Times Of Swaziland: RECESSION FEARS

RECESSION FEARS
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Sanele Sibiya on 07/08/2024 07:47:00


THE global economy has entered into a period of recession fears. Owing to weak
economic performance in the United States (US). The Eurozone economy has
marginally gained back into positive territory in the month.
However, the fundamentals are still lacking, leaving a lot of grey areas in
terms of the growth prospects for the Euro Zone. Adage would have it that when
America sneezes, the whole world shivers. This brings me to attempt to clarify
the issue and give an analysis on the likely impact on our economy. We are also
in the verge of worsening geopolitical tensions in the middle east. Also, the
global economy might likely shift into a different political dispensation,
likely throwing the world into a conundrum of revived economic isolationism and
reversal of free trade. It is imperative to locate Eswatini within these
geopolitics and international tectonic landscape.
Brent crude oil
The middle east is at the principates of a much broader regional crisis,
following the Israel attack on Iranian territory and Lebanese territory. This
sent the price of brent crude oil above the US$85 region, this we expected to
hold or remain the same until the tensions were deescalated. However, due to
weaking global demand, the price of brent crude also decelerated to the mid
US$70 zone. The US economy showed signs of weaking growth, with unemployment at
4.3 per cent in July and inventories are also on the increase. China shocked
markets with an unexpected interest rate cut to prop up demand in a frantic
effort, to push towards the growth target of 5 per cent. Demand in the world is
two largest consumer economies has negative impact on global demand.
We stand at a cross roads, the geopolitical tensions and poor economic
performance data, has plunged the global economy into volatility. As markets
recover, with geopolitical tensions are unchanged, we might swing between
US$75-US$85 in the price of brent crude. This will infuse a bit of uncertainty
in oil prices. This will shed aspersions on the likely monetary policy path, as
we may be at the verge of another supply shock if the crisis in the Middle East
is not averted.
Monetary policy path
Market indications seem to suggest that monetary policy adjustments may be too
little too late. This, we ponder as we assess how fast the economy will react
and respond to a change in monetary policy stimulus. Will a cut in September be
enough to bring the economy back to a growth path? Will policy actions be swift
enough to counter the lagged impacts of the current restrictive policy
environment? Will two interest rate cuts be enough to restore the economy into a
balanced growth path? The truth of the matter is monetary policy takes a rather
long time to affect the economy, and we are to feel the impacts of this
restrictive environment well into the 1st quarter of 2025. However, the income
effect will be more immediate, those with loans will generally feel wealthier as
the interest rates decline. This will boost expenditure, which will require
suppliers to respond to those changes in demand. Such changes will likely take a
bit longer, however eventually we shall revert to equilibrium.
Domestic impacts
Interest rate cuts are with high probability forecast for September in the US
and the domestic economy is expected to follow suit. However, the weaking demand
from the US will adversely affect Eswatini economy. Weak demand from the global
north might have negative impacts for our exports as a country. This will result
in a weaker position of the Lilangeni, we note in the past couple of weeks how
the Lilangeni has been depreciating against major world currencies. In the
short-term, this will improve our export position, however, this will lower our
propensity to import as a country. As we run out of inputs purchased at
favourable exchange rates, our overall input costs will be higher and we will
effectively end up exporting products that are relatively expensive in the
global markets. The volatility in the price of oil and the geopolitical tensions
place volatility on the domestic oil price. We might be entering into a volatile
month in terms of economic fundamentals.
Domestic response
In a bid to prop-up domestic demand, we expect in its next monetary policy
meeting the Central Bank of Eswatini to cut interest rates. We had hoped to wait
for a signal from the US, however, we have seen the Eurozone, the United Kingdom
(UK), China and Japan breaking rank. It would seem the US has been late to the
party and this is beginning to have reaching consequences for the global
economy. Domestic conditions are favourable for a 25 basis point cut to
accommodate monetary policy and grow the economy. The bank has to however be
cognisant of geopolitical tensions globally and endeavour to manage those.
However, the writing is on the wall, we need to start a downward path on
monetary policy. The economy has been in a restrictive environment for a long
period of time, however, this ought not be interpreted as a return to normality,
there is still a lot of volatility in the market.