August 2023 Economic Update
In August, China coped with post-Covid economic issues and trimmed interest rates. Europe's resilience was tested by Russia's recession and the UK's inflation review. Uncertainties stemmed from Argentina's turmoil, US Federal Reserve's actions, and Niger's coup. Gabon pioneered debt-for-nature swaps while raising African stability concerns. Interconnected global economic trends emerged.
Asia
As concerns continue to mount over the health of China’s economy, the People’s Bank of China (PBoC) stepped up efforts to halt the slide of the Renminbi following the release of economic data which paints a worrying picture. China’s economy has struggled to recover from the end of strict Covid-19 controls last year, with its currency facing pressure from the surging dollar, youth unemployment on the rise, and consumer confidence extremely low. Consequently, the PBoC, to the surprise of some, cut interest rates on the 13th of August, putting downward pressure on the Renminbi and causing the Yuan to lose 3.6% of its value against the dollar.
Japan’s core inflation rate fell from 3.3% to 3.1% in July, adding caution to the Bank of Japan’s contemplation of whether to remove Japan’s ultra-loose monetary policy. Due to decades of stagnant prices and flat wage growth, Japan is the world’s only nation which employs negative interest rates, a policy which has been in effect since early 2016. For the 16th month in a row, however, Japan has experienced inflation above the 2% target, currently at 3.1%. The steady increase, especially in the last 3 months, has led to questions about whether the negative interest rate policy should come to an end. The slight reduction in core inflation, however, which can be attributed to falling energy prices globally, has further complicated discussions around the topic. The next few months will be crucial in deciding the future monetary policy of Asia’s second largest economy.
Europe
Russia’s central bank raised interest rates by an eye-watering 3.5% to 12% in a move to arrest the fall of the rouble. Since the full-scale invasion of Ukraine 18 months ago, Russia’s economy has plunged into a recession due to the economic demands of war and numerous sanctions by the West. Russia’s central bank has tried to adapt but has been left with few policy tools as western countries have frozen around $300bn of the country’s foreign currency reserves, rendering the central bank unable to boost the rouble through the sale of dollars and euros. Additionally, to fund the continuing military expansion, the central bank has been forced to pursue loose monetary policy, exerting further pressure on the Rouble. Unsurprisingly, inflation in Russia over the last 3 months stands at 7.6% and the Rouble fell to 102 to the dollar, the lowest in 18months. Accordingly, the Central Bank of Russia intervened with a historically high interest rate hike.
A report released by the Office for National Statistics (ONS) on the 17th of August has affirmed the Bank of England’s position on the root cause of inflation in the United Kingdom – increasing labour costs, rather than increasing corporate profits, is driving inflation. The UK’s extremely high and long-term inflation has been well documented over the last 2 years. Many analysts have attributed this increase in prices to “greedflation” – where businesses drive up inflation by increasing their prices beyond that of current price surges to increase profits. The BoE has repudiated these claims on numerous occasions, insisting wage inflation is the main cause for UK inflation which currently sits at 6.8%. The report from the ONS highlights that companies made a net rate of return of 9.9% in the first three months of 2023, a figure much lower than the average before Covid-19 which was 11.4%. It must be noted these figures exclude North Sea oil profits, which were substantial during this period.
America’s
Argentina’s economy suffered yet another significant setback as radical right-wing presidential candidate, Javier Milei, enjoyed a shock victory in the primaries. Argentina has endured by far its worst economic crisis in a generation across the last two years, suffering persistent hyperinflation which peaked at 142% in July. A large-scale black market for Argentinian pesos has emerged, thereby undermining virtually all government efforts to arrest the spiral and revive the economy. While the official exchange rate sits at 361 pesos to the dollar, the black-market value is estimated at 705 pesos to the dollar. Following the primary win of outsider candidate Javier Milei, a libertarian who promises to pursue a policy of severe austerity and dollarize the peso, the currency was devalued by a further 18%. While the outcome of the general election, to be held on October 22, is far from certain, whoever inherits the Argentinian economy will have their work cut out for them.
The US Federal Reserve’s efforts to shrink its oversized balance sheet looks set to hit the $1tn mark this month as the central bank aims to reverse years of loose monetary policy during the pandemic era. In order to shore up the shaken financial system during Covid-19, the Fed purchased trillions of dollars of government bonds and mortgage securities, lifting the Fed’s portfolio to a peak of $8.55tn in May 2022. Since last spring however, with the financial system now more secure, the Fed has worked to reduce its balance sheet – known as quantitative tightening. So far, a figure of $0.98tn has been removed which is expected to surpass $1tn by the end of August. This is not a risk-free process as private investors will have to absorb the debt. Indeed, in 2018-19 quantitative tightening had to be stopped due to steeply increasing borrowing costs which spooked the markets. So far, the latest round has progressed smoothly. However, some analysts suspect the 2nd $trillion worth of balance sheet tightening may have a more profound effect.
Africa
Severe concerns are rising over the regional stability of West and Central Africa, following the recent coup d'état in Niger. With wars and conflicts raging in 6 of the 7 countries it borders – which include Mali, Libya, Burkino Faso, Chad, Benin and Nigeria – Niger was considered an ally in efforts to impose peace, stability and democracy in the region. Indeed, just last month, Joseph Borrel, the EU’s representative for foreign policy, labelled Niger a “haven of stability”. On Wednesday the 26th of July, however, a military junta removed democratically elected Mohamed Bazoum from power and declared themselves the “National Council for the Safeguarding of the Fatherland”. Analysts lament Niger as the “last domino to fall” as the volatile “coup belt” extends across the Sahel. Not only is the takeover a major setback for Niger, already one of the most impoverished nations in the world, but a setback for democracy and stability in West Africa.
On Tuesday the 14th of August, Gabon agreed the first debt-for-nature swap in continental Africa, an accord which will likely become more familiar across the globe as developing nations funnel money into conservation to ease their debt burden. Arranged by Bank of America, the $500m deal lowers interest rates on Gabon’s debt and gives it longer to make payments. In return, Gabon will spend $125m on conservation efforts such as widening marine reserves and strengthening fishing regulations which will protect endangered species. With developing nations increasingly under debt distress due to global inflation and increased energy prices, and western institutions under increasing pressure by home nations to pursue environmental projects, many expect debt-for-nature swap deals to become more common.
