Coffee Table Economics with Anchor

Anchor’s Coffee Table Economics note by Casey Sprake will be distributed intermittently. It 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 at play in the global and local economies.

Executive summary

In this week’s edition, we highlight the following:

  • Chocopocalypse: Is the global cocoa industry in meltdown? The global cocoa industry plays a vital role in the economy and culture of numerous countries around the world. However, as we move further into 2024, plummeting supply and surging prices have insinuated somewhat of a meltdown in the chocolate market. Recent supply constraints and the resultant higher prices serve to illustrate that the future of the global cocoa industry hinges on addressing sustainability concerns while meeting the growing demand for cocoa products.
  • Hold on tight … 2024 is set to be a wild ride on the global election front. 2024 is poised to become the most active election year on record, with at least 64 countries (plus the European Union [EU]), representing a combined population of about 49% of the global populace, meant to hold national elections, the results of which, for many, will prove consequential for years to come.
  • Anaemic growth helps SA dodge a recession- but it is no cause for celebration: In line with expectations, SA’s 4Q23 gross domestic product (GDP) print increased by just 0.1% QoQ, narrowly dodging a technical recession after loadshedding improved in 4Q23. Whilst a positive GDP print (albeit a marginal one) seemingly appeared unattainable at the start of 2023 amidst record-high loadshedding, it is no cause for celebration. Such minimal growth rates do not lead to meaningful improvements in the economic reality for most South Africans
  • Business confidence in SA continues to sour: The jury is out, and unsurprisingly, SA’s business community remains increasingly unhappy about the country’s general economic conditions. The RMB/BER Business Confidence Index (BCI), a key indicator of economic sentiment in SA, slid further to 30 index points in 1Q24 from 31 in 4Q23. Persistent supply constraints, such as loadshedding, logistical hurdles, and heightened global and domestic policy uncertainties, restrict domestic businesses.

Chocopocalypse: Is the global cocoa industry in meltdown?

The global cocoa industry plays a vital role in the economy and culture of numerous countries worldwide. Cocoa, primarily known for its use in chocolate production, is cultivated predominantly in West Africa, with countries like the Ivory Coast, Ghana, and Nigeria being the largest producers. These regions benefit from suitable climate conditions and rich soil conducive to cocoa cultivation. However, issues such as ageing trees, pests, diseases, and environmental concerns pose significant challenges to production. Simultaneously, however, chocolate consumption continues to rise globally, driven by increasing urbanisation, higher disposable incomes, and a growing consumer awareness of premium chocolate products. Emerging markets (EMs) in Asia, particularly China and India, are witnessing a chocolate consumption surge, presenting new industry growth opportunities. Consequently, sustainability has become a critical concern within the cocoa industry, with growing pressure to address deforestation, child labour, and low farmer incomes. Initiatives such as certification programmes (e.g., Fairtrade and Rainforest Alliance) aim to promote ethical and sustainable cocoa production practices. However, achieving widespread adoption of these practices remains challenging due to various economic and social factors.

With West Africa being home to the largest cocoa-producing countries worldwide, the region hit a dizzying 3.9mn tonnes of production in 2022. Côte d’Ivoire remains the world’s leading cocoa producer, boasting an output of 2.2mn tonnes in 2022, representing one-third of total global cocoa production. However, the cocoa trade in Côte d’Ivoire and West Africa has been controversial for various reasons. Despite being central to the production process, cocoa farmers in the region often receive a meagre 5% share of the retail price of a chocolate bar, resulting in an average daily income of just US$1.20. Additionally, c. one-third of cocoa farms encroach upon protected forests. As the third-largest cocoa producer globally, Indonesia contributed 667,000 tonnes of cocoa to the market in 2022, with significant importers including the US, Malaysia, and Singapore. Despite small-scale farmers contributing 95% of cocoa production in Indonesia, they face numerous challenges, including low wages and adverse effects of climate change, exacerbating the decline in productivity, mainly due to ageing trees.

In South America, Ecuador and Brazil stand out as major cocoa producers. While Ecuador was once the world’s leading cocoa producer in the early 1900s, changes in global market dynamics and crop diseases resulted in a decline in its position. Presently, Ecuador is renowned for its high-quality, single-origin chocolate, with cocoa farms scattered across the Amazon rainforest. Overall, global cocoa production reached 6.5mn tonnes in 2022, buoyed by robust demand. Over the past few decades, the cocoa market has demonstrated an average annual growth rate of 3%, underscoring its significance in the global economy.

However, as we move further into 2024, plummeting supply and surging prices have insinuated somewhat of a meltdown in the chocolate market. New York ICE cocoa bean futures prices have jumped about 58% since the start of 2024 and are c. 143% higher than a year ago. London ICE cocoa bean futures have also reached record highs in multiple sessions, trading up to GBP5,620/tonne on 5 March. Unsurprisingly, the price surges in cocoa bean futures have trickled down to the consumer level. Data from the US Department of Agriculture indicate that the price of sweets is rising almost three times faster than the broader inflation rate. In addition, a recent report from the International Cocoa Organization (ICCO) forewarned that consumers may likely continue to see higher chocolate confectionery prices or a shrinkage in products being offered.

Unfortunately, the situation is almost a perfect storm for chocolate confectionery manufacturers, which have also been managing high sugar prices. While sugar prices have eased in recent months, cocoa futures prices continue to notch successive record highs, and there is little indication of a correction any time soon. Following a spate of adverse weather conditions, the latest 2023-2024 cocoa bean production forecasts in the Ivory Coast have been lowered to c. 1.8mn tonnes, down 550,000 tonnes, or 24%, from 2.3mn tonnes in 2022-2023. Ghana’s 2023-2024 cocoa bean production forecast was also reduced to 580,000 tonnes, down 11% from a prior forecast of 654,000 tonnes. In addition to adverse weather, the rapid spread of swollen shoot disease has significantly impacted cocoa production in the region. Some industry sources believe the sharp decline may signal a structural change from cocoa beans to palm as there is no cure for the viral cocoa tree disease, and land cannot be replanted for five years after the infected trees are removed. Previously, farmers would move to new forested areas and replant trees, but recent environmental restrictions have prohibited the practice.

The bottom line

The global cocoa industry faces various challenges and opportunities, ranging from sustainability issues to evolving consumption trends and technological advancements. While significant progress has been made in addressing sustainability concerns, much work remains to be done to create a more equitable and resilient cocoa supply chain. By prioritising sustainability, fostering innovation, and promoting responsible consumption, the cocoa industry can continue to thrive while safeguarding the well-being of communities and the environment. The recent supply constraints and resultant heightened prices simply serve to illustrate that the future of the global cocoa industry hinges on addressing sustainability concerns while meeting the growing demand for cocoa products. Collaboration among stakeholders, including governments, corporations, non-governmental organisations (NGOs), and local communities, is essential to drive positive change throughout the cocoa supply chain. Investments in research and development, coupled with innovative solutions, will be instrumental in ensuring the long-term viability and resilience of the industry.

Hold on tight … 2024 is set to be a wild ride on the global election front:

2024 is poised to become the most active election year on record, with at least 64 countries (plus the EU), representing a combined population of about 49% of the world’s population meant to hold national elections, the results of which, for many, will prove consequential for years to come. While much attention is on the upcoming US presidential and legislative elections scheduled for 5 November (mainly owing to the US’s global influence and extensive media coverage), other significant elections are also on the horizon and are worth noting. India and the EU, with substantial populations, are among those set to hold elections this year. Populism gained ground in Europe as the continent experienced economic instability and mass migration from elsewhere. June elections for the parliament of the 27-nation EU will indicate whether traditional parties can see off populist rivals, many of which are sceptical of military support for Ukraine.

Already, several noteworthy elections have taken place. Taiwan held its general elections on 13 January, resulting in the Democratic Progressive Party retaining the presidency but losing its legislative majority. Pakistan followed suit with elections on 8 February, where Imran Khan’s party and its allies secured the most seats but relinquished power to a coalition backed by the military. Foreign observers and the media raised concerns about the validity of Pakistan’s election results, particularly following Khan’s arrest and subsequent conviction on corruption charges. The list of contentious elections in 2024 extends further. Despite opposition boycotts and voter disengagement, Bangladesh witnessed a landslide victory in its 7 January elections. Meanwhile, Russia’s upcoming election (scheduled for 15 March) saw three anti-war presidential candidates, including Alexei Navalny, before his controversial and untimely death in February barred from participating. These events underscore some of the challenges and controversies surrounding elections in various parts of the world this year.

Aside from providing exciting fodder for market commentators like myself to analyse and write on, the implications of many countries having major elections within a short timeframe are multifaceted and have the potential to significantly influence global dynamics across political, economic, social, and diplomatic spheres. A wave of elections can dramatically alter the global political landscape as new leaders come to power and geopolitical dynamics shift. This can impact international relations, alliances, and cooperation on various issues such as trade, security, and climate change. Moreover, elections often introduce uncertainty, which can lead to market volatility. Investors may react to the perceived political risk, causing fluctuations in stock markets, currency values, and commodity prices. However, once election outcomes become clear, markets may stabilise.

Nonetheless, new government administrations, more often than not, introduce policy changes that affect domestic and international affairs. These changes could include shifts in economic policies, trade agreements, immigration laws, and environmental regulations. Such alterations can have wide-ranging implications for businesses, citizens, and other countries. Furthermore, elections often reflect societal values and preferences. Therefore, outcomes may signal broader shifts in a country’s social attitudes, cultural norms, and aspirations. This can affect various aspects of society, including human rights, equality, and social cohesion. In a trend that has become increasingly more apparent in recent years, elections (particularly in the event of multiple elections being held) can impact regional stability, especially in areas with existing political tensions or conflicts. Changes in leadership or government policies may either exacerbate or mitigate regional challenges, affecting peace, security, and stability.

The bottom line

The year ahead appears poised to challenge even the most resilient democracies and empower leaders with authoritarian tendencies. From Russia, Taiwan, and the UK to India, El Salvador, and SA, the upcoming presidential and legislative elections carry significant implications for human rights, economies, international relations, and the prospects for peace in an increasingly volatile world. In several nations, the electoral process may not be conducted freely or fairly. Moreover, restrictions on opposition candidates, disillusioned electorates, and the pervasive threat of manipulation and disinformation have thrust the fate of democracy into the forefront of campaign debates.

Anaemic growth helps SA dodge a recession – but it is no cause for celebration:

In line with expectations, SA 4Q23 GDP print increased by just 0.1% QoQ, thereby narrowly dodging a technical recession after loadshedding improved in 4Q23. Six industries recorded positive growth between 3Q23 and 4Q23, with transport, storage, communication, mining and quarrying and the electricity sectors posting the strongest gains. The transport, storage & communication industry made the biggest positive impact, expanding by 2.9% QoQ and contributing 0.2 of a percentage point to GDP growth. Increased economic activity was reported for all transport services across the industry. Mining activity was up 2.4% QoQ, pushed higher by stronger production figures for platinum group metals (PGMs), chromium ore, coal, and diamonds. Conversely, the traditional heavyweights of iron ore and gold were down in 4Q23. On the downside, trade, agriculture, construction, and government were also weaker.

Agriculture, forestry & fishing had a notably turbulent quarter, shrinking by 9.7% QoQ. This was primarily driven by weaker production data for field crops (most notably, grain sorghum, hay, wheat, sugarcane and chicory root), horticulture products (most notably, viticulture and citrus fruits) and animal products (most notably, slaughtered pigs, poultry and eggs). The agricultural sector, in particular, is unfortunately positioned to struggle significantly under the prevailing structural issues facing the domestic economy. Loadshedding continues to hamper growth in the industry, given how reliant the sector is on energy. The Bureau for Food and Agricultural Policy shows that roughly one-third of SA’s farming income depends directly on irrigation, which naturally requires power. Furthermore, deteriorating roads, collapsing water infrastructure, poor performance at our key trading ports, and rising crime form additional barriers to the sector functioning effectively and efficiently. On an annual basis, GDP grew by 0.6% in 2023, primarily due to higher economic activities in finance, real estate, and business services; transport, storage, and communication; personal services; and manufacturing. While 2023 GDP was higher than pre-pandemic growth of 0.3% in 2019, excluding the pandemic years, it was the worst growth print since 2009. The agriculture, forestry, and fishing, trade, catering and accommodation; electricity, gas, and water; and mining and quarrying divisions recorded negative growth in 2023. Construction saw its first positive year since 2016, expanding by 0.6%. Both mining and electricity, gas & water, were down for the second year in a row. Agriculture recorded its first annual contraction since 2019, shrinking by 12.2% YoY. This is the most significant annual drop in agriculture production since 1995 (-19.9% YoY).

The bottom line

Whilst a positive GDP print (albeit a marginal one) seemingly appeared unattainable at the start of 2023 amidst record-high loadshedding, it is no cause for celebration. Such minimal growth rates do not lead to meaningful improvements in the economic reality for most South Africans. The average SA consumer is becoming poorer – with the latest data from the International Monetary Fund (IMF) indicating that SA’s GDP per capita is now below the average for emerging economies – and at about the same level as in 2005. According to IMF data, SA’s GDP per capita dropped from US$6,680 in 2022 to US$6,190 in 2023 – far below the record-high of US$8,800 recorded in 2012. Additionally, the 2023 domestic GDP per capita is below the US$6,450 average for an emerging and developing market. Notably, this is the same level of GDP per capita as in 2005. Simply put, SA’s expanding population growth, the weakness of the rand and the minimal economic growth means that the country’s population has been getting poorer in real terms. Looking ahead, we anticipate that the near-term prospects for growth will remain lacklustre. Moving beyond 2023 and into 2024, we foresee that SA’s growth trajectory will persistently show weakness. The ongoing issues related to electricity supply will likely continue to be a significant limiting factor on economic activity and confidence. Moreover, the impact of elevated interest rates is expected to strain household disposable incomes, thereby restricting growth in consumer spending.

Business confidence in SA continues to sour:

The jury is out, and unsurprisingly, the business community in SA remains increasingly unhappy about the country’s general economic conditions. The RMB/BER BCI (a key indicator of local economic sentiment) slid further to 30 index points in 1Q24 from 31 in 4Q23. The BER takes the percentage of respondents that rate prevailing conditions as satisfactory as an indicator or proxy of business confidence. The composite RMB/BER BCI is the unweighted mean of five sectoral indices: manufacturers, building contractors, retailers, wholesalers, and new vehicle dealers. Business confidence can vary between 0 and 100, where 0 indicates an extreme lack of confidence, 50 neutrality and 100 extreme confidence. As such, by offering valuable insights into the outlook and confidence levels of the nation’s business community, this index holds significant importance for policymakers, investors, businesses, and analysts.

This latest reading essentially means that only three in ten respondents to the survey were satisfied with prevailing business conditions. Underlying this largest marginal decline in the overall BCI reading was a notable uptick in confidence among new vehicle dealers, which was, in turn, counterbalanced by a significant drop in retailer confidence and reduced optimism in the manufacturing sector. Persistent challenges, notably ongoing loadshedding, inefficient rail systems, and congestion at ports, continue to hinder business operations. Furthermore, survey participants expressed worries about elevated crime rates and political instability, adding to the prevailing concerns. The main drag on the 1Q24 business confidence outcome was retailers’ confidence, falling 13 points on a collapse in interest rate-sensitive durable goods sales, with interest rate cuts only likely in 2H24. Overall profitability also came under pressure, which likely weighed on confidence.

Interestingly, in 2023, gross fixed capital formation (GFCF), the component of the expenditure on GDP that indicates how much of the new value added in an economy is invested rather than consumed, expanded by 4.2% – a slight decrease from the 4.8% growth observed in 2022. The decline was primarily driven by a decrease in private sector GFCF, which dropped to 4.9% from 5.2% in 2022, and a contraction in investment by public corporations, falling to 1.8% from 8.2% in the previous year. However, this was partially offset by an increase in GFCF by the general government, which rose to 5.7% compared to 1.0% previously. Excluding investment in machinery and equipment (where renewable energy investment falls), GFCF decreased to 1.4% in 2023 from 2.7% in 2022. This indicates that weak business confidence is translating into falling investment in the domestic economy. Furthermore, GFCF is likely to continue to slow down, partly as political uncertainty in the run-up to May’s elections delays private sector decision-making and investment.

The bottom line

Unfortunately, the RMB/BER BCI results for the beginning of this year do not indicate a positive start to the year for the local economy. Persistent supply constraints, such as loadshedding, logistical hurdles, and heightened global and domestic policy uncertainties, continue to restrict SA businesses. Moreover, lacklustre demand fails to sustain production and trade sales volumes at a higher level. A temporary upsurge in building activity appears to be waning as well. Looking ahead, there is an expectation of moderating inflation, although the survey highlights some near-term upside risks. Additionally, the possibility of lower borrowing costs, stemming from an anticipated shallow interest rate-cutting cycle, may support local consumer demand in the latter half of this year. While there has been some positive movement in alleviating specific supply-side pressures, notably in energy due to private sector investments, a pressing need remains for more substantial economic reforms. These reforms should foster economic growth that can stimulate non-energy investment, boost sentiment, and generate employment.

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