Growth in household spending for this year is projected to reduce on the back of surging inflation and the adoption of the Electronic Transaction Levy pending its commencement on May 1, 2022.
The above assertion is according to Fitch Solutions, the research arm of Fitch Ratings.
According to Fitch Solutions, inflation which is likely to remain elevated over the coming quarters coupled with the implementation of the E-Levy will put downward pressure on private consumption causing it decline in 2022.
In an article assessing the Ghanaian economy for 2022, Fitch Solutions forecasts final household (private) consumption to expand to 4% this year.
The projected expansion is however below the five year average pre-pandemic household spending of 4.2% of GDP.
“We expect that elevated inflation and fiscal consolidation will present headwinds to Ghanaian households over 2022. As a result of the rapid weakening of the cedi (we forecast the 2022 exchange rate to average GHS7.25/USD, from GHS5.91/USD in 2021) and rising global commodity prices following Russia’s invasion of Ukraine, consumer price inflation increased to 19.4% y-o-y in March, the highest rate since 2009.
“Against this backdrop, we forecast private final consumption to expand at 4.0% in 2022, slightly below the five-year pre-pandemic average of 4.2% and contributing 2.5pp to headline growth,” said Fitch Solutions.
Ghanaian Economy To Face Multiple Headwinds Over 2022
At Fitch Solutions, we forecast that real GDP growth in Ghana will slow to 4.4% in 2022, from 5.4% in 2021, as inflationary pressures rise and investor sentiment weakens. Indeed, after stronger-than-expected Q421 data of 7.0% y-o-y, bringing full year data to 5.4%, we see rising economic headwinds in the coming quarters. In 2022, we expect elevated inflation and fiscal consolidation efforts to weigh on private consumption, while declines in oil and cocoa production will cap export growth. Indeed, our forecast implies that Ghanaian growth will remain below trend – growth averaged 5.8% over 2015-2019 – in 2022.
Household Spending To Drive Growth
Ghana – Contribution To Real GDP Growth, pp
f = Fitch Solutions forecast. Source: Ghana Statistical Service, Fitch Solutions
Private final consumption will benefit from an improving epidemiological situation, facilitated by the ongoing rollout of Covid-19 vaccines. As of March 31, 16.0% of the Ghanaian population had received at least two vaccine doses, which is roughly in line with the Africa regional average (15.3%) and ahead of some its West African peers, including Nigeria (6.3% on April 7) and Burkina Faso (5.8% on April 8). As the vaccination drive gathers pace, we believe it is unlikely that the government will re-impose new restrictions that would significantly weigh on economic activity. Indeed, most domestic restrictions on in-person activities were lifted on March 28, providing tailwinds to consumer spending.
That said, we expect that elevated inflation and fiscal consolidation will present headwinds to Ghanaian households over 2022. As a result of the rapid weakening of the cedi (we forecast the 2022 exchange rate to average GHS7.25/USD, from GHS5.91/USD in 2021) and rising global commodity prices following Russia’s invasion of Ukraine, consumer price inflation increased to 19.4% y-o-y in March, the highest rate since 2009. With our Oil & Gas team projecting the price of Brent crude to average USD100/bbl over 2022, inflation is likely to remain elevated over the coming quarters, which will put downward pressure on private consumption. Moreover, the adoption of a 1.5% tax on electronic payments, including mobile money transactions, bank transfers and merchant payments, which is set to come into effect on May 1 2022, will further cap household spending growth. Against this backdrop, we forecast private final consumption to expand at 4.0% in 2022, slightly below the five-year pre-pandemic average of 4.2% and contributing 2.5pp to headline growth.
Inflation To Weigh On Private Consumption
Ghana – Consumer Price Inflation, % y-o-y
Note: Fitch Solutions forecast. Source: Bank of Ghana, Fitch Solutions
Declining business confidence points to a modestly weaker outturn for gross fixed capital formation over 2022. The Ghanaian purchasing managers’ index (PMI) came in at 46.9 in March, the lowest reading since May 2020, the height of the pandemic, and below the 50-level separating expansion from contraction (see chart below). This signals an expectation that manufacturing output is set to decline and that business conditions are deteriorating, fueled by elevated inflation, the depreciation of the cedi, tightening monetary conditions (the BoG hiked its policy rate by 250 basis points in March) and growing concerns among investors around Ghana’s fiscal position. In addition, limited fiscal space is likely to cap capital spending, with public sector wages and interest payments accounting for roughly 53.0% of total planned government spending in 2022. That said, elevated gold prices – our Mining team has increased their gold price forecast to USD1,900/oz in 2022 from USD1,700/oz previously – will provide some tailwinds to fixed investment in Ghana’s large precious metals sector. Taking the above into account, we see gross fixed capital formation expand by 5.2% over 2022, adding 1.1pp to headline growth.
Business Activity To Weaken Amid Growing Investor Concerns
Ghana – Purchasing Managers’ Index (PMI)
Note: Readings above 50.0 signal improving business conditions. Source: S&P Global, Bloomberg, Fitch Solutions
Net trade will act as a tailwind in 2022. While we forecast net exports will add 1.0pp to growth, this is lower than the five-year pre-pandemic average of 1.5pp. We believe that maturing oil fields and previous underinvestment in the oil sector will prevent Ghana from increasing its hydrocarbon output over the year. Indeed, our Oil & Gas team forecasts that oil production in Ghana will fall by 1.9% in 2022. Similarly, the spread of the cacao swollen shoot virus will result in a weak cacao harvest – our Agribusiness team projects that Ghana’s cacao production will decrease by 3.5% over 2022 – preventing Ghana from increasing its cacao exports. These headwinds to exports will be somewhat tempered by stronger gold production, which will be supported by the recommissioning of the Bibiani gold mine – expected to start its first gold pour in Q322 – and the government’s efforts to curtail illicit mining activities. Services will also offer some tailwinds to export growth, with international tourist arrivals set to accelerate in 2022 as travel restrictions are scaled back. However, strong import growth on the back of rising consumer demand will largely offset export gains.
Rising Gold Production To Offer Tailwinds To Exports
Ghana – Gold Mine Production, moz
e/f = Fitch Solutions estimate/forecast. Source: USGS, Fitch Solutions
In 2023, we forecast that growth will accelerate slightly to 4.8% – although still below the 2015-2019 average of 5.8%. We expect inflation to come down, averaging 9.0%, which will improve purchasing power of Ghanaian households and support private final consumption. In addition, we see gross fixed capital formation growth accelerate as business sentiment improves on the back of easing inflation and a more stable cedi. That said, we hold a tepid outlook for exports growth as oil production is likely to remain stagnant and well below pre-pandemic levels.
Source:norvanreports