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The world economy is entering a phase where current high consumer price inflation will be accompanied by relatively fast rising interest rates and lower economic growth, in an environment still plagued by the COVID-19 pandemic, albeit less severe. This is not a favourable outlook for countries with already high unemployment rates such as South Africa, and also not for countries where recessions might occur (due to high interest rates).
The International Monetary Fund (IMF) in April reduced their January world economic growth forecast for 2022 from 4.4% to 3.6%. Their estimate for 2023 is also 3.6% and for 2024 it is 3.4%. This downgrade can be ascribed to a few factors, namely the negative impact of the war between Russia and the Ukraine, China’s severe lockdowns due to its zero-COVID policy, faster and more severe interest rate increases and fiscal policy measures to stabilise and reduce government debt.
The IMF expects global consumer price inflation (CPI) to average 7.4% in 2022, much higher than the 4.7% of 2021 - and estimates a return to pre-pandemic levels only by 2025. Inflation continued to surprise to the upside in April across the board mainly due to external factors, but in some countries domestic issues are also starting to add pressure to CPI.
Some of the factors causing higher than expected CPI are rising food and energy prices (due to oil, gas and food supply shortages emanating from among others Russia's invasion of Ukraine in an environment of strong global demand); ongoing supply-chain constraints (due to among others the zero-COVID policy in China); strong pent-up demand (after-effects of lockdowns); and the start of a wage-price spiral in some countries (due to tight labour markets).
Consequently, an increasing number of central banks are tightening monetary policy by for instance raising interest rates at a faster and more severe (50 basis points instead of 25) pace than originally intended. These actions increased “stagflation talk” in especially the United States as fears of a recession in a high inflationary environment grows.
In the US, the Fed is expected to raise rates by 50 basis points in both June and July, while the European Central Bank stated that net purchases of bonds will end in Q3 2022, whereafter interest rate increases will occur at a gradual pace. However, Japan is at this stage more concerned about weaker growth than inflation and tighter monetary policy is not expected (to the same degree as other countries).
In South Africa, the South African Reserve Bank raised the repo rate by 50 basis points – as expected. This more severe rate hike (previous three increases in November, January and March were 25 basis points each) is intended to reduce the increase in second-round inflation. Such lower second-round inflation includes a smaller pass-through from high fuel prices to a wide range of retail prices, lower inflation expectations and lower wage demands. If left unattended, second-round inflation factors may all contribute to much higher inflation and interest rates.
Multivest Economic Division