July 2023 Economic Review
July 2023 economic and market update
Globally, macroeconomic challenges continued during the month of July. These global challenges include Chinese exports dropping to historically low levels since the pandemic started, inevitably resulting in an economic decline in China. A Chinese economic decline means that there will be an overall decline in global trade, and ideas around investment in developing economies since China is the world’s second largest economy.
Despite this, the Chinese government is still optimistic that they will achieve their desired GDP growth target of 5%. Economists were shocked by the announcement that the US Federal Reserve (US Fed) was hiking rates by 25 basis points (bps) as this has taken US interest rates to the highest level in 22 years. On a positive note, the US is close to achieving its 2% inflation target from the current 3% range. The Growth for Knowledge (GfK) Consumer Confidence Index recorded a drop in consumer confidence in the UK due to consumers holding back on spending. Locally, consumers were relieved when interest rates were paused due to inflation meeting the target range of 3-6%, amongst other critical factors.
Chinese exports drop
China has suffered massive year-on-year declines in exports since the pandemic started, which raised concerns around its growth trajectory. This is the biggest drop since February 2020. The continued declines are largely due to the Covid-19 ban which was only lifted at the start of this year amongst a weak international demand, geopolitical risks, and a struggling property sector. Policymakers in China are still grappling with defaulters; however, they have introduced cautious measures to support a property industry that accounts for more than a quarter of the economy. In June, exports dropped 12.4% in dollar terms, representing a total drop of US$285 billion. Customs data also recorded a trade surplus of US$70.6 billion in June which rose from US$65.8 billion in May. A trade surplus can stimulate economic growth and create employment opportunities for a country.
Reuters polled 30 economists who predicted Chinese outbound shipments to have fallen 9.5% year-on-year with an additional forecast of 6.8% in imports. Chinese exports and imports fell 7.5% and 4.5% respectively in May. Consumer demand has helped push the country to the brink of deflation and youth unemployment has also surged to its highest point since the provision of data by China in 2018. Questions were posed to the Chinese government on whether domestic demand can rebound without much stimulus from the government for the next few months to help the Chinese economy recover.
Chinese economy loses steam
China’s economic growth slowed to 0.8% in the second quarter from the 2.2% growth during the first quarter of the year. The National Bureau of Statistics recorded a Chinese GDP expansion of 6.3% relative to a median forecast of 7.1% by Bloomberg economists. Beijing is currently facing economic challenges, including a possibility of deflation, a weakening property market and falling exports, but hopes to achieve a GDP growth target of 5%. The People’s Bank of China held back on easing policy in July, and rates are expected to be lowered in the remaining months. According to Reuters, economists argue that weak business and consumer confidence have reduced the effectiveness of monetary stimulus, calling for fiscal policy to play a bigger role in the economy. Reuters further explains that pressure is building on policymakers to add more stimulus to the economy, including central bank interest rate cuts and further easing of property controls.
US continues hiking interest rates
Following an interest rate pause in June to assess the state of its economy, the central bank’s Federal Open Market Committee (FOMC) hiked rates by 25 bps in July. The increase takes the fed funds rate to a target range of between 5.25% to 5.50% and is the 11th rate increase since the US Fed began its fight against inflation in March 2022. This rate hike takes the benchmark borrowing costs to their highest level in more than 22 years (since 2001). When deciding whether to approve a rate hike or not, the US Fed takes into account factors including, but not limited to, GDP, consumer spending, industrial production, major economic events, a global pandemic or a massive terrorist attack.
Markets were looking for signs of the Fed not increasing rates for the remainder of the year since economic conditions are impacted. However, policymakers indicated at the June meeting that two rate hikes were still on the cards for this year. The 25 bps increase in July is one of the two anticipated rate hikes. The debate continues as to whether the US Fed needs to continue increasing rates to achieve disinflation without causing more damage to the economy. The following table shows the aggressive rate hikes from March 2022 to July 2023 – accumulating to a total increase of 525 bps.
|FOMC meeting date
|Rate change (bps)
|Federal Funds Rate
|17 March, 2022
|0.25% – 0.50%
|5 May, 2022
|0.75% – 1.00%
|16 June, 2022
|1.50% – 1.75%
|27 July, 2022
|2.25% – 2.50%
|21 September, 2022
|3.00% – 3.25%
|2 November, 2022
|3.75% – 4.00%
|14 December, 2022
|4.25% – 4.50%
|1 February, 2023
|4.50% – 4.75%
|22 March, 2023
|4.75% – 5.00%
|3 May, 2023
|5.00% – 5.25%
|26 July, 2023
|5.25% – 5.50%
Source: Forbes Advisor, July 2023
US inflation is slowing close to target
US Fed Chair Jerome Powell announced that inflation moderated to 3% from 4% in May. This is close to the 2% target they hope to achieve, with observers on Wall Street believing that it will happen sooner, but Powell stated at a news conference that the Fed still has a long way to go. He believes that they will be able to achieve the inflation target without the kind of significant downturn that results in high levels of job losses. The target can be achieved through repo rate hikes which ultimately boosts economic growth. He also mentioned that it’s possible that the committee would raise funds again at the September meeting after making careful assessments around the rate hike implications to the US economy and its consumers. The committee will assess the total incoming data including the implications for economic activity and inflation. A stable inflation rate reduces investor uncertainty and anchors inflation expectations.
UK consumer confidence plummets
Consumer confidence in the UK suffered a collapse after rising interest rates and the GfK’s Consumer Confidence Index plunged six points in July to -30. The Major Purchase Index, which is an indicator of confidence in buying big ticket items, was also down seven points to -32 due to consumers holding back on excessive spending and being more conservative, with the aim of providing for themselves and their families. The below is a Consumer Confidence Barometer created by GfK showing the changes in the Consumer Confidence Index from July 2022 to July 2023.
Source: GfK Consumer Confidence Barometer, July 2023
A survey compiled by KPMG showed that over half of UK consumers say they have reduced their non-essential spending this year, with a quarter feeling more secure than they did since the year began. The data continued to show a third of the population feeling less secure. Joe Staton, a Client Strategy Director at GfK stated that the recent fall in headline inflation will do little to improve the financial mood; consumers need to see falling prices and interest rates before that happens. He also alluded to people feeling financial pain due to economic pressures, mentioning that the confidence deficit needs to be reversed before the gains this year are lost.
SA interest rates paused
The Monetary Policy Committee (MPC) paused interest rates for July, leaving the interest rate at 8.25%. Three members voted for a pause and two voted for a 25 bps hike. This is the first pause the country has experienced since November 2021, following figures published by Stats SA at the beginning of the month which show that inflation cooled from 6.3% in May to 5.4% in June. This is the lowest reading since October 2021 when the inflation rate was at 5.0% and falls within the MPC’s target range of 3-6%. Before the announcement, South African economists had opposing views, with some forecasting a hike of 25 bps and others forecasting a pause. Those that forecasted a pause justified it with the comments that the rand was recovering against the dollar, the SA economy had slightly recovered and the inflation rate eased to targeted levels. However, Central Bank Governor Lesetja Kganyago says the interest rate pause does not mean the hiking cycle has come to an end. They will continue to monitor the data to factor in economic conditions, global issues and inflation concerns before pausing or increasing hikes. The following chart provides a clear picture of the repo rate, considering the inflation rate within the target range.
Source: SARB, Stats SA, July 2023
Global equity markets rallied strongly for a second consecutive month with the MSCI World Index at 3.36% month-on-month (m/m) in dollar terms and all the major global equity markets up for the month. Over half of S&P 500 companies – predominantly tech companies – reported Q2 2023 earnings in July. This resulted in a positive 3.21% m/m figure for the S&P 500 in dollar terms. Global Bonds ended the month at 0.69% in dollar terms and Global Property at 3.73% m/m in dollar terms. The Dow Jones closed the month at a positive 3.44% in dollar terms. The MSCI Emerging Markets Index had a positive figure of 6.29% for the month in dollar terms with the FTSE closing the month at 2.62% in sterling terms. The All Bond Index finished the month at a positive 2.29% with 1-3 year bonds finishing the month at 1.40%, 3-7 year bonds at 1.87% for the month, 7-12 year bonds at 2.46% for the month and bonds of over 12 years at a positive 2.54% for the month.
The local stock market rallied alongside global peers in July and the FTSE/JSE Capped SWIX Index ended on a positive 4.01% m/m in rand terms, recording its best monthly return since January 2023. Financials finished the month at a positive 7.94%, with Cash ending the month at 0.68%. Resources were also positive, ending at 3.66% m/m. Industrials ended the month at 2.76% with Property at 2.30% m/m. The local currency continued to recover from its plunge towards R20/US$1 in May in the wake of US allegations that SA supplied weapons to Russia. The rand ended the month at a positive 6.23% against the US dollar, 5.11% against the Euro, 4.96% against the pound, 0.22% against the Japanese yen and 0.004% against the Australian dollar.