November 2023 Economic Update
November saw a tapestry of economic events unfolding globally. In the Americas, the US experienced a welcome decrease in inflation, buoying Wall Street stocks and leading to a pause in the Federal Reserve's rate hikes. Meanwhile, Canada responded by ramping up investments in green energy, seeking to stay competitive with its southern neighbour. Across the Atlantic in Europe, the UK's inflation rates dropped, potentially meeting government targets, while Germany's new subsidies for its industries sparked debate within the European Union. In Africa, Zambia faced challenges with debt restructuring, and Nigeria contended with currency devaluation under new leadership. Over in Asia, a significant meeting between the US and China hinted at easing tensions, while Japan confronted economic contraction, prompting a reevaluation of its monetary policy.
Americas
Treasury yields fell sharply while Wall Street stocks rose this month due to a larger-than-expected decrease in US inflation, which was recorded at 3.2% this month. Persistent inflation in the US across the last 2 years has persuaded the Fed to repeatedly increase interest rates, putting pressure on the financial markets and the American population. The levelling off of inflation across the last 6 months, however, has convinced the Fed to pause interest rate hikes, to the relief of investors and civilians alike. A larger-than-expected decrease in inflation in October has increased optimism amongst investors and the treasury with some now predicting the Fed will cut rates from the 22-year high of 5.5% as soon as July. Accordingly, the markets reacted positively with treasury yielding falling significantly while Wall Street stocks enjoyed a non-negligible increase. On the other hand, Fed Chair Jay Powell was quick to curb expectations, stating that policymakers would not be “misled by a few good months of data”.
US year over year inflation. FT
Tree Energy Solutions (TES) announced this month that it will build a $4bn hydrogen plant in Quebec to produce synthetic natural gas with green hydrogen as Canada aims to compete with the US for Green investment. The US’s inflation reduction act, which included a cluster of subsidies for green investment and tax incentives, has made attracting cleantech investment a more challenging prospect for the EU and Canada due to the generous subsidies involved. Canada responded with its own investment tax credit policy in the 2023 budget which, while less generous, makes investing in cleantech a more appealing proposition. These efforts appear to have borne fruit as TES Canada announced they will invest $4bn in Quebec which is hoped to produce 70,000 tonnes of green hydrogen a year by 2028.
Eurozone
According to the ONS, UK inflation fell to 4.6% this month as Rishi Sunak looks set to fulfill his pledge to halve inflation by the end of the year. In January, upon taking office, Rishi Sunak claimed his government would halve inflation, which sat at 10.7% at the time, by the end of the year. While many analysts attribute the decrease to falling global energy prices, Sunak asserts that tough controls on spending and public sector wages were responsible for the rapid decrease in UK inflation. Nevertheless, the ONS report means UK inflation currently sits at its lowest level since 2021 which will come as a relief to Sunak’s government. Sunak has claimed that he will use the reduction in inflation to introduce tax cuts which he believes will help stimulate Britain’s stagnating economy.
Price growth year on year in the UK. ONS.
The German government has agreed on a policy which will introduce tax subsidies for industry in a package worth up to €28bn by 2028, as it aims to protect manufacturers from high energy costs. Despite claims of excessive protectionism labelled in the US for its Inflation Reduction Act, the German government is convinced that it’s manufacturing sector needs protection. Germany’s stagnating manufacturing industry has been well documented, with recent reports suggesting that the sector will continue to suffer low growth in the 4th quarter of the year. A subsidy package was therefore announced which guarantees electricity tax relief of €12bn a year for 2024 and 2025, with the potential for extension to 2028. The deal has caused consternation in Brussels with the EU frustrated at Germany’s efforts to provide financial support to German business, which they believe unfairly distorts the market in favour of Germany.
Africa
Zambia’s efforts to restructure its substantial debt is on the brink of collapse after its creditors forced the nation to suspend a deal of almost $4bn in bonds. Zambia defaulted on its debts in 2020, following numerous loans from various countries and institutions, China being the largest of its creditors. Over the last year, a deal which included stakeholders from the IMF, private bondholders and nation creditors, to restructure Zambia’s debt has been in negotiation. A deal was agreed in October which would forgive $700mn of post-default interest bonds with an original face value of $3bn and approved by the IMF who would provide debt relief. China and France, however, rejected the deal this month as they believe that the losses they would incur from the debt restructuring outweigh those of private bondholders. Zambia, therefore, remains in financial and economic limbo.
Nigeria’s currency has fallen to record lows as new president Bola Tinubu struggles to revive Africa’s largest economy. Over the last 3 year, like many nations, Nigeria has experienced persistent inflation due to coronavirus and rising energy prices. Since Tinubu took office in May, however, the currency has tumbled further as he has allowed the naira to float more freely against the dollar. This month, the Naira thus slumped to N880 to the dollar. This has further increased the cost of imports which is said to have fallen 33% in the second quarter of this year compared with the same period last year. Nigeria’s economic woes look set to continue despite an eventful beginning to Tinubu’s reign.
The Naira’s declining value against the dollar. LSEG
Asia
Joe Biden and Xi Jinping met for just the second time in a move which further signals the two leaders’ intentions to smooth relations between the superpowers. China and America’s frosty relationship has been the subject of much speculation and concern with economic sanctions and military threats being exchanged. Some analysts have predicted that the tension between the two could lead to the next global conflict as China threatens to invade America’s important trading partner: Taiwan. Biden and Jinping appear to have realised the severity of the situation, with a working group being established last month to improve economic and military relations followed by a conference both leaders attended this month, which took place in San Francisco. The meeting comes just after Washington and Beijing released a joint statement promising to accelerate the rollout of renewable energy and can only be seen as a positive step in the right direction.
Japan’s economy contracted by a larger than expected margin in the third quarter of the year, highlighting the nation’s fragile post-pandemic recovery and causing the Bank of Japan (BoJ) to reconsider its efforts to unwind its measures. Japan had enjoyed a strong rebound in the first half of 2023, as car exports, returning tourists and China’s re-ignited economy following the removal of Covid-19 restrictions boosted the economy. The BoJ had thus considered ending its decades long ultra-loose monetary policy. They took a step in this direction as they ended the seven-year policy of capping long-term interest rates, allowing the yields on 10-year Japanese government bonds to rise above 1%. Accordingly, many expected the BoJ to finally end its short-term negative interest rates. Data released this month, however, revealed that Japan’s GDP decline by 2.1% on an annualised basis in Q3, the largest contraction since early 2022. The BoJ, therefore, are expected to hold off on the removal of their ultra-loose measures.
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