Impact of anticipated US recession on the local economy
By Anton Mushongo
Bank Windhoek’s Market Research Analyst.
The United States economy is heading toward a recession; this is according to growing concerns from reputable banks and economists in the United States. How will this impact the Namibian economy?
A recession is a term used to signify a slowdown in general economic activities. The most widely used definition of the term recession is two successive quarters of decline in a country’s Gross Domestic Product (GDP), a monetary measure of the market value of all the final goods and services produced in a country in a specific time.
The international news agency, Reuters, said that the United States economy unexpectedly contracted in the first quarter. However, domestic demand remained strong as consumer spending showed positive sentiments. A wider trade deficit mostly drove the decline in real GDP as imports surged and a slowdown in the pace of inventory accumulation.
A brief expenditure and factors overview
Consumer spending accounts for more than two-thirds of the United States’ economic activity. Between February and March 2022, the United States’ economy saw a successive monthly increase in adjusted consumer spending of between 0.2 to 1.1 percent despite rising monthly and annual inflation. The rise in consumer spending in the first quarter of 2022 is subdued and likely to fall as inflation takes centre stage. According to the United States’ Bureau of Labour Statistics, annual inflation rose to 8.5 percent in March 2022, the highest level recorded since 1981.
Some of the factors at play for the United States economy entering a recession include a contraction in real GDP, a widening trade deficit, and low levels of unemployment, which stood at a record low of 3.6 percent at the end of April 2022. Others are the interest rate hikes, as the United States Federal Reserve hiked interest rate by 50 basis points in May 2022, from zero to 0.5 percent, the newest target range of 0.75 to 1.00 percent. The persistent inflationary pressures emanating from Covid-related lockdowns in China and Russia’s invasion of Ukraine also worsen the situation.
Impact on the Namibian economy
Namibia and the United States trade statistics between two selected periods, 2009 – Global Financial Crisis, and 2019 – pre-Covid-19, shed some light on what we can anticipate should the United States recessionary pressures become credible.
Time series data from the United States Census Bureau from 2007 to 2022 reveals that almost every time the United States’ economy recorded a slow down or contraction in its overall economic activities, its demand for goods imports from Namibia increased compared to goods exports. For example, Namibia was the United States’ 132nd largest goods export market in 2019. The United States real GDP growth in 2019 was 2.3 percent. Its goods exports to Namibia in 2019 were valued at $194 million, representing a 3.9 percent decrease from 2009.
The United States goods imports from Namibia were valued at $144 million in 2019, down 56 percent in 2009. A trade surplus in favour of the United States was recorded in 2019. However, in 2009, marking the end of the Global Financial Crisis of 2008-2009, a trade surplus was recorded in favour of Namibia. In 2020, the United States recorded a contraction in real GDP. The United States goods exports to Namibia in 2020 were valued at $60.1 million, representing a 69 percent decrease from 2020. Imports from Namibia were valued at $90.2 million in 2020, down 37 percent 2020. A trade surplus in favour of Namibia was recorded in 2020.
In times of a global economic recession or a slowdown in the United States economy, goods imported by the United States from Namibia are always more than the goods exported by value. A contraction in the United States economy will result in a trade deficit with the United States trade in goods with Namibia. This means that the United States will demand more goods imports from Namibia than goods exports.
The geopolitical tie between Namibia and the United States is beneficial to both countries, especially as far as the foreign currency stock is concerned. Should the United States recession pressures become more pronounced, Namibia will continue to build on its foreign exchange reserves to back its liabilities and influence monetary policy. Foreign exchange reserves are often a nation’s backup funds in an emergency, such as a rapid currency devaluation. Globally, countries use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of an economic crisis, and provide confidence to foreign investors.