Impact of anticipated US recession on local economy
The United States economy is heading towards a recession, based on growing concerns from reputable banks and economists there.So, how will this impact the Namibian economy?
“Recession” is a term used to signify a slowdown in general economic activities. The widely used term refers to two successive quarters of decline in a country’s Gross Domestic Product (GDP), a monetary measure of the market value of all the final goods and services produced in a country in a specific time.
According to news agency Reuters, the US economy unexpectedly contracted in the first quarter. However, domestic demand remained strong as consumer spending showed positive sentiments. A wider trade deficit mostly drove the decline in real GDP as imports surged and a slowdown in the pace of inventory accumulation.
A brief overview
Consumer spending accounts for more than two-thirds of the United States’ economic activity. Between February and March 2022, the US economy saw a successive monthly increase in adjusted consumer spending of between 0.2 to 1.1% despite rising monthly and annual inflation. The rise in consumer spending in the first quarter of 2022 is subdued and likely to fall as inflation takes centre stage. According to the United States’ Bureau of Labour Statistics, annual inflation rose to 8.5% in March 2022, the highest level recorded since 1981.
Some of the factors at play for the US economy entering a recession include a contraction in real GDP, a widening trade deficit, and low levels of unemployment, which stood at a record low of 3.6% at the end of April 2022. Others are the interest rate hikes, as the US Federal Reserve hiked interest rate by 50 basis points in May 2022, from zero to 0.5%, the newest target range of 0.75 to 1.00%. The persistent inflationary pressures emanating from Covid-related lockdowns in China and Russia’s invasion of Ukraine also worsen the situation.
Local impact
Namibia and the US trade statistics between two selected periods, 2009 - Global Financial Crisis, and 2019 - pre-Covid-19, shed some light on what we can anticipate should the US recessionary pressures become credible.
Time series data from the US Census Bureau from 2007 to 2022 reveals that almost every time the economy recorded a slow down or contraction in its overall economic activities, its demand for goods imports from Namibia increased compared to goods exports. For example, Namibia was the US’ 132nd largest goods export market in 2019. The US’ real GDP growth in 2019 was 2.3%. Its goods exports to Namibia in 2019 were valued at U$194 million, representing a 3.9% decrease from 2009.
The US goods imports from Namibia were valued at U$144 million in 2019, down 56% in 2009. A trade surplus in favour of the US was recorded in 2019.
However, in 2009, marking the end of the Global Financial Crisis of 2008-2009, a trade surplus was recorded in favour of Namibia. In 2020, the US recorded a contraction in real GDP. The US goods exports to Namibia in 2020 were valued at U$60.1 million, representing a 69% decrease from 2020. Imports from Namibia were valued at U$90.2 million in 2020, down 37% in 2020. A trade surplus in favour of Namibia was recorded in 2020.
In times of a global economic recession or a slowdown in the US economy, goods imported by the US from Namibia are always more than the goods exported by value. A contraction in the US economy will result in a trade deficit with the US trade in goods with Namibia. This means that the US will demand more goods imports from Namibia than goods exports.
The geopolitical ties between Namibia and the United States is beneficial to both countries, especially as far as the foreign currency stock is concerned.
Should the US recession pressures become more pronounced, Namibia will continue to build on its foreign exchange reserves to back its liabilities and influence monetary policy. Foreign exchange reserves are often a nation's backup funds in an emergency, such as a rapid currency devaluation. Globally, countries use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of an economic crisis, and provide confidence to foreign investors.
*Anton Mushongo is Bank Windhoek’s Market Research Analyst.