United States – US GDP Expansion – A Key Factor to Consider Another Hike?

According to the second estimate released by the United States Bureau of Economic Analysis, the US GDP expanded by 5.2% YoY, a 30bps increase from the first estimate (+4.9% YoY). This upward revision in GDP figures is primarily attributed to positive adjustments in nonresidential fixed investment and state and local government spending, counterbalancing a downward revision in consumer spending.

Overall, the enhanced performance of Q3:2023 GDP, in comparison to Q2:2023 GDP, can be attributed to accelerated consumer spending, increased private inventory investment, and a rise in exports. This positive momentum counteracts the deceleration observed in nonresidential fixed investment and the upward trend in imports, the latter being a negative factor for GDP.

Source: BEA, Zedcrest Wealth

The enhanced GDP figures underscore the resilience of the United States economy, despite the myriad challenges it has faced since the onset of the COVID-19 pandemic and the lingering impacts of the Russia-Ukraine conflicts. However, we anticipate that the US Federal Reserve will refrain from further interest rate hikes, given the persistent disinflationary trends. As of October 2023, inflation stands at 3.2% YoY, a notable decrease from the 9.1% YoY reported in June 2022.

Euro Area – Disinflationary Trends and Decent Unemployment Rate

According to the preliminary estimates released by Eurostat, disinflationary patterns persist within the Eurozone and Euro area. The inflation rate for November in the Euro area is reported at 2.4% YoY, representing a decline from the 2.9% YoY recorded in October 2023.

To provide context, both the Food Index (+6.9% YoY) and Core Index (+4.3% YoY) experienced a modest uptick compared to the preceding month, while the Energy Index continued to contract, recording 11.5% YoY, as opposed to 11.2% YoY in October 2023.

Anticipating the lingering effects of previous rate hikes, we foresee continued disinflationary trends in the Euro area. There is no indication of the ECB raising interest rates shortly, but we do observe a potential for a rate cut in the second half of 2024.

Regarding the ECB’s considerations on rate cuts, we hold the view that despite the ECB expressing concerns about inflation proving more resilient than anticipated and contemplating the possibility of further rate hikes, data from the report suggests that inflation may not be as stubborn, eliminating the imperative for additional interest rate increases.

Additionally, the unemployment rate remains relatively low (6.5% YoY as of October 2023) compared to historical trends, indicating that the economy might have the capacity to withstand additional hikes. Given the current GDP growth at 0.0% in both Q3:2023 and Q2:2023, we believe it is crucial to adopt a wait-and-see approach.

Domestic Economy

2024 Budget – Budget of Renewed Hope

During the week (On Wednesday), President Bola Ahmed Tinubu presented the 2024FY Executive budget proposal themed, “Budget of Renewed Hope” to the National Assembly.

In preparing the budget, the president and his team took into account both global and domestic factors, along with the performance of the 2023FY budget. The primary emphasis of the budget revolves around Improved Employment, Human Capital Development, Defense and Internal Security, Better Investment Environment, economic development, and Poverty Reduction.

Derived from the proposed budget, the Federal Government outlines an aggregate expenditure of N27.5 trillion for the year 2024. Within this framework, non-debt recurrent expenditure is slated at N9.92 trillion, debt service is projected at N8.25 trillion, and capital expenditure is allocated at N8.7 trillion.

The anticipated debt service constitutes 45% of the expected total revenue. The budget deficit for 2024 is forecasted at N9.18 trillion, equivalent to 3.88% of the GDP. This marks a reduction from the N13.78 trillion deficit recorded in 2023, which accounted for 6.11% of the GDP.

To cover the deficit, the government plans to secure new borrowings amounting to N7.8 trillion, with additional funding coming from N298.49 billion in privatization proceeds and N1.05 trillion drawdown on multilateral and bilateral loans dedicated to specific development projects. The President also mentions an ongoing review of tax and fiscal policies, intending to elevate the revenue-to-GDP ratio from its current level of less than 10% to 18% during the term of this Administration.

Analyzing the budget breakdown reveals certain areas of concern regarding the potential recurrence of flaws in the country’s budget system. While we appreciate the conservative approach in the revenue projections by the current administration, there is apprehension about the heightened dependence on oil proceeds, signaling a continuation of economic challenges. Other sectors of the economy still demonstrate suboptimal performance in terms of revenue generation.

Furthermore, a historical review indicates a consistent inability of the government to meet its budgeted oil revenue over time, and we harbor limited optimism that this trend will diverge in the current year (Projected oil revenue for 2022 was N9.37 trillion, whereas actual revenue was N6.54 trillion). However, it is noteworthy that non-oil tax revenue has shown improvement over time (forecasted at N6.54 trillion for 2022, and actual revenue was N7.02 trillion), highlighting the relatively positive performance of the non-oil sector.

On the expenditure front, we observe that the budgeted amount for capital expenditure has experienced only marginal growth compared to the allocation for debt service. This suggests that a substantial portion of the government’s revenue continues to be allocated to debt settlement. We contend that this scenario is unfavorable for an economy like Nigeria, which significantly suffers from inadequate infrastructure.

For the most part, we assert that the pillars of fairness, objectivity, transparency, checks and balances, and trustworthiness play a pivotal role in fostering economic growth. Additionally, the government’s efficacy and efficiency in judiciously utilizing funds stand as the central driving force behind the overall economic development.

The Nigerian Equities Market – The Bulls Extend their Stay for the Fourth Consecutive Week

The Nigerian equities market closed the week on a positive note for the 4th consecutive, as the NGX All-Share Index (ASI) advanced 27bps WoW to settle at 71,419.87 points. The Year-to-date (YtD) returns settled at 39.35%. Sectoral performance was mixed as the Oil and Gas (+5.97% WoW) and Banking (+1.92% WoW) sectors closed on a positive note while the Insurance (-2.03% WoW), Industrial Goods (-1.23% WoW) and Consumer Goods (-0.47% WoW) sectors closed with a bearish undertone.

Leading the gainers chart are MECURE (+41.04% to NGN12.99), NNFM (+24.78% WoW to NGN36.00) and THOMASWY (+20.19% WoW to NGN2.50). The top losers for the week were OMATEK (-21.21% WoW to NGN0.78), GUINEAINS (-20.59% WoW to NGN0.27) and DAARCOMM (-20.51% WoW to NGN0.31).

The Nigerian Fixed Income Market – Bullish Momentum Caps Off the Week

The Nigerian Secondary Treasury Bills market closed on a silent note as average yield stagnated at 10.50%. On the flip side, the secondary bond market closed bullish as average shed 22bps WoW to settle at 15.69%. For the most part, the Naira Fixed income market closed the week on a bullish note as average yield declined 11bps WoW to settle at 13.10%.