Global monetary policy conditions continue tightening
Following an unprecedented period of ultra-lose financial conditions, elevated supply chain disruptions and swelling geopolitical tensions, global inflation has tested historical highs. This has prompted monetary policy authorities to react more aggressively than initially expected, to rein in run-away inflation expectations.
In the latest round of decisions, the Bank of England lifted rates by 50bps, the European Central Bank by 75bps, and the US Federal Reserve (Fed) also by 75bps for the third consecutive time, which brought rates to the highest since 2008. Furthermore, the Fed is expected to deliver another 75bps hike at their next meeting. As a result, economic activity continues to slow and while not our base case, global recession fears have grown.
Locally, GDP shrunk by 0.7% quarter-on-quarter in 2Q22, suppressed by severe floods in KwaZulu Natal; elevated input and transportation costs; global trade disruptions as well as more intense bouts of load-shedding. We also saw intense labour action in 2Q22, which disrupted operations, particularly in the mining and manufacturing sectors. This contraction pushed current GDP back below the pre-pandemic 4Q19 level, corroborating our view of a fragile recovery. Nevertheless, we expect some recovery in the 2H22 and growth should average 1.9% this year.
Despite the decline in economic activity in 2Q22, the latest Quarterly Labour Force Survey data showed that the economy
created approximately 648 000 jobs between 1Q22 and 2Q22. The "unexpected" employment gains in 2Q22 align with sentiment indicators that have consistently shown positive hiring intentions across many sectors. The recent energy market reforms, combined with the private sector's interest to invest in ports, should underpin employment growth over the medium- to long-term. Government is also boosting infrastructure investment and strengthening the balance sheets of SOCs that are critical for economic recovery - this should improve the business operating environment, lift business confidence and support employment growth. However, the prevailing uncertainty from geopolitical tensions and fears of a material global economic slowdown pose a downside risk to the near-term employment outlook.
While many sectors have concluded their wage negotiations, the public sector is yet to reach an agreement. The February Budget pencilled in just1.8% for civil wage increase over the medium-term, which in the context of elevated living costs, recent union demands and strike action, had severe upside risk. The government has since revised up their wage growth projections to just over 3%, with
upside risk intact. Overall, wage agreements across the economy are expected to average between 5.8% and 6.7% this year, slightly below our annual headline inflation forecast.
We expect inflation to average 6.9% this year, largely driven by elevated food and fuel prices. Fortunately, global food and oil prices have declined from post- pandemic and post Russia-Ukraine conflict highs, and this should filter through to domestic prices with some lag. We are also pleased with the easing supply chain disruptions and rapidly declining shipping costs. Risks to this view include the volatility in international oil prices, which are also generally supported by structural supply constraints. The China zero-Covid policy could also delay the easing supply chain disruption trend. We expect the South African Reserve Bank to continue the hiking cycle, with the repo rate peaking at 7.25% by 1Q23. Rates will likely remain at these levels through 2023, and only start descending in the early part of 2024. Ultimately, much will depend on global developments, particularly those related to our trade partners.
