April 2023 Economic Update
Positive developments in the Eurozone defy recession predictions, while the UK grapples with high inflation. Brazil and Russia support China's bid for the Yuan as a global currency. The US introduces incentives for green technologies, Libya plans to resume oil production, and African nations seek increased debt relief. Ghana approves a new malaria vaccine, China's real estate market improves slightly, and India's JSW Group invests in infrastructure for growth.
Eurozone
On April 13, the euro climbed to its highest level against the dollar for more than a year. In 2022, many analysts, including those at the European Central Bank (ECB), predicted a deep recession for the Eurozone in 2023 due to the war in Ukraine which has caused a surge in energy prices, depressed demand for goods due to China’s zero Covid policy and the uncertainties surrounding the ECB monetary policy. Due to the unexpected reduction in energy demand, China’s dismantling of its zero Covid policy rule and the reduction of inflation to a manageable level, the predictions made in 2022 have been negated. The Eurozone’s economic prospects look positive as the bloc saw a 1.5% increase in factory output in February and an inflation rate of 6.8% in March. Accordingly, investors are flocking to the euro and analysts predict that the currency will increase in value to the dollar by 0.63% in April to $1.1067.
Inflation in the UK remained in double digits throughout March as food prices continue to rise. Following Russia’s invasion of Ukraine, inflation has been a perennial issue across the globe, no more so than in the UK, where the annual inflation for 2022 was recorded at 9.2%. Many of the UK’s G7 counterparts such as the US and Germany have seen inflation decrease, whereas in the UK inflation has remained stubbornly high. On the bright side, recent data show that inflation reduced to 10.1% in March which is a slight decrease from the 10.4% recorded in February.
Americas
The Yuan has surpassed the Euro to become the second-largest currency in the foreign reserves of Brazil. Furthermore, the Left-wing Brazilian President, Lula Da Silva has called on developing countries to support China’s efforts to replace the US dollar with the Yuan as the dominant global currency. The US dollar currently constitutes 60% of global foreign currency reserves, a position it leverages to enact foreign policy goals such as freezing the assets of entities or individuals from sanctioned countries including Venezuela, Iran and Russia. China’s long-term strategy is to supplant the dollar’s hegemony, encouraging its trade partners to accrue and trade with the Yuan. In March, Putin announced Russia would be scaling up its adoption of the Yuan rather than the dollar and encouraged Africa and Latin America to follow suit. This appears to have struck a chord with Da Silva, who after a visit to China recently, asserted the need for other nations to reduce their reliance on the US dollar.
Graph 2. Change in shares of global currency reserves since 2004.Bloomberg
The long-awaited directives which spell out the incentives included in the Inflation Reduction Act (IRA) were released on March 31. In August 2022, the US House of Representatives approved the IRA. This bill provides that the US government will invest $369bn towards green technologies, with further incentives to organizations that use domestic materials. The electronic vehicle (EV) market was identified as an industry that would receive a significant proportion of the investment. To the relief of many, the directives presented in the IRA will widen the scope of eligibility for tax breaks by stipulating that just 40% of the minerals in EV batteries be processed in US territories or by those with whom the US has free trade agreements.
Africa
The head of Libya’s state oil company, Farhat Bengdara, released a statement indicating that he has the support of both the Libyan government and renegade, General Khalifa Haftar in his plans to resume large-scale production of the country’s oil. Control over the country’s oil revenues has been at the heart of the ongoing conflict between the Government and supporters of Haftar, who control the Eastern region of Libya. This has resulted in armed groups blockading oilfields and export terminals, which in turn, have caused the reduction of oil exports by a third in 2022. Bengdara announced at the end of March that he had won support from the rival factions to end blockades and resume production. Consequently, he expects oil production to rise to 2 million barrels of oil per day over three to five years. Given that revenues from oil constitute 86% of Libya’s revenues, this news will be welcomed by many.
The head of IMF’S Africa department, Abebe Selassie, has implored African nations’ creditors to step up debt relief efforts as numerous African nations struggle to overcome debt distress. The macroeconomic consequences of the war in Ukraine have affected no continent more so than Africa. Various countries including Ghana, Egypt, Tunisia, Zambia and Nigeria have seen their economies descend to economic chaos due to the cascading effects of soaring energy prices and inflation. Although nations such as Egypt and Tunisia have obtained comprehensive IMF bailouts, Ghana and Zambia have struggled to obtain the necessary funds to overcome their issues as creditors hesitate to negotiate debt restructuring packages or provide the necessary financial assurances. As a result, Selassie has urged the global financial community to increase its efforts to negotiate debt otherwise they risk preventing the region from achieving sustainable growth.
A new malaria vaccine developed by the University of Oxford has been approved by health authorities in Ghana. Health experts predict that this significant milestone will reinvigorate the battle against malaria. Malaria is the leading cause of infant mortality worldwide, taking the lives of an estimated 600,000 individuals a year, 75-80% of which are below the age of 5. Oxford University, following 30 years of malaria vaccine research, have developed a new vaccine named R21 which shows efficacy as high as 80% in one group and 70% in the other. Following trials of the vaccine in the UK, Thailand and several African nations, Ghana has authorised the introduction of the vaccine which is being developed in India.
APAC
In March, China’s real estate market increased by 0.5%. Xi Jinping has targeted the real estate sector as an area of development to sustain and drive further growth for China’s economy. Efforts to push this agenda were hindered by the large scale of unfinished real estate development projects and a liquidity crisis which has lasted for more 2 years. Despite the implementation of policies to fix China’s housing crisis and pump investment into the real estate sector, the housing market has continued to remain at a standstill. Even after ending the extremely restrictive zero-covid policy, China’s debt laden property sector rose by only half a per cent in March. Analysts, however, are of the view that this data is better than they had anticipated. China’s economy has grown since the end of its strict covid restrictions – the National Bureau of Statistics reported that China’s GDP grew by 4.5% in the first quarter of this year. Though this news has improved China’s economic outlook, economists have warned that China’s recovery may take a longer time than expected.
Graph 3: China’s GDP growth from 2011-2023. Reuters.
Indian industrialist, Sajjan Jindal, revealed that his company will invest $65bn into infrastructure enterprises. The objective of this investment is to profit from and support the national infrastructure push which Prime Minister Narendra Modi has made a priority. Since 2011, Sajjan Jindal has led JSW group which is India’s second-largest private sector conglomerate. His corporation, which has enterprises across steel, paint, cement, and energy has been at the forefront of India’s drive to become one of the fastest-growing steel producers in the world.
After the Indian Prime Minister signalled his intent to develop India’s infrastructure, Jindal announced that the JSW group would invest $65bn to $67bn in expanding existing business lines and opening new ones. Consequently, JSW predicts that it will boost its total steel production from 28mn tons to 39mn tons in 2024.
