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Inflation has started to ease in South Africa and elsewhere — suggesting that the price spiral that followed the world economy’s post-Covid recovery and Russia’s invasion of Ukraine is simmering down.
But economists have pointed to another force that threatens to light a fire under inflation once more — El Niño, the weather phenomenon that pushes temperatures higher, threatening food security.
In their report outlining their expectations for South Africa’s economy in the third quarter, economists at Absa flagged El Niño as a potential risk to growth and to inflation. This is after the South African Reserve Bank, which recently changed tack on interest rate hikes, warned that a stronger El Niño threatens the country’s agricultural outlook.
In June, climate experts attending a summit in Pretoria pointed to what looks to be an unusually strong El Niño developing this year.
Neville Sweijd, a senior researcher at the Council for Scientific and Industrial Research, noted published data at the time had shown unprecedented ocean and air temperatures.
The last time El Niño hit South Africa was in 2015, a year marked by one of the country’s worst droughts. Between January and December, the South African Weather Service recorded only 403mm of rainfall — the lowest annual total in 112 years.
According to a 2018 study by the Alliance for a Green Revolution in Africa, the El Niño-induced drought in 2015 caused crop failure resulting in worrying food shortages in a number of countries, including South Africa. The country’s maize prices escalated 22% above their five-year average, it found. During the drought, South Africa imported maize for the first time since 2004.
Though inflation was contained in 2015, the following year prices ticked up above the Reserve Bank’s 3% to 6% target range, peaking at an annual rate of 7% in February 2016.
After hitting excruciating highs last year — in the wake of pandemic and war-related supply-chain chokeholds — South Africa’s inflation has only recently fallen below the 7% mark. The still-elevated inflation recorded in the first few months of the year was largely driven by food prices, which hit a 14-year high in March.
In June, inflation fell below the ceiling of the Reserve Bank’s target range for the first time since May last year. Coming in at 5.4% year-on-year, the June price easing was helped by a significant fall in food price inflation compared to April.
In the midst of lower inflation, last month the Reserve Bank’s monetary policy committee opted to hold interest rates at their 14-year highs. But the committee’s tone was hawkish, noting that, while global inflation has eased in the near term, the longer-term economic outlook “remains clouded by risks to the inflation trajectory, ongoing geopolitical tensions and the effects of climate change”.
On the growth front, El Niño is not a big concern, according to the Absa report, as expectations are that the weather phenomenon’s damage will be limited, given healthier soil moisture from the past four seasons of La Niña. “But El Niño remains a downside growth risk worth monitoring in the months ahead.”
The International Grains Council forecasts that South Africa’s 2023-2024 maize crop will come in at 15.6 million tonnes, down only slightly from the 16.4 million tonnes, expected for 2022-23, it notes.
“Encouragingly, domestic crop prices have not pushed sharply higher in recent months,” the report states, adding that food inflation is expected to continue to moderate during the coming months. According to the bank’s forecast, food inflation will average 10.4% this year and 4.8% next year, and risks are skewed to the upside.
Given the uncertainty surrounding El Niño’s intensity and duration, it is difficult to predict its impact on inflation.
In a research note, published last week, Investec chief economist Annabel Bishop said while inflation is expected to fall further this year, sticky food prices could keep it from embarking on a deeper descent.
Bishop also noted that the base effects of the high prices recorded in the second half of last year would result in lower inflation prints for the remainder of this year.
She said inflation is expected to average around 4.5% year-on-year next year. But there are risks, “particularly from food price inflation, with retailers seeing margin squeeze on the costs of load-shedding, while climate change is escalating globally and locally”.
“The economic effects of climate change will increasingly be felt,” Bishop added, “as will the impact of climate mitigation actions”.