Price pressures are slowing down worldwide, but what about the inflation forecast for Azerbaijan? An observation by Caliber.Az

Efforts by the world’s leading central banks to tighten monetary policy, as well as a notable drop in supply chain problems, increase the likelihood of easing inflationary pressures. Next year’s recession should further contribute to this, which will help reduce commodity prices and freight rates to some extent. All this is expected to slow down the flywheels of the imported inflation, which is the main reason for the price increase in our country. These trends have been taken into account by the parliament when approving the State Budget of Azerbaijan for 2023, with the inflation forecast halved in its draft document.

According to several important indicators, global inflationary pressures reached their peak in early October, and the pace of price increases in the coming months will ease. Referring to Financial Times analysts, the available statistics suggest that the problems in the supply chains are easing. In fact, the prices of leading manufacturers of goods, the cost of raw materials, components, as well as ship charters and tariffs for other modes of transport are gradually dropping today from recent record-high numbers.

Inflation has already reached its peak in several dynamic economies and is slowing down, including Brazil, Chile and Thailand. Similar trends are also observed in developed countries such as Germany, where prices of goods fell by 4.2% in October compared to the previous month. In the US and UK, the growth of wholesale prices in annual terms is slowing down since the summer of this year.

As of October 2022, the G20 countries recorded an overall decline in the annual growth rate of producer prices according to Capital Economics. A similar opinion is held by analytic experts at the international rating agency Moody’s Analytics, which believe that inflation probably reached its peak level of 12.1% in October 2022. Since then, the easing of price pressures and supply-chain problems has brought about a rapid slowdown in prices.

To some extent, these positive trends are linked to the tightening of the US Federal Reserve’s (Fed) monetary policy, which recently raised the interest rate by 75 basis points, ranging now between 3.75% and 4% per annum. Similarly, the European Central Bank (ECB) has also increased the refinancing rate by 75 basis points, to 2%, and plans to increase it further in the next six months. Refinancing rates are also rising in Canada, Switzerland, Israel, South-East Asia, South Africa and several other regions around the world. This is done to curb inflation, but indirectly leads to an increase in the cost of credit and, consequently, a slowdown in economic growth, which reduces global demand for goods, components and commodities, including energy.

Unsurprisingly, all recent forecasts by the International Monetary Fund (IMF) and the World Bank suggest that the risks of a global recession are mounting as monetary policies are tightened by regulators. Capital Economics experts share a similar opinion, predicting the US gross domestic product (GDP) to shrink by about 0.5% in the next six months. An even more unpleasant forecast was given by them for the recession in the EU and the UK, where already today, against the background of the energy crisis and the severance of trade ties with sanctioned Russia, there is a decline in production. Next year’s GDP may fall by more than 2%, given the intensification of destructive trends that are harming the already shattered globalist world order of the past three decades.

Bloomberg, in this regard, recalls the new US law aimed at reducing inflation, which includes lightening the tax burden and providing incentives to American energy companies to encourage people to buy local goods (“Buy American” initiative). A key provision of the US law is a tax deduction on sums of up to $7,500, encouraging consumers to buy US-assembled electric vehicles that have batteries made with American components.

Washington, which was generally promoting the new law, was motivated primarily by the idea of China’s economic isolation but Germany and France, the EU’s strongest economies, believe that the US initiative is essentially protectionist and violating market competition. There also exists a view in the EU that unilateral steps by the US will inevitably have a negative impact on the European industry and may eventually split transatlantic unity. Wherever possible, France’s President Macron calls European countries to fight against the “unfair policy of the USA” and to adopt a similar law, namely to “buy European”.

Concerns about the new US law are also being raised in Japan.

Either way, the regulators' policy of raising interest rates and US protectionist moves will contribute to a decline in global trade turnover by slowing stock-market activity and cooling the overheating of some segments of commodity markets. All of this together will certainly slow the global economy, but a reduction in inflation could be a positive effect of the expected recession.

This is a very important point, as the factor of imported inflation is still the main cause of the price increase in Azerbaijan. At his recent address at the plenary session of the national parliament (majlis), the Chairman of the Central Bank of Azerbaijan (CBA) Taleh Kazimov noted that in October the annual inflation in the country amounted to 15.6% and, according to CBA’s estimates, this is mainly due to external negative issues: imported inflation.

Quite a justified conclusion, as negative processes observed in the world inevitably create risks for Azerbaijan. However, our country’s resilience to crises is based on a low level of public debt, growing foreign exchange reserves and, not least, a positive foreign trade balance, which will continue in the coming year, given the still high oil prices and plans to increase gas exports to the EU through the Southern Gas Corridor. Judging by the draft state budget for 2023 presented in the mejlis and published data of economic, social and other nature, next year’s GDP growth is estimated at 2.7% which will significantly increase in 2024 to reach 4.1%. It will maintain moderate growth in 2025-2026 of 3.7% and 3.4% respectively. Thus, our country will not only maintain its enviable crisis resilience in the foreseeable global recession but will also ensure macroeconomic stability, with priority given to the implementation of a set of measures to curb consumer price rises.

The Government of Azerbaijan is quite optimistic in this regard and, within the framework of the budget package for 2023, forecasts average annual inflation of 6.9%. Fighting inflation and strengthening monetary stability is the main goal of the CBA for the future, and the next step in this regard was to increase the interest rate by 25 basis points - up to 8% in late October. The lower threshold of the percentage corridor has been increased from 4% to 5% with the upper limit kept at 9.25%.

“The CBA will continue the policy of stable exchange rate of monetary policy next year. Our mandate is to ensure macroeconomic stability, price stability”, Chairman Kazimov stressed.
Leading international financial institutions also confirm the trend of decreasing the inflationary burden in Azerbaijan: in the October updated IMF forecast for the world economy, the average annual inflation rate in the republic is noted to fall to 9% in 2023, meaning a single-digit level. In turn, the European Bank for Reconstruction and Development (EBRD) predicts in their report titled “Transition Report 2022-2023” that the average annual inflation in Azerbaijan this year will fall to 12.2% with the prospect of further decline to one-digit levels next year.

Whether these positive expectations will be true will become clear next year. For now, it is clear, that the pressure from the imported inflation will be softer in 2023 than it was in the past 18 months.