December 2022 Economic Update
The Eurozone economy faces signs of a potential recession as retail sales and industrial output decline, leading ECB policymakers to consider lowering interest rates despite high inflation. In the Americas, the US eases restrictions on oil imports from Venezuela, while Argentina expands its currency exchange program with China. In Africa, Ghana seeks to stabilise its macroeconomic conditions through a debt exchange program and negotiations for an IMF relief package, while Nigeria aims to end petroleum imports by Q3 2023 and modernize its refinery. In APAC, China eases its strict COVID-19 restrictions, Japan's yen strengthens due to improving global economic conditions, and Saudi Arabia deepens economic and political ties with China.
Eurozone
Eurostat published data this month suggesting the Eurozone economy may be entering the anticipated recession many predicted. On average, Eurozone retail sales fell by 1.8% in October, the largest decrease since December 2021. Additionally, French industrial output figures revealed an unexpectedly large decrease in output of 2.6%, while Germany reported a 0.6% decrease in industrial output. Separately, S&P Global produced a report this month which indicated that activity in the Eurozone service sector is at its lowest since February 2021. This data bolsters claims from ECB policymakers who are calling for a lower increase in the interest rate at this week’s meeting following two consecutive 0.75 percentage point moves. With inflation still at 10%, far above the ECB’s target of 2%, this appears unlikely.
Graph 1. Eurozone retail sales index. Financial Times.
In a move that sent shockwaves throughout the global oil market, from the 6th of December the EU has banned all seaborne oil imports from Russia. Moreover, the EU will join the G7 in prohibiting their firms from transporting, insuring or selling Russian oil below a price cap of $60 per barrel. This constitutes another chapter in the West’s attempts to undermine Putin’s war effort by crippling the Russian economy. The price cap, it is hoped, will ensure the flow of global oil is not significantly reduced while preventing Russia from accruing large profits on exported oil. Some analysts, however, suggested that the price cap may have little effect as the $60 per barrel cap is close to the average price Russia currently sells its oil for.
Americas
Oil shipments from Venezuela to North America are set to resume this month as the US government eases restrictions on Maduro’s government. Oil imports from Venezuela to the US were discontinued in 2019 as part of Donald Trump’s sweeping sanctions levied on the nation, ostensibly for reasons concerning lack of compliance with democratic principles and international human rights laws. The sanctions have reduced Venezuela’s oil production from 3m barrels per day a decade ago to 700,000 barrels per day currently. With shifting geopolitics and economic realities, Biden has opted to ease sanctions and resume oil imports from the nation which has the world’s largest remaining oil reserves.
Graph 2. Venezuelan Oil Production. Financial Times.
Argentina has reached an accord with the Chinese government to expand its currency exchange program with China by $5bn. Despite strict capital controls, Argentina’s foreign reserves have severely depleted over the last 18 months due to strong demand for dollars, both from importers and savers looking to buffer themselves from the peso, which is expected to experience inflation of over 100% this year. Fernandez asserted that the currency exchange will allow the central bank to intervene in the exchange market and strengthen the volatile peso.
Africa
This month, Ghana will launch a domestic debt exchange program and attempt to obtain a relief package from the IMF to help stabilize macroeconomic conditions. Ghana faces its largest economic crisis in a generation as soaring interest payments and a plummeting currency leave the nation with a debt to GDP ratio of 100%, and the Ghanaian cedi at less than half the value it held at the start of 2022. Consequently, Ghana will pursue a domestic exchange program whereby local bonds will be pushed back to 2027, 2029, 2032 and 2037. Their annual coupon will be set at 0% in 2023, 5% in 2024, and 10% from 2025 until maturity. Additionally, a relief package from the IMF is set to be negotiated in order to relieve some of the domestic and foreign debt distress.
Nigeria expects to end petroleum imports before or by the third quarter of 2023, announced oil minister, Timipre Sylva, on the 29th of November. Currently, Nigeria swaps its crude oil for imported refined oil due to poor infrastructure, theft of oil, and under investment, which has allowed Algeria to usurp Nigeria as Africa’s largest oil producer. By December 2023, it is expected that the refurbished refinery in the city of Port Harcourt, in the oil producing region of Nigeria Delta, will be producing 60,000 barrels of refined oil a day following the $1.5bn project to modernize the refinery.
Despite persistent inflation, rapidly rising interest rates, and frequent power cuts, consumer confidence in South Africa recovered to its highest point since the final quarter of 2019, before the pandemic struck. FirstRand released their quarterly index which measures consumer sentiment; the report showed that consumer confidence rose to -8 from -20. This comes after 14 consecutive negative prints which signal depressed consumer sentiment. Many hope policymakers will look to capitalize on this to revitalize the ailing South African economy.
Graph 3. Debt GBP Emerging Markets. Reuters.
APAC
China appears to be loosening its commitment to the zero-covid policy which has kept the country on lockdown for nearly three years. Whereas many nations across the globe have dramatically reduced or totally removed covid restrictions, China has persisted with severe measures to reduce the spread of Covid-19; restricting access to public transport and requiring covid patients to quarantine in centralised facilities. Following protests that rocked the country last weekend, several Chinese cities have eased restrictions. Unsurprisingly, the stock markets reacted positively to the relaxation of restrictions. The renminbi rose to a 12-week high, while Hong Kong’s Hang Seng and the CSI Index of Shanghai listed stocks jumped 5.1 per cent and 2 per cent respectively.
Japan’s Yen has bounced back from a 32-year low as investors bet on global economic conditions strengthening the position of the currency. Due to ultra-loose monetary policy by the Bank of Japan and the surging dollar, the Yen slid to a multi-decade low in Autumn, forcing the government of Japan to deploy $64bn to stabilise the currency. A series of economic reports from the middle of November, however, show a slowdown of inflation in the US, which has led investors to believe the Fed will reduce interest rate increases, boosting the value of alternative currencies such as the Yen. Furthermore, China, Japan’s largest trading partner, appears to be changing its zero-covid policy, a potential economic stimulus for both Japan and China. Investors are therefore confident that one of the world’s worst performing currencies will make a strong comeback in 2023.
Saudi Arabi and China have signed a series of economic and political agreements during Xi Jinping’s visit to the kingdom on the 9th of December, as the two nations further extend their economic and political ties. Although President Biden previously stated that the US “will not leave a vacuum (in Saudi Arabi) to be filled by China, Russia or Iran”, Saudi Arabia have gradually deepened ties with Beijing. China is already Saudi Arabia’s largest trade partner and Saudi Arabia is the largest exporter of crude oil to China. Jinping’s visit to Riyadh yielded various accords with the Middle East powerhouse, with key agreements being achieved in trade, nuclear energy, oil and national security. As US foreign policy continues to dovetail away from the kingdom, one can expect China and Saudi to further align their economic and political interests.
