July 2023 Economic Update
In July, the UK experienced a substantial decline in household wealth due to rising interest rates, leading to mortgage strain and a £2 trillion wealth reduction. Across the Americas, US inflation eases to 3% after the Federal Reserve's rate hikes, boosting Wall Street but weakening the dollar. Brazil achieves a milestone with Lula's Tax Reform, expected to boost GDP by 2.3%. Algeria seeks BRICS membership with a $1.5 billion offer, while Egypt sells $1.9 billion in state assets. South Africa halts rate hikes at 8.25% despite lingering inflation. China grapples with reduced foreign investments due to structural issues, and Japan's inflation surpasses the US, prompting negative interest rate reconsideration.
Eurozone
Rising interest rates have resulted in the biggest fall in UK household wealth since World War II, a report by think tank Resolution Foundation revealed this month. The BoE has responded to persistent inflation across the last 18 months with continual interest rate hikes. Interest rates now sit at 5.25%, a figure which has not been seen since 2008. This has been felt keenly by UK homeowners whose mortgage repayments have dramatically increased. The Resolution Foundation concluded that rising interest rates have reduced UK homeowners’ wealth by £2 trillion. With inflation in the UK currently at 7.9%, expect this trend to continue.
Graph 1. Increase in mortgage repayments for Britons. FT
The cost of two-year-fixed-rate mortgages in the UK rose to above 6% on Monday the 19th of June, exacerbating the ongoing cost of living crisis which has endured over the last 18 months. As the Bank of England has persistently increased interest rates to curb inflation which currently sits at 8.7%, British mortgages have seen their mortgage payments rise. The Revolution Foundation, a think tank, estimates that 4.2mn households will have experienced an average annual repayment increase of £1500 since the BoE began its interest rate-increasing cycle in December 2021. With no sign of inflation coming to an end, analysts estimate a further increase of £1400 next year.
Americas
US inflation cooled down to 3% in July as the Fed`s interest rate increase policy takes effect. The inflationary impact of covid and the war in Ukraine pushed prices in the US to historically high levels. Accordingly, the Fed have continuously increased interest rates. The policy appears to have worked as inflation has reduced from a peak of 9.1% in June 2022 to 3.1% in July. The stock market reacted positively with Wall Street enjoying big gains as the Nasdaq Composite rose 1.6%. Conversely, the dollar noted its largest fall in 9 months, losing 2% of its value in the second week of July
Graph 2. Decrease in value of US dollar over 15 months. FT
New Brazilian president Lula Da Silva enjoyed his first notable success as president on the 6th of July as the lower house of Congress approved the much needed and highly contested Tax Reform Bill. Brazil’s tax system has long needed reform with the process layered in complex procedures. A midsize company in Brazil needs 1500 hours to prepare and pay taxes, by far the most in the world. In the UK, for comparison, a similar sized company requires just 114 hours. The new bill, which will be integrated into the Brazilian constitution, will reduce this number significantly and is expected to boost Brazil`s GDP by 2.3% over the next 6 to 8 years.
Africa
Algeria has applied to join BRICS, submitting a request in July to join the group. The BRICS organisation, which is composed of the resource rich and economically important Brazil, Russia, India, China and South Africa contains 40% of the world`s population and accounts for 25% of global GDP. Algeria, who are rich in oil and gas, therefore, is eager to join the organisation. Along with their application, Algeria offered a $1.5bn contribution fee. The response is not known, although BRICS officials claim that over 40 nations have shown interest in joining the bloc.
Egypt has announced the sale of $1.9 bn of state assets to Egyptian investors this month. Following and IMF bailout which stipulated that Egypt must both float its currency on the exchange market and sell underperforming public assets, Egypt has been searching for potential buyers internally and externally. Initially, however, sales of assets were slow due to discrepancies in their valuation. Agreements appear to have been struck as large stakes in oil companies and hotels have been sold to the private sector. More sales are expected to follow with Egypt needing to raise billions through the sale of an estimated 32 public assets.
To the relief of many, South Africa`s Central Bank has ended a long run of interest rate hikes, opting to keep rates at 8.25%. Since 2021, the Central Bank has raised rates by a cumulative 4.25%. However, after data released earlier in July revealed that inflation had cooled down to 5.4%, the central bank announced that it would pause interest rates at the current level. With inflation still at 4.25%, above the Central Bank’s target of 2%, the South African Central Bank has warned that there is still more work to be done.
APAC
For the first time in six years, foreign investors are injecting less money into Chinese equities than other Asian economies, a report by Goldman Sachs revealed this month. With sustained growth across the last 2 decades, China had become the favored destination for foreign investors in Asia. However, despite signs earlier this year indicating that China might recover its economy to pre covid levels, new data released in May and June suggests that China’s economy still contains structural issues such as a stagnant and oversized real estate sector. Moreover, the US and EU show no signs of reducing their efforts to decouple from China’s economy. Investors, therefore, have directed investments towards other Asian economies such as India and Japan.
Graph 3. Foreign investments China vs investments into China. Bloomberg.
Japan´s headline inflation has outpaced that of the US. For most of the past three decades, Japan has battled against deflation, even employing negative interest rates to reinvigorate the economy. The policy appears to have worked, perhaps too well as the combination of ongoing negative interest rates and increasing import prices has pushed headline inflation up to 3.3%, compared to the 3.1% in the United States. There are now calls for the Bank of Japan to reverse its negative interest rate policy to prevent further price increases.
