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GLOBAL ECONOMY ANALYSIS

Global inflation dynamics call for cautious optimism that 2023 could be a better year

Global inflation dynamics call for cautious optimism that 2023 could be a better year
A cashier counts banknotes at the check out counter of a store in the Hatfield Plaza shopping centre in Pretoria. (Photo: Waldo Swiegers / Bloomberg via Getty Images)

There’s enough promising news on the inflation front to be cautiously optimistic. Far fewer countries are still experiencing accelerating inflation, according to the World Bank, and the dollar may loosen its hold on global forex markets. However, much depends on the impact of China’s reopening on global price pressures.

The good news on the inflation front is that it is expected to ease worldwide from here, but the not-so-good news is that it may well remain higher than its pre-pandemic average for longer.

This week the World Bank released its World Economic Outlook, which painted a gloomy picture of the global growth outlook this year. However, it did provide some cheer in its forecast for global inflation, which is expected to fall more than two percentage points to 5.2% this year from 7.6% in 2022.

The latest US inflation data, much anticipated by the market because they would set the tone for the year, eased to 6.5% in December last year. 

Prices actually came down on a month-on-month basis, led by a decline in energy prices for the first time in 30 months. Core inflation, which excludes energy and food prices and signals broader price pressures in the economy, was also a welcome surprise, easing to 5.7% on a year ago. 

Another positive from a global perspective is that the share of countries experiencing rising inflation is trending downwards. 

According to World Bank data, more than 90% of the countries were experiencing accelerating inflation in March 2022, and that proportion fell to just less than a third (31.6%) of the countries in November — a significant improvement in the global inflation landscape.

Emerging markets

Emerging markets didn’t get to experience the rewards of taking early action in the fight against inflation because the higher dollar raised the cost of imported goods and put upward pressure on domestic inflation. 

This year, however, they could see relief on the currency front, with the dollar expected to continue retreating from its heady peak in September last year. 

The Dollar Index, a useful measure of the greenback’s level across a range of international currencies, has since depreciated almost 10% to 103 points from 114 in late September. 

At home, the dollar-rand exchange rate had also moved in favour of the rand, trading at below R17 to the dollar after weakening to almost R18.50 in mid-October. Sustaining a level below R19 is significant in the face of recent political shenanigans and the intensive load shedding that has dominated investor attention over the past year, with no end in sight.

SA outlook

The outlook for inflation in South Africa is mixed, with some economists less optimistic about an improvement in the consumer inflation numbers, and others more so.

BNP Paribas South Africa economist Jeff Schultz foresees inflation remaining sticky for longer. He attributes this to “the lagged effects of higher wages and rebounding service prices”, which, he says, will eat into disposable incomes, forcing more action out of the SA Reserve Bank (Sarb).

As a result, he has raised his terminal policy rate, the rate at which the central bank will halt its rate-hiking cycle, by 25 basis points to 7.75% versus the current 7% — a further 75 basis points to go. He only expects the Sarb to cut rates from the second quarter of the year.

Absa economist Peter Worthington is more optimistic, but acknowledges that a high degree of uncertainty about the interest outlook prevails. He has reduced his forecast for the next rate increase to 25 basis points versus 50 bps, the reason being that there have been several positive developments since the Sarb’s November meeting.

These include recent below-expectation inflation numbers, a stable exchange rate, lower fuel prices and moderating food prices — all developments that suggest that South Africa will, indeed, benefit from easing inflation this year. 

Food prices moderate

inflation food

(Photo: Waldo Swiegers / Bloomberg via Getty Images)

Most encouraging of these trends is the moderating food prices, which are crucial to any inflation outlook.

Worthington points out that final manufactured food products have experienced four consecutive months of declines. According to the SA Futures Exchange, maize prices came off significantly in December, and similarly, wheat prices fell sharply in mid-November. 

Globally, food prices have also eased, he notes, with the FAO food price index experiencing its ninth consecutive decline in December when it fell materially. 

Thus, with all going well, South Africa could fall into the camp where inflation continues trending downward this year.

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The outlook for inflation is not nearly as sanguine for Nigeria and Turkey, where consumer price inflation still exceeds 20%, and downward pressure on their currencies will likely keep inflation at much higher levels than elsewhere on the continent.

Oxford Economics Africa notes that the reasons their currencies lost so much ground in 2022 were that the government had maintained artificially strong exchange rates for years, and the strong dollar added to the downward pressure on the Egyptian pound and Nigerian naira. 

It says the chickens are now coming home to roost because of external pressures, and the need to appease the IMF means central banks need to let their currencies slide further. Government will also need to reduce subsidies, which will also have inflationary implications.

Their bottom line for the research team: “While most countries across the continent will enjoy the disinflationary pressures associated with lower commodity prices this year, Nigeria and Egypt look set to miss out on these gains.”

China impact

Globally, much will depend on the impact of China’s reopening on global inflation, with it conceivable that a successful reopening would put upward pressure on commodity prices again. 

Longer term, however, its growing contribution to the world could prove disinflationary — a best-case scenario for central banks determined to bring inflation down to pre-pandemic levels.

A worst-case scenario that would materially change the relatively benign picture explored here is that inflation remains stickier than expected in the advanced countries, and developed world central banks continue raising interest rates more than anticipated.

The outcome here would be an appreciating dollar again, which would export inflationary forces to emerging markets again and weigh on their economic prospects as it did in 2022.

After three years of relentless economic headwinds and inflation posing the greatest threat to the medium- to long-term global economic equilibrium, hopefully the good news wins out this year. BM/DM

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