Writing on the wall: We are headed for a fuel-induced recession
By Josef Kefas Sheehama.
The domestic economy remained in a positive trajectory in the first quarter of 2022, recording a growth of 5.3% compared to a decline of 4.9% in the corresponding quarter of 2021, according to the Namibia Statistics Acency. This is a good positive move, well done!
With the price of oil on the rise, more fuel hikes could be on the cards. Users of all grades of fuel will pay more in July when the Ministry of Mines and Energy adjusts the prices of fuels on 06 July. The ministry will increase the fuel price for July by N$1.88 per litre for petrol and N$1.34 per litre for diesel. With the Consumer Price Index (CPI) hitting 5.60% in April, the Bank of Namibia poised to hike Interest rate by another 0.50% percentage points on17 August 2022. Rocketing energy and food costs have precipitated the worst cost of living crisis, with the war in Ukraine threatening to worsen the price shock. The increase in fuel prices has been noted as a concern for the global and local economy.
These increases will certainly impact every single Namibian given the reliance the country has on fuels for transportation, manufacturing and in the agricultural sector. As the economy emerged from the initial impact of COVID-19 and the sharpest decline in activities, the market looked for a recovery. Therefore, the growth of 5.3% in the first quarter of 2022 was not a surprise.
But the economic recovery following the pandemic has differed from economic recoveries of the past. This has thrown up unanticipated problems in supply chains which have been beset by bottlenecks. I am also aware of issues in the labour market where companies have struggled with worker shortages. Bottlenecks and shortages have pushed inflation higher but salary rates remain constant or have been cut in some cases.
Furthermore, we are halfway through the year, but markets are beginning to fear. We are living in a global village, in other words we have evolved into a globally integrated, fully interdependent world. Nowadays, globalization is a reality for businesses worldwide. It is important to take note that, Ukraine’s exports of grain and oilseeds have mostly stopped and Russia’s are under threat. Together, the two countries supply 12% of traded calories. Wheat prices, up 53% since the start of the year, jumped a further 6% on 16 May after India said it would suspend exports because of an alarming heatwave. Both Russia and Ukraine are exporters of major commodities, and the disruptions from the war and sanctions have caused global prices to soar. Food prices have also jumped. Therefore, rising crude oil prices amidst escalating fears created by the conflict in Ukraine, is one of the main reasons for the increases in Namibian fuel prices.
In recent weeks, business leaders ranging from Elon Musk to David Solomon have begun sounding the alarm bell about an impending economic slowdown. In fact, CEO confidence has dipped to its lowest level since the beginning of the pandemic, according to the latest survey from the Conference Board, a business research group.
Namibians are also impacted by the soaring price hikes. Periods of high oil prices frequently lead to periods of recession shortly after. With oil prices rising above US$122 recently because of the conflict in Ukraine, there are fears high oil prices combined with rising costs of living could lead to an economic slowdown by the end of 2022. Rising oil prices have a significant impact on inflation. Higher oil prices cause a rise in the price of fuel and the cost of transporting all goods. Therefore indirectly all goods which are transported will see rising prices. There is a strong correlation between oil prices and inflation.
Namibia is a small country with an overreliance on diamonds, uranium, and fish. Furthermore, it is burdened by relatively large fiscal deficits, rapidly rising government debt and slipping credit ratings. Fitch Ratings (Fitch) downgraded Namibia’s long-term foreign currency credit rating to BB- and changed the outlook from negative to stable on Friday, 24 June. This reflects high and rising government debt, exacerbated by the economic shock. A downgrade means that when Namibia needs to borrow more money, as it inevitably will, investors will demand a higher interest rate because of the lower creditworthiness of the country.
I tell you this not to scare you, but as a probability with a real possibility of happening. Therefore, if oil prices are rising, we are facing rising living costs and our disposable incomes will not go very far leading to cutbacks on some purchases, because salaries cannot keep up with inflation. With rising oil prices we get both higher prices and less demand, a situation which can lead to stagflation.
The Bank of Namibia has a target of keeping inflation around 4.4%, but if oil prices are contributing to inflation, currently at 5.4%, then the Monetary Policy Committee may feel the need to raise interest rates further and faster. Money will be expensive. Higher interest rates will slow down economic activity because higher rates increase the cost of borrowing and discourage spending and investment. The problem is that we already face a squeeze on incomes from higher oil prices, therefore the increase in interest rates and increased cost of mortgage repayments have a double effect of reducing spending.
If oil prices do cause substantial inflation it presents policymakers with a difficult situation: – increase interest rates to reduce inflation and further reduce demand or leave interest rates unchanged and accept higher inflation. Although higher oil prices alone do not cause a recession, they can be a factor that makes it more likely.