March 2023 Economic Review

March economic and market update

Most global markets finished the month of March (and Q1 2023) in positive territory, showing resilience in a highly volatile month. This is despite the banking mini-crisis, fears of contagion in the US banking sector and persistent concerns that higher interest rates will trigger a global recession. Locally, the JSE was among a minority of major global markets to end the month lower, however it still performed well enough to remain in the “green” for the quarter.

US experiences first banking crisis since 2008

In mid-March, the collapse of a group of mid- and small-cap US banks triggered the first banking crisis since the global financial crisis (GFC) in 2008. The loss of confidence in the financial position of two US mid-sized regional banks, Silicon Valley Bank (the second largest bank failure in US history) and Signature Bank, led to customers swiftly withdrawing deposits, resulting in their rapid downfall.

February headline inflation slowed in the US for the eighth consecutive month, broadly in line with expectations, coming in at 6.0% year-on-year (y/y), compared to 6.4% y/y in January. Personal consumption expenditure (PCE), the Federal Reserve’s (Fed) preferred measure of inflation, rose 0.3% month-on-month (m/m), beating consensus expectations of a 0.4% m/m rise, indicating that US inflation is slowing.

The US economy remains resilient. US gross domestic product (GDP) rose at an annualised 2.6% quarter-on-quarter (q/q) in the final quarter of 2022. Furthermore, the labour market’s robustness was shown in February’s non-farm payrolls, which grew by a stronger-than-expected 311 000.

The Fed raised interest rates by 25 basis points (bps) during its monthly meeting, largely in line with expectations. Jerome Powell, Fed chair, emphasised that the process of getting inflation back to its 2% target level has a long way to go and is likely to be a bumpy journey. Furthermore, he outlined that the Fed is uncertain as to how the recent crisis in regional banks will play out in the economy, adding that the US banking system remains secure and that the Fed has provided additional liquidity to the banking system.

UK inflation rises unexpectedly

After easing for three consecutive months, UK February inflation unexpectedly rose 10.4% y/y in February, compared to a 10.1% y/y rise in January. Food and energy costs continue to increase, placing further pressures on households. The higher-than-expected inflation increase saw the Bank of England (BOE) raising interest rates from 4.00% to 4.25%.

The UK economy has also fared better than expected this year. The composite Purchasing Managers’ Index (PMI) for March dropped slightly, from 53.1 to 52.2, but remains in expansionary territory. Consumer confidence surprised to the upside, increasing from -45 in January to -36 in March, and is the highest reading in a year. UK GDP expanded 0.3% m/m in January, partially bouncing back from its monthly contraction in December. However, GDP showed no growth y/y in January.

Chinese reopening well underway

During March, the economy opened its doors to tourists for the first time in three years. The reopening has increased consumption in the world’s second largest economy and put it on a higher growth trajectory for 2023. China’s official manufacturing PMI expanded for the third consecutive month.  The official non-manufacturing PMI, which measures business sentiment in the service and construction sectors, soared to 58.2 in February, its highest reading since May 2011.

China’s February Consumer Price Index (CPI) reading came in below expectations, rising only 1.0% y/y, while the Producer Price Index (PPI) remained in deflationary territory, falling 1.4% y/y. Against this backdrop, the People’s Bank of China (PBOC) announced a 25 bps cut to its reserve requirement ratio for banks in March, which was earlier than the market expected.

Europe’s economic activity improving

In Europe, despite increasing interest rates and the turmoil in the banking sector, economic activity surprised to the upside throughout the quarter. The euro-area composite PMI for March rose to a 10-month high of 54.1, which was well above expectations.

Eurozone inflation fell to 8.5% y/y in February, its fourth consecutive fall. Despite the decline in headline inflation, the European Central Bank (ECB) hiked interest rates by a further 50 bps, bringing the main deposit rate to 3.00%.

The SARB is not taking any chances with inflation

In local economic data, February’s headline inflation (measured by the CPI) rose slightly for the first time in four months, coming in at 7.0% y/y. The monthly headline CPI rose by 0.7% in February, its biggest rise since July 2022. Food inflation soared 13.6% y/y in February, the highest level since April 2009.

With inflationary pressures lingering, the South African Reserve Bank (SARB) shocked the market with a hawkish move, raising the repo rate by 50 bps to 7.75%, and in sharp contrast to market expectations of a 25 bps hike.

SA’s retail sales shrank for the second consecutive month in January (-0.8% y/y).  SA’s GDP shrank by 1.3% y/y in Q4 2022. This was the sharpest contraction since Q3 2021. Mining production contracted by 1.9% y/y in January, marking the completion of a full 12 months of consecutive contractions. Manufacturing production surprised to the upside by 1.1% y/y in January, as compared to expectations of a 0.3% decline. Following the increased surge in load shedding towards the end of last year, and the fact that it is set to continue, the local economy may need to get used to lower levels of productivity.

Global markets

Developed equity markets ended the quarter on a positive note, with the MSCI World Index returning 2.83% m/m in USD and -0.61% m/m in ZAR. This result also marked the first time we have witnessed back-to-back positive quarters for equity markets in almost two years. The tech-heavy Nasdaq 100 index was amongst the best performing in March. The S&P 500 closed 3.67% higher m/m, despite the mini-banking crisis experienced in the US. European equities pushed higher for the third consecutive month, with the Euro Stoxx 50 (€) closing 2.01% higher m/m. UK equities underperformed their global counterparts during the month, with the UK’s blue-chip FTSE (£) falling by 2.84% m/m.

Emerging markets fared slightly worse than their developed counterparts for the second consecutive month. The MSCI Emerging Markets Index closed 2.73% higher m/m in USD and 0.71% lower m/m in ZAR.

Local markets

The South African equity market ended lower in March for the second consecutive month, with the FTSE/JSE All Share Index closing 1.26% lower m/m. Companies geared towards the domestic economy were amongst the worst performing, with concerns around the impact of increasing costs related to operating under the country’s severe load shedding conditions. JSE-listed banks were also dragged lower as confidence in the global banking system diminished.

On a sector level, Resources led the pack, benefitting from a rebound in gold and other commodity prices, closing 2.85% higher m/m. Financials gained slightly, closing 1.63% higher m/m, while Industrials lagged, falling 0.65% m/m. SA Listed Property fell for the third consecutive month, closing down 3.39% m/m. Local Bonds gained in the high interest rate environment, with the All Bond Index (ALBI) returning 1.32% m/m. Cash (STeFI) delivered a moderate return of 0.61% m/m. South African growth managers (1.13% m/m) outperformed value managers (-3.73% m/m), consistent with the global experience.

The rand benefitted from a combination of a weaker dollar and the SARB rate hike surprise, appreciating by 3.46% m/m. The rand also gained as much as 1.30% and 0.99% m/m against the sterling and euro respectively. However, the rand lost 2.29% m/m against the Japanese yen.