Good and Bad installed for 2023

If trends in January are to be a marker for what to expect in 2023, then we need to brace ourselves for positives and some negatives. Consumer price inflation (CPI) should continue on its declining path, interest rate increases will soon reach its high point, economic growth is on its way down, but may be a tad stronger than 2022 expectations, and the war between Russia and the Ukraine will continue until … nobody knows.

Moving to major economic regions, economic growth in the USA receded to 2.9% in Q4 2022 from 3.2% in Q3 2022, to register growth of 2.1% for the year. Excluding residential investment which declined sharply at a rate of 26.7% in the quarter, growth for Q4 2022 would have been 4.2%. The decline can primarily be attributed to fast and large increases in interest rates. The Fed Resilience in growth is unlikely to persist given still-high CPI and another expected increase in interest rates, but a recession appears unlikely.

In the Eurozone the threat of a deeper energy crisis retreated on warmer weather conditions, resulting in weaker demand. European natural gas prices fell to levels last seen before the war in the Ukraine, allowing for more gas to be directed to Europe’s storage facilities. CPI declined again in December (9.2% vs 10.1% in November), driven by energy, while core inflation increased further. The next rate increase may be only 50 basis points, but more is to come following sticky services and food CPI.

In the UK a deceleration in economic growth to recessionary levels, high CPI and rising interest rates remain. High underlying CPI (10.5% in December vs 10.7% in November) and strong wage growth point to further interest rate increases on top of the cumulative 350 basis points thus far. Dwindling growth is forecasted by the purchasing managers’ index which declined to a two-year low of 47.8 points in January 2023.

In Asia Japan is now experiencing the highest inflation in 40 years, thanks mainly to a shortage of skilled labour which forced companies to offer extraordinary high salary increases (far above CPI), breaking a pattern which lasted for decades. Higher CPI may mean a return to normal monetary policy, as well as more spending by consumers, which may boost economic growth.

In China, a rapid unwind in pandemic controls has led to a surge in COVID-19 infections, but the risk of a country-wide rebound in infections in coming months is deemed to be low. This should support growth for both China and Asia later this year.

In South Africa, load-shedding (mostly at stages 2 and 3) will continue throughout the year; CPI will drift downward, but in a mild pace; we may have seen the last interest rate increase in January, although another 25 basis points is possible in March; economic growth will slow markedly from the expected 2.5% of 2022 (the SARB forecasts growth of only 0.3%); political battles will continue as we draw closer to elections; and labour strikes for higher salary increases to compensate for higher CPI in 2022 may increase. The budget later this month should provide further direction on ESKOM “bailouts” and country risk (size of the fiscal deficit).

Multivest Economic Division