February 13, 2020//-Two decades ago, African consumer spending equated to around 20% of US spending. In five years’ time that proportion is expected to double, according to NKC African Economics, an Oxford Economics company’s research.
Even when expressed in nominal US dollar terms, countries such as Kenya and Côte d’Ivoire will show some of the strongest consumption growth rates on the planet over the medium term.
Research’s list of top 10 consumer markets on the continent takes into account economic momentum to incorporate recent increases in disposable income as well as the consumption growth outlook.
These rankings also consider salient macroeconomic drivers behind consumption growth and do not merely reflect the markets that are expected to see the fastest growth.
African cities have become condensed versions of the traditional Africa growth narrative and numerous cities across the continent are growing around half a percentage point faster than overall GDP growth in those countries.
Four Tanzanian cities will be among the 10 fastest-growing cities on the continent during 2020-24, with economic output in Mwanza and Dar es Salaam growing at just over 8% p.a.
A track record of strong consumption growth and a favourable growth outlook in much less developed and largely unsaturated markets, such as those in our top 10, will create a unique investment opportunity.
In many cases, consumer loyalty to specific brands or products has not yet taken hold, and a significant proportion of the population is enjoying an increase in disposable income for the first time.
African consumption growth alive and well
Even after taking exchange rate depreciation and inflation into consideration, East and West Africa will continue to see remarkable growth in private sector consumer spending over the next five years. We forecast that private sector consumption growth will average over 8% p.a. over the 2020-24 period in both Côte d’Ivoire and Senegal.
This means total consumer spending will expand at a rate nearly double that of the continent’s largest
consumer market, Nigeria (4.2% p.a.), and Africa’s most developed economy, South Africa (4.4% p.a.).
Prospects for medium-term spending growth above 6% p.a. in Côte d’Ivoire, Ghana, Senegal, Cameroon, and Rwanda also compare favourably to the expected increases in consumption in much more developed and saturated markets such as Germany (+4.9% p.a.) and France (+4.5% p.a.).
While Ethiopia’s consumption growth (in US dollar terms) is expected to ease in coming years due to expected currency weakness, the country warrants being in our top 10 ranking of Africa’s consumer markets due to its potential market size, recent increases in domestic spending, and a favourable economic growth outlook.
From economic growth to consumer spending
Africa will see some of the highest real GDP growth rates on the planet in coming years. Rapid urbanisation is improving the attractiveness of these markets for consumer goods industries (driving the transition from informal to formal retail) while the expansion of basic services such as utilities, telecoms and banking has had favourable spill-over effects into other spheres of the economy.
A key facet of growth in most of these economies is that it is primarily driven by the services sector, meaning that growth is less dependent on natural resources and to a large extent insulated from a slowdown in global economic
growth.
The services-driven nature of economic growth and some demographic factors have supported an increase in overall consumption to a much larger extent than that observed in countries that are more commodity-dependent or that do not have these favourable demographic trends.
Looking at our top 10 markets, urban population growth has exceeded growth of the overall population, due to increased migration to cities, while economic growth has exceeded both overall and urban population growth.
Economic growth: a sectoral perspective
Key common characteristics among our top 10 economies include a relative lack of commodity dependence and a growth structure tilted towards private sector consumption.
This is reflected in robust growth in services such as information and communications technology (ICT), finance and transport, and the dominance of sectors such as wholesale and retail trade.
However, industry does play an important role in some of these markets, particularly in the form of construction (Ethiopia, Senegal) and the development of the domestic hydrocarbon sectors (Senegal, Ghana).
While a consumption-driven growth model reduces the potential impact of any slowdown in external demand, persistent external imbalances resulting from this economic structure create inherent risks due to the need to fund current account deficits by attracting external capital.
Key sector: Tourism
Tourism is another key sector that has piqued both government and investor interest across the continent. The labour-intensive and place-specific/non-tradeable nature of the sector is attractive from a developmental perspective.
The positive spill-over effects of the sector to other parts of the economy, and the fact that it generates foreign exchange inflows, have seen more African countries start to prioritise the promotion of tourism as part of diversification strategies.
Europe remains the main source of tourism receipts for Egypt (accounting for just over 31% of international tourist spending in 2019), Morocco (58%), Kenya (58%), and Tanzania (35%).
Germany, in particular, is an important source of tourism for Egypt (accounting for 11% of receipts last year), Morocco (11%), and Kenya (17%). For Nigeria, other African nations (accounting for 33% of receipts last year) and
China (25%) are the largest source markets.
But with a projected tourism spending growth rate of just over 15% p.a. over the next five years, China will become Nigeria’s primary tourism market in coming years. Other African nations account for around 50% of tourism
spending in South Africa.
From a cities perspective, Cape Town is estimated to outperform all other cities on the continent in terms of international tourist spending, generating just under $2bn in revenue in 2019.
Economic growth: a cities perspective
Africa has a higher urbanisation growth rate than any other region on the planet – and by some margin. This, together with the market concentration resulting from rising urbanisation, means that African cities have become condensed versions of the traditional Africa growth narrative – demographics are more favourable than at the national level, services provision is much better, and market concentration increases investment attractiveness.
In fact, many African cities are growing around half a percentage point faster than overall GDP in the relevant countries.
Key growth hotspots
Except for two (Tripoli in Libya and Beira in Mozambique), the 10 fastest-growing cities by GDP over the next five years are all found in our list of top 10 consumer markets. Four Tanzanian cities will be among the 10 fastest-growing cities on the continent during 2020, namely Mwanza and Dar es Salaam, growing at just over 8% p.a., and Dodoma and Arusha at around 7% p.a.
Again, these growth figures should be put into context, with Tanzania’s largest city, Dar es Salaam, generating around $16bn in economic output in 2019, compared with $87bn in Johannesburg (South Africa) and $56bn in Lagos (Nigeria).
Cairo is the clear outlier in this regard, with its current economy generating nearly $100bn in output and boasting a projected growth rate of 5.7% p.a. over the next five years. Our projections show that Cairo will be the only African city within the world’s top 100 cities by GDP size by 2035. Unlike other African cities, Cairo will genuinely have a global economic presence.
Consumer spending: a cities perspective
Similarly to overall projected economic growth, consumer spending is set to rise at a faster pace in Africa’s cities compared to growth at the national level.
Cities such as Douala (Cameroon), Yaoundé (Cameroon), Abidjan (Côte d’Ivoire), Abuja (Nigeria), Nairobi
(Kenya), and Luanda (Angola) will likely each see consumer spending increase by around $5bn over the next five years.
These Cameroonian cities, in particular, should see strong growth, with consumer spending increasing by around 10% p.a., followed by Abidjan (9.4% p.a.) and Dar es Salaam (8.7% p.a.).
In terms of magnitude, Cairo, Johannesburg, and Lagos dominate the continent in consumer spending from an urban perspective.
While government debt overhangs, concerns over trade and infrastructure issues will act as brakes on national-level GDP growth in Africa in the coming years – its cities will tend to outperform national economies. Investors in services and consumer goods, especially, could potentially see the dividends of this growth.
African Eye Report
