February 2023 Economic Update
Positive economic forecasts emerge for the Eurozone as falling energy prices and favourable economic data boost the economy. China aims to revive its economy by repairing relations with the West and dismantling its zero-covid policy.
Eurozone
Falling energy prices and promising economic data from the final quarter of 2022 have led to revised and more positive economic forecasts for the Eurozone economy. Surging energy prices following Russia’s invasion of Ukraine led numerous economists to believe that Europe would see a prolonged recession in 2023. European nations, however, have been very successful in finding and efficiently storing alternative sources of gas, and Europe has also enjoyed above average temperatures this winter. Consequently, wholesale gas prices fell by 4.3% this month to €73.7 a megawatt hour, far lower than the €300 megawatt hour last Autumn. The fall in gas prices appears to have already boosted the Eurozone economy. The unemployment rate dropped in Italy, France, and Spain by 0.1 while German industrial production increased by 0.2% in November, and Germany also saw inflation fall further than expected to 9.6%.
Graph 1. Eurozone unemployment rate. Financial Times.
On Friday the 9th of January, the UK and EU announced a breakthrough in negotiations regarding Northern Ireland’s post-Brexit trade settlement, proclaiming a tentative agreement that would give Brussels access to the UK’s IT systems for trade across the Irish Sea. The Northern Irish border dispute has plagued UK-EU negotiations for several years and after months of negotiations, the UK has agreed to provide the EU with “real time” access to the UK’s data system which will provide full visibility of goods travelling across the Irish Sea border.
Americas
After months of ultra-tight monetary policy by the Federal Reserve, the US economy appears to have finally cooled as December saw inflation fall to its lowest level in more than a year. US annual inflation averaged at 8% in 2022 – a multi-decade high – and the Fed responded with continuous interest rate hikes, ultimately raising the interest rate to 4.5%, a 15- year high. CPI has since declined from 9.1% in June to 6.5% in December. While the Fed’s policy undoubtedly played a part in the decreasing inflation rate, many attribute the decline to steep reductions in petrol prices, which fell 9.4% in December and are now 1.5% lower than 12 months ago. Naturally, the Fed signalled their relief at the reduced inflationary rate, paving the way for a possible reversal in stance. Such news will be a relief to many countries around the world who have seen their borrowing costs rise and currencies depreciate in the face of the US interest rate hikes and the surging dollar.
Graph 2. US CPI across previous 6 years. BBC
Just four days after violent riots on the 8th of January, which saw supporters of Jairo Bolsonaro storm the country’s Congress, Supreme Court, and Presidential palace, Brazilian president Lula da Silva announced his government’s first economic package. Da Silva inherited numerous economic, environmental, and social challenges including extreme inequality, a debt-to-GDP ratio of 90%, illegal deforestation of the Amazonian rainforest, and extremists unwilling to accept Bolsonaro’s electoral defeat. The first instalment of Da Silva’s economic program outlined a number of tax increases and spending cuts aimed at reversing Brazil’s projected deficit this year of more than $45bn, to a surplus of more than $450m. This will be achieved by removing several tax exemptions the previous government introduced for large non-financial corporations and changes to rules about how companies can generate significant revenues for the state. With plenty of opponents of his political agenda, Da Silva will hope his fiscal policies are an immediate success.
Africa
On the 4th of January, Egypt’s pound fell to a record low as the country struggles to overcome a series of economic challenges. Russia’s invasion of Ukraine hit Egypt particularly hard; $20bn of foreign reserves flowed out of the country as investors relocated their capital to the safety of the US dollar. Moreover, the invasion led to large increases in the prices of basic commodities such as wheat, of which Egypt is the largest importer, adding further pressure on the country’s foreign reserves and economy. Consequently, in order to obtain a loan from the IMF, in October 2022 Egypt agreed to a permanent shift to a flexible exchange rate as opposed to using foreign currency reserves to keep the exchange rate at a targeted level as done previously. The consequence of this decision was an immediate 6% decrease in the Egyptian pound to 26.4 to the US dollar. Then in early January, due to a lack of foreign reserves available to pay for imports, billions of dollars worth of goods had been blocked in Egyptian ports as local banks were unable to pay for them. Unsurprisingly, this resulted in a further slide of the Egyptian pound to levels not seen hitherto.
South Africa’s president, Cyril Ramaphosa, has pledged to move state electricity monopoly Eskom to the oversight of the energy ministry, a move which has attracted much controversy to an already volatile situation. Rolling blackouts have become the norm in South Africa with 2022 seeing the equivalent of four full months of blackouts, 200% more than any other year. Lack of capacity, an ageing fleet of outdated coal stations and pervasive corruption are considered the primary reasons for Eskom’s inability to meet energy demand. The controversy peaked last month when André de Ruyter, the former Chief of Eskom who vigorously attempted to root out corruption, survived an assassination attempt shortly after he resigned. While Ramaphosa has suggested the change in oversight will lead to more decisive and effective decision-making, many see this as a move to further embed state assets into the party’s sphere of influence, hindering efforts to root out corruption and enabling further asset stripping.
Zambia’s finance minister, Situmbeko Musokotwane, announced on Friday 13th of January that the Zambian economy grew 3.1% last year in what is undoubtedly an economic success story from a continent which has been crippled by Covid-19 and the war in Ukraine. Zambia was the first African nation to default on its sovereign debt in the coronavirus era and had inflation of 24.5% in August 2021. President Hakainde Hichilema, who took office the same month, quickly turned things around. Hichilema renegotiated the country’s debt and obtained a $1.3bn loan from the IMF while introducing fiscally reserved policies across key sectors of government. 2022 thus saw Zambia’s economy grow at a rate of 3.1% and inflation plummets down to 9.8%, a remarkable achievement given the inflationary effects the war in Ukraine has had on most African economies. Many are still yet to see the benefits of this growth, however, as 64% of the Zambian population still live on less than $2 a day.
APAC
APAC
Xi Jinping’s resolve to re-invigorate the stagnating Chinese economy continues as the nation looks to repair relations with the West and continue dismantling its zero-covid policy. The CCP outlined its commitment to growth at the party’s Central Economic Work Conference, which took place in mid-December, where they outlined a growth target of 6%. Consequently, China has completely reversed its commitment to zero covid, re-opening its borders, and removing many covid restrictions. Unsurprisingly, Covid has swept throughout China’s 1.4bn population and, although China is volunteering little information on the matter, many expect Covid to claim 1 million Chinese lives this year. Separately, Beijing will attempt to repair relations with the West in order to boost trade and prevent future economic decoupling. Following visits to Beijing from the German chancellor, Olaf Scholz, and president of the European council, Charlies Michel, China is set to welcome the leaders of France and Italy, Macron and Meloni, to discuss future trade. The CCP also demoted an outspoken critic of the West, Zhao Lijan, in a move which many interpret as further evidence of China’s desire to improve Sino-Western relations.
The Australian government outlined plans to make the country’s largest polluters slash emissions by 30% over the next seven years. Environmental groups in Australia have long been critical of the government’s climate policy. On a per capita basis, Australians produce the most greenhouse gas emissions from coal in the world and will be significantly affected by climate change due to its extensive arid areas, already high temperatures, and existing pressures on water supply. Albanese’s government, therefore, announced a $414 million investment plan along with product tariffs to help Australia’s biggest polluters – 215 oil, gas, mining, and manufacturing outfits – cut CO2 emissions by 43 million tons.
More than $9bn has been pledged by international lenders and governments to help Pakistan recover from the disastrous floods which struck in June 2022, displacing millions. Before the calamity, the economy of Pakistan was already faltering, with a heavy debt burden, skyrocketing inflation, and a tumbling currency. The floods compounded matters. Analysts estimate that the floods inflicted up to $40bn in damages on Pakistan’s economy, affecting agriculture in particular which contributes 23% of Pakistan’s GDP and employs 38% of its labour force. A conference in Geneva yielded pledges of $4.2bn from the Islamic Development Bank, $2bn from the World Bank, and $1bn from Saudi Arabia. The total figure, however, falls short of the $16.3bn Pakistan estimates it will need for flood recovery and relief.
