Current International Economic Context

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8 September 2022

IMF Overview (July 2022)

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Growth: Global Growth Projections for 2022 fell from 3,6% in April 2022 to 3,2% in July 2022, US revised downwards by 1,4% and China by 1,1% and by 0,2% for EU (Germany 0,9%)

Inflation: Global inflation projections for 2022 have been revised up from April to July 2022, by almost 1% all round to 6,6% for rich economies and 9,5% for emerging and developing economies

The following downside risks have been identified in the IMF report:

• The war in Ukraine could lead to a sudden stop of European gas imports from Russia;
• Inflation could be harder to bring down than anticipated either if labour markets are tighter than expected or inflation expectations unanchor;
• Tighter global financial conditions could induce debt distress in emerging market and developing economies;
• Renewed COVID-19 outbreaks and lockdowns as well as a further escalation of the property sector crisis might further suppress Chinese growth; and
• Geopolitical fragmentation could impede global trade and cooperation.

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Impact of the Russia-Ukraine related Energy Crisis

• Energy crisis and related economic crisis brought on by the Russia-Ukraine conflict
• Much of the western world has sanctioned Russia for its invasion of Ukraine
• Russia has responded by cutting off gas supplies to Europe
• This will have short-run and long-run economic effects for the world and for South Africa

Short-Run Effects of the Energy Crisis

• Stagflation (higher prices and falling output)
• Electricity prices are rising sharply pushing up inflation
• Output is under pressure due to supply effects e.g. production of steel, food, paper, chemicals, all under pressure as they use gas
• Interest rates will rise throughout the world
• Many countries will face more intense fiscal pressures as interest rate are rising, growth will fall, and resources will be needed to assist citizens with the cost of living crisis

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Longer-Run effects of the Energy Crisis

• Despite ongoing disinformation that fossil fuels are back in vogue and global warning is less of a threat than European Winters, the crisis is likely to accelerate the energy transition in the longer-run in two ways:
• move away from Russian gas to find other sources in order to restore energy security,
• increased investment in wind and solar as they are locally produced
• But there is uncertainty about the long run effects as energy transition plans have been destabilised by the unexpected cutting off of Russian gas
• This uncertainty is likely to destabilise COP27 as there will be allegations of European hypocrisy as it de-mothballs coal plants temporarily, and there will be voices arguing for a slow down and recalibration of energy transition
• It is likely that these voices will be in a (significant) minority, as the dominant view will be to accelerate the energy transition in response to the Russia-Ukraine crisis

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What about South African economy?

• The slowing of European and other economics will be bad for SA exports which will impact negatively on our growth and employment
• Rising SA interest rates are necessary to control inflation and avoid a very sharp deprecation of the Rand
• SA’s programme to bring rising national debt under control will be made more difficult as interest rates will be rising and policies to mitigate the rising cost of living are implemented – such as temporary reductions in the fuel levy and discussions on social security support
• If further tax increases (VAT and personal income tax) are required to fund SA’s fiscal position this may also have a negative impact on the demand side – negatively impacting consumption, investment and job creation

The impact on South Africa’s global stance

• SA will have to prepare for COP27 that may be destabilized as it taking place in the context of a European energy crisis
• SA’s needs to articulate the position that we are implementing urgent reforms to our energy sector in order to overcome loadshedding as rapidly as possible and that this programme is compatible with our decarbonation commitments – as the lowest cost sources of new energy generation are wind and solar power which will give Eskom the space to maintain the core of its baseload systems
• The implementation of the COP26 funding offer will assist SA to accelerate the country’s just energy transition programme – including electricity, green hydrogen and EV elements - more effectively than if such finance was not available.
• We should also argue that the global decarbonisation programme should not be derailed by the current energy crisis (the recent melting of glaciers and floods in Pakistan are just one recent example of why), but that it should be a lesson to all countries to be more sensitive to the specific problems and circumstances that need to be overcome in advancing this energy transition

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Will there be a global recession?

• Estimates of the probability of recession have also increased.
• The probability of a recession starting in Group of Seven economies is estimated to be nearly 15 percent four times its usual level—and nearer one in four in Germany.
• For the United States, some indicators suggest that a technical recession (defined as two consecutive quarters of negative growth) may already have started.

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Will there be an emerging market crisis?

• As advanced economy central banks raise interest rates to fight inflation, financial conditions worldwide will continue to tighten.
• The resulting increase in borrowing costs will, without correspondingly tighter domestic monetary policies, put pressure on international reserves and cause depreciation versus the dollar, inducing balance sheet valuation losses among economies with dollar-denominated net liabilities.
• Such challenges will come at a time when government financial positions in many countries are already stretched, implying less room for fiscal policy support, with 60 percent of low income countries in or at high risk of government debt distress
• Widespread capital flight from emerging market and developing economies could amplify this risk.
• Emerging market bond spreads have already been rising.