August 2023 Economic Review

August 2023 economic and market update

The BRICS bloc has shown their commitment to developing the world and obtaining a large share of the global GDP. The biggest news from the BRICS Summit in August was the addition of new members to the bloc. Globally, the US is continuously looking at ways to tame inflation to achieve the 2% target and has put restrictive monetary and fiscal measures in place, one of them being the need to increase interest rates. China, however, has cut rates in order to recover economically after the impact from the Covid pandemic. The ongoing Russia-Ukraine war has had detrimental effects on both countries, and Russia had to significantly raise its benchmark rate to hedge against a declining currency. Locally, the inflation rate continued slowing to a little below the upper end of the 3-6% target range, but the SA Reserve Bank Governor says there are still some inflation risks to be monitored. China has also provided a donation to South Africa to assist with the energy crisis.

BRICS adds new members to the bloc

The 15^th annual BRICS Summit took place in Sandton, Johannesburg, in August with various business leaders joining forces to discuss some of the key global economic issues, to create a more inclusive world order that empowers nations and people. The BRICS countries aim to tackle challenges through continuous collaboration across climate issues, investment financing for development, combatting crime and terrorism, economic empowerment, and job creation amongst others. A historic moment from the summit was the announcement of six new members to the bloc, with hopes of expansion and achieving 50% of global GDP by 2050 and gaining global economic power. The new members, which will formally become part of the bloc from 1 January 2024, are: Saudi Arabia, Iran, Ethiopia, Egypt, Argentina and the United Arab Emirates (UAE), and the door has been opened to add more members who’ve shown interest to join the bloc in the future.

The addition of the UAE, Saudi Arabia and Iran will increase oil production, with Ethiopia contributing to the global growth rate. Argentina, Chile and Bolivia account for 60% of the world’s known deposits of lithium according to an article by the World Economic Forum. In support of the expansion, South African President Cyril Ramaphosa said BRICS has embarked on a new chapter in its effort to build a world that is fair, just, inclusive and prosperous. He also stated that this is only the first phase of the expansion, with other phases looking to follow. Chinese President Xi Jinping said the expansion shows the determination of BRICS countries for unity and cooperation with the broader developing countries. Some of the key decisions made by the BRICS members include unlocking trade and investment opportunities, opening new markets through the African Continental Free Trade Agreement, empowering entrepreneurs and small and mid-size enterprises, creating a sustainable economy that develops ecofriendly jobs, and investing in agriculture. The below table details the additional new members to the BRICS bloc, their population and share of global GDP:

Source: Visual Capitalist, IMF, August 2023

Higher rates needed for the US

The US Federal Reserve (Fed) Chair, Jerome Powell, stated that they may need to raise interest rates further to ensure inflation is contained to achieve the 2% inflation target. The US economy performed exceptionally in August, with the addition of 187 000 jobs and price pressures easing significantly. That said, Powell says the Federal Open Market Committee would need to proceed carefully when it comes to raising rates because he believes that holding policy at a restrictive level will allow for the US Fed to achieve their overall inflation target. He believes that policy has tightened and even though inflation has moved from its peak, it remains too high. Moreover, in order to achieve the target, it requires a period of below-trend economic growth as well as some softening in labour market conditions. He says they are aware that the economy may not be cooling as expected because of robust consumer spending and a rebounding housing sector. During the July meeting, the US Fed hiked rates by 25 bps, taking it to the 5.25%-5.50% benchmark rate, the highest level recorded.

China’s central bank cuts interest rates

China, the world’s second largest economy, is finding ways to recover economically since being badly hit by a property crisis, weak consumer spending and an economic decline post the pandemic. The People’s Bank of China (PBOC) cut its one-year loan prime rate by 10 bps from 3.55% to 3.45% in August amid an economic slowdown. However, the five-year loan prime rate remained at 4.20%. The rate cuts are a result of the PBOC lowering its medium-term policy rate and finding ways to increase credit demand. The Chinese yuan has also been underperforming against the US dollar during the month with imports and exports indicating a sharp decline. The National Bureau of Statistics of China reported that the country had fallen into deflation, with consumer prices falling by 0.3% year-on-year (y/y) in the month of July, due to slowing domestic spending. Falling food prices also had an impact on the overall cost of living. The pressure to boost economic stimulus and restore consumer confidence lies with the Chinese government, while also considering the high youth unemployment, weak housing market and a drop in foreign investment amongst other factors.

Russia raises benchmark rate amid currency depreciation

The Bank of Russia announced an emergency interest rate hike of 350 basis points, taking Russia’s interest rates from 8.5% to 12%. The last rate hike (since September 2022) by the Russian central bank was in July – from 7.5% to 8.5%. The decision to hike rates was made by the Kremlin (Russian government) to tighten monetary policy in an attempt to tame inflation and after the rouble dropped to a 16-month low against the US dollar. The ruble has been at a low level since Russia’s war with Ukraine. Higher Russian oil prices have also contributed to the low currency levels. Analysts who study Russia have noted that the lagging currency does not mean the Russian economy is in freefall – though it is facing challenges, including rising prices for households and businesses. The Russian inflation rate has reached 7.6% over the past three months and the demand for goods has exceeded the country’s production supply.

SA inflation slows to its lowest level

The South African inflation rate pleasingly fell within the SA Reserve Bank’s targeted range of 3-6%, reaching 4.7% in July from 5.4% in June. This is the lowest reading since the July 2021 reading of 4.6%, and provides hopes of a further rate pause following the previous rate pause by the Monetary Policy Committee in July. However, the Reserve Bank Governor has given a warning that there are still inflation risks that they will need to watch closely and it does not mean an end to the interest rate hiking cycle. The outlook for the SA economy is on both growth and the economy. Moreover, he mentioned the rand as one of the risks to the SA inflation forecast. The rand has depreciated almost 9% against the dollar this year, making it the fourth-worst performing emerging market currency of those tracked by Bloomberg. Statistics SA also recorded an average consumer price increase of 0.9% between June 2023 and July 2023, up from the monthly rise of 0.2% recorded in May and June. The chart below depicts the inflation rate fluctuations from August 2022 to July 2023.

Source: Trading Economics, August 2023

South Africa and China sign power deals

The load shedding crisis has been crippling South Africa’s economy, affecting domestic businesses while reducing investor confidence, worsening the already failing infrastructure, and negatively impacting communities and people at large. As part of resolving the record-breaking energy crisis and enhancing its energy collaboration with SA, China has donated equipment and a grant to South Africa to provide development assistance. The donation includes emergency power equipment worth R167 million and a grant of R500 million. The two countries have a shared dedication to environmentally-friendly, low-carbon and climate-resilient development. Moreover, China is SA’s largest global trading partner and an alliance in the BRICS bloc. The country also provided support to SA at the peak of the Covid pandemic through vaccines and personal protective equipment, and cancelled debt from various African countries. South African President Cyril Ramaphosa expressed gratitude for the donation which will improve the country’s wellbeing.

Market overview

Global markets

Global equity markets stumbled in August with the MSCI World Index ending the month at -2.3% in dollar terms. Global Bonds were recorded at -1.37% month-on-month (m/m) and Global Property at -3.30% m/m respectively, in dollar terms. Despite the bulk of the year’s equity market returns coming from US-domiciled, mega-cap tech and chip companies, this area of the market held up relatively well and the S&P 500 Index ended the month at -1.59% in dollar terms. The FTSE 100 Index declined by 2.50% m/m. Emerging market stocks fared even worse than those in developed markets, ending the month at -6.14% in dollar terms. Chinese companies were the biggest drag. Looking at the bond market, the All Bond Index finished the month at -0.23% with the 1-3 year bonds at 0.91%, 3-7 year bonds at 0.74%, 7-12 year bonds at -0.13% and bonds of above 12 years at -1.10%.

Local market

The SA stock market followed global equity markets lower with the FTSE/JSE All Share Index at -4.77% m/m, leaving local equities only slightly positive. Industrials and Resources were the biggest drag and ended the month in negative territory at -5.05% and -9.57% respectively. Property ended the month with a positive 0.92%. Financials were at -1.78 m/m and Cash at 0.69% m/m. The rand underperformed against the US dollar, ending the month at -6.08%. The local currency was still in negative territory against the euro but fared better at -4.59% m/m. When compared against the British pound and the Japanese yen, the rand ended the month at -4.63% and -2.27%, respectively. The rand showed some resilience against the Australian dollar, although still ending the month at -1.29%.