The Reserve Bank isn’t due to decide on interest rates for another month.
While events in Russia show that a lot can change in a short period of time, the IMF’s latest economic outlook released on Tuesday makes worrying reading. Some of its findings could have dire implications for emerging economies such as SA, where consumers are facing rising costs for basic goods and higher interest rates.
While SA can take some comfort in the fact that the IMF didn’t downgrade the country’s growth forecasts, these were already poor and far from what’s needed to make a dent on an unemployment rate that has risen above 35%.
The IMF report was compiled before the flooding in KwaZulu-Natal that has damaged key infrastructure and disrupted the country’s busiest port and the road network that’s crucial for getting supplies to the economic heartland of Gauteng.
The setback comes just nine months after the violence that hit the region and cut SA’s growth performance in 2021 so much that GDP failed to rebound to its pre-Covid levels. The damage to supply chains increases the danger that inflation, which in March almost hit the upper end of the Bank’s 3%-6% target, will accelerate faster than policymakers expect.
In its latest world economic outlook, the IMF avoids references to stagflation — a prolonged period in which slow economic growth is accompanied by elevated price increases — but it’s hard to come to a different conclusion based on its warnings. Stagflation will see policymakers confronted with a stagnant economy and rising unemployment, while rising prices erode the value of the money in workers’ pockets.
If policymakers do nothing, inflation accelerates further; but if they hike interest rates, the economy slows down further and jobs are lost.
According to the IMF, Russia’s aggression in Ukraine has led to a dramatic reversal in prospects for the global economy. It went as far as to warn that the recovery from the easing Covid-19 crisis could be undone.
It sees global GDP growth slowing to 3.6% in 2022, from an estimated 6.1% in 2021. This is 0.8 percentage points less than what it expected as recently as January, and comes with a warning that “overall economic risks have risen sharply”. It also says inflation “will remain elevated for much longer”, having reached 40-year highs in the US and some European countries. At least in these countries, this comes in the context of a strong recovery that has seen them approaching full employment, unlike SA.
There will, of course, be implications for SA and other emerging markets from the IMF’s advice that central banks should “adjust their policies decisively to ensure that medium- and long-term inflation expectations remain anchored”.
This could see capital flowing away from emerging markets, resulting in weaker currencies and elevated prices of imported goods such as oil, while higher rates will increase the fiscal pressure on governments that increased borrowing as they sought to deal with the effect of the pandemic. As IMF MD Kristalina Georgieva said this week: “The debt problem is knocking on the door louder and louder.”
The IMF also warns of potential social unrest due to rising food and fuel prices. SA has made some moves to cushion the effects of record petrol prices but these are small and unlikely to make a material difference to living standards. Despite the higher commodity prices, SA’s fiscal space is still constrained, similar to its peers, though the commodity-price boom has removed the funding concerns that dominated in 2020.
Whether central banks are wise to raise rates given the danger posed to growth won’t be resolved in the next month, and whatever the Bank does will be subject to heated debate.
What’s not in doubt is that it’s more crucial than ever that SA accelerates the implementation of reforms to ensure a more resilient economy
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