January 2024 Economic Update
In January 2024, the global economy witnessed a series of pivotal developments, from the UK's ongoing struggle for growth post-pandemic to Japan's stock market rally and China's deflationary pressures. As the ECB prepares to cut interest rates, providing a potential boost to the European economy, the US averts a government shutdown with a significant spending agreement.
Eurozone
As expected, the UK economy shrank slightly in the third quarter of 2023, as per figures revealed by the ONS at the end of last year. Unlike some of its counterparts in Europe and North America, the UK has failed to stimulate its low-growth economy following the pandemic. The UK economy flatlined in the second quarter of 2023, not reaching estimates of a predicted 0.2% increase, which was subsequently followed by a 0.1% decrease in Q3. Analysts attribute the stagnant economic growth to a lack of investment and low productivity, while weak business investment and decreased real household expenditure continue to plague the UK economy. Sunak’s government affirm that the UK’s medium to long-term economic growth is positive despite the tepid performance. Further contractions, however, would put a further strain on UK households and the Conservative government.
In news that will come as a relief to investors and households alike, economists expect the ECB to cut interest rates in the second quarter of 2023, a poll released by the FT revealed. The ECB has raised interest rates to 4% in the wake of large surges in consumer prices following the pandemic. This has put households and financial markets under significant pressure due to increased borrowing costs. Euro area annual inflation was recorded at 2.4% at the end of 2024, however, just 0.4% above the EU’s 2% target. Many economists, therefore, expect the ECB to cut rates, with 60% of economists polled by the FT predicting that the ECB will cut interest rates in the second quarter of 2024. While analysts forecast cuts, they also insist that such reductions are unlikely to be administered as aggressively as the hikes due to fears amongst ECB executives that high inflation may return later in the year.
Markets expect to pose in ECB rate hikes soon
ECB rate hikes are likely to curtail in 2024. Reuters
Americas
The US looks set to avoid a governmental shutdown as Republican and Democratic leaders reach a $1.66tn agreement on federal spending for 2024, just two weeks before the budget deadline. Concerns have been mounting across the last 3 months as the Republicans, who have a slim majority in the House, insisted on steep cuts to the budget while the Democrats pushed for a larger budget to push through welfare reforms. Consequently, funding for several crucial parts of the federal government was set to run dry by the end of January. Following intense negotiations, where the Democrats agreed to cuts in the Internal Revenue Service and COVID-19 relief funds, an agreement was struck for $1.66tn federal spending. Biden welcomed the deal while many Republican politicians criticised the deal for not going far enough.
The IMF has agreed to release $4.7bn to Argentina as new president Javier Milei pursues steep austerity. South America’s second-largest economy has suffered economic turmoil for almost 2 years with rampant inflation, low economic growth and unemployment forcing the nation to rely on an IMF bailout. The economic turmoil fueled support for radical right-wing libertarian Milei to take charge with promises to dollarise the economy, increase taxes and cut social spending. Following visits to Argentina from fund officials, who were convinced that Milei’s government had moved quickly to restore macroeconomic stability, the IMF agreed to release a disbursement of $4.7bn which will be used to get individuals back to work and relieve internal debt.
Argentinian President Javier Milei
Asia
Japanese stocks have rallied in January as investor confidence returns to the world’s 3rd largest economy. In the second quarter of 2023, following China’s removal of COVID restrictions, the Japanese economy enjoyed a surge in growth and consumer confidence, leading the Bank of Japan (BoJ) to consider removing their ultra-loose monetary policy. This was soon followed by stagnation, however, as Chinese demand tailed off. The start of 2024 has seen another twist as Japanese stocks rose to their highest levels since 1990.
The Nikkei 225 Index gained has gained 6.3% in 2024, while the broader market stock, Topix, has climbed 5.4%. Analysts attribute this to the economic impact of an earthquake on New Year’s Day which has led traders to believe that it is unlikely the BoJ will introduce an interest rate hike, which would likely strengthen the yen but suppress equities in the country’s export heavy market.
Japanese equities increasing at the start of 2024. FT.
Consumer prices in China reduced for the third consecutive month as Beijing struggles to reboot the world’s second largest economy. China’s economy fell into deflation in July 2023 and has since stagnated or reduced in every month except August. Many attribute these reductions to low consumer confidence, the ongoing trade with US, and a housing crisis which has plagued the economy for almost 3 years. Beijing has introduced several measures, such as loosening lending rates and stimulus packages to stimulate demand and growth. These measures have yet to have the desired effect the Chinese consumer price index fell 0.3% year on year last month. With continued tensions with the US and Europe, the rise of rival markets such as Indonesia and India for cheap labour, and increased military hostilities with Taiwan, Jinping is under immense pressure to put the Chinese economy back on track.
Africa
Somalia has rejoined the global financial system as the war-torn nation secures a significant debt relief package amidst one of the most severe droughts the nation has ever suffered. Somalia has been virtually ostracized from the financial international community since the fall of its communist government in 1991 and subsequent failed attempts from the US to stabilise the nation. Across the last 15 years, governments have struggled to contain Islamist insurgency groups which have prevented Mogadishu from implementing progressive structural policy. To compound matters, Somalia is currently experiencing a severe drought which has displaced over 2m individuals. To the relief of humanitarians and the government of Hassan Sheikh Mohamud, the IMF agreed to a debt write-off of almost $4bn which will slash Somalia’s debt-to-GDP ratio from 65% to 6%. It is hoped this will give Mohamud leeway to introduce welfare reforms and suppress Islamist insurgency groups.
Angola to quit OPEC over oil production quotas disagreement
Following a clash with Saudi Arabia over baseline production of oil, Angola has opted to quit OPEC. Angola joined OPEC in 2007 due to its vast reserves of oil, with the nation possessing the 18th largest oil reserves on the planet. Tensions rose in June 2023 when Angola, along with Nigeria and Congo, exited an OPEC meeting due to Saudi Arabia’s effort to lower its production baseline – the level from which each member’s output quota is calculated – in favour of increasing that of the United Arab Emirates.
Angola subsequently agreed to an independent third party to review the quota. However, the review resulted in similar results with Angola’s baseline production level reduced due to its decreasing reserves. Officials in Luanda shortly expressed that they were quitting the oil cartel in a move that will undoubtedly come as a blow to OPEC.
OPEC oil production by country
Source: OPEC
Angolan Minister of Mineral Resources, Petroleum and Gas, Diamantino Azevedo speaks during the Investing in African Mining Indaba 2023 conference in Cape Town, South Africa, February 7, 2023
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