April 2024 Economic Review

The US economy expanded at its slowest recent pace in Q1 2024, strengthening economists’ expectations that the Federal Reserve (US Fed) would not cut interest rates before September 2024. The Eurozone rebounded from a technical recession in Q1 2024, boosted by lower energy prices, falling inflation, rising real wages and the prospect of interest rate cuts. The International Monetary Fund (IMF) published its World Economic Outlook Report in April, which forecasts growth in advanced economies, although it expects emerging markets will lag in 2024 and 2025.

The Bank of Japan (BOJ) kept its interest rate unchanged after its April core inflation figure was below market expectations. The US recorded a slowdown in non-farm payrolls between March and April, which was less than market expectations. The UK business activity index rose more than expected in April, with the S&P Global Flash UK Composite Output Index rising slightly in March. The South African Reserve Bank (SARB) is still struggling to lower inflation to the midpoint of its target range. A high inflation rate is one of the key contributors to the country’s high interest rates.

Imports hold back US economy in first quarter

The US economy expanded at its slowest pace in Q1 2024 in nearly two years. This follows a rise in imports and a build-up of unsold goods at businesses, signs of solid demand as well as an acceleration in inflation, which strengthened expectations that the US Fed would not cut interest rates before September 2024. At its April 2024 policy meeting, the US Fed left rates unchanged in the 5.25%-5.5% range. According to Reuters, the US Commerce Department reported ‘cooler-than-expected’ growth in its Q1 GDP snapshot in April, which also reflected a downward shift in government spending. Domestic demand, a better growth measure, was strong as consumer spending and business investment picked up and the housing recovery gained steam. Trade and inventories tend to be the most volatile GDP components, and are often revised when the government updates its growth estimates.

Source: LSEG Datastream, Reuters, April 2024

The Commerce Department’s Bureau of Economic Analysis reported that GDP grew by a 1.6% annualised rate in Q1 2024 from 3.4% growth in Q4 2023. This is the slowest pace since Q2 2022 and lower than the forecast increase of 2.4% predicted by economists polled by Reuters. Economists’ estimates had ranged from 1% to 3.1%. Q1 2024’s growth was below the level that US central bank officials regard as the non-inflationary growth rate of 1.8%. Excluding inventories, government spending and trade, the economy grew by 3.1% after expanding by 3.3% in Q4 2024, ruling out the theory that government spending was fuelling the economy. The significant reduction in government spending emphasises the central bank’s commitment to bringing inflation down without causing a recession.

The US economy has outperformed other advanced economies due to support from a resilient labour market. US Treasury Secretary Janet Yellen emphasised that the economy was driven by consumer and business spending. Core inflation increased by 5 basis points in March to 3.8% from 3.75% in February, putting pressure on prices. The personal consumption expenditure (PCE) price index (the Fed’s preferred inflation measure) surged by 3.7% in Q1 2024 after a 2% increase in Q4 2023. Inflation in the US was boosted by increases in the service costs of transportation, insurance and housing, which offset a decline in the goods costs of motor vehicles and parts.

Eurozone rebounds from a recession as inflation holds steady

In the Eurozone, Q4 2023 GDP was revised down to -0.1% from a previous 0%, putting the region into technical recession in the second half of 2023. The figures reflect general expectations of a slow recovery in the Eurozone. In April, the IMF forecast that Eurozone GDP would rise by 0.8% in 2024, double the rate of 2023, and by a healthier 1.5% in 2025.

The Eurozone economy rebounded in Q1 2024 as growth revived in Germany, largely driven by the construction sector and exports. Inflation steadied, strengthening the case for the European Central Bank (ECB) to cut interest rates. Official data in April showed that Eurozone GDP increased by 0.3% quarter-on-quarter (q/q) in January-March 2024 and by 0.5% year-on-year (y/y), compared with market expectations of 0.2% for both comparative periods.

April data showed that Eurozone headline inflation steadied at 2.4% y/y, which makes it more likely that the ECB will cut interest rates at its 6 June meeting, when the European Union public starts voting in the European Parliament election. Bank of France Governor Francois Villeroy de Galhau supported the notion of a June rate cut, saying that the data boosted confidence that inflation would return to the ECB’s 2% target by 2025. He said that the speed of subsequent cuts would depend on the inflation outlook beyond the month-to-month (m/m) results, which could show a certain level of volatility.

Source: Eurostat, April 2024

Germany, the Eurozone’s largest economy, returned to growth in Q1 2024 with a bigger-than-expected 0.2% expansion from Q4 2023, due to exports and construction investment, which were boosted by unusually mild winter weather. UniCredit said rising trade and lower inflation would probably moderate German growth in the coming quarters. Spain’s economy grew by 0.7% q/q, beating analysts’ forecasts of 0.4% growth, which was attributed to greater investment and private consumption. Spain’s industrial and construction sectors both expanded in Q1 2024. France also gained momentum in Q1 2024, growing slightly faster than expected after a pick-up in consumer spending and business investment. This growth is good news for the French government, which drew fierce criticism for its handling of the economy after it revised its 2024 growth forecast down in February.

For your interest:

1. IMF forecasts global economy to be steady but slow

• The IMF forecasts that the world economy will continue growing at 3.2% in 2024 and 2025. This is the same pace as in 2023. It expects a slight acceleration in advanced economies, with growth rising from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025. Growth will be offset by a modest slowdown in emerging market and developing economies from 4.3% in 2023 to 4.2% in both 2024 and 2025.
• The forecast for global growth five years from now – at 3.1% – is at its lowest in decades. Global inflation is forecast to decline steadily from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developed market economies. Core inflation is generally projected to decline more gradually.

(Source: IMF, April 2024)

1. Japan keeps interest rates unchanged

• The BOJ kept its policy rate unchanged after its monetary policy meeting, holding its benchmark policy rate at 0%-0.1%, in line with forecasts by economists polled by Reuters.
• This decision was reached after April’s inflation was lower than expected, with the core inflation rate at 1.6% compared with Reuters expectations of 2.2%. The BOJ said it would continue to conduct bond purchases in line with the March decision. The bank said in March that it bought about six trillion yen (US$83.5 billion) worth of bonds per month in the past.

(Source: Reuters, April 2024)

2. US adds more jobs in April

• April’s non-farm payroll data shows that US employment increased by 175 000 in April, less than the 243 000 expected. That represents a sharp slowdown from March, when an upwardly revised 315 000 jobs were created, while February’s figure was revised down from 270 000 to 236 000. Jobs were added in healthcare, social assistance employment, and the transportation and warehousing sectors.
• The slower-than-expected gain is the lowest since October 2023, as the Fed has sought to cool demand to tame high inflation. The unemployment rate ticked higher to 3.9%, according to the Bureau of Labour Statistics.

(Source: CNN Business, April 2024)

3. UK business activity expands in April

• UK business activity rose more than expected in April, marking the fastest growth since May 2023, according to a survey that also flagged increasing cost pressures in the economy.
• The S&P Global Flash UK Composite Output Index rose to 54 in April from 52.8 in March, well above the 52.6 forecast by economists polled by Reuters, according to data released in April. A figure higher than 50 indicates expansion.

(Source: Financial Times, April 2024)

South Africa’s inflation risks

South Africa’s headline inflation has slowed but there were setbacks in food and fuel prices in recent months, causing an uptick to 5.3% in March, which is closer to the upper limit of the SARB’s 3-6% inflation target band. The SARB has always had a 4.5% midpoint inflation target but achieving it has become increasingly challenging because of administered prices for services like electricity, water and education. The SARB said the resulting stickiness in core inflation has slowed the path towards the 2-3% inflation targets that many central banks are trying to achieve. The SARB said that many emerging market economies continued to experience currency volatility and higher-than-desired inflation, despite global interest rates remaining near all-time highs. The South African repo rate has remained unchanged since May 2023 at 8.25%, with consumers feeling the effects of persistent inflation and an uncertain domestic outlook.

The SARB said administered prices continue to exert substantial upward pressure on headline inflation. Other administered prices, including education and assessment rates, are influenced by headline inflation outcomes and should be more closely aligned to the target midpoint itself. Reducing headline inflation would bring down administered price inflation, creating a virtuous cycle. Inflation is projected to drop to the midpoint of the target in future years, as depicted in the chart below.

Source: Stats SA, SARB, April 2024

Market overview

Global markets

Global equity markets took a step backwards in April. The MSCI World Index retraced for the first time in six months, with a -3.71% month-to-month (m/m) return in dollar terms. Emerging markets (EM) fared significantly better than their developed market (DM) peers in April, ending the month positively at 0.47% in dollars. Both global bonds and global property ended negatively at -2.52% m/m and -5.93% respectively in dollars. The S&P 500 was in negative territory at -4.08% m/m. Meta was the standout disappointment in the S&P 500, with its results accompanied by disappointing sales guidance and a pledge by CEO Mark Zuckerberg to spend aggressively on AI. The Dow Jones Index fell by -4.92%. The FTSE gained 2.47% m/m, with the EuroStoxx 50 declining by -2.26% m/m and the Nikkei by -4.86% m/m.

Local market

South African equities carried their strong momentum from March into April, with the FTSE/JSE All Share Index ending positively at 2.95% m/m in rands. Industrials, Resources and Financials were in positive territory at 6.78% m/m, 6.4% m/m and 2.95% m/m respectively, while Property ended in negative territory at -0.59%. The bond market gained for the month, with the FTSE/JSE All Bond Index ending at 1.37% in rands. Bonds of 1-3 years were positive, ending the month at 0.41%, with bonds of 3-7 years at 0.56% m/m, bonds of 7-12 years at 1.27% m/m and bonds of above 12 years ending at 2.31% m/m. As in March, the rand ended strongly in April, gaining 0.53% m/m against the US dollar, 1.54% m/m against the euro, 1.43% m/m against the pound, 3.98% m/m against the Japanese yen and 0.0005% m/m against the Australian dollar.