For decades the global economy has enjoyed low inflation and solid growth, until now.
After a long period, starting in 2021, of stubbornly high inflation, and efforts to bring it down, we now find ourselves on the brink of recession — and 1970s-style stagflation has become a very real threat.
In South Africa, inflation seems to have peaked, slowly retreating from the 13-year high recorded in July. This week’s consumer inflation print seemingly confirmed it, with 0.1 percentage point shaved off the headline number between August and September.
But, considering the country’s lacklustre growth, we are not out of the woods yet.
Earlier this month, the International Monetary Fund (IMF) confirmed what many had already been feeling: “The worst is yet to come.”
In its World Economic Outlook, the IMF forecast that global growth would slow down to 2.7% in 2023, 0.2 percentage point lower than projected in July, with a 25% probability that it could fall below 2%.
More than a third of the global economy will contract this year or next, the IMF said, while the three largest economies — the United States, the European Union and China — will continue to stall.
The IMF’s prediction comes as a number of economies grapple with high inflation, which has stuck around for far longer than central bankers thought it would a year ago. Many, including the Federal Reserve in the US, have made eleventh-hour interventions to rein in inflation, risking growth.
Low growth and high inflation are a heady combination.
The last time inflation got out of control was in the 1970s during the global oil crisis, when the oil price quadrupled. The spike in oil prices, as well as a wage-price spiral in the US and Europe, resulted in runaway inflation that took years to temper.
More recently, in 2014, South Africa faced a stagflation trap, when the country’s economy shrank by 0.6% in the first quarter and inflation hit 6.6% for the month of May. Over a decade of stagnant growth has made South Africa vulnerable to stagflation, especially in the wake of global economic shocks.
In its October Monetary Policy Review, the South African Reserve Bank weighed the risk of worsening stagflation, noting that there is the chance that the outlook could deteriorate further.
“One such risk would be central banks not doing enough to increase the credibility of their
inflation targets and thereby prevent inflation expectations from drifting higher,” the review said.
“Stagflation could further deepen if disruptions to energy supplies persist, keeping oil and other energy-related prices elevated for longer even in an environment of slowing
energy demand. Overall, failure to bring inflation under control in a reasonable time frame would jeopardise global growth over the medium to long term.”
Fairly recently, oil prices had started to fall, as recession fears beared down on commodity markets. Lower oil prices have been the reason for cooling inflation.
But crude prices recently did a U-turn after oil cartel Opec+ announced plans to curb production, increasing the likelihood of inflation sticking around for longer.
The Opec+ decision also threatens global growth, with the International Energy Agency warning that higher oil prices “may prove the tipping point for a global economy already on the brink of recession”.
According to Investec chief economist Annabel Bishop, inflation now looks to average 6.8% in 2022. In September, the Reserve Bank’s monetary policy committee kept its headline inflation forecast for this year unchanged at 6.5%.
The Reserve Bank forecast that core inflation would be 4.5% in September. But, according to the September print, core inflation rose to 4.7% year-on-year, from 4.4% year-on-year, indicating that inflation pressures have become more broad based.
These underlying price pressures, as well as the rand’s current weakness, means South Africa has not yet conquered inflation, Bureau for Economic Research chief economist Hugo Pienaar said.
“Core is still accelerating. So what is bringing down the headline level is the fact that oil prices and petrol prices are coming down. But there is actually still a build up of the underlying, lagged effects that still need to filter through the system. So I think we are certainly not out of the woods yet.”
Adding to South Africa’s stagflation risk is the country’s high level of unemployment, as well as the fact that GDP contracted by 0.7% in the second quarter of 2022. The IMF lowered South Africa’s growth forecast to 2.1% from 2.3% previously. The country’s country is now expected to grow by a meagre 1.1% in 2023 from 1.4% previously.
“South Africa has an undesirable combination of precarious growth and higher inflation, though we are not as high as elsewhere in the world,” Pienaar said.
