February 2024 Economic Review

Both the UK and Japan moved into a technical recession in Q4 2023 after posting two consecutive quarters of negative economic growth. UK Prime Minister Rushi Sunak is under pressure to find ways to stimulate the UK economy and address the country’s cost of living crisis. Japan battled with high economic uncertainty and inflation, which weighed heavily on private consumption and foreign investment.

US inflation rose more than expected in January because of stubbornly high shelter prices which impacted consumers. A preliminary Reuters poll showed that China’s manufacturing activity contracted in February as factory owners struggled to secure local and international orders. Eurozone business activity fell for the ninth month in a row, but the rate of decline eased in January.

In SA, President Cyril Ramaphosa delivered his State of the Nation Address and Finance Minister Enoch Godongwana presented the National Budget. In these speeches, government updated citizens on the steps it will take to move the economy in the right direction.

UK slips into a recession

The UK entered a recession in Q4 2023, as GDP declined by 0.1% in Q3 and 0.3% in Q4. The manufacturing, construction and wholesale sectors contributed to the weakness. Households have cut back on spending due to high inflation and soaring food prices, resulting in a cost-of-living crisis. If wages and salaries do not keep up with inflation, consumers will only buy goods and services that are essential to them and their families. Annual inflation was unchanged at 4%, double the Bank of England (BoE)’s 2% target but better than the record 11.1% in October 2022. Slowing inflation, expected interest rate cuts and outperformance by the manufacturing, construction and wholesale sectors could boost economic growth.

UK GDP decline (quarter-on-quarter %)

Source: Office for National Statistics, February 2024

The Office for National Statistics (ONS) estimated that UK GDP rose by 0.1% in 2023. It highlighted this as the worst performance since 2008, when the UK was recovering from the global financial crisis. 2023’s weak growth rate follows a 4.3% expansion in 2022. UK general elections will take place in the latter half of the year, putting pressure on Prime Minister Rushi Sunak, as he has prioritised growing the economy after years of stagnation.

UK’s stagnant economy

Source: CNN Business, February 2024

UK Finance Minister Jeremy Hunt is widely expected to unveil moderate cuts to some taxes, despite the weak economy and high government debt levels. He has said that low growth was to be expected due to high interest rates, which the BoE has taken to levels not seen in 26 years to tackle inflation. He said in a statement that there were signs of the British economy turning around and that he planned to cut taxes on work and business to build a stronger economy.

Japan enters a recession

Japan slipped into an unexpected recession when provisional GDP contracted by 0.4% in Q4 2023, after a contraction of 3.3% in Q3. The country lost its title as the world’s third-largest economy in US dollar terms to Germany, when its nominal GDP, at $4.21 trillion in 2023, fell below Germany’s $4.46 trillion. Private consumption fell 0.2%, less than market forecasts of a 0.1% gain, as rising living costs and warm weather discouraged households from dining out and buying winter clothes. Capital expenditure, another key private-sector growth engine, fell 0.1% compared with forecasts of a 0.3% gain.

Many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, but the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation around its 2% target. Although the country entered a technical recession during July to December, the economy’s full-year real GDP growth of 1.9% in 2023 was above 2022’s 1% growth rate.

Source: Bank of Japan, February 2024

For your interest

1. US prices increase more than expected: The US labour department reported that inflation rose more than expected in January as stubbornly high shelter prices weighed on consumers. The Bureau of Labour Statistics reported that the consumer price index (CPI) increased 0.3% for the month. On a 12-month basis, the CPI was 3.1% from 3.4% in December. Excluding volatile food and energy prices, core CPI accelerated 0.4% in January and was up 3.9% from a year ago, unchanged from December. The forecast was 0.3% and 3.7% respectively. (Source: Bureau of Labour Statistics, February 2024)

2. China’s February factory activity probably contracted for the fifth month: A preliminary Reuters poll showed that China’s manufacturing activity probably contracted for a fifth straight month in February, intensifying calls for further stimulus measures as factory owners struggled for orders both at home and abroad. China’s disappointing post-Covid recovery has raised doubts about the foundations of its economic model and stoked expectations that policymakers will need to consider reforms, as consumers hold off spending, foreign firms divest, manufacturers struggle for buyers, and local governments contend with huge debt burdens. (Source: Reuters, February 2024)

3. Eurozone business activity declines slowly in February:  A closely-watched survey in February showed that Eurozone business activity fell for the ninth month in a row, but the rate of decline eased from January. The HCOB Flash Eurozone Purchasing Managers’ Index (PMI) published by S&P Global recorded a figure of 48.9 in February from 47.9 in January. A figure below 50 indicates contraction. This is the smallest rate of decline since June 2023. Some economists said the data showed the 20-nation single currency area was moving slowly towards recovery, while others said it meant the European Central Bank (ECB) would not cut interest rates soon. (Reuters, February 2024)

4. SA’s State of the Nation Address (SONA): The final SONA of the sixth administration presented no new ideas on how the government will deal with pressing economic and societal issues. Instead, President Cyril Ramaphosa updated citizens on measures government was taking to move the country in the right direction.

The following are the key points the President made in the SONA:

• • The Asset Forfeiture Unit of the National Prosecuting Authority (NPA) was working tirelessly to recover funds stolen in the State Capture era.
  • While acknowledging the staggering unemployment rate, the President noted that the economy must grow so job opportunities can be created.
  • The energy crisis continues to put the brakes on economic growth and strains households. The National Energy Crisis Committee, which was formed to deal with the power crisis, is looking to implement new ways of energy generation.
  • The President hinted that he was on the brink of signing the much-contested National Health Insurance (NHI) Bill, which was passed by the National Council of Provinces in December.
  • The R350 Social Relief of Distress (SRD) grant would be extended. The grant, which was initially introduced at the height of the Covid-19 pandemic, has helped many unemployed citizens to survive. (Daily Maverick, February 2024)

SA’s Budget Speech 

South African Finance Minister Enoch Godongwana presented the highly anticipated Budget Speech in February, which many South Africans felt was positive. Below are some of the key issues that the minister addressed:

• Tax revenue for 2023/24 is now expected to amount to R1.73 trillion, which is R56.1 billion less than expected in the 2023 Budget. It was highlighted that government will achieve a primary budget surplus for the first time since 2008. This means revenue exceeds non-interest spending.
• An estimated R5 billion is likely to be raised in 2024/25 from tax collected as fund members access once‐off withdrawals due to the two‐pot retirement reform. The seed capital transfer is a once‐off event, so this revenue will not flow into the following fiscal years.
• To encourage infrastructure investment, the government will investigate the feasibility of a flow‐through tax, similar to that afforded to trusts and other investment vehicles, for certain clearly-defined infrastructure projects under specified circumstances.
• In February 2023, the International Financial Action Task Force (FATF) put SA on its “grey list” due to deficiencies in technical compliance and effectiveness of the country’s system to combat money laundering and the financing of terrorism. In response, government developed a strategy to build a financial system that is less vulnerable to abuse and where abusers are effectively prosecuted. In late 2022, Government enacted two key legislative amendments: the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act (2022) and the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Act (2022).
• National Treasury will develop a strategy on financial inclusion in 2024 based on the policy paper, approved by Cabinet in 2023, entitled ‘An Inclusive Financial Sector for All’. The strategy’s goals will include deepening financial inclusion for individuals, improving access to financial services for small-, micro-, and medium‐sized enterprises, and enabling diversification, competition, and innovation in financial services. Government has proposed the relaxation and modernisation of certain exchange controls to promote long-term investment and foster business growth.
• The Reserve Bank is expected to distribute approximately R100 billion from the current Gold and Foreign Exchange Contingency Reserve Account (GFECRA) in 2024/2025 and R25 billion each over the next two years to reduce the country’s borrowing requirements.

Market overview

Global overview

After a positive start to 2024, global equity markets accelerated in February, with the MSCI World Index ending the month at 4.24% in dollar terms. Emerging markets (EMs) underperformed developed markets (DMs) for four consecutive months before February but managed to slightly beat DMs, with the MSCI EM Index ending positively at 4.77% month-on-month (m/m) in dollar terms. Chinese equites rallied strongly due to economic stimulus and contributed to the performance of the MSCI EM Index. Although it was announced that Japan slipped into a recession, the Nikkei still managed to end the month positively at 7.99% in yen terms. Both Global Bonds and Global Property entered negative territory at -1.26% m/m and -0.55% m/m in dollar terms. Tech stocks contributed to the S&P 500’s positive performance of 5.34% m/m in dollar terms, with Nvidia, Meta and Amazon being the top contributors. The Dow Jones Index was positive at 2.5% m/m in dollar terms and the FTSE gained 0.19% m/m in pound.

Local overview

The South African stock market was in negative territory in February, when the FTSE/JSE All-Share Index ended at -2.44% in rand terms. Industrials and Financials were negative, at -0.79% m/m and -1.2% m/m, but Resources was the biggest laggard, at -6.92% m/m. Local Property and Cash were both positive for the month, at 0.82% and 0.65% respectively in rand. The bond market underperformed, with the FTSE/JSE All-Bond Index ending at -0.58% m/m in rand terms. Bonds of 1-3 years ended the month at -0.04%, with bonds of 3-7 years at -0.88%, bonds of 7-12 years at -0.78% and bonds of above 12 years ending at -0.53%.

Expectations of sustained higher US interest rates boosted the dollar, which was stronger against all major DM and most major EM currencies in February. The rand was among the worst-performing currencies. It depreciated against the US dollar by -3.05% m/m, the euro by -2.68% m/m and the pound by -2.4% m/m. However, the currency appreciated against the Japanese yen by 2.39% m/m.