Global & Local Investment Advisors | (Watch) August 2023 Economic Update

Posted at 04 Sep, 09:44h in Library by Global & Local

Global markets eased off highs in August due to persistent indications of slowing growth in the United Kingdom, Europe, and China. Additionally, yields increased in the United States (US) as a response to the hawkish comments made by Federal Reserve Chair Jerome Powell. This move dampened risk sentiment and led to a decline in longer duration equities. Consequently, the Morgan Stanley Capital International (MSCI) All Country World index ended August with a 3.0% decline. Emerging markets, primarily influenced by discouraging data from China, performed less favourably than their developed counterparts. The MSCI Emerging Markets index lost 6.4%, in contrast to the 2.6% decline in the MSCI World index.

While the US labour market remains relatively robust, recent data indicates a gradual deceleration. The Nonfarm Payrolls report revealed that the US economy added 187 000 jobs in July, falling short of the projected 200 000. More recent data indicated a decrease of 338 000 job openings, bringing the total to 8.827 million in July, marking the lowest level in over two years. Although this still translates to a relatively high ratio of 1.51 jobs per unemployed individual, the prevailing trend in recent reports has been downward.

More good news was received on the inflation front, as the July Consumer Price Index (CPI) report came in lower than expectations. The annual headline CPI rose to 3.2%, while up from the previous month, the market had anticipated a 3.3% increase due to base effects from July of the previous year. Diminishing inflationary pressures and a slowing labour market have prompted investors to increase bets that the Federal Reserve will keep rates unchanged at their next meeting in September.

China remains a significant drag on global growth expectations, as economic data consistently disappoints on the downside. Recent figures revealed that China’s economy slipped into deflation in July, with consumer prices contracting by 0.3% year-on-year. This underscores the bleak demand outlook for the world’s second-largest economy and has raised concerns about the potential for a period of stagnation. In response, the People’s Bank of China has lowered policy rates, but many believe that more will need to be done to shore up confidence.

In early August, the Bank of England implemented another 25 basis point hike in an attempt to tame inflation. However, with annual CPI still running hot at 6.8% and wage data showing record growth of 7.8% year-on-year, the Bank of England will likely need to maintain their hawkish stance in the future. Unfortunately, this comes at a price, as the economy is already displaying signs of slowing down and is at risk of slipping into a recession. Recent data highlights that both the manufacturing and services sectors have entered contractionary territory. Additionally, retail sales declined by 3.2% year-on-year, underscoring the impact of elevated rates and prices on consumer demand.

Locally, a sense of relief was felt about the battle against inflation, as all figures for July surprised on the downside. Particularly noteworthy was the decrease in both the annual headline and core CPI, which now stand at 4.8% and 4.7%, respectively. With inflation comfortably within the South African Reserve Bank’s target range of 4%-6%, many expect rates to remain unchanged in the upcoming meetings. While this is promising, the local consumer is already facing significant pressure, evident from the June 0.9% year-on-year decline in retail sales. This marks the seventh consecutive month of contraction and highlights the negative impact of the challenging economic environment and higher interest rates.

The weak domestic data and a resurgence in the dollar has sent the rand lower in August. The local currency has depreciated against all three major currencies, experiencing losses of 5.7% against the dollar, 4.4% against the pound, and 4.3% against the euro. Similarly, South African equities have also ended the month lower, with the JSE All Share index losing 5.1%. The resources sector was the primary contributor to this decline, experiencing a significant 10.3% drop, followed by industrials and financials with -5.1% and -2.0%, respectively. On the other hand, South African listed property advanced 0.8%, marking the third consecutive month of gains.