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 at play in the global and local economy.
Executive summary
In this week’s edition, we highlight the following:
- The war in Ukraine one year on: Aside from the obvious physical destruction, the invasion has led to a significant loss of life for the Ukrainian and Russian armies as well as a high number of Ukrainian civilians being killed. The spillover effects on the greater global economy have been immense as well. Most notably through the prolonged surge in global inflation caused by reduced gas supplies and supply chain disruptions. While there are no winners in war, there are glimmers of hope beginning to emerge.
- Does war=profit? Who is still buying Russia’s fossil fuels since the invasion? Contrary to most expectations, a year after Russia’s initial invasion of Ukraine, Russian fossil fuel still flows to various nations worldwide.
- China’s recent annual National People’s Congress (NPC) presented a growth target of c. 5% for this year (the lowest in over three decades), with the focus being to ‘prioritise economic stability’. Given that the country’s recently lifted zero-COVID policy kept 2022 growth at just 3%, economic activity year to date has seemingly been rebounding- in light of this, the 5% target does not seem particularly ambitious. Is China entering some form of ‘economic slumber’? Furthermore, why does this matter to the greater global economy?
- According to the latest economic growth and unemployment data, South Africans across the board are still rolling in the economic doldrums. Typically, in the local economy, material job creation has only occurred when GDP growth approaches 3% p.a. Thus, South Africa’s (SA’s) economy is simply not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans.
Find out more about how the Ukraine war will affect the South African Economy here.
Russia’s war on Ukraine: An unfortunate one-year anniversary
On 26 February, the world marked an unfortunate anniversary in our global political history – one year since Russia’s invasion of Ukraine began. What, by all accounts, was expected by Russia to be a brief military conflict has proven to be anything but. Aside from the obvious physical destruction, the invasion has also led to a significant loss of life for the Ukrainian and Russian armies as well as a high number of Ukrainian civilians being killed. Moreover, the spillover effects on the greater global economy have also been immense – most notably through reduced gas flows from Russia to Europe, having turbo-charged and prolonged the inflation surge that initially began with supply chain disruptions through the COVID-19 pandemic. Unfortunately, the war does not appear to be coming to a resolution anytime soon, as the fighting is ongoing with limited military progress on either side. However, Russian President Vladimir Putin shows no signs of being willing to back down either. He has (literally and figuratively) dug into the trenches with this one.
Nonetheless, Russia’s leadership no longer appears to be trying to oust Ukrainian President Volodymyr Zelensky from power. Instead, the short-term goal seems to be gaining control over the territories Russia annexed last autumn. Putin has said he is open to negotiations while Russian troops continue to attack Ukraine’s cities. Meanwhile, Ukrainian officials have been unwavering in their stance that a peace settlement is impossible until Russia withdraws from within Ukraine’s internationally recognised borders. This would mean leaving Crimea and regions that had been under the control of Russian-backed separatists since 2014. A stalemate indeed.
Aside from the political posturing in the background to the crisis, the war itself has had significant economic ramifications. The war has cost Ukraine hundreds of billions of dollars in damaged infrastructure and caused its GDP to plummet by 30% in 2022. Russia’s output contracted by just over 2%, surprising financial markets that believed a meltdown was imminent. However, we would caution against using GDP to measure the performance of a wartime economy since military expenditures can distort the big picture. If one considers the significant decline in Russia’s consumer spending and a higher-than-expected increase in its government’s budget deficit, Russia’s economy is worse off than it seems. Furthermore, Russians now have to shop abroad to snag a Big Mac or a pair of Levi jeans. The latest estimates indicate that the corporate exodus from Russia is six times bigger than during the Apartheid era in SA, which in 1988 was the largest in history.
However, the most damming outcome for the Russian economy thus far has been the action of governments abroad. Due to its invasion of Ukraine, Russia is now the most sanctioned country in the world, with restrictions on its energy exports, strategic imports, and overall access to the global financial system. Overall, the war in Ukraine has formed the biggest international conflict since World War II, spurring many countries to reconsider their approach to national defence. Notably, Germany and Japan appear to have abandoned their customary pacifism by promising to ramp up their military spending, and the US is increasing its arms stockpiles.
Read more about our Initial thoughts on the Ukrainian War here.
The bottom line
As Neville Chamberlain, the UK’s prime minister from 1937 to 1940, once famously remarked, “In war, whichever side may call itself the victor, there are no winners, but all are losers.” There are indeed no winners here. However, despite the dark clouds that continue to hang over the conflict (and all those involved), there are glimmers of hope beginning to emerge. With regards to Ukraine, China presented a twelve-point plan calling for a ‘political settlement’ of the conflict, including a ceasefire and renewed negotiations. Whilst this may not be acted upon, increased pressure from Beijing on Russia to end the war may be helpful. Even with respect to energy prices, the newsflow has since turned more positive – Europe has managed (through a mix of speedy infrastructure enhancements, energy savings and luck [in the form of a mild winter]) to attract and maintain natural gas stocks to meet its needs through its current winter season, sending wholesale prices sharply lower from their peak.
As a result, inflationary pressures are slowly starting to trend downward. However, overall inflation across the globe remains too high relative to most central banks’ targets, and pressure to redistribute the pain to some extent away from workers (through higher wages) remains. As a result, it, unfortunately, appears that a restrictive policy stance by central banks is still needed for some time. Nonetheless, the end of monetary tightening now looks closer than before, and economic prospects that little bit brighter.
War=profit: Who is still buying Russia’s fossil fuels since the invasion?
Contrary to most expectations, a year after Russia’s initial invasion of Ukraine, Russian fossil fuel exports still flow to various nations worldwide. According to estimates from the Centre for Research on Energy and Clean Air (CREA), since the invasion started about a year ago, Russia has made more than US$315bn in revenue from fossil fuel exports worldwide, with nearly half (US$149bn) coming from EU nations. The quote, “there’s no such thing as bad publicity”, appears true for the oil business. As one might expect, China has been the top buyer of Russian fossil fuels since the start of the invasion. As Russia’s neighbour and de facto informal ally, China has primarily imported crude oil, which has made up more than 80% of its imports totalling more than US$55bn since the start of the invasion. The EU’s largest economy, Germany, is the second-largest importer of Russian fossil fuels, mainly due to its natural gas imports worth more than US$12bn alone. Türkiye, a member of the North Atlantic Treaty Organisation (NATO) but not of the EU, closely follows Germany as the third-largest importer of Russian fossil fuels since the invasion. However, it is worth noting that the country is likely to overtake Germany soon as not being part of the EU means it is not affected by the bloc’s Russian import bans put in place over the last year.
However, whilst more than half of the top-20 fossil fuel importing nations are from the EU, countries from the bloc and the rest of Europe have been curtailing their imports as bans and price caps on Russian coal imports, crude oil seaborne shipments, and petroleum product imports have come into effect. The EU’s bans and price caps have resulted in a decline of daily fossil fuel revenues from the bloc of nearly 85%, falling from their March 2022 peak of US$774mn/day to US$119mn/day as of 22 February 2023. That is no mean feat. Still, despite the EU’s best attempts at curtailing Russia’s oil revenues, in the meantime, India has stepped up its fossil fuel imports from US$3mn/day on the day of the invasion to US$81mn/day as of the end of February 2023. Notably, this increase is not close to making up the US$655mn hole left by EU nations’ import reduction. In that same vein, even if African countries have doubled their Russian fuel imports since December 2022, Russian seaborne oil product exports have still declined by 21% overall since January 2022, according to S&P Global.
The bottom line
Overall, from a peak on 24 March 2022 of around US$1.17bn in daily revenue, Russian fossil fuel revenues have declined by more than 50% to just US$560mn/day. Along with the EU’s reductions in purchases, a key contributing factor has been the decline in Russian crude oil’s price, which has also dropped by c. 50% since the invasion, from US$99/bbl to US$50/bbl today. Looking ahead, whether these declines in global purchases will continue is yet to be determined. That said, the EU’s tenth set of sanctions (announced on 25 February) ban the import of bitumen and related materials like asphalt, synthetic rubbers, and carbon blacks and are estimated to reduce overall Russian export revenues by almost US$1.4bn. Perhaps war is not profitable for the oil game then – or at least in Russia’s case.
Slumber time for China?
“Let China Sleep, for when she wakes, she will shake the world,” states a quote often attributed to Napoleon Bonaparte. Whether or not these words were spoken by Napoleon, in recent years, the Chinese Communist Party (CCP) has created a very concerning reality to this statement. However, if the latest newsflow is anything to go by, China appears to be returning to her past historical slumber – or at least some version of nap time. China’s recent annual NPC opened with outgoing Prime Minister Li Keqiang presenting a growth target of around 5% for this year (the lowest in over three decades), with the focus being to ‘prioritise economic stability’. Given that the country’s recently disbanded zero-COVID strategy kept growth last year at just 3%, economic activity year to date has seemingly been rebounding. In light of this, the 5% target does not seem ambitious. However, aside from the demographic challenges of an ageing population, China is still grappling with the woes of its property development sector. Furthermore, the latest available data show that China’s exports have fallen in each of the final three months of 2022.
It is important to remember that China weathered the early stages of the COVID-19 pandemic better than many of its peers, as high export demand propped up the economy despite weaker consumption. In 2021, the country’s GDP expanded 8.1% YoY, though that figure was boosted by the comparison with early 2020 when activity collapsed. A significant portion of that growth was also bolstered by net exports, which are weakening as other big economies struggle to contain inflation. However, as we move into 2023, the prospect of stimulus in China (policymakers’ favoured response to past bouts of weakness, notably after the 2008 global financial crisis) sits uneasily with the current political rhetoric to push to contain high debt levels. Housing sales in China have declined since mid-2021 following a wave of defaults among the country’s biggest developers (most famously Evergrande). However, the pace of the decline has slowed in January and February 2023. Nonetheless, the central authorities in Beijing appear reluctant to allow local governments, which rely on land sales for much of their income, to borrow more and has not increased the limits on how much they can raise through new bond sales this year.
The bottom line
Some investors may ask, “why does this matter?” Well, shortly after the announcement of China’s economic growth target coming in at less than expected, coal and iron ore prices drove global commodity markets lower, fuelling fears across financial markets of an uneven recovery in the world’s largest consumer of raw materials. As the world’s biggest commodities consumer, China drives prices for raw materials ranging from zinc to copper and crude oil to corn. Simply put, as a major player in the global economy, what China does matters.
South Africans across the board continue to roll in the economic doldrums
Coming in lower than expectations, SA’s latest GDP print (the primary measure of economic growth) printed at 0.9% YoY for 4Q22. Overall, the weakness was broad-based, with seven of the ten sectors measured contracting to negative territory. This bout of weakness is unsurprising, given the number of headwinds that weighed on the economy in 4Q22, including the Transnet strike that disrupted exports, loadshedding, high interest rates, and elevated inflation. As usual, the agricultural sector was the wild card for the 4Q22 print, contracting by a significant 3.3% after a stellar performance in 3Q22. In addition, consumer demand remained weak for the quarter, which filtered through to the broader services sector. For the full year, GDP came in at 2% for 2022, with the mining sector being the biggest drag on growth.
Looking ahead, growth in 2023 is expected to slow to below a meagre 1%. Overall, the domestic economy faces a range of risks in the form of continued high levels of loadshedding and the deterioration of port and rail infrastructure. Furthermore, the slow implementation of structural reforms is lowering business confidence and deterring new investment. Whilst economic growth has been volatile for some time, prospects for growth appear even more uncertain than usual.
According to the latest unemployment statistics released by Stats SA last week, employment in SA remains at 600,000 jobs, down from the pre-COVID-19 high of 16.5mn jobs in 4Q18. While there was a net creation of 169,000 jobs, i.e., 1.1% QoQ in 4Q22, this was in line with a normal seasonal increase in employment in the fourth quarter in preparation for higher business and retail activity for the festive season and increased tourism activity. Overall, SA’s unemployment rate remains uncomfortably high at 32.7% and above pre-COVID-19 levels. Whilst the expanded definition of unemployment (i.e., it includes those discouraged from seeking work, thus more reflective of the actual number of unemployed persons in SA) declined to 42.6% (from 43.1% in 3Q22), it is a marked 13.9 percentage points higher than the rate logged during the same period in 2008, demonstrating the extent of SA’s unemployment crisis.
Of greater concern, however, is the youth category – which comprises those aged 15-24 years and is the most afflicted segment of the economy. Unemployment in this group rose to an unacceptably high 61.0% in 4Q22 after easing slightly in 3Q22. This indicates the greater structural issues present in SA’s economy – thus, improving the quality of and access to education remains essential. Overall, the risks currently present to the employment outlook in SA cover all those currently stymying the greater growth outlook for SA – for instance, increased frequency and intensity of loadshedding, which will weigh on business prospects, confidence, investment, economic growth and in turn, employment. A slowdown in domestic demand and global growth in response to higher interest rates also pose a risk to job creation.
The bottom line
Typically, in the local economy, material job creation has only occurred when GDP growth approaches 3% p.a. Thus, the SA economy is simply not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans. SA’s economic growth is forecast to slow below a meagre 1% YoY. In 2023, loadshedding is expected to continue at a relatively high intensity throughout the year. Household consumption is expected to weaken, given the high-interest rate environment. Additionally, the economic slowdown in developed markets will likely reduce export demand (even as imports grow). However, this could be countered to some extent by demand from China. Electricity supply and other structural constraints prevent the domestic economy from taking off in any real, meaningful way. Without power, the cogs of our economy cannot turn.
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