April 2023 Economic Review

April economic and market update

The year 2023 started with unpleasant economic effects – from the unending interest rate increases, inflation rate, a continuation of geopolitical tensions and the ongoing local energy crisis. These issues continued into April and have since caused uncertainty amongst investors across the world. Locally, South Africa experienced its ninth consecutive interest rate hike of 50 basis points, with hopes of taming inflation, raising prime to its highest level at 11.25%.

Furthermore, the South African growth outlook has been discouraging, with a high possibility of little to no economic growth. This has led to expectations of contracting corporate earnings and rising recession risks, which could lead to a sell-off in the market if valuations become overstretched. Citywire, BusinessLIVE and BusinessTech have all reported signs of South Africa’s economy approaching a recession. However, finance minister Enoch Godongwana batted away claims of a looming recession by stating in an interview with Reuters that South Africa will not fall into recession this year, irrespective of a gloomy International Monetary Fund (IMF) forecast and a contraction in the last three months of 2022. Food inflation increased to 14,4 %, leaving most South African consumers under financial strain in April. It also looks as if this strain will continue into May.

The ongoing energy crisis

South Africa’s severe power crisis, caused by a decline in Eskom’s ability to meet electricity demand, has had a negative impact on the country – with no answer as to when the energy crisis will end. April began with Eskom announcing electricity tariff increases of almost 19%, as approved by the National Energy Regulator of South Africa (Nersa). This percentage has increased significantly more than inflation since the beginning of load shedding in 2008. Electricity tariffs have increased by 653% over the last 15 years while inflation increased by only 129% during the same period. Rolling power cuts do not only impact South African citizens; most sectors of the economy are also negatively affected, with implications for unemployment and the economy.

Electricity minister Dr Kgosientsho Ramokgopa added 4000 MW of electricity to the underperforming grid as a proposed plan to prevent more power cuts, in an attempt to solve for the national energy crisis. In the proposal, he suggested using more diesel turbines and increasing fuel storage capacity. Eskom’s former chief operations officer also supported the notion of extending the life of some of the coal-fired power plants but stated that Eskom’s target of improving their performance by the end of March next year is unrealistic. There are increased risks of higher stages of loadshedding, adding more implications to the already-lowered growth rates.

A possibility of de-dollarisation

The US dollar has been trading as the global reserve currency for decades.  According to Bloomberg, the currency seems to be losing its dominance because China, Russia, Brazil and Turkey (to name a few), traded using their own local currencies as alternatives to the US dollar during the first quarter of 2023. This process is known as de-dollarisarion, where the US dollar is substituted as the currency for trading commodities and other goods and services. Some countries view the dominance of the US dollar as a threat to their independence and do not want the US dollar to influence their economy.

The Commonwealth Financial Network chief investment officer explained how difficult it would be to abandon the dollar by stating that the US is the largest open trading economy and everyone in the world wants access to the US economy. He also cited the tediousness and inconvenience of switching currencies, and concluded by saying that the position of the dollar as the global reserve currency is secure.

China’s re-opening

China’s economy grew 4,5% year-on-year in Q1 2023. According to the IMF, China will be the top global growth contributor over the next five years. China’s manufacturing activity expanded rapidly earlier this year and production increased after the lifting of COVID-19 restrictions late last year. Consumer spending, which stemmed from retail sales and travel, also increased, ultimately boosting the Chinese economy. The property sector also experienced some positives for this year compared to last year’s declines caused by a surge in COVID-19 infections, which posed an economic threat.

Chinese authorities have responded with measures to encourage the delivery and completion of real estate projects which include monetary easing, tax relief for firms, and new vaccination targets for the elderly, amongst others. Overall, there are many presold unfinished houses to be delivered, generating downward pressure on Chinese house prices, which price floors have so far limited in some regions. China has been exporting mostly to Asian countries and between 5% and 10% to other geographic regions. Furthermore, the reopening and growth of its economy is another positive, especially because there are countries relying on Chinese tourism.

Interest rates rise and an economic activity slowdown

Global interest rate hikes could have more contractionary effects than expected, increasing debt levels. A need for more monetary tightening might arise if inflation remains worse than expected. Banks suggested that they would be able to take on the effects of monetary policy tightening and adapt smoothly because of strong liquidity and capital positions. However, some financial institutions that relied heavily on the low nominal interest rates of the past few years have come under stress and have been finding it difficult to adapt to the rising interest rates. The unending rise in interest rates and slowing of economic activity to put inflation on a downward path have raised concerns around financial stability and directly impacted the financial system. The economic turmoil and global pandemic have also led to private and public debt in most economies. The IMF projects interest rates to return to pre-pandemic levels in the future, with an analysis that suggests that real interest rate increases are likely to be temporary. Major central banks have highlighted a restrictive monetary policy stance, and interest rates are expected to stay higher for longer than previously expected, to address sticky inflation.

Market overview

Global markets

Global equity markets were in positive territory, with the MSCI World Index increasing 1.75% month-on-month (in US dollars) and 4.86% month-on-month (in rands) in April. The Dow Jones increased 2.57% with the  FTSE 100 Index increasing at 3.35% month-on-month. Global Bonds increased 0.44% month-on-month and Global Property rose 1.93%. The MSCI Emerging Markets Index declined -1.11% in April, with the S&P 500 increasing 1.56%. The Gross Domestic Product (GDP) in the United States rose at a 1,1% annualised pace in Q1 2023.

While most of the large banks delivered reassuring earnings that settled investor fears, First Republic Bank was the latest mid-cap US regional bank to become a casualty of the mini banking crisis. It reported a 41% year-on-year drop in Q1 2023 deposits and a plan to cut 25% of its employees in order to pursue strategic options.