Anchor’s Coffee Table Economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics in the global and local economy.
In this week’s edition, we highlight the following:
- BRICS is ascending – albeit contentiously: BRICS is poised to welcome six new member states at the start of 2024, raising questions about the expansion of the group’s growing economic power and influence. With its new entrants, the bloc will encompass a collective GDP exceeding US$30trn – constituting c. 29% of global GDP. As its influence expands, the BRICS bloc remains a crucial driver of economic growth, innovation, and cooperation in an interconnected world.
- Underdog economies: The surprising economies throwing punches in the global economic ring. While BRICS continues to dominate the headlines, plenty of lesser-known economies are pushing far above their respective weight categories on the economic growth front. These fast-growing economies underscore the often-underappreciated dynamic landscape of global economic expansion.
- Cooling US inflation leads to a red-hot market response: Investors anticipate that the US Federal Reserve (Fed) will steer clear of additional interest rate increases and might even start to cut rates from 2Q24, following the latest US CPI data release this week. Outside of a big risk-off event, we are likely entering a gradual cutting cycle of US interest rates as the Fed continues to doggedly strive towards reaching the goal of inflation anchoring at around 2%.
- South Africa’s latest unemployment figures: Much Ado About Nothing? The latest Quarterly Labour Force Survey (QLFS) for 3Q23, which highlights the general trends in the South African (SA) labour market for the past quarter, indicates that the official unemployment rate decreased by 0.7 of a percentage point to 31.9% in 3Q23. Whilst on the surface, these latest unemployment figures may appear as a cause for celebration, persistent concerns remain around the accuracy and validity of the data itself.
BRICS is ascending – albeit contentiously:
BRICS is poised to welcome six new member states at the start of 2024, raising questions about the expansion of the group’s growing economic power and influence. With its new entrants, the bloc will encompass a collective GDP exceeding US$30trn – constituting c. 29% of global GDP. As of 1 January 2024, Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates (UAE) will join the bloc of top emerging economies, significantly expanding the group’s global economic reach and influence. The bloc, formed in 2009 with Brazil, Russia, India and China, first expanded to admit SA in 2010. Now, the bloc says it is seeking to grow a stronger coalition of developing nations who can better put the interests of the Global South on the world’s agenda. Whilst BRICS (even with its new members) falls short of the G7’s 43% share of global GDP, the gap is likely to shrink as major BRICS nations such as India continue to grow at above-average rates. Before adding its new members, BRICS had a cumulative GDP of US$27.7trn, a 26% share of global GDP. BRICS’ new members now add US$3.1trn of GDP to the bloc, with Saudi Arabia contributing the greatest – thanks to its GDP of US$1.1trn. Moreover, many new entrants have significant growth forecasts ahead of them. According to Goldman Sachs, many of BRICS’ current members already have real GDP growth rates higher than their G7 counterparts, with current members having an average GDP growth of 189% to 2050 compared to the G7’s average of 50%. BRICS’ newly added members, like Ethiopia (1,170% GDP growth projected by 2050) and Egypt (635% GDP growth projected by 2050), have even higher rates of potential economic growth – further raising the bloc’s economic potential.
From a more socio-economic perspective, it is hard to find much commonality among the six nations invited to join BRICS. However, they are individually each a significant player in their respective regions. With the inclusion of Saudi Arabia, Iran, UAE and Egypt, one could argue that the bloc is now somewhat Middle East-centric, which could have meaningful economic, geostrategic and geopolitical implications. These latest additions to the bloc will likely push some BRICS nations to ponder their Middle East policies and for the likes of China and India to beef up their existing policies. This naturally raises concerns for the West. Aside from Russia, all the core BRICS countries are non-energy-producing. They need to be able to make their economies function, but they do not want to get caught in the secondary collateral damage of sanctions either.
The bottom line
Regardless of the schematics, Goldman Sachs forecasts indicate that by 2050, BRICS will have overtaken the G7 in terms of GDP, even without its newly added members. Whether or not these projections come to fruition remains to be seen. Nonetheless, with BRICS intent on adding even more members, the group is likely to eclipse the G7’s GDP in the coming decades. Characterised by their diverse economies, these nations have demonstrated resilience and adaptability navigating the complexities of the international market. The BRICS nations have weathered global economic challenges and played pivotal roles in shaping international financial institutions and fostering a multipolar world order. As their influence expands, the BRICS bloc remains a crucial driver of economic growth, innovation, and cooperation in an interconnected world.
Underdog economies: The surprising economies throwing punches in the global economic ring
While BRICS continues to dominate the headlines, plenty of lesser-known economies are pushing far above their respective weight categories on the economic growth front. Considering the latest GDP growth forecasts from the IMF’s October 2023 World Economic Outlook, many of the fastest-growing economies are in Asia and Sub-Saharan Africa — two of the world’s fastest-growing regions. For 2024, the fastest-growing economies in Asia are forecast to be Macao (+27.2%), Palau (+12.4%), and India (+6.3%). Macao’s economy depends heavily on tourism, which constitutes over 60% of the region’s employment and c. 70% of its total GDP. Palau, a small nation comprising 340 islands with a total land area of 466 square kilometres, relies on tourism for around 40% of its GDP (as reported by the US State Department). India, recently crowned as the world’s most populous country, is projected to reach a population peak of 1.7bn by 2064.
Sub-Saharan Africa, on the other hand, accounts for half of the top 20 list of fastest-growing economies, with Niger (+11.1%) and Senegal (+8.8%) leading the fight. Unfortunately, however, the recent military coup in Niger may pose significant challenges to the country’s future economic expansion. The Agadem oil field, primarily owned by the China National Petroleum Corporation (CNPC), faces the potential disruption of exports due to global sanctions. Furthermore, Senegal, whose economy is too intertwined with the oil industry, is susceptible to fluctuations in growth over the coming years. The most surprising of the economic underdogs, however, is Guyana. With a population of only 815,000, this tiny South American country is expected to be the second fastest-growing economy in 2024, with a growth forecast of 26.6%. Interestingly, it was the world’s fastest-growing economy last year, with a 62% increase in GDP, and is likely to claim that title again in 2023 with expected growth of 37%. This surprising growth story is primarily driven by rising oil exports from the Stabroek Block, an offshore oil field developed by an Exxon Mobil-led consortium. According to the BBC, Guyana has over 11bn barrels in oil reserves.
The bottom line
Whilst the spotlight often shines on the BRICS member nations (and their incoming compatriots), it is well worth highlighting the remarkable economic growth achieved by lesser-known nations, particularly in Asia and Sub-Saharan Africa. These fast-growing economies underscore the often-underappreciated dynamic landscape of global economic expansion. However, challenges such as the recent military coup in Niger demonstrate the fragility of some economic trajectories, given their relatively small, cautious role in the greater global economy. Guyana’s surprising growth story, fueled by the Stabroek Block’s oil exports, is an interesting example of economic resilience and potential. As we navigate these diverse economic landscapes, it becomes clear that the global growth narrative is not confined to the well-established players but extends to these emerging economies, each with unique opportunities and challenges.
Cooling US inflation leads to a red-hot market response:
Investors anticipate that the US Fed will steer clear of additional interest rate increases and might even begin to cut rates from 2Q24, following the latest US CPI data release this week. Inflation, as measured by the consumer price index (CPI), slowed to a cooler-than-expected 3.2% YoY in October, down from 3.7% in September. Meanwhile, the “core” inflation gauge, which does not include food or gas prices, rose at its slowest pace since September 2021. The Fed, which was previously mulling over the idea of one more rate increase, is now seen by the market as more likely to deliver its first rate cut in May 2024, with a projected full percentage point decrease by the end of 2024. Whilst the Fed last raised rates in July, and although the recent inflation data eases pressure for further tightening, caution is expected in maintaining a tightening bias. It is worth bearing in mind that the December Fed’s Federal Open Market Committee (FOMC) meeting will provide updated inflation and job market data, which could naturally have a bearing on future Fed decisions – the data cycle sludge is by no means finished for this year.
The bottom line
With the latest inflation print cooling faster than expected, many across Wall Street have declared victory in the fight against inflation, and markets have surprisingly reacted accordingly. Stocks surged across the board amid renewed optimism that easing inflation will likely end the Fed’s current interest rate-hiking cycle. Even before this latest inflation data release, the chances of more Fed interest-rate increases were becoming increasingly less likely. Financial markets across the globe are now pricing in that the US central bank is done with its fastest rate-hiking cycle in a generation. However, Fed Chair Jerome Powell and his colleagues will undoubtedly wait before declaring any concrete victory. Outside of a big risk-off event, we are likely entering a gradual rate-cutting cycle of US interest rates as the Fed continues to doggedly strive towards reaching the goal of inflation anchoring at around 2%. Still, at the end of the day, one consumer positive inflation print does not equate to a total victory – as much as markets may be feeling otherwise.
SA’s latest unemployment figures: Much ado about nothing?
The latest QLFS for 3Q23, which highlights the general trends in the SA labour market for the past quarter (primarily the size of the labour force, the number of those employed, the number of those unemployed and the number who are not economically active) indicates that the official unemployment rate decreased by 0.7 of a percentage point to 31.9% in 3Q23. The unemployment rate, according to the expanded definition (i.e., including discouraged work seekers, thus more reflective of the fuller picture), decreased by 0.9 of a percentage point to 41.2% in 3Q23 compared to 2Q23.
Whilst on the surface, these latest unemployment figures may appear as a cause for celebration, persistent concerns remain around the accuracy and validity of the data itself. In recent months, the employment data from the QLFS survey (a household-based survey of labour market dynamics covering the formal, informal, and agricultural sectors) has diverged sharply from data reported in the Quarterly Employment Statistics (QES), an enterprise-based labour market survey that only reports on the formal sector. Thus, gaining a clearer, more holistic picture of unemployment in SA is becoming increasingly difficult. Furthermore, the QLFS suffered data collection challenges throughout the COVID-19 pandemic, but these appear to have been normalising over the past few quarters. However, it does continue to make it difficult to interpret the extent of the increase in job growth as reported in the QLFS – how much of these data reflect ‘real’ jobs and how much is mere statistical noise/rebalancing. Regardless of the exact data, we maintain that the official headline unemployment numbers do not fully reflect the true extent of the unemployment crisis in the country. How unemployment is measured tends to overlook specific segments of the population, such as discouraged workers who have given up searching for jobs and are, therefore, not considered part of the active labour force. Additionally, the official statistics do not adequately capture informal and underemployed workers. Furthermore, the official unemployment rate might not fully account for the quality of jobs available or the degree of job security. Many individuals in SA are trapped in low-skilled and precarious employment, leading to underemployment and persistent poverty.
The bottom line
Overall, the unemployment problem in SA remains a significant and complex challenge, particularly from a fiscal and greater economic perspective. High levels of unemployment lead to decreased tax revenue as fewer individuals contribute to the tax base, limiting the government’s ability to fund essential services and infrastructure projects. Moreover, the fiscal burden intensifies as unemployment increases demand for social welfare programmes, such as unemployment benefits and poverty alleviation initiatives, placing additional pressure on public expenditure. Persistent unemployment also hampers economic growth potential, diminishing the overall tax revenue generation capacity. To address this fiscal challenge, SA needs targeted policies that stimulate job creation, enhance skills development, and foster an environment conducive to investment and business growth. Addressing the unemployment issue not only improves the financial well-being of individuals but also contributes to the country’s long-term fiscal sustainability. Typically, in the SA economy, material job creation has only occurred when GDP growth approaches 3% p.a. Thus, regardless of the seemingly resilient nature of the local economy to the various structural constraints present, simply put, the economy is not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans as a whole.