Financial markets both locally and globally showed a robust recovery during the fourth quarter of 2023, successfully erasing losses from the initial ten months of the year. The sustained rise in interest rates by central banks worldwide, coupled with significant increases in oil and food prices, along with ongoing military conflicts in Ukraine and the recent developments in the Gaza Strip, raised concerns reminiscent of the Black Swan events observed during the global sub-prime crisis and the impacts of the Covid-19 pandemic.
Many economists and market analysts predicted a looming recession for the US and other developed economies, marking the second within three years. However, the downward shift in oil prices and other energy and food costs in the last three months indicated that the tighter monetary policies were beginning to yield positive results. This not only resulted in a decrease in inflation rates across most countries but also hinted at a tangible economic recovery, potentially steering most economies away from another recession.
Nevertheless, projections indicate a significant slowdown in economic growth in the US for 2024. While a recession might be avoided, there is an anticipation of a contraction in consumer spending as disposable income diminishes over time.
South Africa
In Q4 2023, the Reserve Bank's Monetary Policy Committee (MPC) maintained the repo rate at 8.25%. The December inflation rate (CPI change) increased 5.1%, slightly below the MPC's upper target of 6.0%. STATSSA's CPI report highlighted notable increases in food prices (8.8%), electricity (15.2%), water (7.9%), and petrol (11.9%), all surpassing the 5.9% CPI index from October the previous year. The MPC, considering high interest rates and market uncertainty, expects financial markets and asset prices to remain volatile, dampening investor appetite and capital flows.
The SA Consumer Confidence index remained low, at -17 in Q4, down from -16 as of Q3. This is the lowest festive-season consumer confidence reading in more than 20 years. This indicates that consumers controlled their spending during festive season shopping. 2023 was a year plagued with consistent loadshedding for 335 days. This equates to around 6,947 hours of loadshedding in 2023. The cost of loadshedding continues to be counted by citizens and businesses alike. Private generation is on the rise, with the Department of Mineral Resources and Energy stating in December that they had issued three requests for proposals requesting 5,000 MW of renewable energy from independent power producers.
The US economy measured by GDP, grew by3.3% in in the fourth quarter of 2023, reflecting robust consumer spending despite high inflation and rising interest rates. However, economic growth is expected to slow down in the first quarter of 2024 as real disposable income stagnates, pandemic savings have depleted, and household debt levels have risen. The national unemployment rate was unchanged at 3.7% in December 2023 and is expected to continue rising through 2024. The Federal Reserve maintained its benchmark interest rate at its December 2023 meeting, after aggressively hiking rates during 2022 and early 2023 in an effort to combat inflation. Overall, economic growth is slowing, and risks are tilted to the downside looking ahead to 2024 amid declining consumer strength, tightening financial conditions, and a weakening labour market.
In Q4 2023, the US annual inflation rate edged higher to 3.4%, from 3.1% in November, coming ahead the market forecast of 3.1%. The pick-up fluctuations in inflation have added to the uncertainties as underscored in the minutes of the Fed meeting in December 2023. However, the shallow recession have been avoided which indicates a soft landing.
In Q4 2023, the European Commission revised down its real GDP growth forecast for the eurozone from 0.8% to 0.6%, citing factors such as high inflation, increasing interest rates, and weak external demand. The sluggish performance had a more significant impact on GDP growth than initially anticipated. The projections indicate a gradual improvement, with GDP expected to reach 1.3% in 2024, still below potential and a 0.1 percentage point reduction from the previous estimate. Further momentum is anticipated in 2025, with a forecasted growth of 1.7%. For the entire euro area, GDP growth is projected to be slightly lower at 1.2% in 2024 and 1.6% in 2025.
The Commission anticipates a recovery in economic activity driven by improving consumption, supported by a robust labour market, sustained wage growth, and ongoing inflation easing. Regarding inflation, the European Central Bank's target of 2.0% over the medium term is expected to see a decline to 3.2% in the following year (2024) from the 5.6% projected for 2023, further slowing to 2.2% by 2025.
Emerging Markets
In the fourth quarter of 2023, emerging market economies continued to face challenges from high inflation, currency devaluations, and tighter financial conditions. However, some positive signs emerged towards the end of the year, which might translate to opportunities in 2024
Inflationary pressures moderated in many emerging markets, albeit at a slower pace than earlier in 2023. Consumer price inflation remained above central bank targets in most countries, but the easing of supply constraints and weaker demand brought some relief. This enabled several central banks to slow the pace of interest rate hikes, though policy rates still stayed above neutral levels.
India proved resilient with the IMF revising its 2024 growth forecast upwards to 6.3% in October 2023. This reflects India's robust domestic demand and strong investment inflows. Meanwhile, China's growth projections were trimmed to 5% for 2023 and 4.2% for 2024, underscoring the strain from its zero-Covid policies and real estate sector weaknesses.
Overall, emerging economies faced significant headwinds in 2023 but showed some adaptation by year-end. With inflation proving stickier than hoped, policy normalization is set to continue in 2024. But resilience in major economies like India provides some offset to the global slowdown's impact.
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