SA just can’t afford the Middle East war

Things are hotting up on the war front. The world in general and SA in particular, cannot afford it. Russia’s invasion of Ukraine in February 2022 precipitated a sharp rise in oil and other commodity prices. That in turn spurred acceleration in inflation globally and a global hiking campaign unprecedented in its co-ordination, scale and speed.

The global growth outlook slumped. The prospect of another stagflation-inducing conflict should worry us all.

In SA, the start of the Ukraine war and its adverse impact on food and fuel prices led to sharp revisions in inflation expectations. The Reserve Bank’s 2022 inflation forecast jumped almost a percentage point to 5.8% between the March and January monetary policy committee (MPC) meetings that year.

By the time we got to November, inflation was forecast to average 6.7% in 2022. This deterioration in inflation expectations was accompanied by concomitant policy action. The Bank raised rates 325 basis points in 2022. The MPC hiked at every meeting, including three instances when rates were hiked 75 basis points at a time in the second half of 2022.

Oil was not the only force driving inflation in 2022. Unprecedented monetary policy accommodation was probably the spark, but the food and fuel conflagration brought about by the spike in commodity prices turbocharged already bad inflation fundamentals. This time is of course different. Inflation is low, but notably still above target for most economies.

Growth is also subdued, and interest rates already high. Even then, a wider war would lead to oil prices rising and inflation resurging. This would delay easing, and in some cases turn central banks towards further hikes. Many economies are growing below potential, and monetary policy easing is needed to spur activity. High oil prices would only extend economic misery.

The oil price response to the Ukraine war was not the worst we have seen. In February 2022, Brent rose 30% in seven days. During the Gulf war of 1990 it doubled in three months. The Iraq war of 1998 led to oil prices rising 60% in four months. All this is to say that oil prices can and do move aggressively if supply is threatened. They climbed steadily in 2024 to date, teased higher by Opec production cuts, high risk premiums because of the conflict in the Middle East, and an improvement in the demand outlook as global growth rebounds. The per barrel price of Brent in dollars is up 17% year to date. In rand terms it is up 23%. The domestic inflation outlook has already deteriorated, most recently because of high services inflation rebounding strongly on medical aid price rises.

Services inflation in the SA context could be under further pressure because of rising rental inflation. This measure, at 3.5% at last print, is still recovering from post-pandemic lows. Municipal services, running at 7.9%, are nothing to sniff at. These administered prices, totally unresponsive to underlying economic conditions and set by organs of state, form the hard underbelly of inflation, which is so difficult for the Bank to break.

So, as the MPC goes into the May meeting it will have one more headache to contend with. As it is, the Bank’s next meeting would have been a depressing one. The Bank will have an inflation path that does not see 4.5% until the middle of next year, an economy that continues to underwhelm, and a country that is voting as the MPC deliberates in what could be the most consequential general election since the one that ushered in the first democratic government in 1994.

We do not need geopolitical dynamics that could imperil inflation and growth outlooks any further.

We hope and — those of us who do — pray that war in the Middle East can be contained. The world’s people cannot afford the alternative, and South Africans have more than enough to deal with as it is.