June 2023 Economic Review

June 2023 economic and market update

Among the biggest interest rate and inflation increases in history, lie numerous global challenges. June had no shortage of global and local issues affecting the economy, various countries and their citizens. Job and salary cuts in China have led to factory workers striking, which in turn has caused unrest. This is detrimental to the growth of the Chinese economy. The US debt limit was also reached, and the US Congress needed to vote on whether the US debt limits had to be raised or suspended. Additionally, the US GDP was revised, with inflation slowing down for the month. Also making headlines on a global scale is the continuation of the Russia-Ukraine conflict with Putin saying that the Wagner uprising was doomed to fail.

Locally, the electricity crisis continued into winter, leaving South Africans with limited, to no alternative, electricity in the dark. In addition, South Africa being accused of weaponising Russia has raised questions as to its status as part of the African Growth and Opportunity Act (AGOA).

Worker unrest in Chinese factories

Chinese economists say strikes at Chinese factories have risen to a seven-year high and are anticipated to become more frequent. According to Reuters, “Chinese factories produce a third of global manufactured goods, form complex supply chains that ultimately rely much more on exports than domestic demand, leading to giant trade surpluses in the US$18 trillion economy”. Ultimately, weak global demand forces exporters to cut workers’ pay and shut down plants. Labour activists in China added that factory manufacturers employ many rural immigrants who are hired informally or who are on temporary contracts. Since the factories are looking to reduce costs when employing non-permanent employees, this leaves room for exploitation of workers who take pay cuts, are laid off or not paid for their overtime work. Non-registered workers do not have unions or representatives, making it difficult to win conflicts against their employers. Labour unions are present, but play a marginal role on the modern, authoritarian China. This has resulted in a spike in labour disputes and civil unrest through worker strikes, which affect consumer and business confidence just as it was recovering from the COVID-19 curbs. Some factories closed or are struggling to pay wages or severance pay for laid-off workers as a result, according to Chinese labour researchers. Data compiled by the China Labour Bulletin shows that China has already had at least 130 factory strikes year-to-date, which is more than triple the number in the 2022 calendar year.

US debt limit raised

In June, the US Congress approved a deal to raise the government’s borrowing limit (also known as the debt limit) to avoid a US debt repayment default. The debt limit is a law that puts a limit to the amount of money the US government can borrow to cover its legal obligations, including paying for social security, federal employees, the military, medicare, tax refunds and other debts. This agreement was passed by the Senate and the House of Representatives, and President Joe Biden has signed it into law. The agreement will suspend the debt ceiling for two years past the November 2024 presidential election, while limiting federal spending. Moreover, it imposes new work requirements on some American citizens receiving food assistance and will formally end the pause on student loan payments in August. However, taxes on the big corporations, a key demand from the White House, were not included. For months, the president had insisted that he would not negotiate the debt ceiling, but with the 5 June deadline looming and millions of US Social Security, Medicare and Veteran benefits at risk, the president and the speaker of the House of Representatives, Kevin McCarthy, worked out a last-minute deal. This is according to ABC News. Treasury Secretary Janet Yellen also gave a warning that without more borrowing, the US will not have enough money to meet all its financial obligations.

US GDP revision

The US economy performed better in the first half of 2023 than economists had previously believed. Real GDP was revised up to 2.0% in the first quarter from 1.3% in the previous quarter. Real final sales to private domestic purchasers was revised up to 3.2% annualised, an increase from 2.9% prior. This measures the core GDP that leaves out components disconnected from the underlying trend, such as inventory fluctuations, foreign trade and government spending. Comerica Bank revised the forecast for 2023’s real GDP growth to 1.3% in June from 0.9% in May, and growth is expected to slow to 0.5% in 2024. Moreover, the long and variable effects of the US Federal Reserve (US Fed)’s tighter monetary policy weigh on interest-rate sensitive economic activity.

US inflation slowing

Inflation is slowing in the US and the positive view is that most prices in the consumer basket, besides the shelter component (rent of primary residence and owners’ equivalent rent), have slowed down dramatically. Rents on new leases and house prices indexes in the US have slowed down this year, and economists predict that this will cause the Shelter Consumer Price Inflation (CPI) to slow in the next quarter as well. The view that considers inflation dynamics since the pandemic is that aside from energy prices, inflation is still far above normal. There is an upside risk to Shelter CPI and the overall inflation outlook in 2024 due to stabilising house prices, labour-intensive services in the US and high interest rates. The US Fed is also likely to raise rates in July since the rate hikes were paused in June to combat inflation. US Fed Chair Jerome Powell highlighted that inflation has moderated, however, the process of getting it to the 2% target is still lengthy. Nearly all the Federal Open Market Committee (FOMC) members expect interest rates to increase for the remainder of the year to achieve the inflation target.

Wagner rebellion and the Russian economy

Russia’s economy has been showing signs of stabilisation and performed better than the economies of most European countries, despite imposed sanctions following the Russia-Ukraine war. The risk of political instability showed itself when the Wagner paramilitary group threatened a rebellion against Moscow in June and the ruble hit a nearly 15-month low against the US dollar. Russian President Vladimir Putin met with Wagner Chief, Yevgeny Prigozhin, after the Russian warlord abandoned his armed mutiny. Putin’s public appearance came after Prigozhin issued a statement in which he defended the Wagner uprising and denied that he wanted to defeat the Russian president. Russia’s economic recovery could easily be derailed by something like the Wagner rebellion. On the other hand, Russia is heavily reliant on trade with China and could become its biggest trading partner since the imposing of sanctions by the European Union. Business with China accounted for 22% of Russia’s total external trade in 2022, increasing by 29% year-on-year to US$190 billion. This continued into 2023, with bilateral trade reaching nearly US$94 billion in January-May, as shown in the chart below:

Source: China’s General Administration of Customs, June 2023

SA’s load shedding continues

It may have seemed as though load shedding had come to an end but the national crisis continued into June. The South African Reserve Bank (SARB) released an annual report in June which highlighted that South Africans have suffered the consequences of its insufficient and unreliable energy supply, which is among some of the nation’s major issues. Load shedding is one of the drivers of inflation which impacts investor confidence. Electricity shortages threaten worker productivity which unfortunately leads to some businesses closing down. The financial viability of municipalities is also impacted and they could cost the central government more and perform even more poorly on service delivery. This eventually takes a toll on economic growth, contributing to slow and inequitable domestic growth. The SA Reserve Bank compiled a vulnerability matrix below, highlighting the dire impact of load shedding as a national disaster:

Source: The South African Reserve Bank, June 2023

South Africa’s AGOA debacle

Following allegations that South Africa had supplied Russia with ammunition for the war against Ukraine, South Africa has been on bad standing with the US. A second controversial issue which raised questions is South Africa working to include Russian President Vladimir Putin in the BRICS Summit, despite an outstanding warrant of arrest issued by the International Criminal Court. South Africa is set to be reviewed by the United States Congress for benefits under the African Growth and Opportunity Act (AGOA) and whether it is eligible to be part of the legislation. Since its enactment in 2000, the trade act’s objective is to promote economic growth through good governance and provide duty-free treatment to goods of over 1 800 products to some sub-Saharan African countries. South Africa is included in the 36 countries eligible for AGOA benefits. The US Congress passed the legislation in 2015 modernising AGOA and extending the programme to 2025. They also removed Ethiopia, Mali, and Guinea from AGOA in 2022 because of actions taken by each of their governments in violation of the AGOA Act. The Biden Administration wanted to penalise South Africa for supporting Russia’s war in Ukraine in June by moving the AGOA Forum from South Africa.

Market overview

Global Markets

Global equity markets rallied strongly into mid-year with the MSCI World Index ending the month on 6.05% in dollar terms. The threat around the US debt limit was safely avoided and a pause in rate hikes by the US Fed kept equity markets afloat. Global Bonds were in negative territory and ended at -0.01% month-on-month (m/m) and Global Property ended the month positive at 3.18% in dollar terms. Emerging markets have lagged developed markets year-to-date, with foreign-listed Chinese companies the biggest laggards in the face of a disappointing rebound in Chinese economic activity, but remained in positive territory at 3.89% m/m. The FTSE 100 Index ended the month positive at 0.99% and the S&P 500 ended positive at 6.61% m/m in dollar terms.

Local Markets

The local market also finished strong in June, with the FTSE/JSE All Share Index ending positive at 1.35% m/m. Industrials were at 3.65% m/m and Resources at -8.17%. Local Property ended the month at 0.92% m/m, and Financials and Cash ended at 11.39% m/m and 0.65% m/m respectively. The rand ended the month at 4.90% against the US dollar, 2.50% against the euro, 2.26% against the pound, 7.32% against the yen and 3.25% against the Australian dollar.