It is common knowledge nowadays that we are in a global recession. This article will attempt to address why we are in a global recession and how it will affect Africa.

Why are we in a global recession?

In an attempt to end the recession caused by the dot com bust the Federal Reserve, in 2003, kept interest rates unreasonably low (at 1%) for one year. This caused bankers/lenders to be frivolous in giving out credit and consumers to abuse it. The cost of borrowing money was so cheap that bankers were in a hurry to get the money out the door. Consumers were borrowing and spending beyond their means and on the fiscal side, government was subsidising the housing market. This led to a massive expansion in the housing market, excessive demand and asset price inflation amongst others. At the time asset prices and demand for property was going up fundamentals like income and productivity amongst others was not keeping up-–an unsustainable scenario. Eventually, asset prices had to crash which is what usually happens when you have excess supply over demand. Enter credit crunch of 2008.

If bankers have been frivolous in giving credit so that consumers eventually default, what will happen is a credit crunch. Bankers/lenders will get burnt so they will disinvest in those schemes. That is the way the market corrects it self.

Normally the service (banks, insurance etc.) sector of an economy feeds on the real (agriculture, manufacturing etc.) sector to grow. For instance, if the real sector expands by 1% you can expect the service sector to double (2%) or maybe triple (3%) that expansion and vice versa. That is why financial institutions are hard hit in a recession. A country has to consume, invest, import and export to function properly; everything in balance and dependent on economic capacity. Unfortunately Americans were over consuming and not saving enough. This structural deficiency in the US economy is being corrected now, and will have to run its course before the recession ends.

Prospects for Africa

Africa was largely spared this crisis because (apart from South Africa and Egypt) our economies and banks are not fully integrated into the global economy. In other word Africa’s backwardness in globalisation was a blessing in disguise. For most of this decade African economies have achieved some degree of macro economic stability, have had impressive growth rates (between 4% and 6%) which was not necessarily natural-resource-based and have been liberalising their economies. Most of the best performing economies in Africa (South Africa, Nigeria, Morocco, Ghana, and Tunisia) are considered frontier or emerging markets. Frontier markets usually out perform emerging markets and emerging markets outperform developed markets in terms of return on investment.

Recent stimulus measures by the U.S. like quantitative easing, lower and lower interest rates, are going to devalue the dollar in the long run. This means that countries and individuals might resort to storing wealth in form of commodities. Africa is the richest continent in terms of commodities and is expected to benefit the most from this development. Earlier this year China indicated that it would shift from dollar to copper for storing her reserves.

Africa’s consumption prowess is also being unleashed as some of the most profitable markets in Telecom and beverages, amongst others are in Africa. We can expect these types of consumer and service industries to move in and set up shop, creating jobs in Africa in the process. In the global real estate market, according to Knight Frank, Africa is cutting into funds originally destined for Asia and Latin America

These reforms, economic performance and relative insulation from the global crises mean the continent is properly positioned to attract investment at a time developed markets increasingly look unattractive.

Article by: A nan correspondent - www.triumphnewspapers.com