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Citation Third Quarter 2023



Maarten Ackerman
Chief Economist
Estimated reading time: 20 minutes 46 seconds read

While South Africans bask in the summer sun after a long and cold winter, global economies and markets are still navigating a mild chill before they can look forward to the daffodils of spring.

In addition to sticky inflation, the world economy has faced many challenges in 2023, including global geopolitical tensions like the Russia-Ukraine war, cooling US-China relations, and now most recently, a resurgence of conflict in the Middle East. The world and South Africa have also had to manage a number of natural disasters including devastating floods, earthquakes, heatwaves and widespread wildfires. It almost seems like there is a link between climate change, and economies and markets becoming more volatile.


The last quarter saw a change in the global economic powerhouses, with a counter move to the G7 – which are a grouping of the largest seven global economies – when BRICS (Brazil, Russia, India, China and South Africa) moved to become BRICS+ with the inclusion of six new member countries, namely Iran, Saudi Arabia, the United Arab Emirates, Egypt, Ethiopia, and Argentina. There are two interesting points to note about BRICS+. The first is that countries like Saudi Arabia, India and Brazil, are considered to be allies of the United States (US). Secondly, the extended group also includes countries that are large oil exporters, which will have an impact on commodity markets over the next couple of decades. The grouping has also played into Russia’s hands of dividing the world on the geopolitical front. The countries who voted to condemn Russia’s invasion of Ukraine, in fact only amount to 25% of the global economy. The new BRICS+ block will total around 50% of the global economy by 2050.

What is interesting is that the East and the West are now in play to woo Africa, an important player in global commodities. BRICS+ brought its African membership to three countries, while the West (represented by the G20) invited the African Union to become permanent members of the G20 at last quarter’s G20 summit. In addition, the G20’s communication also softened towards Russia, without any direct criticism around Putin’s invasion of Ukraine. This is indicative that the West is aware that BRICS+ is emerging as a powerful economic bloc. As investors, we need to monitor the game that is playing out between the East and the West closely, as it will have severe implications for global markets.


As we look at the global economy in the third quarter of 2023, the key themes of peak inflation and peak interest rates remain in place. Global inflation figures are coming down, but core inflation in the major economies like the European Union (EU) and the United Kingdom (UK) remains sticky, while in the US, although there has been a decline in its inflation figure, it is not significant. This means that major global central banks will maintain their tight monetary policies as they go into 2024. We are, however, getting close to peak interest rates in those economies, but there are no interest rate cuts on the horizon anytime soon. The US Federal Reserve (the Fed), in a conference held in Cape Town recently, started talking about a “Table Mountain” Policy, which suggests that rates may have peaked, but will stay elevated for longer than markets initially expected and before any decline in rates can be expected.

Given sticky inflation, along with the higher-rates-for-longer narrative, we are starting to see a slowdown in the global economy. China was impacted by its slow return after its hard COVID-19 lockdowns going into 2023 and is disappointing the world in terms of its slow recovery at the moment. With Germany already in a recession and other EU countries flatlining, Europe, as a whole, is struggling. Yet, the US economy is still doing well, for now, which is resulting in the desynchronisation in the global slowdown. Having said that, the US is not going to escape its own economic winter. We are preparing for the US economy to experience a much larger slowdown going into 2024.


Last quarter we spoke about the likelihood of the global economy entering into a recession. Three months later, while most of our 10 Recession Scorecard Indicators have not improved, a few are getting softer. This indicates that while we are still in for an economic slowdown, it will be a softer landing than previously expected.

We are currently in the danger zone, which refers to the lag between when the forward-looking Global Leading Indicator turns negative (which is already the case), and when the Coincident Indicator (measuring what is happening right now) turns negative. At the moment, the Coincident Indicator dropped to below 2% growth. When this number turns negative, the global economy will definitely be in a recession. It normally takes eight months for both these indicators to turn negative – this time it is taking longer and we have already been in the danger zone for 12 months.

This extended Danger Zone is the reason that a number of major central banks and market commentators are dubious that we will enter a global recession. The Citadel Asset Management (CAM) team, however, does not agree with this. Both China and the EU are already experiencing a strong slowdown, and they account for a sizeable chunk of the global economy. Even if the US is ‘fine’, it alone will not be able to prevent the global economy turning negative. We also believe that the US is going to experience a recession of its own, albeit a mild one, in 2024.


Currently the US economy is being buoyed by the US consumer and is managing to delay an imminent recession. However, US consumer health is starting to deteriorate. While consumers benefitted from healthy savings during the pandemic, now with interest rates having gone from zero to over 5%, those savings are being depleted. Indicators of this are increased credit for vehicle sales, an increase in student loans, increased credit card spending, as well as general spending in the economy on credit. This type of spending is unsustainable and at some point we are going to see interest rates impacting these consumers. So while debt levels are much lower than in 2008, they are on the rise as the cost of living is up in the face of very high inflation.

The consumer is also going to be under further pressure as employment conditions are starting to weaken. There are three metrics which usually point to growing unemployment. The first is US retail sales, which are negative, an indication that the consumer is already under pressure. Weak US manufacturing numbers are also indicating that the US economy is slowing down, and finally, the US housing market is under pressure due to higher mortgage rates.

While US unemployment is still low, it is starting to increase, and is an indicator that the US economy is potentially heading for a recession. Another recession indicator that we are looking at is US interest rates. The US is very close to reaching peak interest rates, and if history is a guide, then the lag between peak interest rates and a US recession is between six to nine months. So, we expect the US economy to enter negative territory sometime in 2024.

In summary, when we look at US growth projections, we are expecting US growth to average 1.5% over the next three years. It will be well below capacity in 2024, given that it is moving into the bottom of the economic cycle. Growth will then return to trend growth in 2025, before moving slightly above trend growth in 2026, signalling the economy entering into an economic spring. Inflation over the next three years will likely hit the Fed’s target and average around 2.5%, but it will take some time to get there. We expect US interest rates to remain around 4% over the period, and we do not expect any major rate cuts as the Fed maintains its hawkish policy.


 Europe is ahead of the US on the curve and already finds itself in an economic winter, and there may be another cold front on the horizon. Germany, the EU’s most important economy, is already in a phase of negative growth. As an exporter of high-quality manufacturing goods, machinery and equipment, Germany’s recessionary environment not only tells us what is happening in the country, but also about what is happening with its global trading partners. We believe Germany to be the canary in the coalmine, because when Germany slows down, it is indicative that so is the rest of the world.

Despite this, EU confidence is recovering from hitting an all-time low, following the Russia-Ukraine war which broke out in February 2022. But it is still fragile and if dealt another blow, like the current war in the Middle East, this more upbeat sentiment will not boost consumer spending. Like in the US, EU employment remains robust, but the region is experiencing a cost of living crisis on the back of higher interest rates and inflation. We are also starting to see that consumer credit is increasing, as consumers try to make ends meet.

Industrial production in Germany, which forms a big chunk of Germany’s economy, is stagnating. Germany’s PMI (Purchasing Managers’ Index) has fallen to 44 from a previous print of 48. Anything below 50, points to a contraction. A fall to 44 talks to just how tough the environment is. The index is currently sitting at an eight-month low, and this has been driven by a fall in new orders, which, again, is indicative that the rest of the world is slowing, resulting in reduced business output and shrinking exports. It indicates that Germany is already experiencing its economic winter.

If we look at eurozone money supply, which is the money in circulation, we are seeing a decline. This is something we have not seen since 2010. This contraction is attributed to a drop in private sector lending and deposits. Money supply is one of the measures that the European Central Bank (ECB) looks at to determine the impact its monetary policy is having. Monetary policy is not just about lowering inflation, it is also about reducing money supply, because when money supply shrinks, it is an indication that the economy is struggling, which in turn lowers inflation. This is what the ECB wants to achieve. But if you look at the EU’s current inflation of around 5%, it is still more than double the ECB’s target of 2%. As such, like in the US, monetary policy is going to remain tight for some time with interests staying higher for longer.

Looking at Europe’s growth, we are expecting it to average around 1% to 1.1% for the next three years. It will look similar to the US, where 2024 is going to be tough with below-trend growth, putting it in the middle of its economic winter. In 2025, we expect the EU economy to return to trend growth, and then grow above trend growth in 2026 as the buds of spring begin to appear. Over that period, we expect inflation to return to 2.5%, just above the ECB’s 2% target, which will not leave the ECB a lot of room to cut rates, which are expected to average around 3% for that period.


Despite the UK having “Brexited”, it is also feeling the same winter chill as its mainland neighbour. The country finds itself in a very tough economic environment at the moment, as its trading partners are also slowing down in a tight global economic environment. When we look at UK PMI, like the EU, it has also dropped below 50, with a slowdown in economic activity in both the service sector and manufacturing. Both UK business and consumer confidence are at historic lows. Inflation here is in a similar position to the EU, where it is falling, but it is not close to where the Bank of England (BoE) would like it to be. Currently, the UK’s inflation rate is hovering around 6%, three times the BoE target, meaning we will see ongoing tight monetary policy for the foreseeable future.

The UK property market is deflating, with house prices down 20% compared to a year ago. This talks to the impact higher interest rates are having on this sector of the economy. In addition, mortgage approvals are down significantly, when compared to before rates started to rise. This indicates that people are not willing or able to pay higher rates. The consumer is also under pressure and spending more on credit. Retail sales are down 2% year-on-year and industrial production is flat compared to a year ago. But, like the EU and US, the UK labour market remains robust, despite the fact that unemployment is picking up from an all-time-low of 4.4%.

When we look at the UK’s growth, we are expecting it to average around 1.2% over the next three years, with the same trend as in the US and EU, where 2024 will see below trend growth. It will reach trend growth in 2025 and then, in 2026, we will see it move to above trend. Inflation will fall to about 2.5% over the three years with interest rates averaging around 4%.


China, which was hoping for an economic spring as it came out of the hard COVID-19 lockdowns, has found itself battling a prolonged economic winter. Following the opening of the economy, China did, in fact, see its economy bounce back in the first quarter of 2023. However, in the second quarter, the property sector, driven by a lack of policy easing and negative sentiment, had a tangible negative impact on China’s economic activity. In effect, China experienced a degree of fiscal austerity in the first half of 2023 on the back of weak property sentiment, weak land sales, and lower spending being a headwind in terms of the property market. China’s second quarter growth was only 0.8% which, for China is unheard of, and was partly due to the declining property sector.

Now, at the end of the third quarter, we are seeing more targeted stimulus from government, as it tries to boost its economy. This stimulus includes certain rate cuts, reductions in mortgage downpayment requirements for property buyers, as well as a removal of certain restrictions in tier one and tier two cities in terms of owning property, as the government tries to stimulate the property sector.

On the back of the week property sector, as well as China’s global trading partners also experiencing economic slowdowns, we are not expecting to see a recovery of the Chinese economy any time soon. The Chinese government is implementing proactive policies, particularly in the housing sector, that are aimed at stimulating consumer demand and consumption. Simultaneously, however, the Chinese government is very aware of creating structural imbalances in the economy. In the past, China has grown on the back of infrastructure development and property development. They cannot continue doing that, and need to transition the economy toward consumers.

Unfortunately the Chinese consumer is not coming to the party as quickly as expected. Chinese retail sales remain below pre-pandemic levels. So if we take a longer-term view, China is going to experience lower growth, compared to what they have experienced in the last decade. Over the next three years, we expect growth to sit at around 4.5% which is much lower than where they have been over the last decade. It is also below consensus, which is at around 5%. At 2%, the country does not have an inflation problem. And where interest rates in the West are expected to hover between 3% and 4% over the next three years, China’s are only expected to be around 1.5%. In time, we believe China will get the rebalancing of its economy right, but we believe that until they do, they are entering a phase of much lower structural growth.


South Africa’s situation remains bleak. In line with the rest of the world, we will experience a tough winter, and will feel the chill a little more than the rest of the world. But it is not all bad news, because there are some green shoots of spring expected to emerge, given the investment projects on the go at the moment.

Looking at South Africa, it can be argued that the country is already in a recession. It has very weak growth, much lower than was projected in the February budget. It is expected that growth will continue to decline on the back of the structural issues that we are all aware of. This unfortunately will set the scene for increased unemployment and greater social issues which need to be addressed in a very weak fiscal environment.

When we look at the fiscal position of the country, ahead of the Medium Term Budget Policy Statement (MTBPS) in the first week of November, we know that February’s budget was optimistic, and that the reality is that it hasn’t achieved its budgeted growth. In addition, the revenue collection in the form of tax is down R20 billion from what was predicted in the budget. This implies that we need to borrow in the region of R500 billion in the next year to meet budgetary shortfalls, which equates to R2 billion per weekday. This is not sustainable. If the country is not achieving economic growth, it means it will not meet its tax collection targets and will be forced to rely on borrowing. As a result the red lights are starting to flash. This shortfall in tax collection is being driven by falling corporate income tax collections as well as by an increase in tax refunds due to businesses struggling financially.

With the government being forced to turn to the bond markets to cover the shortfall in its budget, we could see the country’s interest payment as a percentage of revenue increasing to unsustainable levels. The International Monetary Fund (IMF) has warned that the servicing of government debt could soon exceed twice the health budget, and stands at around 20% to 25% of total government revenues. So one in every four rand collected is going to service government debt, leaving the government just 75c of each rand collected to spend on South Africa.

What is worrying is the prospect that South African may have to borrow money to meet its interest repayments. In addition, a big chunk of the budget is going on the public wage bill, and the budget did not factor in the 7.5% wage increase given to public sector workers, which was negotiated after the budget was delivered. The government is also still funding special grants in a tough environment in which there is no economic growth. A further hurdle for the fiscus is that the country is entering an election year in 2024. As such, it is going to be very difficult for government to cut back on expenses, while it tries to woo voters. The MTBPS is going to see the Minister of Finance have to perform a very tight balancing act.

But it is not all doom, gloom and tornados. There are some green shoots on the horizon and these must be mentioned. In the past two editions of Citation, we have talked about fixed capital formation and its percentage of South Africa’s gross domestic product (GDP). In this regard, we had another strong quarter with a print that was up 3.9 points, making it the seventh positive quarter in a row. It has been a very long time since we have seen this, but it is important that this trend continues or we will not see South Africa’s economy pick up over the medium term and the country will not see sustainable growth into the future, which critically, needs to exceed the country’s population growth of 1.5%.

What is encouraging, is that around two-thirds of the fixed capital formation is coming out of the private sector, with the remaining third coming out of public corporations and general government. What this shows us is that the private sector is investing back into the economy. This trend – with the last quarter being very strong with solar coming into the country – is not just energy related. It started in 2021, which was much earlier than when the renewable energy cap was lifted by government and the tax incentives were put in place at the beginning of this year. This shows that we already had five quarters of very strong fixed investment before the energy incentives came into play.

If you look at the South African Reserve Bank’s (SARB’s) monetary policy review, it suggests that fixed capital formation will remain at these levels up until 2025. This is extremely encouraging as it will pave the way for more sustainable economic growth

When we look at loadshedding, in 2022 we had 157 days of loadshedding, and this year the expectation is that we will get 250 days of loadshedding. However, looking at 2024, it is predicted that the number of days of loadshedding will again fall to 150 days, which speaks to the impact alternative energy sources will have on removing some of the pressure on South Africa’s power supply. By 2025 this will fall to 100 days, and although not good enough, it does show an improvement. Loadshedding in 2023, has cost the economy around 2% in growth. By 2025, loadshedding will impact the economy by less than 0.5% of its economic growth, which is encouraging. We must also remember that loadshedding is inflationary, so while there is loadshedding, it is making it more difficult for the SARB to bring inflation down to target.

Other projects that are very positive and will help bring South Africa back to a growth path are the mining-water project, where major mining companies are collaborating on a significant water project, which aims to supply drinking water to platinum and chrome communities. This will benefit thousands of people and it is a project between government and the mining sector, with an investment of around R27 billion. This is a very positive move, because the mines are saying that the government needs to become the regulator and allow the private sector to get its hands dirty on the ground, which will allow projects to get moving.

Another issue hampering growth is South Africa’s ports and rails. Over the last quarter, we have seen Transnet make significant progress in addressing the issues. The CEO of the Association of Freight Forwarders has commended government and Transnet for their newfound dedication, so there is a lot of optimism around the table. We are expecting a new logistics plan to be tabled in parliament in the last quarter of 2023. In addition, the general feedback from discussions between the private sector and Transnet has been positive in terms of finding a solution and keeping the private sector involved in solving these issues.

When we look at South Africa’s growth, we are expecting it to average around 1.3% over the next three years. We expect growth to continue to be weak in 2024, as the country is dealing with a number of structural issues. But if we continue with the investment drive, with a number of challenges being resolved, we believe that by 2026, South Africa has the potential to start growing above capacity. This indicates that our spring is in the pipeline, albeit just a little bit later than the rest of the world. Our inflation will probably hover around 5%, at the top end of the SARB’s target band, which will allow the SARB to start cutting rates during 2024.


As economies brace for a big chill until the back end of 2024, it implies that markets, too, will be in for a colder period. Citadel and the CAM team have taken that into consideration when it comes to managing your portfolios.

We have the opportunity now to make the most of higher interest rates, both locally and abroad, especially when you are managing tax through the use of retirement products, which can then beat inflation and minimise tax obligations. This will provide a much-needed buffer to our portfolios.

Despite the wintery chill in markets, we will not get rid of all of our growth assets. Yet, we are making sure we weather-proof our portfolios by investing in companies that should perform well as we go through this cold patch. Harold Strydom’s Asset Valuation Signals piece will give a more in-depth look at CAM’s current investment strategy.


We recently hosted the virtual edition of our Annual Client Presentation with Citadel Investment Strategist, Yolande Naudé and Portfolio Manager, Nishlen Govender. If you would like to revisit some of the insights or missed the webinar, click below.