Global Economic Overview
By Isaac Otolo and Anthony Njeeh
Partner, Deals - Transaction Advisory, PwC Kenya | Senior Manager, Government and Public Sector, PwC Kenya
Introduction
The annual inflation rate in Kenya accelerated for the seventh consecutive month to 9.2% in September from 8.5% in August according to data from the Kenya National Bureau of Statistics. This was largely driven by a rise in food and energy prices. Food prices rose by 15% while energy prices went up by 11.7% over the same period.The phenomenon that is causing a strain on the pockets of both individuals and businesses alike is not unique to the country but the global economy at large.
According to the World Economic Outlook update by the International Monetary Fund (IMF) issued in July 2022 aptly named “Gloomy and more uncertain” - a tentative recovery in 2021 was followed by gloomy developments in 2022. The projected forecast for global growth for 2022 is 3.2 percent from an estimated 6.1 percent in 2021.
The Global Economic Prospects by World Bank has the 2022 growth at 2.9% from a projected growth for 2022 of 4.1%. In 2022, several events hit a world already impacted by the pandemic, these include:
- War in Ukraine;
- Slow down in China as a result of COVID-19 outbreaks and lock downs;
- Higher than expected inflation worldwide; and
- The compounding damage from the COVID-19 pandemic.
The war in Ukraine has affected the commodity market negatively. The high energy prices has led to lower real incomes, raised production costs, tightened financial conditions and constrained macroeconomic policy in energy importing countries. The prices of commodities such as wheat, fertilizer and meal products have also been on a sharp increase in Russia and Ukraine. On the background of the compounding damage from the COVID-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown of the global economy. A period of stunted growth and elevated inflation is possible. This has raised the risk of stagflation. Stagflation is a situation where the economic growth slows, there is high unemployment and high inflation. There is need for decisive global and national policy action to avert the worst consequences of the war in Ukraine for the global economy.
Though the year started well for China, multiple outbreaks of the Omicron variant of COVID-19 and resulting mobility restrictions across major cities have disrupted the country’s growth normalization. China is projected to grow by 4.3% in 2022 before rebounding to 5.2% in 2023 reflecting COVID-19 effects.
Global inflation is anticipated to reach 6.6% in advanced economies and 9.5% in emerging market and developing economies this year because of food and energy prices as well as lingering supply-demand imbalances. These are upward revisions of 0.9% and 0.8% points, respectively. In 2023, disinflationary monetary policy is expected to come into place, with global output growing by just 2.9%.
Though stagflation was once considered impossible, this is a situation that has happened severally since the 1970s. There is a need to compare the current economic conditions to the 1970s stagflation. The current situation resembles the 1970s in three key aspects:
- Persistent supply-side fluctuations fueling inflation preceded by a protracted period of accommodative monetary policy;
- Prospects for weakening growth; and
- Vulnerabilities that emerging markets and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.
It is also important to note the difference between these two eras which include the following:
1. A stronger dollar in the current economic conditions;
2. The percentage increases in commodity prices are smaller compared to the 1970s; and
3. The balance sheets of major financial institutions are generally stronger in the current period.
The above differences are attributable to central banks in advanced economies and many developing economies now having clear mandates for price stability and inflation.
Conclusion
The outlooks of the remainder of 2022 are rather gloomy. There is a possibility of Russia stopping importation of gas to European countries and rising commodity prices might push policy makers to distortionary policies such as price controls, subsidies and export bans. Tighter monetary policies will have real economic costs. Governments will need to prioritize spending towards vulnerable populations and there might be the need to increase taxes or reduce government spending. We note the effects of the pandemic continue as seen in China and climate change requires multi-stakeholder action.
A sample of economic growth regional outlooks are as follows: Sub-Saharan Africa the growth is expected to moderate to 3.7% in 2022 and rise to 3.8% in 2023: Europe and East Asia the growth is expected to shrink by 2.9% and rise to 1.5% in 2023: Latin America and the Caribbean growth is projected to slow to 2.5% in 2022 and 1.9% in 2023.
At this rate we will need to coin a new inflation-based term for the current phenomenon which is nowhere near temporary as had been originally predicted. However, we remain optimistic that the economy will recover and a downtrend in inflation will be noted globally.
