June 2023 Economic Update
In the world of global finance and economic developments, the past month has witnessed significant shifts across various regions. In the Eurozone, the European Central Bank (ECB) raised interest rates to their highest level since 2001, citing the strength of the labour market and persistent inflation above the 2% target. Meanwhile, the United Kingdom continues to grapple with a cost of living crisis as mortgage rates soar due to the Bank of England's ongoing efforts to curb inflation.
Eurozone
As expected, the ECB raised interest rates by a quarter-point to 3.5% this month, which constitutes the highest level since 2001. With inflation still at 6.1% across the EU, far above the 2% target, many analysts expected a further increase in interest rates. ECB President, Christian Lagarde, has attributed EU inflation, which is now higher than the US, to a the “incredible strength” of the labor market and suggested that interest rate hikes will be coupled with tighter borrowing conditions and reduced fiscal support from governments.
ECB interest rate hikes since 1999. Financial Times
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
For the first time since March 2022, the US Federal Reserve refrained from introducing another interest rate hike following a meeting in the middle of June. To contain aggressive inflation which has persevered for almost 2 years, the Fed has raised interest rates to historic levels, reaching 5% in May. However, with inflation now beginning to slowdown, the Fed opted not to implement another quarter-point increase, to the relief of many. Nevertheless, Fed Chair, Jay Powell, has suggested that further increases are likely to occur in the future to ensure inflation is kept under control.
Despite a reprieve, future hikes from the Fed are expected this year. Bloomberg
June brought more good news to Mexico as economic data indicated that inflation fell more than expected to the lowest level since March 2021. Mexico has enjoyed healthy growth over the last 18 months, recording GDP growth for the 6th consecutive quarter in June. This growth has been driven by increased productivity in the services sector and the manufacturing industry along with consistently high numbers of tourists. Mexico is now Latin America’s fastest-growing economy, outstripping counterparts including Brazil, Chile and Colombia. Nevertheless, Mexico has also struggled with inflation over the past 18 months which has led to persistent interest rate hikes. Banco De Mexico’s policy appears to have paid dividends as inflation dropped more than expected in June to 5.18%, albeit this figure is still above Banco de Mexico’s target of 3%.
Africa
Early moves by Nigeria’s new president, Bola Tinubu, have attracted investors to Africa’s most populous nation. Tinubu inherited a nation plagued with political, economic, and social issues which have rendered 63% of the country officially poor, one-third of the working population unemployed, and led to perpetual conflicts with rebel groups that kills thousands of Nigerians every year. Tinubu immediately introduced several measures; scrapping the excessively expensive $10bn fuel subsidy program while promising to channel the funds into social programs and education, and suspending central bank governor, Godwin Emefiele, who is accused of corruption. Subsequently, Nigerian Eurobonds maturing in 2051 rose 3.8% on the 20th of June with analysts expecting Nigerian stocks to increase. However, while Tinubu has started his tenure positively, there remains much work to be done if Nigeria is to achieve robust economic growth and social stability.
Earlier this month, the EU agreed to a long-awaited and highly important trade deal with Kenya in an effort to boost Brussels’ relationship with Africa. The accord, which was labelled the Interim Economic Partnership, will provide Kenya with duty-free and quota-free access to the EU market for all its exports including coffee, flowers, and minerals. In return, Kenya, which is one of Africa’s most promising and prosperous nations, will gradually open up its market to more EU products. Furthermore, Kenya agreed to binding commitments which include environmental protection, climate mitigation, and labour rights, an EU request which has prevented similar deals being reached with nations such as Brazil and Indonesia. This accord is an important step for the nation of Kenya and the EU’s attempts to expand its economic influence.
Zambian Finance Minister, Situmbeko Musokotwana, announced on Thursday the 22nd of June that China and other creditors had reached a deal to restructure billions of dollars of debt which Zambia has owed since 2020. China has been Zambia’s largest creditor by some distance, having lent an estimated $6bn to the nation, which Zambia defaulted on in 2020. Negotiations to restructure Zambia’s estimated $13bn debt to China and other creditors had stalled, which prevented Zambia from accessing an IMF loan to help stabilise its economy. At the global finance and climate summit, which took place in Paris this year, however, bilateral lenders agreed to restructure the payments and extend maturities on loans to allow Zambia some breathing space and access the $1.3bn IMF loan. Some hope this accord will act as an example of how to negotiate debt between poorer and richer nations, an issue which is becoming increasingly prevalent across Africa.
APAC
India’s stock market increased more than 14% in the last 3 months as investors look to take advantage of the nation’s sustained economic growth. Modi’s policy to turn India into a modern superpower through investment into technology, the pharmaceutical industry, and infrastructure has seen India enjoy prolonged and robust growth. India now boasts a well-educated middle-class, a thriving service sector, and the world’s largest population which Modi has taken full advantage of. Accordingly, India enjoyed economic growth of 6.7% in 2022, the second highest globally, and is projected to sustain growth levels of 6-7% in the near term. Investors are clearly keen to take advantage of this growth with Indian equities increasing $440 bn over the last 3 months. India’s stock market has now surpassed that of France and UK and represents 3.3% of global stock market capitalization.
A visit from US Secretary of State, Antony Blinken, has yielded significant “progress” towards mending US-Sino relations, according to Xi Jinping. China and America’s tense relationship has been well documented, with China’s growing economic, military, and political importance perceived as a threat to US hegemony. America and its allies have levied numerous sanctions on Beijing while China threatens an invasion of the economically strategic state of Taiwan. Blinken is the first US Secretary of State to visit Beijing since 2018. While no concrete accords have been announced, the visit constitutes an important step in re-establishing diplomacy and open channels of communication between the two superpowers. The US will be keen for the CCP to condemn Russia’s actions and put an end to threats over Taiwan, while China will hope the US will reverse policies which prevent China from obtaining crucial raw materials for technology and military development.
