. . . fundamentals point in wrong direction
MASERU- Lesotho faces stagflation, as all key economic indicators such as the inflation rate, economic growth and unemployment rate point in the wrong direction. Economic commentator Retšelisitsoe Mobote says people are familiar with the term inflation, which is the rate at which money increases, commonly controlled through increasing interest rates which is the money banks loan to the public to cut demand.
He said, one of the common indicators of inflation is recession, which is when the economy grows at a negative rate for two consecutive quarters. Recession is a significant, widespread and prolonged downturn in economic activity. A popular rule of thumb is that two consecutive quarters of decline in gross domestic product (GDP) constitute a recession. Recessions typically produce declines in economic output, consumer demand, and employment. However, he said, with stagflation all the key indicators point in the wrong direction.
“For instance, if inflation is high, in response, central banks increase interest rates. And looking at the economic growth now, it is increasing at a negative rate, there is also high unemployment, which means everything points in the wrong direction and it is the longer phenomenon of recession,” he said explaining that if the economy is in stagflation all the key indicators are paralysed. Therefore, he said, the government finances or rather revenue sources are low because there is less spending.
“Another thing is that firms are facing closure, the government is also unable to increase the number of civil servants and mines in South Africa are constantly retrenching while our own mines are also unable to hire more employees,” Mobote said, adding that during times like this, banks’ prime lending rates become high, discouraging people from taking loans due to high interest rates. Mabote said further that the global economy is entirely at risk.
“Looking at the United States of America and the United Kingdom, they are both affected by stagflation and almost the entire European Union as well. In Africa, South Africa has been the anchor of economic activities in the Southern Africa and it also hit by stagflation which means there will be a decrease in SACU revenue in the approaching financial year,” he said. He added that the whole Southern African Development Community (SADC) countries are facing stagflation and this is propelled by factors such as COVID-19 and the Russia –Ukraine war which contributed to increase in prices of oil, wheat, maize, among others.
“This should be a wake-up call to Basotho to use their agricultural land,” he said, “I know we might be late for production of food now but this is how it should be.” According to reports stagflation represents a dilemma in economic theory. It occurs when there is high inflation and moderate or unbalanced economic growth. For economists and elected leaders, this predicament can be a devastating combination; it plagued the US in the 1970s.
There are legitimate concerns about stagflation amidst the ongoing pandemic economic recovery. Although thousands of jobs are available and the unemployment rate is falling, the US economy shrank in the first half of the year. Domestic issues, strained political tensions, and aggressive attempts by the Federal Reserve to curtail inflation have created side effects.
According to the World Bank, compounding the damage from the COVID-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation, according to the World Bank’s latest Global Economic Prospects report. This raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike.
Global growth is expected to slump from 5.7 percent in 2021 to 2.9 percent in 2022, significantly lower than 4.1 percent that was anticipated in January. It is expected to hover around that rate over 2023-24, as the war in Ukraine disrupts activity, investment, and trade in the near term while pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn. As a result of the damage from the pandemic and the war, the level of per capita income in developing economies this year will be nearly five percent below its pre-pandemic trend.
On the other hand, South African media reported that more recently, in 2014, South Africa faced a stagflation trap, when the country’s economy shrank by 0.6 percent in the first quarter and inflation hit 6.6 percent for the month of May. Over a decade of stagnant growth has made South Africa vulnerable to stagflation, especially in the wake of global economic shocks. Observing the October Monetary Policy Review, the South African Reserve Bank weighed the risk of worsening stagflation, noting that there is the chance that the outlook could deteriorate further.
“One such risk would be central banks not doing enough to increase the credibility of their inflation targets and thereby prevent inflation expectations from drifting higher,” the review indicated. In June this year, during the 7th Summit of the Southern African Customs Union (SACU) countries, namely; Botswana, South Africa, Eswatini, Namibia and Lesotho, it emerged these countries are now at a stage where there is increasing risk for stagflation.
President Mokgwetsi Masisi of Botswana in his opening remarks said that the ongoing Russia-Ukraine conflict is dimming the economic growth prospects to a point where growth is estimated to slow down to 3.6 percent in 2022. Masisi said the Russian-Ukraine conflict has worsened the already depressed economy due to the impact of the COVID-19 pandemic together with the disruptions of the global supply chains, thereby resulting in a surge in inflation the world over, including the SACU region.
Although stagflation is a concern globally, reports indicate that for poor countries its worse because many developing countries are reliant on exports to wealthy countries to prop up their economy, meaning the global slowdown hit them even harder.