The outlook for 2024? Challenging and volatile
Fiscal stimulus in this environment can be viewed with the suspicion that it’s driven by political considerations in the run-up to elections
This year is likely to be one of the most challenging yet for policymakers, and very volatile for financial markets. First, there are two major wars — Russia vs Ukraine and Israel vs Hamas — that continue to pose risks to global supply chains, energy markets, inflation and general geopolitical stability.
Second, it is a global election year; more than 70 countries, including South Africa, the US, India and the UK, head to the polls to elect leaders or governments. There are various implications for economic policy and how to respond to them.
Let’s begin with the risks for financial markets. In many countries there is the possibility that elections can produce unexpected outcomes. In South Africa there are two possibilities with fat tail risks — an unstable coalition, or an outright majority for the ANC.
Both can lead to wide swings in asset prices: a significant sell-off in the case of potentially populist and unstable coalitions, or a major rally in the case of the governing party maintaining its majority at the national level. But the financial markets are pricing neither of those possibilities.
From a policy perspective, the critical question is how the authorities set economic policies in this highly uncertain outlook, both from an economic and political perspective.
Fiscal and monetary authorities can be seen to be aiding or working against the existing governing parties if they loosen or tighten policy, even where economic conditions demand those policy stances. Effectively, policymakers are damned if they do and damned if they don’t.
It is critical to assess the body of evidence policymakers put forward in justifying their decisions. However, even with enough evidence from a technical perspective, there are always other considerations beyond the actual functioning of the economy that critics can level against policymakers for making certain choices. Thus, evidence alone won’t cushion them from criticism.
With two wars keeping geopolitical uncertainty and global fracturing high, economic growth is expected to slow, which will reduce external demand for domestic exports. There will therefore be a drag on domestic demand that will keep a lid on South Africa’s economic growth prospects. Tax revenues are likely to struggle due to muted domestic economic growth.
Fiscal policy will therefore remain constrained this year on account of limited potential for tax revenue growth in an environment in which fiscal consolidation is the right policy choice due to debt levels that are already on the upper side relative to other emerging markets.
Fiscal stimulus in this environment is unwarranted and can be viewed with the suspicion that it’s driven by political considerations in the run-up to elections.
The blockage of some ships in the Red Sea, forcing them to go around Cape Town, has the potential to push prices higher and so, too, inflation. That’s a clear risk for monetary policy this year.
Already, several major central banks, including the Reserve Bank, have highlighted these risks and signalled that cuts in policy rates are unlikely to be soon. Inflation and inflation expectations remain well above many central bank targets, thus expectations of earlier cuts in rates are potentially too optimistic.
Many of the considerations for stimulating economic growth appear to be unsupportive for loose policy. Debt is unsustainable and inflation expectations are still high and off targets. The uncertain global environment is a further complicating factor, with the potential to yield unexpected electoral outcomes that can destabilise the world economy.
Monetary policy decisions must offer predictability for investors, businesses and households as they guide investment and consumption decisions. When the political situation is volatile, as is likely this year, policy must overcompensate and be less volatile.
In essence, monetary policy must necessarily be more boring now so as not to be a source of instability that can affect the ability of the economy to attract investment.
Still, when evidence suggests particular policy choices they must not stand in the way of good policymaking in an effort to accommodate the politics of the day.