Africa and the Middle East have the potential to replace China as the global hub for low-cost goods, Ernst & Young reckons in a new report.
E&Y’s 2012 Rapid Growth Markets (RGM) Forecast also predicts that exports from Africa and the Middle East are poised to grow by more than 12 per cent over the next decade.
“While China is still very competitive, rising wages are opening up opportunities for Africa and the Middle East,” says Bassam Hage, MENA Markets Leader, Ernst & Young. “With a fast-growing labor force, they have the potential to become the next world assembler, possibly replacing China, as China specialises in higher-value added goods,” he adds.
Of the 25 rapid growth markets, the Middle East and North Africa (MENA) region countries include Qatar, the UAE, KSA and Egypt. Qatar will continue to be the fastest growing MENA RGM at 7 per cent in 2012, largely due to expectations of robust government spending and exports focused on Asia, while Egypt will be the slowest growing at 1.2 per cent in 2012 and 3.5 per cent in 2013 with downside risks, the report states.
However, the region will need large infrastructure investments to displace China as a global manufacturing hub, E&Y adds. “For this to happen, there will need to be an investment in infrastructure and the continued fostering of entrepreneurship. RGMs need to look at China and learn from its fostering of small and medium-sized companies which have identified and captured gaps in the market and driven the growth of China’s export market,” says Hage.
Technological advancements and the process of industrialisation in the Middle East and Africa will lead to metals, chemicals and other ‘intermediate’ goods becoming an increasingly important part of their exports as they seek to position themselves in the global supply chain. Exports to Russia from the region will show significant growth of close to 12 per cent per year from sub-Saharan Africa and 14 per cent from the MENA region.
A seismic shift in trade patterns with the advanced economies is also expected as they have increasingly been looking to RGMs for trade opportunities. Europe’s exports to Africa and the Middle East are currently around 50 per cent larger than its exports to the US.
While the global economy is still in an uncertain state and trade flows remain subdued, the 25 rapid-growth markets worldwide are proving resilient. RGMs are expected to grow collectively at 5.3 per cent this year, bouncing back to 6.3 per cent in 2013.
They are expected to account for nearly half of global growth in the next ten years, with emerging Asia leading the way at an annual average growth rate of 7 per cent. The MENA region collectively is expected to grow at an average of 4 per cent but growth in the region could be stronger.
The increase in the middle class in RGMs, particularly in Asia, will drive growth in consumer demand and trade flows between RGMs. For instance, the number of households in China with a real disposable income of $30,000 to $50,000 will increase from 1.6 million in 2010 to an estimated 26 million in 2020.
As a result of changes in the costs of production and rising consumer demand, it is the trade between RGMs that will see the fastest growth over the next decade. Flows of goods from China to India are expected to grow by an impressive 22 per cent per year over the next decade. Businesses will need to adapt their strategies to the new challenges and opportunities presented by these changing patterns of trade.
“The outlook for the MENA RGMs in the medium term is optimistic. In addition to the rise in oil prices benefiting the region, non-oil activity is likely to remain strong especially with the steady labour force growth. Government spending and the increase in trade between RGMs, will serve as significant catalysts to growth and, in turn, be hugely beneficial for companies that invest in these markets,” concluded Bassam.
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