Markets & economy

Global economic recovery slower and more complex than expected

The global recovery from the severe economic contraction in the first half of 2020, which followed the initial outbreak of the pandemic, has proved to be both slower and more complex than was originally expected. The public health emergency continues and during 2021 there were successive waves of new COVID-19 variants, most notably the more virulent Delta variety. Fortunately, the latest Omicron variant seems more benign. While good progress has been made in rolling out vaccinations in developed economies, they lag in less developed countries. Accordingly, there is a continuing risk of further waves of infection originating from the third world.

The economic recovery has been delayed both by the successive new waves of infection and by severe disruptions of the global supply chain, including shipping delays and shortages of vital components, such as computer chips. A constant, almost universal, refrain from business is that it is finding it difficult to recruit the skills needed to restore operations to meet strong consumer demand. These shortages have caused a surge in inflation, which in December 2021 reached 7% in the United States and 5% in Europe. Central banks in North America and Europe have abandoned their previous complacency about inflation and are tapering asset purchases in anticipation of increasing interest rates from the prevailing low levels. Rising inflation is also putting pressure on governments to rein in bloated fiscal deficits. Consequently, the growing fiscal stimulus of recent years is being reversed, which will slow global growth.

The Chinese economy has also slowed. Currently its growth rate is between 4% and 5%, but it seems probable that China, while still very important, will have a lesser impact on the rest of the global economy than it has had previously.

South Africa’s economy continues to disappoint. The riots of July last year brought the economy to a halt. While mining and agriculture continue to boom and the current account remains in a comfortable surplus, Omicron dashed hopes of a return to normal in the tourism sector over the summer months. Investment remains subdued and the fiscal deficit, while improving, is still elevated. A severe constraint remains a shortage of skills. South Africa has a propensity to lose skills due to emigration. With a global skills shortage and travel opening up again, emigration of skills could again become a serious problem.

Consumer price inflation was 5.5% in November 2021. The South African Reserve Bank has joined other emerging market central banks in commencing a cycle of interest rate hikes, increasing the base rate by 0.25% to 3.75%. 

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