The past two years have taught us that year-ahead predictions in times of Covid-19 — with successive new variants of the coronavirus of unknown severity — is a futile exercise.
But, it’s the beginning of the year and we must at least map out what we know and what we do not know that will affect the economy and markets.
The biggest known fact is that in the US (and in other countries) inflation is no longer transitory. Consequently, the US Federal Reserve is on course to end its asset purchases faster, by the end of March 2022, and administer three interest rate hikes thereafter, one in each of the remaining three quarters of the year or until the economy chokes.
This is a regime change and departure from ultra-loose monetary policy of the past decade and will probably result in a strong US dollar and market correction, given record high asset prices and valuations.
The wild card for the global economy, financial markets and emerging markets is the economic effect of the Omicron variant and several Chinese developments. As far as Omicron is concerned, the prevailing view so far is that infections are high, but hospital admissions and deaths are low, thus the world is one step closer to normalcy.
Lockdown restrictions in the US, Europe and China — the latter with a zero tolerance to infections — will continue to disrupt global value chains and support rising inflation that will require more aggressive interest rate increases.
As far as China is concerned, the big question is whether policy-makers there will be able to deflate the property market bubble without causing a significant slowdown in economic growth. So far, the evidence points in that direction, with industrial production slower because of power cuts, infrastructure investment moderating as a result of slow growth in credit to local government and the regulatory restraints to property developers.
Economic growth is set to moderate towards the 5.5% trend, which implies that the support which drove commodity prices higher in 2021 will recede. Aggravating this is China’s zero Covid-19 infection policy which will probably remain in place through the winter Olympic Games and the all-important five-yearly Chinese People’s Congress later in the year.
The US Fed, Omicron and China developments are headwinds for the South African economy, which is battling its own set of problems. Higher global interest rates and more moderate commodity prices are a double whammy for the economy, which will grow at about 2.5% this year, insufficient to reduce the record 34.9% unemployment rate.
The South African Reserve Bank will have to normalise interest rates with at least two rate hikes of 25 basis points each. The risk is for more rate hikes as projected by its models.
On the fiscal side, the pressure for a universal basic income grant is on, but fiscal sustainability requires consolidation, thus the risk of fiscal slippage at the February budget is high, a risk for bond yields rising.
All considered, domestic growth will be slower, inflation will be sticky, the rand weaker and interest rates higher by the end of the year.
There are also more adverse risks on all these this year compared with 2021, compounded by the uncertainty of the ruling party’s policy conference and electoral cycle later in the year.