Remarkably resilient. This is how global economic activity can be described in the face of many headwinds. Rising interest rates amidst stubborn inflation, heightened geopolitical tension, tightening fiscal policy, unpredictable effects of China dropping its COVID restrictions, stress in the USA banking sector, and cracks in residential property markets are but some of these headwinds. All the while, the world economy keeps on lurching from one shock to the next.
Therefore, it is puzzling to central banks and analysts alike that labour markets remain remarkably tight. Low unemployment rates in the developed markets and rising wages keep central banks awake to demand side inflation risks. Monetary policymakers have been diligently warning that their anti-inflationary campaign is not over. This means that more interest rate hikes are likely in some quarters, even though the Federal Reserve and others, such as the Reserve Bank of Australia, have paused.
Nevertheless, the end of the tightening campaign is in sight and will be reached in the coming reporting period. The Monetary Policy Committees of the USA Federal Reserve (+525bp), the South African Reserve Bank (+475bp), and the Bank of Namibia (+400bp) have increased rates quite sharply, whereas the Bank of Botswana (+151bp), in comparison, hardly moved.
This is predicated on the view that inflation has peaked. In the USA, consumer inflation reached 3.2% in July 2023, having peaked at 9.1% in June 2022. In the RSA, the decline had been less pronounced, reaching 5.4% in June 2023 after peaking at 7.8% in July 2022. Similarly, in Namibia, it declined from a peak of 7.3% in August 2022 to 4.5% in July 2023. Botswana experienced a bigger inflation shock in the wake of the energy crisis, its consumer inflation rate rising to 14.6% in August 2022. Since then, it plummeted to 1.5% in July 2023. As these declines continue in line with expectations, significant real interest rates are being reached.
The full effect of the above-mentioned headwinds, and especially that of tightening policy, is still to be felt in the real economy. Even though, “remarkably resilient" is how we describe the current environment, forward-looking indicators are signifying trouble ahead.
While actual, real GDP growth rates are holding up quite well, official leading indicators are deeply negative. In the USA and RSA, these are comparable to previous major slowdowns in conjunction with financial crises.
Furthermore, this mixed picture is also evident in the capital and money markets. Global financial conditions are tight, showing up in contracting money supply growth numbers in the face of firm demand for credit, whereas in Namibia, Botswana and South Africa, the reverse is true. In Namibia, the demand for credit remains remarkably weak, barely growing, while money supply is rising with double-digit growth rates. This makes for a liquid environment and downward pressure on interest rates, while uncertainty is high about how long this will last.
Similarly, in Botswana, growth in the money supply tended to exceed credit growth lately. However, this underwent a remarkable reversal late in the reporting period. Growth in loans and advances accelerated to nearly 11% year-on-year before slowing down again somewhat.
Consumers are still wrestling with the increased cost of living that is evident in transport, food and housing, amounting to roughly two-thirds of the expenses that households face. And it seems that high interest rates are starting to bite, especially in Namibia and South Africa, where it is negatively affecting consumers' ability and willingness to take up credit.
The volatility and cyclicality of the Namibian and Botswana economies have recently, again, come to the fore. For these, small, open economies, the importance of the mining and commodity cycles and its related industries cannot be overstated. Recently, activity in the mining sector has picked up significantly, which augurs well for headline GDP growth over the next several years, as long as the expected global economic down cycle is not too severe.
Floris Bergh
Chief Economist
Capricorn Asset Management
