May 2023 Economic Update
Western sanctions have led to a sharp decline in Russian energy revenues, down 50% in Q1 2023, while the UK and EU are improving cooperation on financial regulation. In the Americas, US treasuries and Wall Street stocks rise as inflation drops, and Argentina introduces emergency measures to address rampant inflation. In Africa, Egypt's efforts to sell state assets face challenges, and China's strategy in Sudan suffers setbacks. Meanwhile, the IMF approves a $3bn loan to Ghana. In APAC, Japan's economy shows signs of sustained growth, but China's economic recovery faces obstacles with lower-than-expected figures in key sectors.
Eurozone
Russian revenues from energy are down 50% in the first quarter of 2023 as finance minister, Anton Siluanov, concedes Western sanctions are a “problem”. Following Russia’s invasion of Ukraine, G7 members and their allies imposed numerous sanctions on the Russian economy. None have been more extreme than the price cap on the purchase or transport of Russian oil and petroleum products. The policy has evidently been a success as energy revenues have halved in the first quarter of 2023, with an estimated 75% of the reduction being attributed to Western sanctions.
Graph 1. Russia’s reduced energy reserves. Financial Times.
In a further sign of improving relations between the UK and EU, Brussels and Westminster have agreed to increase cooperation on financial regulation services going forward. The fallout from Brexit left many regulatory and governance gaps in trade between the two territories with neither party willing to concede. In more recent times, the UK and EU have found some common ground with the long-running issue of the Northern Ireland trading arrangements being resolved in January. The EC announced this month that they had created a regulatory framework with the UK to manage financial trade, along with a UK-EU regulatory forum to improve co-ordination and help settle financial trade disputes more easily.
Americas
Following encouraging data from the US Bureau of Statistics earlier this month, US treasuries and Wall Street stocks rose significantly. Data released in early May revealed that headline inflation dropped to 5.5% in April. This has fueled investors’ hopes that the Fed will now end its policy of monetary tightening. Therefore, yields on rate-sensitive two-year Treasuries fell 0.11 percentage points to 3.91 per cent while Nasdaq Composite and the blue-chip S&P 500 rose by 1% and 0.4%, respectively.
Graph 2. US stocks grow throughout 2023. Financial Times.
On Monday the 16th of May, Argentina’s government introduced a string of emergency measures to subdue the nation’s rampant inflation and economic decline. South America’s second largest nation has experienced its worst economic crisis in two decades as annual inflation hit 109% in April, with output and growth stagnating over the last 18 months. Consequently, Peron’s government has raised interest rates by 600 base points to 97%, requested that the IMF bring forward a disbursement, and introduced a government scheme to enable Argentinians to obtain locally produced goods on credit to boost the economy.
Africa
Egypt’s attempts to sell off state assets have proven unsuccessful as traditional economic allies take a tougher stance. In order to obtain a $3bn loan from the IMF in October, Egypt agreed to reduce the size of the state through the sale of assets to raise funds and increase the nation’s depleted currency reserves. Egypt had hoped that it would find buyers in oil rich gulf states which have traditionally bailed out Cairo during economically difficult periods. The 32 state assets which have been floated for sale, however, have received little interest. Analysts attribute this to the Gulf states’ reluctance to invest money into assets which are underlined by weak governance and inadequate regulation, opting rather for commercial private investments. Moreover, a mismatch in value has been highlighted as another issue, with Egypt claiming that depressed market prices do not represent the long-term value of the assets.
The conflict in Sudan has delivered another blow to China’s strategy towards Africa. In 2016, Xi Jinping labelled Africa “the fastest growing and most promising continent in the world” which was supported by a large investment in the continent, peaking at $26bn. Sudan has been one of the key beneficiaries of this policy, receiving at least $5.5bn from Beijing. The conflict in Sudan, however, has displaced millions and rendered Khartoum unable to pay back many creditors, with China being one of them. Zambia has already defaulted while Ethiopia, Sudan, and Angola are all currently struggling to make repayments.
On Wednesday the 17th of May, the IMF approved a three-year loan to Ghana worth $3bn in total. Despite long being considered a success story in Africa, global increases to food and energy prices crippled the Ghanaian economy. The Cedi lost half its currency value in 2022 and Ghana’s debt-GDP ratio skyrocketed to 100% on the eve of 2023. After Ghana’s creditors (which include China and France) held a committee to agree on the restructuring of Ghana’s debt, the IMF approved the $3bn loan with an immediate release of a $600m disbursement to help alleviate the nation’s financial woes.
APAC
After an extremely difficult economic year in 2022, Japan’s economy looks ready for sustained growth as Japanese stocks hit a 33-year high. 2022 was a challenging year for Japan with many labelling the Yen as the worst performing currency of the year. Tokyo’s fortunes in 2023, however, have reversed. The dollar’s rise has slowed down which enabled the Yen to recover much of its value while China’s end to its zero-covid policy has also provided a boost to Japan. Not only has this re-energised trade with Japan’s largest trading partner but attracted investors as they perceive Japan as an avenue to benefit from Chinese growth without the geopolitical risk. Accordingly, Japan’s Topic index rose 0.6% on the 16th of May taking this year’s gains to 13.6%.
China’s youth unemployment hits record high. ICEF.
Despite early promise of economic revival following the dismantling of a strict zero-covid policy, a string of data released this month throws into question the belief that China’s economy has truly recovered. After almost three years of economically hindering covid restrictions, the CCP removed many of these lockdown policies which boosted the Chinese economy and led analysts to believe that China would pick up where it left off. Although industrial output added 5.6% last month, this figure is far below the anticipated 10.6% while the 4.7% fixed-asset investment growth was also lower than expected. Moreover, property investment has declined by 6.2% in 2023 and youth unemployment hit 20.4%, a record high.
