Energy issues all around the world - October 2021

October was dominated by energy issues all around the world – and these issues are likely to persist, affecting future consumer price inflation (CPI), interest rates and world economic growth.

Various events in China are and will be causing a slowdown in the pace of economic growth. Real GDP in the third quarter grew only 4.9% from a year earlier, and was up only 0.2% from the second quarter – the second-lowest quarterly growth since 2010. Reasons for this are the shortage of electricity (16 of 31 provinces are experiencing electricity rationing) due to a lack of sufficient coal, and government policy preventing large increases in electricity prices (creating no incentive to curb demand); weakening of the massive property and construction sector following government restrictions on property developers (this sector is estimated to comprise 28% of GDP); continued disruptions of supply chains; and the negative impact of periodic regional outbreaks of COVID-19. The government intervened recently, and is in process of increasing the cap on price increases from 10% above the base to 20% above the base, while there will be no ceiling for high energy-using industries. This is likely to raise CPI, though, and may cause interest rates to increase.

India is also facing a coal shortage, while demand for electricity is rising faster than the ability of the market to supply coal. As such, India may be challenged by the same disruption to industrial activity that is happening in China. Should both India and China’s economic growth decelerate, it will have a substantial impact on world economic growth via lower exports to these countries.

The UK and Europe are facing power problems of their own. Its natural gas prices increased fourfold over the past six months. As gas accounts for 40% of UK electricity generation and comprises around 25% of electricity generation in Europe, the surge in prices fed through to wholesale electricity prices, which almost tripled since March. The sharp increase in natural gas prices can be attributed to a few factors, namely insufficient reserves when demand increased (due to a cold winter and hot summer); maintenance work at producers in the North Sea and Russia which affected supply; low wind speeds which affected generation via wind-power; while droughts limited hydropower generation. Higher energy costs will increase consumer price inflation in both the UK and Europe. Already in August, consumer energy inflation hit 15.4% in the euro area and 9.5% in the UK. Furthermore, the increase of 12% in the UK’s energy price cap in October will cause the energy bills of consumers who are on tariffs below the current cap to rise by up to 50%. The Bank of England expects CPI to increase by more than 4% compared to the target of 2%.

In the US, talks on CPI and bond purchase tapering still dictate market directions. CPI in September was up 5.4% from a year earlier (5.3% in August). Core CPI (ex food and energy) were up 4.0%, unchanged from August. The price of energy increased substantially, with the price of gasoline up 42.1% from a year earlier and the price of natural gas 20.6% higher. However, higher CPI is still regarded to be transitory and bond purchase tapering is expected in December. Interest rates are at this stage still expected to increase in 2023, following economic growth of only 2% in Q3, down from 6.7% in Q2.

South Africa’s Q4 economic growth will be hit by load shedding, following slower Q3 growth emanating from July’s lootings. CPI should have reached a peak of 5% in September and interest rates should remain unchanged in 2021. However, increasing oil prices (at $85 per barrel - demand exceeds supply as new investment in production falters due to a move away from fossil fuels) will continue to put upward pressure on CPI. Budget revenue is likely to see another overrun of around R100 billion in 2021. Expenditure, however, is also above target. The fiscal deficit should, however, be much lower than projected in the February budget, which should appease rating agencies, for now!

Multivest Economic Division