December 2023 Economic Review

December Economic Review

2023 was a year of market surprises, indicating that volatility will always be part of the investment journey and amid the highs and lows, there will always be gains and losses for investors, businesses, and economies. Some of the market conditions might continue into 2024 but the reality is that no one knows what’s in store for the new year. Economists can make predictions of how they perceive the market to play out, however, unforeseen circumstances might arise to impact global economies and once again prove market predictors otherwise.

A recap of 2023

Continued geopolitical tensions

The Russia-Ukraine war, which disrupted supply chains and contributed to oil price volatility, continued into 2023 and sanctions were imposed on Russia which responded by announcing a ban of more than 200 products, impacting consumers from across the world. According to Statista, the war resulted in a humanitarian crisis as thousands of Ukrainians were internally displaced or fled abroad. The other major geopolitical tension was the conflict in the Middle East which resulted in a nearly 4% increase in Brent Crude Oil prices to around US$88 per barrel and a 1% rise in gold prices in October. Geopolitical tensions have had the following impact on financial markets: a hike in the oil price, which ultimately impacts the supply of oil in a region and affects prices paid by consumers.

US bank collapse

In the US, the collapse of First Republic Bank, Silicon Valley Bank (SVB) and Signature Bank shook investors and savers, sparking fears that other US banks might follow. SVB was the first bank to collapse and created a ripple effect on Signature Bank and First Republic Bank. The SVB collapse was caused by its depositors withdrawing large sums of money due to their investments decreasing in value. While US regulators were trying to take control of the situation, markets were panicking. The Federal Deposit Insurance Corporation reported the reason for the collapse of Signature Bank as poor management and a pursuit of rapid, unstrained growth with little regards for risk management. According to the Wall Street Journal, the collapse of First Republic Bank was because of depositors seeking better returns elsewhere due to a series of interest rate increases by the US Federal Reserve (Fed).

US debt limit raised

In June 2023, the US Congress approved a deal to raise the government’s borrowing limit (also known as the debt ceiling) to avoid a US debt repayment default. This agreement was passed by the Senate and the House of Representatives, and President Joe Biden signed it into law. It suspends the debt ceiling for two years past the November 2024 presidential election, while limiting federal spending. Moreover, it imposes new work requirements on some American citizens receiving food assistance, and formally ended the pause on student loan payments in August. Treasury Secretary Janet Yellen also gave a warning that without more borrowing, the US will not have enough money to meet all its financial obligations.

Record-breaking global interest rate hikes

A global topic of concern prevalent throughout the year was interest rates, with global reserve banks excessively raising rates to reach record-breaking highs as a solution to taming inflation. This was to measure how long the economy can sustain higher-for-longer rates with the back end of the year turning to market expectations of a rate cut. Excessive raising happened in 2022, while 2023 saw a cautious approach to inflation. The US Fed raised rates 11 consecutive times during its rate hiking cycle, leaving the rate at 5.25%-5.50%. In the euro area, interest rates from the main refinancing operations rate was at a 22-year high figure of 4.50%, while the deposit facility rate was at an all-time record of 4% at the end of December 2023. The below table shows the inflation rate and central bank interest rate in developed and emerging countries in January 2022 and August 2023. These are compared to the inflation and interest rates of the previous years.

Source: Statista, October 2023

The Chinese economy loses steam

China’s economy showed some recovery in January after the COVID-19 ban was lifted and quarantine requirements for inbound travelers were removed. However, economic activity shrunk a few months after because of heavily indebted property developers, weak domestic demand, and inflation. Country Garden, China’s leading property developer, was reported to have 108.7 billion yuan of debt due in 2023. 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 chose to save instead of spending. Numerous plans to avert default were followed but the property sector is still ailing.

The US avoids a recession

The US Fed’s higher-for-longer interest rate environment resulted in strong fears of a recession in the US by economists and analysts, but the economy continued resilience throughout the year. According to CNN Business, some of the most closely watched economists were all predicting a recession for 2023 but revised their forecast by penciling a mild recession. Furthermore, many economists began abandoning the narrative after the economy grew with a GDP of 4.9% in Q3 2023. US Federal Reserve (Fed) chair Jerome Powell said he also did not expect the economy to hold up so well after multiple interest rate hikes.

BRICS adds more members to the bloc

Following the 15^th annual BRICS Summit which took place in Johannesburg in 2023, the BRICS countries announced the addition of new members to the bloc which include Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates. According to the World Economic Forum, the addition of the UAE, Saudi Arabia and Iran will increase oil production, with Ethiopia contributing to the global growth rate. Argentina, Chile and Bolivia account for 60% of the world’s known deposits of lithium.

SA power crisis

Severe power cuts have been part of South Africa ever since 2023 started, and they continued into the year to end with a record-breaking 332 days of load shedding. SA’s severe power crisis, caused by a decline in Eskom’s ability to meet electricity demand, had a negative impact on jobs and businesses in the country – with no answer as to when the energy crisis will come to an end. 2023 also saw a record number of days of Stage 6 load shedding – with 74 days, highlighting an urgent need for effective crisis management and long-term sustainable solutions. Moreover, 2023 was also by far the year of the most intense blackouts, with significant portions of the year being at stages 5 and 6. President Cyril Ramaphosa and the government then created a post for Minister of Electricity in the year as part of the efforts to finding solutions.

SA interest rate hikes

2023 marked the continuation of rate hikes in South Africa with the SARB hiking interest rates 11 times since November 2021, reaching a total hike of 475 basis points and a 14-year high of 8.25%. The interest rates were paused at the July to December meetings after inflation fell within the SARB’s target range of 3-6%. The Monetary Policy Committee’s stance was to increase confidence levels in attaining the inflation target sustainably over time and anchor inflation expectations more firmly at the midpoint of 4.5%.

These are some of the global and local key events that impacted the market for most of 2023. In closing the year, we take a look at the key global and local events that shaped the market during December.

December in review

More jobs added for the US

To combat unemployment and boost the economy, the US labour market added 216 000 jobs in December. According to the Bureau of Labor Statistics, this employment figure outperformed economists’ forecast of 170 000 and November’s downwardly revised figure of 173 000. The bulk of the jobs created can be largely attributed to government at 52 000, healthcare at 38 000, construction at 17 000 and hospitality at 40 000 while transportation and warehousing sectors collectively lost 23 000 jobs. US Economists forecasted the unemployment rate for December to show a reading of 3.8%, however, the rate remained unchanged at 3.7%, 0.1% below expectations while wages were up 0.3% and in line with expectations. The December employment reading takes the overall US job gain for 2023 to 2.7 million, indicating an average monthly gain of 225 000 jobs created.

Euro area inflation rises less than expected

Inflation in the euro area ended a seven-month decline streak and rose by 2.9% year-on-year (y/y), less than the expected rate of 3% y/y but higher than November’s rate of 2.4% y/y. On a month-on-month (m/m) basis, the inflation rate rose by 0.2% with core inflation (excluding energy and food) recorded at 3.4%. According to Eurostat, looking at the main components of euro area inflation, food, alcohol and tobacco had the highest annual rate in December (6.1% y/y, compared with 6.9% y/y in November), followed by services (4% y/y, stable compared with November), non-energy industrial goods (2.5% y/y, compared with 2.9% y/y in November) and energy (-6.7% y/y, compared with -11.5% y/y in November).

Source: Eurostat, December 2023

Moreover, the Eurostat provided data that shows that within the euro area, Italy reported a December inflation rate of 0.6% y/y, marginally falling short of the forecasted 0.7% y/y. Germany reported an inflation rate increase of 3.7% y/y, depicting an increase from the 3.2% y/y seen in November and matching economists’ expectations. France’s inflation rose to 3.7% for December, a slight increase compared to November’s 3.5%, but still below the expected 3.6% rise.

Source: Eurostat, December 2023

Market overview

Global overview

The year ended on a high note for global investors with the MSCI World Index ending the month at 4.91% and a year-to-date (YTD) positive of 23.79%, both in dollar terms. Since late October, investors became increasingly optimistic about the prospect of US rate cuts in 2024 and this led to a benchmark rise of 16%. Earlier in the year, tech stocks showed dominance with the Magnificent Seven recording an aggregate of 50% by late October, while the rest of the S&P 500 shares were down 2% in aggregate over the same period. The S&P 500 Index ended the month at 4.53% with a YTD figure of 26.26%. Even though emerging markets were held back by Chinese stocks, the MSCI Emerging Markets Index still ended in positive territory at 3.95% m/m and 10.27% YTD. The Dow Jones ended the month at 4.93% in dollar terms, the FTSE at 4.52% m/m in pound terms, the Euro Stoxx at 3.22% m/m in euro terms, and the Nikkei Index at 0.04% m/m in yen terms.

Local overview

The SA stock market ended the year positively with the FTSE/JSE All Share Index at 2% and a YTD figure of 9.25%. SA Value stocks ended at 2.81% m/m and 2.79% YTD, while SA Growth stocks ended at 1.18% m/m and 14.45% YTD. In the derivatives market, Resources ended the month negatively at -1.31%, with Industrials and Financials positively at 0.49% and 2.31% respectively. Cash ended in positive territory with the STeFI Composite Index at 0.70% m/m and 8.06% YTD, both in rand terms. In the credit market, the All Bond Index ended at a positive 1.49% m/m in rand terms, with bonds of 1-3 years at 1.10% m/m, bonds of 3-7 years at 1.25% m/m, bonds of 7-12 years at 2.23% m/m and bonds of over 12 years at 1.13% m/m. In the currency market, the rand ended positively against the US dollar at 3.62% m/m (-6.96% YTD), positively against the euro at 2.35% m/m (-10.11% YTD), positively against the British pound at 2.90% m/m (-12.21% YTD), but negatively against the Japanese yen at -4.64% m/m (+6.85% YTD).