South Africa almost twice as likely to see another recession as in January

The chances of South Africa heading into a recession have almost doubled since January, due to the prolonged Russian war in Ukraine that ushered in a new era of volatility.

The beginning of the year saw the global economy rebounding to new highs, equity markets soaring and consumer spending recovering.

Higher inflation was initially considered a short-term hiccup. But then the outlook for the global economy made a drastic turn in March 2022, with soaring commodity prices dramatically weakening the global inflation outlook and affecting consumer confidence negatively, turning the markets more volatile.

“The risk of a recession has almost doubled since the start of the year if the war does not end soon,” says Maarten Ackerman, chief economist at Citadel. The Citadel Recession Scorecard, which examines 10 economic fundamentals, placed the likelihood of a recession at around 25% in January, but due to geopolitical developments, it has jumped to over 40%.

When finance minister Enoch Godongwana delivered his maiden budget speech in February, he did not know that Russia would invade Ukraine the very next day, immediately changing the world’s and South Africa’s economic outlook for 2022 and beyond.

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War created some economic challenges for SA

Ackerman says despite the rebound in economic growth since the Covid-19 recession, more time and growth are necessary to get the economy back to pre-pandemic levels. Population growth is also not stagnating along with the economy, creating the additional challenge of record unemployment.

“The war in Ukraine created new economic challenges for South Africans, such as increasing essential commodity prices for fuel, fertilizer, and a combination of agricultural products that will hurt consumer pockets even more. Given these challenges, economic growth is expected to remain around only 2% over the next few years.”

In 2021, the economy experienced several tailwinds, with mining having an exceptional year growing by almost 12%, while agriculture grew by around 8%. Mining and agriculture helped to underpin economic growth and better-than-expected tax collection that supported a reduction in the budget deficit, Ackerman says.

However, now the agricultural sector must prepare for a tougher time into 2023, with higher oil, gas, and fertiliser costs and export growth will also be affected as the global economy wanes on the back of war, high inflation and monetary tightening, he says.

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Expectations for the rand and trade surplus

Ackerman says he expects the rand to remain under pressure as the tailwinds from last year’s positive trade balance start to fade. “Another headwind for the trade balance is the price of oil, our biggest import item, which has jumped on average from $50 per barrel last year to over $110 per barrel this year.”

The trade surplus is now expected to turn back to a deficit in the next year, which is bad news for the local currency.

But Ackerman says it is not only bad news.

“Despite these trends, South Africa can benefit from exporting some of the sanctioned commodities that Russia used to export but unfortunately, the true benefit depends on the efficiency (or lack thereof) of the local logistical infrastructure.” 

Local infrastructure is taking strain with the increased export load.

”To meet global demand for our commodities, we need functioning railroads and harbours. We also took a devastating knock recently from the flooding in KwaZulu-Natal where one of our biggest harbours is situated.”

Ackerman says our lack of infrastructure maintenance and building is reflected in the ailing construction sector, which declined by a further 2% last year.

“South Africa is unlikely to see the growth it needs in the next two to three years. Inflation is on the high end of the South African Reserve Bank’s (Sarb’s) target range of 6%. Local inflation could exceed the target if we experience a supply shock in higher food and oil prices.”

However, the Sarb cannot hike interest rates purely to combat sticky inflation, as the country does not have a lot of demand-driven inflation and therefore excessive rate hikes would hurt the consumer and ultimately the economy, he says.

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Global food and commodity shortages

It is not only South Africa that will suffer, Ackerman points out. “With the implementation of sanctions, global food and commodity shortages will have a major impact on prices and result in higher and more sticky inflation.

“China’s zero-Covid policy and widespread lockdowns are also causing pressure on global supply chains, while Europe’s supply chain issues are reflected in Germany’s Producer Price Index (PPI) which is at its highest level in 73 years.”

The European Central Bank believes Europe’s challenge is supply inflation and is taking a cautious approach, indicating that an imminent rate hike is unlikely. On the other side of the Atlantic, the US Federal Reserve is taking a more hawkish view on inflation, hiking interest rates and looking at significantly tightening monetary policy to curb record-high inflation.

Ackerman says fortunately US interest rates are coming off a very low base and will take some time before reaching 2% to 3% levels, which hurts consumers and companies.

“We are fortunate to still have healthy gross domestic product (GDP) growth margins in developed economies for now.”

The question remains what the likelihood is of another global recession in the next 12 months. Fortunately, Ackerman says, we believe the global economy is not there yet and that global growth is high enough to ensure that companies remain quite profitable.

“Our view is that a recession is unlikely this year, but risks are mounting and as the storm clouds keep building, we will continue to de-risk and protect our portfolios.”