Global macroeconomic factors that shaped 2022

06 Jan, 2023 - 00:01 0 Views
Global macroeconomic factors that shaped 2022 Africa is heavily reliant on Russia and Ukraine for food imports.

eBusiness Weekly

The year 2022 is a watershed moment in history, marked by economic, geopolitical, and environmental disruptions. Matters quickly escalated from fighting off what was hoped to be the pandemic’s final phase to a full-fledged war.

As the sun sets on 2022, here’s a look back at global macros that have had cascading effects in most asset classes, singling out equities. Throughout the year, the following global macroeconomic factors agitated the markets:

Russia-Ukraine war and its impact on the global economy

The biggest military conflict in Europe since World War II began on February 24, with Russia’s invasion of Ukraine. While Russian President Vladimir Putin has had restricted rational success in clarifying his goals for the invasion, it is widely assumed that it is simply the ambition of annexing Ukraine and expanding Russian territory.

Whatever the cause, the conflict had a frightening set of repercussions for the global economy. In response to Russia’s aggression, the West imposed economic sanctions on Russia to weaken its economy. Such restrictions include reducing Russia’s imports of oil and natural gas. This resulted in an oil supply shortage, which exacerbated inflation.

As a result of Russia’s aggression, agricultural exports from Ukraine to other parts of the world were hampered, resulting in commodity price increases. Ukraine is one of the world’s top producers and exporters of agricultural commodities such as oil seeds and grains. Furthermore, several companies and countries with ties to Russia or Ukraine suffered.

Resultantly, investors switched into flight to safety mode thereby strengthening the US dollar. As of October, the dollar was 12 percent stronger against the euro, 9 percent against the British pound, 16 percent versus the yen and 8 percent against the rand. The anchoring reason surrounding investors’ flight to safety is that US assets are considered safe in turbulent economic environments and therefore can be used for hedging purposes.

Spiralling global inflation

The global economic shock induced by the pandemic in 2020 prompted central banks worldwide to pump more money into economies to support demand recovery. It’s no surprise that, as demand increased, prices rose, and inflation exceeded desirable levels. In addition to causing domestic problems, inflation had a significant impact on global supply chains. To rein in inflation, most global central banks embarked on a monetary tightening campaign characterized by strategic interest rate hikes, which have been the main actor in 2022 to curtail the rampant effects of historic inflation levels. The US inflation rate is 8.2 percent year-on-year, while the Eurozone’s rate is 10.1 percent year-on-year, the UK’s rate is 8.8 percent, and South Africa’s rate is 7.78 percent year-on-year.

Central banks’ monetary tightening crusade

As a result of inflation nearing 40-year highs in the US, the Federal Reserve raised interest rates by 25 basis points in March, 50 basis points in May, and 75 basis points in June. Fortunately, the inflation trajectory in the US is beginning to show signs of retreating from a high of 9.1 percent recorded in June to 8.2 percent in the last reading. Despite the positive trend, one stubborn factor defying the US Federal Reserve’s hawkish tone is the labour market. Unemployment in the US remains stable at 3.7 percent, while the number of jobs added per month and wage increases remain far above desired levels. Wage inflation is a major contributor to overall inflation, and once the labour market is effectively slowed, the rate of disinflation can accelerate.

The South African Reserve Bank was not left out in this monetary policy tightening crusade; the central bank hiked rates seven consecutive times since policy normalisation started in November 2021 as a way to anchor inflation expectations more firmly around the mid-point of the target band. Currently, South Africa’s repo rate is sitting at 7 percent.

With persistent rate hikes, caution has to be taken to avoid sliding the economy into a recession, which would spark more problems for the socioeconomic fabric.

Equities are severely hurt by spiking inflation levels

Notwithstanding the lethal combo of interest rate hikes, decades-high runaway inflation, and a strong labour market notably in the US, the stock markets globally, endured unprecedented levels of pain throughout the year with record-high selloffs wiping out gains made in previous years.

Chief among them is the technology sector which has been hardest hit and is very sensitive to interest rate hikes. Year-to-date the tech-heavy Nasdaq 100 index plunged 32 percent reflecting how deep the index is in the bear territory.

With high interest rates, equity valuations are much lower than their 10-year averages and also the cost of borrowing in households and corporates for investment in capex purposes is discouraged thus stalling economic growth.- Moneyweb

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