Global and domestic financial markets remain uncertain and volatile, with concerns about elevated inflation and sluggish economic growth. The US Federal Reserve recently raised its interest rate by 0.25%, and the Reserve Bank's Monetary Policy Committee increased the repo rate by 0.5% in March. These actions reflect the ongoing inflationary pressures and the challenging economic conditions. There is a growing possibility that developed economies may enter a period of stagflation. The US economy showed noticeable deterioration in the first quarter of 2023, while predictions suggest a significant contraction in South Africa's economic growth for the year.

According to the April 2023 Economic Outlook report by the International Monetary Fund (IMF), the global economic outlook remains uncertain due to financial sector turmoil, high inflation, the ongoing effects of the Russia-Ukraine conflict, and the lingering impact of the COVID-19 pandemic. However, the report suggests that the world economy may experience a soft landing, with signs of recovery. China is rebounding strongly after reopening its economy, supply-chain disruptions are easing, and the energy and food market dislocations caused by the war are subsiding. Additionally, the synchronized tightening of monetary policy by most central banks is expected to bring inflation back towards its targets.

Financial markets appear to anticipate the end of the current upward phase of the interest rate cycle. In April 2023, the Dow Jones increased by 2.50%, with a modest 2.90% gain since the beginning of the year. The S&P500 gained 1.5%, resulting in a year-to-date increase of 9.03%, driven by the strong recovery of tech stocks. In South Africa, the ALSI (All Share Index) rose by 2.0% in April, mainly due to the higher prices of commodities and precious metals like gold and platinum. By the end of April 2023, the ALSI was already up by 7.10%.

South Africa

The South African economy is showing signs of entering a recession in the latter part of the year. Both the International Monetary Fund (IMF) and the South African Reserve Bank have forecasted a growth rate of only 0.3% for 2023, which is 2.0% lower than previous expectations due to ongoing and persistent load shedding by ESKOM. The impact is expected to be felt heavily in domestic production and exports, potentially leading to the closure of more retailers. Surging electricity prices, load shedding, a weaker Rand, and supply chain bottlenecks have contributed to food inflation exceeding 14.0% year-on-year in March 2023. Additionally, rising fuel prices have pushed the inflation rate to 7.1%, prompting the Reserve Bank's Monetary Policy Committee (MPC) to raise the repo rate by 0.5% in March. This marks the ninth consecutive rate hike since November 2021 and brings borrowing costs to the highest level since May 2009.

Other economic indicators also point to a contraction in the South African economy. Retail trade declined by 0.5% compared to the previous year in February 2023, following a 0.8% decrease in the previous month, and against market expectations of a 0.3% decline. This marks the third consecutive month of declining retail activity, reflecting the impact of electricity load shedding and the increased cost of living for consumers.

Figure 1: South Africa’s retail sales shows the economy is moving towards a recession.

USA

The US economy experienced slower growth in the first quarter of 2023, with an estimated rate of 1.1%, significantly lower than the 2.6% growth in the fourth quarter of 2022. This has raised concerns that the economy may enter a recession in the latter part of 2023, indicated by two consecutive quarters of negative economic growth. Furthermore, the inflation rate remains above 5.0%, significantly higher than the Federal Reserve's target of 2.3% before considering relaxation of interest rate policies. The unemployment rate in the US is also stagnant at around 3.7%, suggesting ongoing wage pressures that could contribute to sustained inflationary pressures.

Recent data on US private consumption expenditure (PCE) indicates a real PCE growth rate of 3.2% during the first quarter, signalling high consumer demand in the economy. This excessive demand may further exacerbate inflationary pressures. As a result, there is a possibility that the Federal Reserve may raise its interest rates further in the upcoming meetings in May and June to address these concerns.

Figure 2: US economic growth moving towards recession.

EUROPE

According to the April 2023 report by the International Monetary Fund (IMF) on the economic outlook for Europe, the region faces significant challenges. Economic growth has declined throughout Europe, inflation remains high, and there are risks in the financial sector. The combination of high inflation and a looming recession (stagflation) creates a crisis for the Eurozone in 2023. However, there is some hope for improvement in 2024, with advanced European economies projected to experience a rebound in annual growth from 0.7% in 2023 to 1.4% in 2024, and emerging European economies (excluding Belarus, Russia, Turkey, and Ukraine) expected to see growth increase from 1.1% to 3.0%.

The report highlights that severe and interconnected risks persist in the European economy. Failing to address financial stability risks could lead to a crisis and hinder economic growth. While implementing tighter macroeconomic policies may contribute to concerns in the financial sector, not taking decisive action to bring down inflation now could result in even higher inflation later. This would necessitate more aggressive policy tightening and potentially lead to an economic downturn. Additionally, tight labour markets, rising energy prices, and risks of fragmentation could further undermine growth and exacerbate inflation. These factors create a complex and challenging environment for European policymakers.

Figure 3: Euro Area inflation rate February 2022 to January 2023. Signs of improving

EMERGING MARKETS (Ems)

In China, the waves of COVID-19 that had been impeding economic recovery and affecting East Asian emerging markets began to recede in January 2023. The reopening of the Chinese economy led to a return to normalcy, with indicators like retail sales and travel bookings showing signs of improvement. Since China is a major importer, absorbing around 35% of exports from Asia and other commodity-based emerging markets, its economic growth and reopening will have positive spill-over effects.

For most other emerging markets and developing economies, the economic prospects are generally better than those of advanced economies, although the outlook varies across regions. On average, these economies are expected to grow by 3.9% in 2023, with a further increase to 4.2% in 2024.

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