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The year that was, and the year ahead
The year 2021 will not be categorised by many as an easy year economically. Early optimism was short-lived as subsequent waves of Covid-19 infections washed over the globe. The Delta variant saw politicians continue to struggle for a consensus response to the pandemic, although, as access to vaccines improved the trend towards hard lockdowns the spread of infection was thankfully eased. Economies reopened and built-up demand drove markets higher in both developed and developing economies. According to IMF estimates, global growth reached 5.9% in 2021, well above trend, but largely driven by the low base set in 2020.
Much of the rebound in growth and demand in 2021 can be attributed to fiscal and monetary stimulus. Interest rates remained at historic lows in many countries and governments in the developed world approved stimulus packages of unprecedented size. All of this aimed to support reopening economies, a goal that was largely achieved and is reflected in global growth estimates. This recovery was, however, unevenly spread over individual countries with Sub-Saharan Africa, as a group, and Namibia in particular, lagging. Sub-Saharan growth for 2021 is estimated at 3.7%, with South Africa outperforming with growth likely to have reached 4.9% for the year. The Bank of Namibia expects Namibia to have achieved just 1.5% of growth, underpinned by weak performance in key sectors such as tourism and construction. While the rest of the world seems to be shrugging off the impact of the pandemic, Namibia continues to languish.
So, what could the year 2022 have in store for the Namibian economy? It is shaping up to be a particularly uncertain one for a number of reasons, primarily inflation and the interest rate environment.
Monetary and fiscal stimulus have to a large extent saved the developed world from much of the economic turmoil created by lockdown measures aimed at slowing the pandemic. Such stimulus has supported demand which has in turn supported businesses and jobs. In 2021 the US added a total of 6.4 million jobs (preliminary figure), the largest number on record for a single year, and unemployment dropped to 3.9% by year-end, nearing full employment. In fact, many US firms are struggling to find the human capital they require to keep up with demand, which already results in wage inflation. This economic relief may come at a cost, however.
Stimulus-induced demand combined with supply chain disruptions and increased energy costs have resulted in rising inflation in many developed markets. US inflation has topped 7.0% y/y, a four-decade high. Inflation in the euro area came in at 5.0% y/y in December, also reaching multidecade highs. And contrary to expectations, inflation seems less transitory and more persistent than central bankers would have had us believe in 2021. Inflation is likely here to stay and the need to address it is building rapidly. While some inflation is healthy, too much of it erodes confidence in the value of money and leads to wealth destruction and increased living costs for the most vulnerable in society.
Central banks’ primary tool for addressing inflation is through setting interest rates. The rates of inflation currently experienced in the US, UK and the euro area are likely to result in interest rate hikes in some, or possibly all, of those markets in 2022. Current expectations are for rate hikes in the US and UK with the euro area expected to attempt to maintain rates at current levels. Rate hikes in these key markets tend to drive inflation elsewhere as currencies depreciate against the dollar, pound and euro. This in turn increases the likelihood of interest rate hikes in other markets. South Africa is expected to continue with the interest rate hiking cycle initiated in November last year with a 25 basis-point hike in the repo rate.
Namibia did not follow suit. The Bank of Namibia (BoN) opted to maintain Namibia’s repo rate at 3.75%, now in line with that of South Africa. Further hikes by the South African Reserve Bank (SARB), however, are much more likely to necessitate rate hikes by the BoN, thus causing monetary tightening. Namibians can expect higher interest rates in 2022, the question just remains “how much higher?”. At the time of writing, expectations point to 0.75% to 1.0% above current levels.
Slightly higher interest rates should be absorbable by a Namibian economy which may benefit from a depreciating currency and an expanding mining sector. However, a tighter monetary environment will place pressure on other economic sectors and is likely to lead to an uneven recovery in 2022 where mining underpins overall GDP growth, but other sectors post low growth. Unemployment is unlikely to decline much in 2022. The fiscus also remains relatively tight with little growth projected in budget ceilings over the next few years. Meaningful fiscal support for the economy is unlikely.
Some green shoots are visible. We are entering a bullish commodity cycle, and expectations are for increased diamond output as capacity expands, and a global energy transition toward green generation solutions which may benefit Namibia over time. These green shoots will not materialise all at once but should result in economic growth slowly moving toward long-term trends. We also remain hopeful that economic and investment policy will be adjusted to reflect the need to attract investment in an ever more competitive global capital market.
Eric van Zyl is the head of research at IJG, an established Namibian financial services market leader. IJG believes in tailoring their services to a client’s personal and business needs. For more information, visit www.ijg.net.
