Fitch Raised Estimates of Economic Growth in SSA over Nigeria’s Performance

Fitch Raised Estimates of Economic Growth in SSA over Nigeria’s Performance

Fitch Ratings has raised 2020 macroeconomic estimates of the Sub-Saharan African (SSA) region due to stronger than expected third quarter economic performance in Nigeria, the largest economy in the region.

Due to this, the Ratings expects the SSA economy to contract 3.5% as against 4.1% previously projected due to faster than expected recovery.

While forecast for 2020 for SSA macros improves, Fitch reduced expectation on the region performance in 2021.

Nigeria’s gross domestic products (GDP) for the third quarter plunged 3.62% as against 6.01% drop recorded in the second quarter.

Though, the GDP data technically confirmed Nigeria slipped into recession after two consecutive negative growth, the figure came stronger than expected.

Analysts noted that the decline in economic output was driven by sustained contractions in both the Oil (-13.89%) and the Non-oil (-2.51%) sectors.

However, there was relative improvement in non-oil GDP relative to Q2-2020 (6.05%). Cumulatively, economic output for the first 9 months of the year shrunk by 2.48% year on year.

“We raised our estimate of economic growth in Sub-Saharan Africa (SSA) in 2020 but downwardly revised our forecast for 2021”, the Ratings firm explained.

In the report, Fitch now expects that the region’s economy contracted by 3.5% in 2020 compared with 4.1% previously and that output will grow by 3.2% in 2021 from 3.5%.

Accordingly, it said this will mark the slowest pace of growth for any EM region in 2021.

“Our revision for 2020 was almost entirely due to a more optimistic view on Nigeria after the region’s largest economy released stronger-than-expected figures for Q3.

“We now expect that output only fell by 3.2%, compared with 6.0% previously.

“Given a higher basis for comparison, however, we reduced our 2021 forecast from 3.5% to 2.0%. 

“We retained our very pessimistic outlook on South Africa, where we believe that GDP fell by 8.0% in 2020, and will only rise by 2.0% in 2021”, Fitch said.

The report states that global growth momentum slowed in Q4, but Fitch has become more bullish for 2021 as several dynamics play out.

The firm’s forecasts for global economic activity point to a contraction of 4.0% in 2020, marking a slight improvement compared with 4.1% we estimated last month.

However, its forecasts now point to an even stronger recovery of 5.5% in 2021, up from previous forecast of 5.2%, on the back of upward revisions in growth to the US (3.9% to 4.1%), Japan (2.1% to 2.7%), Brazil (3.2% to 3.5%), Saudi Arabia (2.7% to 3.1%), India (6.2% to 9.5%), Indonesia (3.3% to 6.1%), Malaysia (6.2% to 11.5%) and elsewhere.

“We forecast that growth in developed markets (DMs) will rebound from -5.3% in 2020 to 4.2% in 2021 and that growth in emerging markets (EMs) will flip from -2.0% to 7.2% over the same period”, it said.

The Ratings explained that base effects will play a large role in boosting growth next year, as even conservative assumptions of average quarter-on-quarter growth rates yield strong full-year out-turns in 2021.

However, other factors will also be increasing supportive over the coming months.

First, UK regulators approved a vaccine on December 2 – much earlier than most had anticipated – and Fitch expectation is that more vaccines will be approved in the near term, accelerating the pace of distribution.

Second, despite a weaker Q4, especially in Europe, US data continue to show signs of relative strength and Google mobility data point to a potential bottom in the restrictions, meaning that the worst may be behind us, at least in the absence of another wave of infections.

It stated that while asset prices are starting to look a little stretched, global financial conditions remain quite loose, volatility remains low, and we expect that commodity prices will remain elevated in 2021, helping to underpin the recovery in emerging markets.

“While we expect domestic political risk will most likely rise in certain countries next year, we believe that a Biden presidency will result in both more predictable US foreign policy and a slight reduction in US-China tensions, which should be positive for global growth, especially as trade is already starting to rebound on a year-on-year basis”, Fitch explained.

Despite this more sanguine outlook for global growth in 2021, Fitch said it continues to flag that many downside risks could weigh on growth next year.

It recognised that healthcare workers are bracing themselves for the flu season in the northern hemisphere, which could dampen sentiment – although it also note that the flu season might be mitigated somewhat by social distancing measures.

In addition, Fitch said Covid-19 virus could mutate, or the distribution of vaccines may take longer to roll out.

Moreover, with Brexit negotiations still ongoing, there are downside risks of a no-deal Brexit, which could disrupt trade.

The 2021 German federal election could yield a weak coalition, which would slow policymaking both at the national and the European level.

It is also possible that the Chinese government could ramp up tensions with the US in an attempt to test its new administration.

Read Also: Trade tension may reduce global GDP by 0.5%, larger than size of SA economy

In aggregate, the Ratings revised up emerging market GDP growth forecasts for 2020 and 2021 this month on evidence that the recovery in the second half of 2020 was stronger than it had previously thought.

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