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Wars, rising inflation, higher interest rates, lower economic growth – possible recession in 2023


  • March was, as expected, characterised by central banks increasing interest rates to contain runaway consumer price inflation (CPI), partly fueled by additional supply chain disruptions caused by the conflicts in the Ukraine and Middle East. An eye should be kept on the pace and magnitude of interest rate increases, as it will determine whether another recession is awaiting the world economy.

  • CPI in lots of countries advanced to almost record heights in February/March 2022. US CPI increased to 7.9% year on year (y/y) in February – the highest in more than 40 years. In the UK it increased to 6.2% in February from 5.5% in January - the highest since 1992. Euro Area CPI rocketed to 7.5% in March from 5.9% in February – an all-time high.

  • At this stage World CPI is expected to peak in Q3 2022 (above 7%) and average 6.4% for 2022 (more than double the 3.4% of 2021). Average US and UK CPI for 2022 is expected above 6%, that of the Euro Area at 5.5%, and of emerging markets close to 8%. Russia’s CPI is expected to average around 24% in 2022.

  • In reaction to consistently increasing CPI, central banks acted - with the Federal Reserve increasing interest rates by 25 basis points. The Fed’s expectation of PCE Core CPI for 2022 was revised upward to 4.1% from 2.7% and to 2.6% from 2.3% for 2023. Consequently, the Federal Reserve’s median interest rate forecast increased from 0.9% to almost 2%, pointing to interest rate increases at every meeting, and some increases may be 50 basis points.

  • The European Central Bank (ECB) “surprised” by announcing a faster exit from bond purchases – by Q3 2022. The ECB however also mentioned interest rates would only increase after the end of net purchases under the Asset Purchase Programme - and will be gradual. The ECB revised its economic growth projection for 2022 from 4.2% to 3.7% and highlighted it could be as low as 2.5% in a more adverse scenario. The Bank of England raised interest rates three times since December 2021 and is expected to raise rates by at least another 75 basis points.

  • Several culminating factors are driving World CPI. CPI was originally forced upward by supply chain disruptions emanating from COVID-19 and lockdowns, and strong demand accruing from fiscal and monetary stimulus – causing demand to exceed supply. High commodity prices and droughts eventually found its way into consumer prices at a time when Russia invaded the Ukraine. This fueled oil prices further, while putting huge pressure on food prices – due to Russia and the Ukraine’s large production of some crops and fertilizers.

  • In South Africa CPI is expected to peak close to 7% and average 5.5% in 2022, with fuel, food and municipal rates the big drivers. The South African Reserve Bank raised interest rates by another 25 basis points in March (75 basis points since November 2021), while economic growth is expected to average 2% in 2022. The minister of finance announced measures to reduce the impact of high fuel price increases on consumers (for instance R1.50/l will be “subsidised” by government until May). This is likely to reduce the number of interest rate increases this year – to three more rate increases of 25 basis points each instead of four.

Multivest Economic Division

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