The chances of South Africa entering a recession have nearly doubled since January, due to the protracted Russian war in Ukraine which ushered in a new era of volatility. The start of the year saw the global economy rebound to new highs, equity markets rallied and consumer spending picks up. Rising inflation was initially considered a short-term hiccup. But then the outlook for the global economy took a drastic turn in March 2022, with soaring commodity prices significantly weakening the global inflation outlook and negatively impacting consumer confidence, making markets more volatile. “The risk of a recession is almost …
The chances of South Africa entering a recession have nearly doubled since January, due to the protracted Russian war in Ukraine which ushered in a new era of volatility.
The start of the year saw the global economy rebound to new highs, equity markets rallied and consumer spending picks up.
Rising inflation was initially considered a short-term hiccup. But then the outlook for the global economy took a drastic turn in March 2022, with soaring commodity prices significantly weakening the global inflation outlook and negatively impacting consumer confidence, making markets more volatile.
“The risk of a recession has nearly doubled since the beginning of the year if the war doesn’t end soon,” said Maarten Ackerman, chief economist at Citadel. The Citadel Recession Scorecard, which examines 10 economic fundamentals, placed the probability of a recession at around 25% in January, but due to geopolitical developments, it jumped to over 40%.
When Finance Minister Enoch Godongwana delivered his inaugural budget speech in February, he did not know that Russia would invade Ukraine the next day, immediately changing the economic outlook for the world and South Africa for 2022 and beyond.
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The war created some economic challenges for SA
Ackerman says that despite the rebound in economic growth from the Covid-19 recession, more time and growth is needed to bring the economy back to pre-pandemic levels. Population growth is also not stagnating along with the economy, creating the added challenge of record unemployment.
“The war in Ukraine has created new economic challenges for South Africans, such as rising prices of essential raw materials for fuel, fertilizers and a combination of agricultural products that will hurt consumers’ pockets even more. Given these challenges, economic growth is expected to remain around 2% over the next few years. “
In 2021, the economy experienced several favorable winds, with mining having a bumper year growing nearly 12%, while agriculture grew about 8%. Mining and agriculture helped support economic growth and better-than-expected tax collection that supported a reduction in the budget deficit, Ackerman says.
However, now the agricultural sector must prepare for a more difficult period in 2023, as oil, gas and fertilizer costs rise and export growth will also be affected by the decline of the global economy in the wake of war, inflation. high and monetary tightening, he says.
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Expectations for the edge and trade surplus
Ackerman says he expects the rand to remain under pressure as the favorable winds from last year’s positive trade balance begin to fade. “Another barrier to the trade balance is the price of oil, our main import, which jumped on average from $ 50 a barrel last year to over $ 110 a barrel this year.”
The trade surplus is now expected to revert to a deficit in the next year, which is bad news for the local currency.
But Ackerman says it’s not all bad news.
“Despite these trends, South Africa can benefit from exporting some of the sanctioned goods Russia was exporting, but unfortunately the real benefit depends on the efficiency (or lack thereof) of the local logistics infrastructure.”
Local infrastructure is under pressure as the export load increases.
“To meet the global demand for our goods, we need functioning railways and ports. We also recently suffered a devastating blow from the flooding in KwaZulu-Natal, where one of our largest ports is located. “
Ackerman says our lack of infrastructure maintenance and construction is reflected in the struggling construction sector, which fell a further 2% last year.
“South Africa is unlikely to see the growth it needs in the next two or three years. Inflation is at the high end of the South African Reserve Bank (Sarb) 6% target range. Local inflation could exceed the target if we were to experience a supply shock due to rising food and oil prices. “
However, the Sarb cannot raise interest rates solely to combat sticky inflation, as the country doesn’t have much demand-driven inflation and therefore excessive rate hikes would harm the consumer and ultimately the economy, he says.
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Global shortage of food and raw materials
It’s not just South Africa that is suffering, Ackerman points out. “With the implementation of the sanctions, the global shortage of food and raw materials will have a major impact on prices and will result in higher and stickier inflation.
“China’s zero-Covid policy and widespread blockages are also causing pressure on global supply chains, while supply chain problems in Europe are reflected in Germany’s producer price index (PPI), which is at the highest level. of the last 73 years “.
The European Central Bank believes Europe’s challenge is supply inflation and is taking a cautious approach, indicating that an imminent rate hike is unlikely. Across the Atlantic, the US Federal Reserve is taking a more aggressive view of inflation, raising interest rates and seeing a significant tightening of monetary policy to curb record inflation.
Ackerman says that fortunately US interest rates are falling from a very low base and it will take some time to reach levels of 2% to 3%, which hurts consumers and businesses.
“We are fortunate to still have room for gross domestic product (GDP) growth in developed economies for now.”
The question remains as to what the likelihood of another global recession is in the next 12 months. Fortunately, Ackerman says, we believe the global economy is not here yet and that global growth is high enough to ensure companies remain quite profitable.
“Our view is that a recession is unlikely this year, but the risks are increasing and as the storm clouds continue to grow, we will continue to reduce the risks and protect our portfolios.”
