An old enemy is stalking the global economy and SA could be caught in the middle.
The double shock of Covid-19 and Russia’s invasion of Ukraine, two events that induced a series of negative aggregate supply shocks that have curtailed production and increased costs, has led to a bout of global stagflation — a situation in which the inflation rate is high, economic growth slows and unemployment remains steadily high.
The more commonly cited parallel is the 1970s Arab oil embargo when inflation surged to double-digit rates as economies around the world stagnated. This was a painful mix of high prices and low growth known as “stagflation”.
While SA is nowhere near Turkey, whose annual inflation rate is expected to rise to 68% in April and only dip to 52% by year-end, or developed economies whose inflation numbers posted well above their target ranges, the country has become part of the stagflation debate.
In a statement released on Wednesday, Moody’s Investors Service said it expects SA’s inflation to hit 8% in 2022.
In line with the SA Reserve Bank forecast, Absa senior economist Miyelani Maluleke said Absa expects SA headline consumer price inflation to peak at 6.2% by June before beginning to ease gradually.
The inflation outlook comes higher than the Bank’s 3%-6% target range. The Bank’s monetary policy committee said in their last statement that risks to the inflation forecasts are firmly on the upside. Its model released at the March policy meeting suggested that hikes would be gradual, with the repo rate reaching 6.1% in 2023 and 6.68% in 2024. The repo rate is currently at 4.25%.
Forecasts for SA real GDP growth in 2022 have come down to 1.9% most recently.
The latest data released on Thursday by S&P Global shows the IHS Markit SA Purchasing Managers Index pointed to a deterioration in business conditions. The reasons for the sharp decline included load-shedding, the KwaZulu-Natal floods and rising fuel prices that also led to a sharp rise in purchasing costs, as well as efforts to compensate staff facing higher living expenses.
Oxford Economics said it is less optimistic about SA’s prospects, having revised down their real GDP projections to 1.5%, while they expect inflation to average close to 6% in 2022.
PwC economist Christie Viljoen said PwC expects SA’s economy to grow by 1.8%.
In an interview with Business Day, IG senior market analyst Shaun Murison said with inflation testing the outer threshold of the Bank’s targeted 3%-6% band, further caution towards the stagflation conundrum persists. “The real concern around stagflation though is that it becomes a precursor to an economic recession,” he said.
The stagflation situation was further compounded by the Federal Reserve’s decision to raise its benchmark policy rate by half a percentage point (50 basis points) on Wednesday, a first since 2000.
The Fed sent a strong message that it intends to increase it by the same amount at the next two meetings. And, with inflation at 7% — more than three times its target — and still rising the Bank of England raised its rates for a fourth consecutive meeting on Thursday, lifting its benchmark interest rate to 1%, while warning that inflation could reach 10% in 2022, a level not seen since the early 1980s.
The SA Reserve Bank had already started becoming more hawkish at its last meeting. Murison said it is possible the Bank is looking to speed up its monetary tightening in light of these international events and to keep pace with major central banks around the world.
Maluleke said this more aggressive Fed hiking cycle will strengthen the dollar, weakening emerging market currencies. He said slower growth in the US and China will also weigh on global commodity prices, which will erode SA’s strong terms-of-trade, leading to a narrower current account surplus over the coming quarters. “A further risk to the rand is the recent increase in SA’s offshore investment limits, which could lead to more capital outflows over time,” Maluleke said.
Africa region economist at Oxford Economics Jee-A van der Linde said the rand will come under pressure over the near term as the favourable consequences of high commodity prices dissipates and the interest rate differential with the US becomes less favourable, due to the aggressive policy tightening expected by US monetary officials in 2022.
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