(Source: African Energy Chamber)
December 5, 2022/Cordros Report
The Year 2022 – A period that started with the optimism of consolidation of the post-COVID recovery, albeit slowly, but eventually went southwards with the multifaceted impact of the Russia-Ukraine conflict and tighter monetary conditions. Not only did the Russia-Ukraine conflict disrupt the relatively smooth functioning of the global economy, but it also made global central banks hasten switches to monetary policy tightening as inflationary pressures rose to levels not seen in decades. To put it in a proper context, we acknowledge that global inflation rates were on the rise before Russia invaded Ukraine on 24 February, reflecting the (1) post-pandemic supply chain disruptions, (2) shortages of chips and semi-conductors, and (3) increased demand that accompanied the reopening of world economies. However, just before the world economies started feeling the impact of the war, global PMI surveys reflected that the supply chain delays had started easing in the US, UK and Euro Area, implying that inflationary pressures may moderate by H2-22 amid the favourable base effects from the prior year.
However, the Russia-Ukraine conflict shattered the hopes of moderation as the conflict introduced new risks to the inflationary pressures, worsening the supply chain constraints. Moreover, food and energy prices also spiked, given the contribution of both countries to global supplies. Therefore, consumer prices spiralled across the developed and developing economies to the extent that some countries introduced export bans to limit price shocks in their respective domestic economies. Consequently, the preceding induced global central banks to aggressively tighten monetary policies faster than initially expected as inflationary pressures rose.
Given that the uncertainties concerning the global macroeconomic and financial environment are high striking a balance between avoiding a disorderly tightening of financial conditions and containing the potential threats will be critical as we head into 2023FY. With persistent and aggressive monetary policy tightening, the questions on the minds of investors have been centred around the probability of a ‘soft landing’. However, in our opinion, it will be difficult for major central banks globally to engineer this, especially given that inflation rates have significantly risen above the monetary authorities’ target, even as the impact of monetary policies lags behind inflation and output. Crucially, our call is for the US Fed to maintain its rate increases, albeit at a slower pace than implemented in 2022FY, until H1-23 and pause for the remainder of the year before cutting the key policy rate in 2024FY. Our prognosis is hinged on the Fed’s inflation-targeting strategy (adopted in August 2020), designed only to cut the Fed’s funds rate when actual inflation converges to the 2.0% target. Thus, as the central banks in advanced economies keep raising key policy rates, we expect growth to falter and turn negative in H1-23. Indeed, the IMF forecasts that 31 out of selected 72 economies will experience a contraction in real GDP lasting for at least two consecutive quarters at some point during 2022-2023, amounting to more than one-third of world GDP.
Away from that, the US dollar has appreciated significantly against other world currencies on account of the combined impact of (1) US Fed monetary policy tightening, (2) heightened global uncertainties, (3) the Russia-Ukraine conflict, and (4) country-specific conditions; for instance, fiscal risks in the United Kingdom. Moreover, the US dollar’s strength against other world currencies could linger into H1-23, given that the US policy rate is expected to remain elevated, and many advanced economies could fall into economic recession. Consequently, (1) higher global interest rates and (2) a strengthened US dollar implies that it will become more difficult for many emerging and frontier economies to raise money and refinance their external debts, increasing financial markets’ volatility. Notwithstanding, we believe the situation has created an opportunity for countries to embark on a conscious fiscal consolidation effort, as funding from alternative external sources (bilateral and multilateral) may not be enough to cover the outsized fiscal deficits, holding domestic debt issuances constant.
Overall, our outlook for the global economy is a slowdown compared with 2022E growth levels. On the one hand, we expect to see the impact of monetary policy tightening on global household demand and private investment conditions, weighing down the overall growth in 2023. Elsewhere, while inflationary pressures are likely to slow down compared to 2022E levels, given the favourable base effects, we expect prices to remain significantly above pre-pandemic levels, further pressuring consumer wallets and slowing household consumption. On the other hand, the slowdown in China primarily because of the lingering property sector woes and stifled domestic consumption will negatively impact other countries’ external sector conditions, given the roles played by China in global trade. Equally, the lingering Russia-Ukraine conflict is also expected to contribute to the expected global economy’s pervasive slowdown in 2023FY. On a balance of factors, the IMF expects global economic growth to slow to 2.7% y/y in 2023FY, down from an expected 3.2% y/y growth rate in 2022E.
Finally, the level of volatility in the crude oil market heightened in 2022 following an increased uncertainty about the interplay between supply and demand forces. Prices have generally fallen from the multi-year high reached in March, as global growth concerns and lockdowns in China influenced an underperformance in global demand. Amid the mire, supply recovered to pre-pandemic levels, underpinned by increased output from OPEC and its allies, and the US, coupled with the substantial releases of crude oil from strategic reserves. As a result, we expect oil demand to reach pre-pandemic levels in 2023FY, driven majorly by increased consumption from China. On supply, while we still expect growth in oil production, we anticipate a slower increase with the drag stemming from a fall in output from the OPEC alliance following the newly instituted production cuts and the impact of EU sanctions on Russia’s output. On a balance of factors, we forecast Brent crude oil price will average USD92.00/bbl. in 2023. We cite the slowdown in global growth and prolonged COVID-19 restrictions in China as potential risks to demand. On the flip side, we believe any disruption to current output poses key risks to supply.
