- with inflation, FX, policy rate set to cage economy
Amid the central bank’s continued aggressive policy stance, a free-falling cedi and an eclectic collection of external factors, the research arm of Databank has projected an end-of-year overall Real Gross Domestic Product (GDP) growth rate of between 3.5 and 4.5 percent.
The lower end of the band is consistent with forecasts by the finance ministry, which in mid-year pegged the growth rate at 3.7 percent; as well as the International Monetary Fund (IMF) suggesting in its most recent Economic Outlook Report the year will close with growth at 3.6 percent, down from 5.2 percent earlier in the year.
Databank anticipates industry, and the manufacturing sub-sector in particular, to suffer the brunt of unfavourable conditions in its analysis of the first three quarters and outlook for the remainder of the year, titled Tough Times Calls for Tough Measures.
“We maintain our FY22 growth forecast at 4 percent ± 50bps as the ongoing policy squeeze, tighter operating environment, and external factors are expected to curtail growth,” the report reads in part, even as the Purchasing Managers’ Index (PMI) – which measures the prevailing direction of economic trends in the manufacturing and service sectors – plummeted to 45.6pts at the end of September 2022 from 50.8pts in January.
“With the GH cedi enduring intense depreciatory pressure, we expect that input costs will continue to rise – further constraining growth in the manufacturing sub-sector. We expect a hardening operating environment for businesses, and the monetary squeeze to remain a significant risk to the near-term growth outlook,” it added.
On the back of a strong performance in the manufacturing sub-sector, which increased by 8.8 percent year-on-year, the larger industry sector experienced a recovery in the second quarter; rocketing to 4.4 percent compared to the -0.5 percent registered in the first quarter (YoY).
Comparatively, agriculture expanded by 4.6 percent at end of the second accounting period; a 40-basis point decline from the first quarter’s 5 percent growth rate as the cost of inputs, particularly fertiliser, took a toll.
In contrast to the meagre 3.7 percent recorded in quarter-one, the services sector once more emerged as the most formidable – hitting 5.2 percent over the period. Unsurprisingly, the information and communication subsector expanded by 12.4 percent, with the main sectors being health (12.7 percent) and education (13.2 percent).
Despite an easing of pressure on the cedi owing to a number of measures introduced by the central bank as well as inflows of the US greenback, most notably from the US$1.13billion COCOBOD syndicated loan, depleted reserves and uncertainty remain over the protracted negotiations with the IMF, Databank noted.
“Bare international reserves could increase offshore portfolio outflows. Offshore investors question government’s capacity to meet its external debt service commitments and foreign portfolio outflows, considering the substantial fall in foreign exchange reserves – 2.9 months of import cover as of Aug, 22. This significant reserve fall has intensified offshore demand while limiting supply-side interventions from the central bank,” the report noted.
This, Databank believes, will keep demand for forex safe-haven assets to remain heightened in the near-term.
“An uncertain economic environment could sustain demand for safe-haven assets. As inflation still outpaces domestic yields and the GH¢ continues to depreciate, the risk of holding onto GH¢-denominated assets have been elevated due to losses associated with inflation and depreciation.
“Local investors will likely seek safe havens to protect capital and real returns. This approach has enhanced the allure of US$-denominated assets among local investors. We expect the corresponding foreign exchange demand for safe-haven assets will exert further depreciation pressure on the local currency in 4Q22,” it explained.