In this month’s outlook, developing countries experienced rising interest rates, while the Reserve Bank’s Monetary Policy Committee took an aggressive stance, impacting financial markets. There were concerns about a possible recession in the USA, but signs suggested that South Africa’s economy might only face a mild recession before recovering later in the year. This has a positive effect on equity markets. The weakening Rand, partly influenced by rumors of arms dealings with Russia and a strong US dollar, reached record levels of around R20 to the dollar. The US Federal Reserve maintained its aggressive stance on interest rates, but there are indications of a possible change in direction. Oil prices were trending downwards, despite Saudi Arabia’s production cuts, and analysts didn’t expect a significant increase in prices. The global economy was showing signs of improvement, although the recovery was expected to be weak, according to the latest Economic Outlook by the Organisation for Economic Co-operation and Development (OECD). Global GDP growth was projected to moderate from 3.3% in 2022 to 2.7% in 2023, with a slight pick-up to 2.9% in 2024. Lower energy prices were providing relief to households, and business and consumer sentiment were recovering. The reopening of China also contributed to global economic activity.
USA
Despite the Federal Reserve's continuous increase in the bank rate, it appears to have little impact on real economic activity in the US. The economy continues to add more jobs, with 380,000 new jobs created in May 2023. However, the unemployment rate also increased to 3.7% in May 2023, the highest since October 2022, surpassing market expectations of 3.5%. The Organisation for Economic Co-operation and Development (OECD) projects that US GDP growth will be 1.6% in 2023, slowing to 1.0% in 2024 due to tight monetary and financial conditions.
The upcoming question is whether the Fed will make any changes to interest rates at their next meeting on June 13. Inflation in the US decreased to 4.9% in April 2023, the lowest since April 2021, and below market forecasts of 5%. The strong US dollar continues to exert pressure on emerging countries' currencies and keeps bond rates high. US policymakers agree that they should aim to sustainably reduce inflation and unwind broad fiscal support after the recent government debt ceiling issues.
Retail sales in the US increased by 0.4% in April 2023, recovering from two months of declines but falling short of market expectations of a 0.8% increase. This positive change supports the belief of the US Federal Reserve that the country is unlikely to experience a recession this year.
According to the latest projection by STATISTA Research, there is a 68.22% probability that the United States will enter another economic recession by April 2024. This represents an increase from the previous month's projection, where the probability peaked at 57.77%.
EUROPE
The European Commission recently released its Spring economic forecast for the European Union (EU) and the Eurozone. Despite global challenges, the EU's economy has shown resilience. Lower energy prices, reduced supply constraints, and a strong labour market have moderated growth in the first quarter of 2023, dispelling concerns of a recession. As a result, the growth outlook for the EU economy has been revised upwards to 1.0% in 2023 and 1.7% in the following year. Similar upward revisions have been made for the Eurozone, with GDP growth now expected at 1.1% and 1.6% respectively. Inflation has also been revised upward due to persistent core price pressures, with projections of 5.8% in 2023 and 2.8% in the following year for the Eurozone.
However, the European Bank for Reconstruction and Development (EBRD) reports that emerging Europe and other regions are experiencing slower growth due to high gas prices and tighter financing conditions. It is expected that these regions will face another recession.
EMERGING MARKETS (Ems)
According to S&P Global Ratings' recent report on emerging market economies, most emerging markets, except for China and Thailand, are expected to experience a significant slowdown in real GDP growth this year. The initial rebound from the pandemic is fading, and higher interest rates are starting to have an impact. Although China's higher growth is beneficial for emerging markets, it is not enough to offset the slower growth in the United States and Europe.
Inflation is projected to decrease throughout the year, which will alleviate pressure on central banks in emerging markets to continue raising interest rates. However, it is unlikely that most central banks will ease rates in 2023 until the US Federal Reserve clearly signals its intent to do so.
Lazard Asset Managers' latest report on the outlook for emerging economies highlights that these economies generally outperform developed markets in terms of economic growth. Despite recent capital outflows, many parts of emerging markets are undervalued and attractively priced, with strong financial productivity.
The ongoing Russia-Ukraine conflict and the possibility of tighter global financial conditions are significant risks that could negatively impact the growth of emerging markets.
SOUTH AFRICA
On June 5, 2023, STATSSA released the Q1 economic growth rate for South Africa. The economy grew by 0.4%, avoiding a recession after a revised decline of 1.1% in Q4 2022. Eight out of ten sectors showed growth, with manufacturing experiencing a strong recovery with a 1.5% increase. However, the agricultural sector (-0.4%) and electricity (0.0%) did not show any growth. Gross capital formation (investment) increased by 1.4%, which was a positive surprise. However, net exports recorded a negative growth of -0.3%, which could have a negative impact on overall economic growth due to an increasing negative trade balance.
The surprise repo rate increase of 0.5% by the Monetary Policy Committee (MPC) in the previous month indicates that the MPC is following the aggressive stance of the US Federal Reserve. Additionally, the inflation rate, although decreasing to 6.8% in April, remains above the upper level of the target range. The aggressive stance of the Reserve Bank seems to have positively influenced the strengthening of the Rand exchange rate against the US dollar since the last week of May.
There are indications that South Africa's economic growth rate may enter negative territory in Q2 2023. Retail trade in March 2023 declined by 1.6% compared to the previous year, marking the fourth consecutive month of declines, largely affected by the ongoing power crisis. Manufacturing production also fell by 1.1% compared to the previous year, marking the fifth consecutive month of decreases in industrial activity.
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