December 2021 Economic Overview

Many events and indicators affecting the world economy and financial markets occurred relatively early on in December, slowing towards the end of the month as the holiday season set in. Nevertheless, the world economy and markets were largely driven by a few factors, namely the COVID-19 Omicron variant, consumer price inflation (CPI) and subsequent views on monetary tightening and slowing Chinese economic activity. South Africa’s economic growth would have been negatively affected by these events in the last month of 2021.

The Omicron variant spreaded fast throughout the world, negatively impacting demand for and supply of especially goods. Although the demand slowing effect of the new variant may contribute to slower increases in world CPI, the disruption of supplies may put upward pressure on CPI. Although the outcome is still uncertain, there is little doubt about the current trends in CPI. In the US the year on year (y/y) CPI for November increased to 6.8%, while that of the Eurozone was up 4.9% (the highest since July 1991). Main drivers of the higher CPI are high energy prices (fuel and gas) caused by increasing demand and supply disruptions and goods affected by supply chain problems (motor vehicles and goods with electronic parts).

Consequently, Federal Reserve Chair, Jerome Powell, stated that the proposed slowing in the bond purchasing programme may have to be fast tracked, while the term transitory inflation should be done away with as markets interpreted it differently from what the Federal Reserve meant. Christine Lagarde, President of the European Central Bank, don’t anticipate faster monetary tightening though, as the higher CPI is still viewed as a temporary phenomenon driven by supply chain disruptions.

Although oil prices, a primary driver of higher CPI, declined somewhat in reaction to the spreading of the Omicron variant, it increased steadily towards the end of the month as risk-on returned to markets – in reaction to evidence of Omicron’s “milder” symptoms. Brent oil returned to around $80 per barrel following an initial slump to below $70 per barrel.

The Omicron variant also had a negative impact on economic growth, affecting demand in the US and Europe. China’s economic activity also slowed due to the authorities’ “no tolerance” policy towards COVID-19. Moreover, electricity rationing impacted manufacturing, which should have a further effect on fourth quarter economic growth.

South Africa’s economy was hurt by the Omicron variant as several countries imposed travel bans to the country. These bans were ill-informed knee-jerk reactions, and later removed by most countries, but the damage was done, affecting especially tourism and downstream industries. CPI also increased to around 5.5% in November and may be close to its highest point. Fuel prices were responsible for 29% of the 5.5% increase and municipal tariffs for 12%. Good news is that the trade surplus increased by R35.8 billion in November, bringing the year-to-date surplus to R412.5 billion. This should support fourth quarter economic growth, neutralizing some of the Omicron effects. Also, latest government finance numbers reveal another budget revenue overrun in the order of R100 billion, thanks mainly to high commodity prices. However, personal income tax revenue is on a declining trend, in accordance with lower employment. The share market gained further in December, ending the year 24.1% higher compared to the end of 2020. However, the rand ended the year 8% weaker against the US$ at R15.94, while the Brent oil price gained 51% to $77.9 per barrel.

2022 will be challenging, but not bad for South Africa - characterised by lower economic growth, higher CPI and interest rates. And then there will be politics to either aggravate or soften the blow!

Multivest Economic Division