2022 saw a massive appreciation of the US dollar against all other currencies and the highest inflation since the early 1980s. These trends, which so dominated the economic narrative, have now reversed. The index of the value of the dollar has retreated almost 10% from its 2022 peak at the end of September. In November, US inflation had fallen to 7.1% from a peak of 9.1% in June. The latest inflation print for Europe is 10.1% after peaking at 10.6% in October.
The supply disruptions of the past year are coming to an end and the global economy, with the notable exception of China, is entering a new post-pandemic normality. Following widespread public protests against its policy of controlling the pandemic using draconian quarantines, China has now adopted the strategy, which has proved effective elsewhere, of relying on vaccination and allowing herd immunity to develop. The transition to the new strategy has seen a surge in infections, which have caused China’s economic growth, already damaged by a weak housing market, to slow even further. In 2022 China’s economic growth was only 3.0%. However, there are signs that China is now behind the worst of the pandemic and conditions there will also normalise in 2023.
While inflation may have peaked, it remains elevated and is substantially higher than prevailing interest rates. The rhetoric from central banks remains hawkish. They say further interest rate hikes will be necessary to bring inflation under control and rates will remain high for longer than the markets currently expect. The markets are more sanguine because they are pricing in a significant slowdown and possibly a recession in 2023. A recession is what is required to bring inflation under control and that is what many market participants expect. However, present times are very unusual and there is a wide range of expectations regarding the prospects for 2023. The simple truth is no one knows.
South Africa is also entering a new normality. One sector which has been slow to recover from the pandemic is tourism and hospitality, which is an important source of employment. Last year, Europe grew much faster than expected due to a record summer tourism season. South Africa is now benefiting similarly. However, in an environment of a global slowdown it will be difficult for South Africa to escape from its current stagnation in 2023.
The implosion of Eskom is seriously damaging the South African economy. During the past quarter, loadshedding reached record levels. It seems that, as a consequence of years of mismanagement and corruption, the system is decaying faster than it can be fixed. The resignation of Andre de Ruyter in response to intense political pressure is concerning. The market had confidence in De Ruyter, believing that he was doing a better job than his predecessors and that any replacement is unlikely to do better. However, some clouds have a silver lining. The solution to the electricity availability problem lies in a significant investment by the private sector to get off the grid. This investment should have a positive impact on the economy over the next two years.
South African consumer price inflation remains elevated. In December it was 7.2%, marginally lower than the peak of 7.8% in July. Food inflation at 12.5% is the problem. Food has a disproportionate impact on wage inflation and can trigger a wage price spiral. At the meeting of the SA Reserve Bank’s Monetary Policy Committee on 24 November the repo rate was increased from 6.25% to 7%. The Committee indicated that it was concerned about excessive wage inflation and that further rate hikes were probable.