A person shops at a supermarket in Moscow on April 6, 2022. - Russia said on April 6 it had been forced to make foreign debt payments on dollar-denominated bonds in rubles, in a new blow to its efforts to avoid a sovereign default amid unprecedented Western sanctions over the Ukraine conflict. (Photo by Natalia KOLESNIKOVA / AFP)
Next week will mark a year since Russia invaded Ukraine in an event that rocked the world economy.
The war sent shockwaves through energy markets, which threatened to put the lights out in Europe, and energy security concerns disrupted the world’s transition to renewables.
Energy supply shortages caused inflation to become a stubborn feature of 2022, sending central bankers across the world into a tizzy to bring prices to heel.
Today, South Africa’s inflation is on the decline, as energy prices have moderated, easing pressures globally. Russia’s impact on the economy appears to be retreating — but, amid uncertainty about the growth trajectory, risks to inflation remain.
Tempering inflation
Earlier this week, data from Statistics South Africa showed that consumer price inflation eased again in January to 6.9% year-on-year, from 7.2%, marking the third consecutive decline.
The January retreat was in line with consensus expectations, which saw domestic price pressures moderating as a result of significant cuts in petrol and diesel prices.
The petrol price fell by 8.8% month-on-month and 2.8% year-on-year in January amid lower global oil prices and a relatively strong rebound in the value of the rand.
The country’s inflation rate is still, however, uncomfortably high by the South African Reserve Bank’s standards. The bank, which aims to keep the rate anchored at between 3% and 6%, has forecast that inflation will average 5.4% in 2023, down from 6.9% last year.
All signs point to ultra-high food prices as the main driver of inflationary pressures. According to the January print, food price inflation hit the highest rate since 2009.
In its January statement, the Reserve Bank’s monetary policy committee (MPC) revised its food price inflation forecast to 7.3% in 2023, up from 6.2% previously.
Local food inflation is expected to remain elevated, despite global prices continuing to ease, as a result of the lagged effect of the rand’s weakness, the MPC noted.
Inflation has held above the midpoint of the Reserve Bank’s target range for 20 consecutive months. In July 2022, it rose to its highest rate since 2009, when the world economy was left reeling from the impact of the global financial crisis.
Prices had been ticking up prior to Russia’s invasion of Ukraine on 24 February 2022. This was as the global economy adapted to lingering Covid-19-related supply chain disruptions, aggravated by the recovery from the pandemic-era slowdown.
For most of 2021, a number of central bankers — especially in advanced economies — had dismissed elevated inflation as transitory, opting not to raise interest rates and risk tempering economic recovery.
With a far closer relationship with inflation, central banks in emerging economies began raising rates much earlier than many of their advanced economy peers. The Reserve Bank first started hiking interest rates in November 2021. At the time, the MPC forecast that headline inflation would average 4.3% in 2022.
By the committee’s March 2022 meeting, Russia’s war had changed the country’s inflation outlook considerably. The MPC adjusted its inflation forecast to 5.8% in 2022.
The United States Federal Reserve only started hiking interest rates in March 2022. But by then many of that central bank’s critics would point out that it had fallen behind the curve, as Russia’s war had already pushed oil prices close to $100 per barrel.
Energy crisis
Russia is the world’s third-largest oil producer and a number of sanctions and trade restrictions would inevitably limit supply and push up prices.
The last time the oil price had held around that level was in 2013 and during the first half of 2014 amid strong economic growth in China and the United States, low interest rates, as well a number of power struggles in the Middle East. The oil price subsequently plunged due to an oversupply of petroleum, which resulted in prices being less influenced by geopolitical swings.
Global oil prices remained below $75 per barrel for the five years leading up to the pandemic before they slumped to their lowest levels in almost two decades in 2020. The world’s recovery from the Covid-induced downturn had already pushed oil prices beyond $80 per barrel before Russia’s war triggered crude’s greatest reprise since 2011.
The Russia-related oil cycle caused US inflation to accelerate to 8.5% year-on-year in March 2022 — the fastest pace since the 1980s oil crisis. The inflation rate remained above that 40-year record until the last quarter of 2022.
Meanwhile, Europe would bear the brunt of constrained gas supplies.
Russia is the second-largest producer of natural gas, accounting for 16.6% of total supply in 2020, and about 70% of Russian exports are sent to Europe.
Like oil prices, gas prices recorded a meteoric rise in 2022.
Increased concerns for energy security, especially as Europe’s winter approached, saw a number of countries restarting their coal-fired plants, which in turn sent the price of that commodity soaring.
Europe’s return to coal marked a significant disruption in its transition to renewables, though recent forecasts by the International Energy Agency (IEA) suggest low-emission energy sources are still set to cover almost all the growth in global electricity demand by 2025.
Global electricity generation from both natural gas and coal is expected to remain broadly flat between 2022 and 2025, the agency said in a report published last week.
That said, according to energy economist Lungile Mashele, Russia’s war has definitely prompted a shift to energy security and energy sovereignty.
“I do expect renewables to keep on their upward installation trajectory as they have been over the last few years, however, as things stand, nuclear (25%), gas (20%) and coal (14%) are the three technologies used predominantly in Europe,” she noted.
Mashele expects that the energy market will plateau in 2023, with little volatility on the horizon.
The oil price, she said, should stabilise at $78 per barrel this year on the back of good fundamentals and a resilient global market.
The growth question
“The only upset I anticipate would be a global recession which would send oil prices spiralling on the back of reduced demand. The timing, depth and spread of the recession however, is unknown,” Mashele added.
Recession concerns, a result of increased tightening by central banks, have dampened the commodity outlook.
Growing fears about the health of the global economy have driven oil prices down significantly. Supply pressures have also eased, with the IEA forecasting this week that oil supply will outstrip demand during the first half of 2023.
However, the IEA also expects that a supply deficit could come as soon as the second half of the year, as China’s recovery amps up demand and an EU embargo on Russian oil takes effect.
China’s Covid-related slowdown dampened global trade growth and international commodity prices in 2022. The International Monetary Fund recently upgraded China’s 2023 growth from 4.4% to 5.2%, though the rate of its recovery is still in question.
Investec chief economist Annabel Bishop noted that the world has adjusted to war’s impact on energy supplies — but not fully.
Prices are still elevated compared to their pre-pandemic levels, with their slowdown aided by lower global economic growth.
“This is key,” she said, “as a quickening in global growth would exert higher pressure on energy prices, which are still sensitive to supply considerations, of which the ongoing Russia-Ukraine war is one.”
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