African spending to hit $4 trillion by 2025, led by consumer growth

14 December 2016 Consultancy.uk

The African continent has seen a slowdown in economic activity, as global commodity demand and prices wane. Consumption growth has remained relatively robust, a new report finds – with projections supporting average consumption growth across the region of 3.8% to 2025. Business spending too is set to see robust growth, at 3.3% annually to 2025. Total consumption across the region is set to hit $4 trillion by 2025. 

In a new report from McKinsey Global Institute, the research arm of McKinsey & Companyentitled ‘Lions on the Move II: Realizing the Potential of Africa's Economies’, analysts find that the recent trend of Africa’s almost 4% average annual growth is set to continue to 2025, creating opportunities to tap into the corresponding growth in consumer spending.

Slowdown in growth across Africa

African growth

The African continent has long been a place of considerable diversity and possibility. Yet political conflicts, both internal and colonial, as well as harsh environmental conditions and epidemic diseases, too have left their mark. Recent decades have, McKinsey’s analysis shows, seen robust economic growth across Africa as a whole; between 2000 and 2010 compound annual growth across the region stood at 5.4%, somewhat behind Emerging Asia, at 9.1%, but well in advance of the world average of 3%.

Between 2010 and 2015, growth has slowed to 3.3% – in line with a wider global slowdown. Across the continent a range of factors have impacted GDP growth, including lower commodity prices, which in particular affected large oil producers such as Nigeria, as well as China’s slowdown, resulting in lower demands for metals, and a resulting drop in price. One effect from lower tax receipts, on the back of lower commodity prices, has been governments falling into deficit in the most recent period. The research also highlights that FDI investment across the continent too have stagnated at around $50 billion, following years of rapid growth in the previous decade – although, recent research notes that opportunities continue to exist in the space.

Share of household consumption growth to 2025

Consumer spending growth

Consumption growth, across the regions’ households, has seen rapid growth between 2000 and 2010, averaging 5.5% – standing at $910 billion in 2005. Between 2010 and 2015, in line with continent’s economic slowdown, growth fell to 3.9% – with total consumption hitting $1.4 trillion in 2015. The region’s consumption growth rate has, the research notes, outstripped much of that of the rest of the world.

In the period between 2015 and 2025, consumption growth is set to stay steady at a relatively robust 3.8%, pushing total private consumption to nearly $2.1 trillion in real 2015 prices. East Africa, Egypt and Nigeria are to account for almost half of the growth, at $116 billion, $114 billion and $94 billion respectively.

Drivers of consumption growth among countries

The research also considers the drivers of consumption growth across the regions over the most recent decade – finding considerable differences between countries. In Nigeria for instance, 62% of consumption growth between 2005 and 2015 resulted from population growth, while household consumption increases accounted for the remaining 38%; sub-Saharan Africa had a similar profile. East Africa saw 52% of growth stem from growth in household consumption, while in Egypt and South Africa, 57% and 60% respectively came from increases in household consumption. The continent continues to see population growth, and the trend – the firm reports – is likely to continue with as is until 2025.

Consumption category growth to 2025

The research also sought to identify where consumption growth is concentrated, on a country and by country basis. Nigeria, the report notes, will see strong growth in food and beverage sales – at $28.7 billion more by 2025 in 2015 prices. Housing follows, with an increase of $16.8 billion. In total the country sees growth of 2.3% over the period. 

Angola will see some of the strongest overall growth in consumption, at 5.9% annually to 2025, and up $43 billion in absolute terms. Food and beverages increases the most significantly, followed by housing and consumer goods. Kenya too sees strong growth, at 5.3% annually, while Egypt is up 4.1% on average, with food and beverages, other consumer goods and housing, each adding around $20 billion to total consumption growth. The rest of the continent is projected to see consumption growth at 5.3%, adding an absolute $232 billion in consumption over the period.

Business spending growth to by sector and growth to 2025

Business spending growth

While consumption growth is projected to increase by $645 billion by 2025, businesses too are set to increase their spending to meet growing demand. For 2015 for most businesses, the largest area of spending remains materials, particularly for agriculture, construction and wholesale and retail. Services spending remains relatively small across most sectors as a proportion of total spending, aside from financial services and ‘other’ businesses.

Total spending by businesses, the analysts’ model projects, will increase by $970 billion across the continent by 2025. Construction, utilities and transportation will see the largest increase, at $215 billion, followed by agriculture and agri-processing at $204 billion. Resources spending will grow relatively slowly, up $49 billion over the coming decade, while banking and insurance will see an addition of $74 billion.

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