By: Josef Kefas Sheehama
Expectations about future inflation play a crucial role in influencing current decisions on consumption and investment.
Therefore, the long-term relationship between household savings and anticipated inflation is evident from the cointegration test.
Despite some moderation in fuel costs, inflation remained uncomfortably rapid in Namibia, with an annual rate of 6% in October 2023.
The constant fuel prices is worth noting, but it does not represent the full picture about inflation in the country.
With the rising cost of living, just comparing your electricity cost to the actual units could be enough to send you into a coma.
When you consider the persistent increase in fuel prices coupled with global oil prices, transport costs and domestic taxation, you will begin to understand how inflation has affected the domestic market from commodities to business operational costs.
Therefore, the growing inflation has the capability to worsen the deep economic gap between the rich and poor in Namibia, a problem that has already been exacerbated by the global Covid-19 pandemic and the Russia-Ukraine war.
Globally, there is optimism as inflation is forecasted to decline steadily from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, aided by lower international commodity prices and tighter monetary policies.
The decline in global inflation can primarily be attributed to the decline in energy prices since the summer and because supply chains are operating more smoothly.
Yet this decline remains far off the mark for Bank of Namibia’s 3.6% target.
Core inflation is generally projected to decline more gradually. We have seen that declines in consumer price growth below 5% in the UK, USA and Eurozone are fueling expectations that central banks could take their feet off the brakes and pivot to cutting interest rates in the first quarter of 2024.
In Namibia, realised inflation increased from 5,4% to 6% in October 2023, with variations across regions.
The composition of consumption baskets influences the across-regions variation in experienced inflation.
As inflation expectations increased over the years, individuals have grown more pessimistic about the economic outlook, despite visible signs of recovery in the economy.
This prevailing pessimism poses a downside risk to the ongoing recovery, emphasising the need for policymakers to exercise caution in the swift removal of supportive measures.
Therefore, combining realised, perceived, and expected inflation provides a more realistic measure of how global factors impact domestic inflation.
DOMESTIC INFLATION AND ECONOMIC OUTLOOK
The recent inflation spike highlights Namibia’s economic challenges, with food, electricity, and fuel prices impacting daily struggles of ordinary Namibians.
Amidst these economic tremors, the path forward for Namibian consumers appears laden with additional challenges, underscoring the urgent need for comprehensive solutions.
Moreover, as inflation surges, it undermines the purchasing power of your hard-earned money.
Therefore, it is crucial to ensure that your financial resources are actively working for you.
Yet, finding a savings account that outpaces inflation is almost impossible at the moment.
The impending impact will be widespread, creating a significant financial strain for everyone.
For lower-income households, the consequences could escalate to a catastrophic level if nothing changes.
Additionally, if inflation intensifies, the government might resort to a contractionary fiscal policy.
These measures, including raising interest rates and escalating borrowing costs, could decelerate economic activity and exert downward pressure on standard prices.
The outcome would entail elevated operational expenses for businesses and a profound strain on the cost of living for households.
The Bank of Namibia anticipates a slowdown in GDP growth in 2023 due to weaker demand globally and domestically. Real GDP growth is projected to moderate downwards to 3.3% in 2023.
Hence, the weak demand, and high base effects from the diamond sector, which expanded by more than 45.0% in 2022 have a dampening impact on 2023 growth.
GLOBAL INFLATION AND ECONOMIC OUTLOOK
At present, it appears that inflation will normalise without triggering a recession. However, prices continue to rise more rapidly than desired by central banks.
The escalating global geopolitical risks, particularly related to the Russia-Ukraine conflict and the Israel-Hamas war, introduce the potential for oil price volatility.
The trajectory of these conflicts raises concerns about the overall stability of the global economy.
These geopolitical shocks have introduced uncertainty into the global political economy, impairing the world’s ability to fully recover from the impact of Covid-19.
This situation has led to new geopolitical tensions, revealing the fragility of international relations and contributing to a breakdown in the world economy.
In essence, the challenge for smaller nations is not only to maintain a level of policy independence but also to reconcile potentially conflicting geopolitical and geo-economic goals.
In conclusion, addressing the global inflation crisis requires the establishment of production and work systems that provide a good quality of life for everyone while actively avoiding geopolitical conflicts.
