ECONOMIC COMMENTARY – OCTOBER 2022
Rising inflation and interest rate increases continued into the third quarter of 2022.
Globally, inflation has been driven by the rising energy, food and labour costs. Domestic inflation was driven largely by rising fuel prices, with higher food prices and wage increases also contributing. Domestic inflation peaked at 7.8% in July 2022, well above the upper limit of the 3% – 6% band used by the South African Reserve Bank (SARB). The SARB has increased the repurchase rate on five separate occasions by a total of 2.75% since September 2021. Similarly, inflation in the United States (US) peaked at 9.1% in June 2022 (compared to a target inflation rate of 2%) and the Federal Reserve Bank (Fed) has hiked its Fed funds rate on five occasions by a total of 3%.
Graph 1: SA Inflation and SARB repurchase rate
Following interest rates higher, the 10-year government bond yields climbed to 3.8% in the US and 11.30% in South Africa. The global risk-off trade contributed to rising bond yields in South Africa as foreign investors reduced their holdings.
Globally, unemployment has fallen to low levels – for example, 3.5% in the US, 5.3% in China, 6.6% in the Euro zone, 3.5% in the United Kingdom (UK) and 2.5% in Japan. South Africa’s unemployment rate improved to 33.9% from 35.3% recently. With unemployment based on its narrow definition running at more than 30%, the improvement of 1.4% does not really move the needle.
A hallmark of events in 2022 is the powerful surge of the US dollar exchange rate against other currencies.
Graph 2: US dollar vs Euro
The US dollar strengthened as interest rates and bond yields in the US rose. The lacklustre performance of economies in China, the Euro zone and the UK only served to amplify US dollar strength as the renminbi (yuan), euro and pound sterling came under pressure.
Globally, institutions downgraded their economic growth projections through the year. For example, in October 2021, the IMF’s global economic growth projection for 2022 was 4.9%. It was adjusted downwards to 3.6% in the IMF’s April 2022 review and to 3.2% in the July 2022 review. Similarly, growth projections for 2023 have been pegged back with only moderate expansion of 2.7% expected, followed by some normalised expansion towards 2024 and 2025.
| IMF projections for world economic growth | 2022 | 2023 |
| Published in October 2021 | 4.9% | n/a |
| Published in January 2022 | 4.4% | 3.8% |
| Published in April 2022 | 3.6% | 3.6% |
| Published in July 2022 | 3.2% | 2.9% |
| Published in October 2022 | 3.2% | 2.7% |
The continuing war between Russia and Ukraine is expected to impact events globally, particularly in Europe during the Northern Hemisphere winter. Many European countries depend on Russian natural gas for energy supplies and to generate electricity. The expectation is that Russia may reduce the supply of natural gas to Europe to influence the stance taken by European countries on the Russia-Ukraine war. Should this expectation materialise, Europeans could expect to pay more for energy and other products.
Rising inflation, higher interest rates and expectations of a difficult winter have seen a change of governments in democracies around the world. In Europe, there are new governments in Ireland, Italy, Sweden and the UK (for altogether different reasons). A new government has also been elected in Australia and the election in Brazil is being hotly contested. The change of government in the UK has been accompanied by turmoil, as the fiscal stimulus package introduced by the new government was widely rejected by financial markets. The Bank of England had to step in with short-term purchases of gilts to stabilise the market, else there would have been a pensions crisis in the UK.
Rising inflation, higher interest rates, lower economic growth and political changes combined to result in a proper bear market for share prices, with occasional bear market rallies following blowouts.
Graph 3: S&P 500 Composite
Financial markets struggled in this environment. In the US, for the calendar year to date, the S&P 500 is down approximately 25%, share prices in Europe are down approximately 20% and in China down 15%. South African share prices are down 10% for the calendar year to date, but in Turkey prices are up sharply. Share prices are also up in Portugal, Brazil, Argentina and Chile.
It certainly appears that the adverse conditions in financial markets may continue in the short term. Interest rates will continue at elevated levels while inflation remains high. Expectations of a recovery in financial markets should not be linked to inflation coming down, because interest rates could remain higher for longer.
| % Change September 2022 | Most recent quarter | Calendar YTD | 1 year (p.a.) | 3 years (p.a.) | 5 years (p.a.) |
| All Share Index | -1.9% | -10.1% | 3.5% | 10.0% | 7.4% |
| Listed Property | -3.5% | -15.8% | -8.7% | -8.0% | -7.5% |
| STeFI Composite | 1.3% | 3.6% | 4.6% | 5.1% | 6.6% |
| BEASSA ALBI | 0.6% | -1.3% | 1.5% | 6.1% | 8.2% |
| MSCI All Country World ZAR | 3.6% | -15.3% | -4.3% | 10.6% | 11.2% |
| Bloomberg Global Aggregate ZAR | 3.4% | -8.9% | -4.5% | 0.0% | 3.5% |
| Rand (+ stronger, – weaker) | -10.0% | -11.9% | -16.7% | -5.4% | -5.0% |
| Inflation (estimate) | 1.8% | 6.1% | 7.5% | 5.4% | 5.4% |
| Gold ZAR | 1.6% | 3.0% | 15.5% | 10.0% | 11.6% |
However, generally, bear markets are shorter and sharper affairs than bull markets and often play out much sooner than expected. These bear markets also present investors with excellent opportunities to buy quality financial assets at attractive prices.
Information for this article obtained from several sources: IRESS and IMF