana, Côte d’Ivoire, Ethiopia, Kenya, Mauritius, Morocco, Rwanda, Senegal, Tanzania, and Uganda. These countries, typically not dependent on resources for growth, are smaller economies that are progressing with economic reform and increasing their competitiveness.
Vulnerable growers
These countries, which accounted for 35% of African GDP in 2015, achieved average GDP growth of 5.1% a year over the past five years but had relatively low levels of stability. This group includes countries heavily dependent on resources, such as Nigeria, Angola, and Zambia, as well as countries such as the Democratic Republic of Congo, which have clear potential but need to improve their security, governance, or macroeconomic stability.
Slow growers
These countries, which accounted for 46% of Africa’s GDP in 2015, together grew at 1.3% per year between 2010 and 2015—less than the 2.9% a year global average over that period—and have had varying degrees of stability. This group includes the countries affected by the Arab Spring—Libya, Egypt, and Tunisia. It also includes South Africa, which is experiencing slow growth and high unemployment in spite of promising opportunities that could spur development.
Despite African economies diverging in their growth paths from 2010 to 2015, the continent’s overall outlook remains promising. Africa’s collective GDP is still expanding faster than the world average, and it is forecast to accelerate over the next five years to become the world’s second-fastest-growing region once again.
In the longer term, four factors could have a transformative effect on the continent’s economies and their pace of growth.
The world’s fastest urbanisation
Africa is the world’s fastest urbanising region. Over the next decade, an additional 187 million Africans will live in cities—equivalent to ten cities the size of Cairo, Africa’s largest metropolitan area. Between 2015 and 2045, an average of 24 million additional people are projected to live in cities each year, compared with 11 million in India and nine million in China (Exhibit E4). Urbanisation has a strong correlation with the rate of real GDP growth, because productivity in cities is more than double that in the countryside: Africa’s urban GDP per person was $8,200 in 2015, compared with $3,300 in rural areas. Higher productivity translates into higher incomes, and cities offer better access to infrastructure, education, and new markets, resulting in more rapid growth in consumption by households and businesses. The challenge will be to cope with the stresses of rapid urban expansion, including provision of housing and services.
Workforce larger than China or India
Africa has a young population and a growing labor force—a highly valuable asset in an aging world. The challenge for Africa will be to ensure that its economies continue to create sufficient jobs for the many millions of young people entering the workforce—thus far the signs are positive with the rate at which stable jobs have been created outpacing growth in the workforce—and to help develop their skills. By 2034, the working-age population is expected to be 1.1 billion, larger than that of either China or India.
Roughly 60% of the world’s population lives in countries with fertility rates below replacement rates and, for the first time in human history, demographic change could mean that the planet’s population plateaus. In some countries, one-third of the workforce could retire in the period to 2025, with a potentially negative impact on economic growth prospects. However, Africa’s demographics are still working in its economic favor: an expanding working-age population is associated with strong rates of GDP growth.
Huge potential from accelerating technological change
The accelerating scope, scale, and economic impact of technology is a major transformative force around the world. Faster penetration of the internet and mobile phones offers Africa a huge opportunity to enhance growth and productivity; Africa’s penetration of smartphones is expected to reach 50% by 2020, from only 18% in 2015.10 Previous McKinsey Global Institute research estimated that the internet could drive 10% of Africa’s GDP by 2025.
This trend is already transforming a number of sectors, including banking, retail, power, health care, and education. Electronic payments are sweeping across the region and changing the business landscape. East Africa is already a global leader in mobile payments. E-commerce in Africa is growing quickly—revenue has doubled in Nigeria each year since 2010.
In South Africa, smart metering is taking off and is expected to modernise consumer payments in the power sector, while ambulance services are using mobile application technology to improve response times greatly. The African Leadership University, launched in Mauritius in 2015, is using technology to reduce teaching costs and deliver e-learning, creating a replicable model for expansion across the continent.
Continued abundance of resources
Africa contains 60% of the world’s unutilised but potentially available cropland, as well as the world’s largest reserves of vanadium, diamonds, manganese, phosphate, platinum-group metals, cobalt, aluminum, chromium, and gold. It is responsible for 10% of global exports of oil and gas, 9% of copper, and 5% of iron ore. Even at recent low prices for such commodities, a significant share of African production continues to be cost competitive, putting the resources sector in a strong position for when demand and, eventually investment recover.
Capturing these opportunities will be challenging. Governments will need to improve their investment attractiveness in a weaker environment, while companies must review their approach to community engagement so that they have the support of local communities as well as their license to operate from regulators.
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