September 2023 Economic Review

September 2023 economic and market update

September opened with the G20 Summit, when world leaders came together in one setting to discuss global issues under the theme of “One Earth, One Family, One Future”. The European Central Bank (ECB) raised rates to 4% in September, taking them to the highest level since 1999. While the US Federal Reserve (Fed) kept rates unchanged at 5.25%-5.50%, Fed Chair Jerome Powell anticipated further rate hikes would be needed to achieve the 2% inflation target.

The UK also paused rates at 5.25%, providing relief to households battling rising prices and high borrowing costs. China’s economy continues to weaken and data from the Chinese Beige Book survey indicate that retail sales and pricing power as well as manufacturing production and loans contributed to the slowdown in the Chinese economy. Locally, the South African Reserve Bank (SARB) kept interest rates unchanged at 8.25% at the September Monetary Policy Committee (MPC) meeting. The South African economy grew 0.60% in the second quarter of 2023 and there was concern that it might move into recession in the first quarter of 2023.

An overview of the G20 Summit

In the 2023 G20 Summit, which took place on 9-10 September, global leaders gathered in New Delhi, India to address key issues related to the world economy. It was a historic moment for India since it was its first time hosting this summit.

The theme for 2023 was “One Earth, One Family, One Future”. Attendees discussed issues such as climate and energy; the importance of reducing poverty and inequality; accelerating efforts to achieve Sustainable Development Goals; and multilateral reforms. Members adopted the New Delhi Declaration which launched the Global Biofuel Alliance, allowing leading biofuel producers and consumers to work together.

The addition of the African Union as a permanent member of the annual summit was another key development, reflecting Africa’s influence and growing importance on the global stage. World leaders announced in the Delhi Declaration that they remained committed to co-operating to achieve a globally fair, sustainable, and modern international tax system appropriate to the needs of the 21st century.

ECB hikes rates to their highest-ever level

The ECB raised interest rates by 25 basis points (bps) to 4.0% in September. This is the highest level since the launch of the euro in 1999 and the 10^th rate hike in a 14-month-long battle against inflation, which the bank hopes to rein within its 2.0% target. The Governing Council said it believed that the key ECB interest rates have reached levels that will help to return inflation to its target. It also indicated that interest rate hikes were probably at an end, however, ECB President Christine Lagarde did not rule out future interest rate hikes and said they would have to be maintained at restrictive levels. The council’s future hikes would be based on their assessment of the inflation outlook, economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

The dilemma faced by ECB policymakers is that prices are rising above the target range and high borrowing costs are causing the economy to struggle. The ECB forecasted in June that inflation will reach 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. The bank has also lowered growth expectations and forecasts the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.

US pauses interest rates

The Fed held interest rates unchanged in a range of 5.25%-5.5%, after 11 consecutive rate increases in the last 18 months. Fed Chair Jerome Powell said it was likely that further rate increases would be appropriate to bring inflation down to 2.0%, even though the level has moderated. He said the Fed was watching economic indicators to determine whether interest rates would need to be raised before the end of the year. Other factors that added to the interest rate pause were: US economic growth, which Jerome Powell said exceeded expectations; stock market performance, with the S&P500 surging 16%; a decline in savings and consumer spending; and banks’ move to reduce the flow of capital to businesses. The Fed is watching the labour market for signs of a cooling economy. Fed officials anticipate rates will cool down in 2024 and 2025.

UK keeps interest rates unchanged

The Bank of England (BoE) paused interest rates at 5.25% after inflation fell in August. This provides relief to UK households battling rising prices and high borrowing costs. The MPC aims to meet the 2.0% inflation target to create employment and sustain economic growth. There have been signs of a loosening labour market. In the Labour Force Survey, the unemployment rate rose to 4.3% in the three months to July and was higher than expected in August. CPI inflation fell from 7.9% in June to 6.7% in August and is expected to fall further in the near term, despite upward pressure from oil prices and declines in core food prices. The BoE has not ruled out further rate hikes and will keep hikes at restrictive levels. It indicated that borrowing costs would need to be kept higher for longer to sustain inflation. BoE Governor Andrew Bailey said the bank would watch closely to see if there was a need for any further rate increases. He also highlighted that inflation was not where it should be, and rates would have to be maintained high enough to ensure that inflation is tamed.

China’s economic activity weakens

2023 proved to be a challenging year for the Chinese economy, which has shown little growth as it tries to recover from the global pandemic. The country experienced setbacks in September, increasing the risk it would not achieve the government’s growth target of 5.0% for the year. A survey from the Chinese Beige Book, with findings from 1,330 firms from private to state-owned enterprises, indicated that retail sales and pricing power as well as manufacturing production and loans contributed to the slowdown in the Chinese economy. The Chinese property sector has been deteriorating since mid-2020, when regulators tightened policy to trim debt and curb speculative investment.

Reuters reported Country Garden, China’s leading property developer, has 108.7 billion yuan of debt due in the next 12 months. Evergrande, another massive Chinese property developer, reported a 33 billion yuan loss for the first six months of 2023. This has led to property developers struggling to complete housing projects, with a knock-on effect on property consumers, who are choosing to save instead of spending. To put this into perspective, property sales between January and August 2023 fell by 7.1%, property investment fell by 8.8% year-on-year, and funds raised by developers fell by 12.9% from January and August 2023, as shown in the charts below.

Sources: Reuters, LSEG Datastream; National Bureau of Statistics of China, September 2023

SA pauses interest rates

The SARB kept interest rates unchanged at 8.25% at its September meeting. The rates have been on hold since July 2023, following a three-to-two vote split among MPC members. Reserve Bank Governor Lesetja Kganyago indicated that the pause did not imply an end to the hiking cycle and serious upside risks remain to the inflation outlook. The MPC is ready to act should these risks begin to materialise and its decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook. The MPC has recommended ways to tame inflation since 2020 which include increasing energy supply, maintaining public debt levels, and keeping real wage growth in line with productivity gains, among others. The inflation rate is at 4.8% and within the SARB’s 3-6% target range. The MPC’s stance is to increase confidence levels in attaining the inflation target sustainably over time and anchor inflation expectations more firmly. A better perspective on the interest rate pause is provided in the chart below. The data shows SA’s interest rate hikes from April 2022 until the pause in July 2023.

Source: Trading Economics, September 2023

SA GDP growth rate

SA’s real GDP expanded by 0.60% in the second quarter of 2023, although there were fears that the economy might move into recession in the first quarter of 2023. It exceeded the Bloomberg consensus forecast of 0.30% growth. The economy also expanded by 0.40% in the first quarter, despite a contraction in the last three months of 2022.

Source: Trading Economics, September 2023

The manufacturing and finance sectors were the key drivers of the growth on the supply side, contributing 0.3 and 0.2 percentage points to GDP growth respectively. On the demand side, Stats SA reported an increase in machinery and equipment investments which included renewable energy-related products. The agriculture sector has performed well but is facing climate concerns. The chief African economist at Standard Chartered Bank in London said it was doubtful that the very strong performance in agriculture would be sustained, with Southern Africa heading for drier summers. The South African economy remains unlikely to show any meaningful growth this year as economists look ahead, even if its performance has exceeded expectations. It is not growing fast enough to improve the government’s revenue stream and debt profile.

Market overview

Global overview

Global equity markets fell for a second consecutive month, with the MSCI World ending the month at -4.31% in dollar terms. Interest rates were a key factor weighing on market sentiment in September as investors’ focus shifted from how much higher rates could go to how long rates would remain elevated and how many cuts would eventually come.

Emerging Market (EM) stocks outperformed their Developed Market (DM) counterparts. The MSCI EM ended at -2.57% month-on-month (m/m) in dollar terms with China dragging on EM stocks. Global Bonds ended the month negatively, at -2.92%, and Global Property was -5.96%, both in dollar terms. The FTSE ended the month at 1.82% in pound terms and the S&P 500 at a negative 4.77% in dollar terms. In domestic bond markets, the FTSE/JSE All Bond Index closed the month at -2.34% with the 1-3 year bonds at -0.36% m/m, 3-7 year bonds at -1.22% m/m, 7-12 year bonds at -2.84% m/m and bonds over 12 years at -2.96% m/m.

Local overview

The South African share market followed global equity markets lower. The FTSE All-Share Index closed the month at -2.55%. Industrials and Property were in negative territory at -4.44% and -4.08% m/m. Resources ended with a positive 0.95% return. Financials ended negatively at -3.83% m/m. Cash was in positive territory at 0.68%. The local currency held up relatively well against a generally strong US dollar, ending the month at 0.51%. It performed relatively well against the euro and pound at 3.03% and 4.34% respectively. The rand performed negatively for the month against the Japanese yen at -0.17% and -0.65% against the Australian dollar.