Recession warning for 2023

A recession could be looming, but it’s possible to ride this wave and emerge relatively unscathed, says CHRIS HATTINGH.

In early November one of the world’s biggest shipping companies, Maersk, issued a statement projecting that global container demand will decline by as much as 4% this year. Maersk’s fortunes effectively act as a bellwether for global trade and, by extension, global economic activity; the company accounts for about one-sixth of global container trade.

While lower freight rates will be welcomed, given how much they spiked during the pandemic and lockdowns, they also indicate a generally lower level of demand.

Price pressures such as higher energy prices and labour shortages are feeding into higher inflation, making it more difficult for manufacturing to take place. Consumers are also under more pressure, with less disposable income translating to less demand for goods. That Maersk sees lower demand for containers this year indicates less economic activity and, in turn, prime conditions for a recession next year.

Maersk’s statement additionally indicates that the global economy is “downshifting”. Even though some supply chains are steadily resolving themselves after Covid-19 and lockdowns, the continued conflict in Ukraine will maintain increased pressure on European governments, companies, and consumers, while China does not appear set to radically depart from its “zero-Covid” policy anytime soon.

In the third week of September, a 40-foot shipping container from Shanghai to Los Angeles fetched US$3 779 (according to Drewry) – the first time the spot price had fallen below $4 000 since September 2020. While economic activity in China may well pick up again next year, for the time being one of the world’s major manufacturing hubs is not demanding as many containers as before.

In regions such as sub-Saharan Africa, governments are experiencing tighter fiscal conditions, and will be unable to stimulate economies as much as some others will be able to. As a whole, consumer purchasing power in emerging markets will be at heightened risk of being undermined by a strengthening US Dollar – at least, for as long as the US Federal Reserve maintains its cycle of interest rate hikes. A global recession in the second half of 2023 will heap yet more pressure on consumers and businesses.

South Africa could better weather some of these global storms if the country’s trade infrastructure were to be upgraded – or at the very least, maintained to an adequate level. In this regard, Transnet Freight Rail’s move to open slots for investment was encouraging, although because of inhibitory requirements, only one company made the eventual shortlist for a rail slot. These requirements included the fact that the contract period would only be for two years (too short a period for investors to see a meaningful return on investment), and furthermore that Transnet would remain the custodian of infrastructure.

It is unlikely that serious capital investment will be poured into rail, for as long as the state-owned entity has the ultimate say over what happens with the upgraded infrastructure.

South African businesses and consumers can better deal with coming storms if manufacturing capacity increases and skilled people are enticed to move to the country. Business and communities can do this work without needing to wait for macro reforms to come from the central government.

Looking at different port avenues to export one’s materials, products, and goods would be one such exercise that could serve one well in the future. Making sure that there is at least some redundancy for electricity generation and water sources could also prove useful, based on how far municipal service delivery quality has declined.

Tighter economic conditions and higher credit borrowing costs are the likely future, both for South Africans and the global community. It is likely to become a situation where the emphasis lies more on mitigating downsides as much as possible, while positioning oneself as well as possible to take advantage of the opportunities that will always be there. The biggest mistake at this point in time would be to presume that economic growth will pick up massively within the next two years, and that one’s business operations (especially in the import and export space) will continue to look the same as they have in the past.

Tougher times lie ahead. Fortunately, the data, statistics, and analysis are available to at least help one to emerge on the other side in a stronger, rather than a weaker, position.