Coen Welsh | Nov 14, 2017 | 0
Our Dilemma: Growth or Inflation
The Economic Cycle Research Institute claims to be the world’s leading authority on business cycles. Their claim is not a glib cliche’, there are many other astute analysts that vouch for ECRI’s track record, and even those who sometimes criticise their work, specifically their leading indicators, still keep a watchful eye on the weekly movements in the array of indices.
I want to quote from an ECRI overview published a week ago, but I want to obliterate the identity of the jurisdiction under discussion. Let us call the phantom country Bongo Bongo.
“ECRI has just updated its Bongo Bongo Future Inflation Gauge (BONFIG). The value of this forward-looking gauge lies in its ability to predict cyclical turns in Bongo Bongo inflation.
“Against the background of weaker Chinese economic growth, a mining-induced economic slowdown, federal budget cuts, a strong Bongo Bongo dollar, and an unemployment rate that hit a 12-year high in July, the Reserve Bank of Bongo Bongo (RBB) is keeping the official cash rate at a historical low for the 13th consecutive month, marking the longest period of stability in interest rates in more than eight years. However, with headline inflation near the top end of the RBB’s preferred range in the June quarter, the RBB is facing a policy dilemma.
“In our latest update to the BONFIG, we provide insight into the future trajectory of Bongo Bongo inflation, which may determine whether the RBB will be able to maintain its present monetary policy stance.”
Except for the reference to the strong dollar, almost everything said in that statement can be made applicable to Namibia, at least during the first six months of the year. The eye-opener comes when one learns the real identity of Bongo Bongo.
It is Australia, and this is the fact that caught my attention. It sounded almost as if ECRI has turned their attention to us, particularly to our economic performance of the first semester.
We also sit with the same policy dilemma: Do we want to continue pursuing real growth north of 5%, or must we consider the ordinary consumer, tweak the liquidity injections, raise interest rates, and wait for a very hot and stimulated economy, to cool off naturally over the next 24 months.
Against these considerations, we also have to contend with Euro and Yen weakness (incorrectly described as Dollar strength), run-away equity markets, volatile capital markets, exchange rate weakness and the very basic local fact that earlier this year, for the very first time in our existence, our capital market requirements had to be furnished by foreign investors. Indeed, this is not a healthy mix of variables the Bank of Namibia must consider when it determines our interest rate trajectory for the next 24 months.
Just as in Australia, I reckon the inflation debate will heat up towards the end of the year. We have seen four and a half years of intensive stimulation, unprecedented injections of liquidity, and an explosion on the balance sheets of both the private sector and the government.
Our trade balance has been negative for several years, meaning we are importing in value, far more than we are exporting. Granted, part of this must be expected as the massive imports required for the massive infrastructure projects, must reflect somewhere. But I also suspect that consumer spending contributed in no small measure to the skewed trade balance, and that it is this particular distortion the Bank of Namibia is attempting to address through its careful but deliberate recent interest rate raises. It may also be an attempt to slow imports since it has become patently obvious our foreign reserves are under pressure through a combination of a negative trade balance, a weakening currency, and excessive local demand, translating into a punishing inflation.
Somewhere during 2010 in the first year of so-called counter-cyclical budgeting, I was asked how long can an economy run on artificial stimulation before economic fundamentals will have caught up with reality. My answer then was: For as long as capital market will allow us to borrow against a favourable, or at least a comparable, rate, and we are able to service those bonds.
Looking at economic conditions beyond our borders, I shiver. Volatility is as rife as ever but nobody seems to care. On top of that, this volatility has now shifted to the world’s four major capital markets, i.e. the USA, the UK, Germany and Tokyo. The obvious distortions are bound to impact us, supposed to be an exporting economy, and a relatively small shock to the international system, can bring severe disruptions to us.