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May 2023 Economic Review

| Market Forces

May 2023 economic and market update

US interest rate increases

The US Federal Reserve (Fed) raised interest rates by 25 bps – the 10th consecutive increase in 14 months – to fight against inflation, pushing its benchmark rate to between 5% and 5.25%. The increase is at its highest level since the 2007 global financial crisis. According to BBC News, “In the US, higher rates have sharply raised borrowing costs, spurring a slowdown in sectors such as housing, and playing a role in the recent failures of three US banks.”

The Fed’s chair, Jerome Powell, said that the fear of a US recession has supported the aggressive interest rate increase. US citizens will also need to brace themselves for possible further rate hikes for the remainder of the year as the benchmark rate could further increase borrowing costs. The US recession has been pushed out by a quarter, and the profile for the Fed funds forecast has been raised slightly. Inflation has started to fall but has been stickier on the back of higher services inflation.

US banking sector improvement

The US banking sector also showed improvement for the month, with Powell referring to it as ‘sound and resilient’. This touches on the collapse of Silicon Valley Bank as well as the two regional banks (Signature Bank and First Republic Bank) earlier this year. Moreover, he said they will continue to monitor conditions in this sector and will work to prevent events like the bank collapse from happening again. The banking sector topic follows the interest rate increase announcement made by Powell, which he called a significant policy shift.

UK avoids recession

The UK economy is likely to avoid a technical recession this year since it has shown a 0.1% growth in Q1 2023 when compared to Q4 2022. The UK government expects economic activity to contract in the second quarter due to a holiday marking the King’s Coronation, and in addition, the economy is expected to stagnate for most of the year. Lower energy prices will help lower inflation over the forecast, but core inflation is expected to remain elevated.

Government spending fell by 2.5% and strikes, amongst others, contributed to the decline. Total investment in the economy grew by 1.3%, and business investment grew by 0.7%, but remains below pre-pandemic levels.

The Bank of England (BoE) raised interest rates by 25 bps for the 12th consecutive time on 11 May, to 4.5%. The BoE will want to see a cooling labour market, an easing inflation, and a stronger GDP before reducing interest rates. BoE Governor Andrew Bailey indicated that the UK is closer to ending its interest rate hiking cycle.

China’s economic recovery losing steam

China’s economy seemed to be on a positive trend in April when the Chinese government removed its zero-Covid policy. This led to strong consumption of services and it was expected that the housing market would add growth from a low base. The Wall Street Journal reported that the Chinese economy expanded at an annual rate of 4.5% in the first quarter, yet more signals suggest a fall back.

While the Chinese economy seemed to have recovered, a rise in youth unemployment, low industrial production and retail sales resulted in an economic decline. The National Bureau of Statistics reported that China’s Purchasing Managers’ Index (PMI) dropped to 48.8 in May from 49.2 in April, highlighting the country’s economic challenges. The Non-Manufacturing PMI expanded at a slow pace after falling to 54.5 in May from 56.4 in April. This is a measure of business sentiment in the services and construction sectors. There is also a downward spiral risk for its manufacturing sector, with factory activity reducing to its lowest level since the end of last year. Economists expect China’s GDP growth to slow from 6.5% in 2023 to 4.3% in 2024.

Another SA interest rate hike

South Africans faced the effects of another interest rate hike when the SA Reserve Bank (SARB) increased its repo rate by 50 bps to 8.25%, with hopes of taming inflation. This is the highest interest rate increase faced by the country and has muted economic growth. The country’s inflation has also exceeded its target range of between 3-6%. The SARB Governor, Lesetja Kganyago, said the headline inflation is forecast to remain above the upper end of the inflation target range until the third quarter of this year and will only sustainably revert to the mid-point of the target range by the second quarter of 2025.

The chart below provides a history of interest rate hikes from November 2010 to May 2023.

Graviton Anchor Capital

Source: SARB, Anchor Capital, May 2023


The Bureau for Economic Research (BER) projects South African economic growth to be extremely low to zero. The full-year GDP growth in 2023 is projected at 0.2%, while the SA Reserve Bank has revised the estimate to 0.3%. Load shedding is seen one of the main economic detractors since many jobs depend on electricity to operate. Furthermore, it is expected to get worse before it gets better, leading to further economic decline. In addition, there are still doubts that South Africa missed a technical recession, looking at its current economic outlook.

South Africa accused of sending arms to Russia  

News24 reported that US ambassador to South Africa, Reuben Brigety, accused South Africa of supplying Russia with weapons in the war with Ukraine. It is said that the weapons and ammunition were loaded onto a Russian ship that docked at the Simon’s Town naval base in Cape Town in December last year. According to the Guardian, “South African President Cyril Ramaphosa said an investigation into the visit by a Russian vessel named Lady R to his nation’s main naval base was already underway behind the scenes, with the help of US intelligence services.” This was before the announcement made by the US ambassador.

These accusations resulted in the rand crashing to a level of R19.32, however, the currency later recovered to R19.15 to the US dollar. The rand also came close to reaching a record low of R24 against the pound. The accusations stirred fears of the US taking economic action against South Africa and scrapping the duty-free export benefits it receives because of the African Growth and Opportunity Act (AGOA).

The rand was already in a fragile state with unending load shedding woes, a deepening economic crisis, and aggressive interest rate hikes which have dampened the local economy. The harsh reality is that the South African interest rates need to be competitive to protect the rand.

SA Reserve Bank prepares for grid collapse

South Africa’s central bank is working on a contingency plan to ensure the country’s payments system remains in operation if the nation’s electricity grid collapses. Concerns over reliable power supply in the country have heightened as Eskom warned it would have to intensify rolling blackouts over the winter months to protect the grid from complete collapse, reported Bloomberg.

The SA Reserve Bank and other financial market regulators, including the operator of the Johannesburg Stock Exchange (JSE), are working on the strategy to ensure the orderly closing and reopening of markets, Deputy Governor Kuben Naidoo said on Monday. South Africa is experiencing unprecedented levels of load shedding in 2023, and the power utility has struggled to meet electricity demand, leaving the nation in darkness for as many as 12 hours a day. It is reported that this year’s electricity load shedding to date has surpassed the entire load shedding total for 2022.


Market Overview

Global markets

President Joe Biden highlighted the possibility of an upcoming US government default. This dominated financial news in May and political parties were finding it difficult to reach a compromise on raising the US borrowing limit during the month of May. Leading up to the agreement, US government bond investors drove US 10-year government bond yields higher, to above 3.8%. The US dollar ended May stronger against most currencies, and higher yields made the currency more attractive.

Emerging markets did not perform well with the MSCI EM Index closing at -1.65% month-on-month (m/m). The MSCI World Index ended -1.00% m/m and global bonds at -1.95%. Global Property ended at -4.42% m/m in dollar terms, the FTSE 100 Index at -4.63% m/m and the S&P 500 ended 0.43%m/m in dollar terms.


Local markets

South Africa’s FTSE/JSE All Share Index recorded a decline of -3.92% m/m in May. Financials were hardest hit at -7.92% m/m and Property ended at -5.32% m/m. Resources also retreated and were down -2.16% m/m, even though gold counters shone as the rand gold price soared on the back of a falling rand. Industrials declined by 3.06% m/m. Cash ended the month at 0.65%. The rand weakened by 7.73% m/m against the US dollar. It further declined by 4.45% against the euro, 6.43% against the pound, 0.44% against the yen and 0.005% against the Australian dollar. This is in relation to the rand crash caused by accusations of supplying arms to Russia. In May, the rand breached the R19.90/US$1 level and got close to the psychological R20/US$1 mark.

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