Covid-19 will greatly reduce Africa’s GDP growth in 2020: McKinsey

April 02, 2020: As per a McKinsey report, Covid-19's economic impact finds that Africa's gross domestic product (GDP) growth in 2020 could be cut by three to eight percentage points. The pandemic and the oil-price shock are likely to tip Africa into an economic contraction in 2020, in the absence of a major fiscal stimulus.

The analysis states four scenarios of the economic impact on Africa's GDP. "To gauge the possible extent of this impact, we modeled four scenarios for how differing rates of Covid-19 transmission - both globally and within Africa - would affect Africa's economic growth. Even in the most optimistic scenario, we project that Africa's GDP growth would be cut to just 0.4 percent in 2020 - and this scenario is looking less and less likely by the day. In all other scenarios, we project that Africa will experience an economic contraction in 2020, with its GDP growth rate falling by between five and eight percentage points," it noted.

Scenario 1: Contained global and Africa outbreak: In this least-worst case, Africa's average GDP growth in 2020 would be cut from 3.9 percent to 0.4 percent. This scenario assumes that Asia experiences a continued recovery from the pandemic and a gradual economic restart. In Africa, we assume that most countries experience isolated cases or small cluster outbreaks - but with carefully managed restrictions and a strong response, there is no widespread outbreak.

Scenario 2: Resurgent global outbreak, Africa contained: Africa's average GDP growth in 2020 would be cut by about five percentage points, resulting in a negative growth rate of %u22121.4 percent. Assume that Europe and the United States continue to face significant outbreaks, while Asian countries face a surge of re-infection as they attempt to restart economic activity. In Africa, we assume that most countries experience small cluster outbreaks that are carefully managed.

Scenario 3: Contained global outbreak, Africa widespread: Africa's average GDP growth in 2020 would be cut by about six percentage points, resulting in a negative growth rate of %u22122.1 percent. This assumes that significant outbreaks occur in most major African economies, leading to a substantial economic downturn. 

Scenario 4: Resurgent global outbreak, Africa widespread: Africa's average GDP growth in 2020 would be cut by about eight percentage points, resulting in a negative growth rate of %u22123.9 percent. Globally, we assume that Europe and the US continue to face significant outbreaks as China and East Asian countries face a surge of re-infection. In addition, significant outbreaks occur in most major African economies, leading to a serious economic downturn.

Against the backdrop of worrying public-health situation, African countries will have to address three major economic challenges in the coming weeks and months.

• Disruption in global supply chains exposed to inputs from Asia, Europe, and the Middle East, as well as lower demand in global markets for a wide range of African exports. Moreover, Africa is likely to experience delayed or reduced foreign direct investment (FDI) as partners from other continents redirect capital locally.
• The economic impact of the spread of the virus within Africa, and of the measures that governments are taking to stem the pandemic. Travel bans and lockdowns are not only limiting the movement of people across borders and within countries, but also disrupting ways of working for many individuals, businesses, and government agencies.
• The collapse of the oil price, driven by geopolitics as well as reduced demand in light of the pandemic. In the month of March 2020, oil prices fell by approximately 50 percent. For net oil-exporting countries, this will result in increased liquidity issues, lost tax revenues, and currency pressure.

For Africa's economies, the implications of these challenges are far-reaching. A slowdown in overall economic growth is already being felt, and this is acute in hard-hit sectors such as tourism. Many businesses, particularly SMEs, are under significant cost pressure and face potential closure and bankruptcy. That is likely to lead to widespread job losses. At the same time, the pandemic will impact productivity across many sectors. 

African governments will face rising deficits and increased pressure on currencies. In the absence of significant fiscal stimulus packages, the combined impact of these economic, fiscal, and monetary challenges could greatly reduce Africa's GDP growth in 2020.

Across the continent, leaders in the public, private, and development sectors are already taking decisive action - both to save lives and to protect households, businesses, and national economies from the fallout of the pandemic. At the same time, many African countries are still in the early stages of organising their responses into focused, prioritised efforts that make the most of the limited time and resources available.

As of March 31, more than 720,000 cases of Covid-19 had been recorded worldwide, with nearly 40,000 deaths. Compared to other regions, the number of recorded cases in Africa is still relatively small, totalling about 5,300 cases across 47 African countries. Even though the rate of transmission in Africa to date appears to be slower than that in Europe, the pandemic could take a heavy toll across the continent if containment measures do not prove effective, the report stated.