Falling inflation boosts hope of early ECB rate cut

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Falling inflation in the eurozone’s two biggest economies has prompted investors to up their bets on early interest rate cuts from the European Central Bank and raises hopes that the bloc can escape from what the IMF views as its laggard status on growth.

Today’s data showed the rate of price increases in Germany falling faster than expected to 3.1 per cent from 3.8 per cent in December while in France it fell to a near two-year low of 3.4 per cent. Joachim Nagel, president of Germany’s central bank and one of the ECB’s more hawkish policymakers, said he was “convinced that we have tamed the greedy beast [of inflation]”.

European bonds rallied on the news, sending yields down and indicating investors think the ECB, which has a target inflation rate of 2 per cent, is now more likely to start cutting rates by April. 

Crucial to ECB thinking will be tomorrow’s EU-wide data, which is expected to show inflation falling from December’s 2.9 per cent. Another crucial piece of information in determining when rates should be cut will be on wage growth, a point reiterated yesterday by ECB president Christine Lagarde.

Today’s figures follow GDP data yesterday showing the eurozone flatlined in the final three months of last year, held back by shrinking German output and stalled French growth, offsetting a stronger than expected rebound in Spain and Italy and bringing the total for 2023 growth to 0.5 per cent.

This leaves the bloc trailing the US, which last week was confirmed as the world’s fastest-growing advanced economy in 2023 with growth of 2.5 per cent. China has estimated its economy grew 5.2 per cent. 

“Europe is still recovering from a lingering energy shock and has not experienced the same degree of fiscal stimulus as the more resilient US economy in recent years,” was how one analyst described it.

As for the year ahead, the IMF is pessimistic, cutting its forecast for eurozone growth from 1.2 per cent to 0.9 per cent yesterday in its twice-yearly World Economic Update.

The new data comes as Brussels shifts its spending focus from the green transition to defence as it faces a backlash over climate regulation and grapples with Russia’s war in Ukraine.

That shift is being complicated by Hungarian prime minister Viktor Orbán, who in his role as the “EU’s chief antagonist”, as the FT editorial board describes him, has been blocking a package of aid for Kyiv.

Brussels is hoping that a last-minute offer, revealed this morning by the FT, will resolve the impasse ahead of tomorrow’s EU leaders’ summit.

Need to know: UK and Europe economy

The IMF warned UK Chancellor Jeremy Hunt against tax cuts in his forthcoming Budget and urged him to focus on cutting borrowing and boosting spending in areas such as health, education and tackling climate change. The government has set up a new business council as it seeks to win back corporate confidence.

Hunt’s wannabe successor, Labour’s Rachel Reeves, said her party would “unashamedly champion” the City if it came to power and now had no plan to reinstate the cap on bankers’ bonuses.

A referendum in Paris on raising parking fees for SUVs could inspire cities across Europe to follow suit if passed. The fuel-hungry cars emit more air pollution and carbon emissions than regular vehicles, take up more road space and pose a higher risk to pedestrians and cyclists in crashes.

The Russian economy has been boosted by its war in Ukraine. The IMF doubled its previous forecast for 2024 growth to 2.6 per cent, prompting questions over the effectiveness of sanctions against Moscow. The EU has agreed to set aside profits from frozen Russian assets, potentially handing over billions of euros to Ukraine.

Need to know: global economy

The IMF upgraded its forecast for global growth this year by 0.2 percentage points to 3.1 per cent, followed by 3.2 per cent in 2025. It also predicted global inflation would fall to 5.8 per cent in 2024 and 4.4 per cent in 2025.

Chinese manufacturing activity shrank in January for the fourth month in a row, highlighting the sluggish momentum in the world’s second-largest economy, despite policymakers’ efforts to boost confidence. New data showed the Hong Kong economy grew less than expected last year. Meanwhile Chinese investors are piling into gold as property and stock markets fall and the country’s major airlines forecast a fourth consecutive year of losses.

On a more positive note for China’s economy, rapid growth is continuing in electric cars, batteries, and wind/solar power. As our Big Read explains, the west is fretting over the forthcoming wave of low-cost imports.

The latest Houthi attack in the Gulf of Aden has pushed up fuel tanker rates and diesel prices, with further rises expected. Companies trading commodities such as iron ore and grain are putting pressure on shipowners to use the Suez Canal route, which is more dangerous, but also cheaper and faster. However, FT commentator Chris Giles says it’s no time to panic.

Saudi Arabia, the world’s biggest oil exporter, ditched its plan to raise production in a major policy reversal.

Indonesia is flooding the global nickel market with low-cost supplies, forcing rivals to shut unprofitable mines and creating concerns in western capitals that the upheaval will give China more control over the strategic resource. Indonesia is the world’s largest producer with a 55 per cent market share.

A new FT visual investigation highlights the hidden cost of supermarket salmon and how fish sold by big retailers in Europe is harming food security in west Africa.

Need to know: business

Big Tech investors were downbeat after Microsoft and Google warned of more large costs ahead in the race to develop cutting-edge artificial intelligence products, despite strong quarterly results. Google owner Alphabet missed its advertising forecasts, sending its shares downwards.

Novo Nordisk shares hit a record high as sales and profits surged from the Danish pharma’s weight-loss drugs, cementing its position as Europe’s most valuable company.

Corporate insolvencies in England and Wales hit their highest level since 1993 last year, highlighting the challenges facing companies amid slowing demand and high production costs. However, charges brought against company directors fell by nearly half, despite a surge in fraud during the pandemic, thought to be because of resource constraints.

It’s a depressing week to be working in UK broadcasting. Sky is cutting 1,000 jobs as it shifts from satellite dish services towards digital streaming. It follows Channel 4’s announcement of 200 job cuts, with staff reductions also soon likely at the BBC and ITV.

Wuhan in China is emerging as a key testing centre for self-driving cars. The city’s 500 robotaxis, mostly run by Baidu, China’s rival to Google, recorded more than 730,000 ride-hailing trips last year compared with a combined 700,000 in Phoenix, San Francisco and Los Angeles.

The World of Work

Our careers expert Jonathan Black proffers some tips on how to prepare for the unpredictable changes coming to the jobs market.

After more than 50 years of evidence highlighting its disruptive powers, Pilita Clark asks why we’re still no closer to solving the problems of jet lag.

The latest in our Economists Exchange series features Stanford professor Erik Brynjolfsson on what generative AI will mean for productivity, jobs and the society of the future.

The Working It podcast discusses how managers can support workers who are struggling with grief.

Some good news

Holiday travel can be daunting for visually impaired and neurodiverse visitors. Here are some examples of how tour companies are adapting.

Source: Economy - ft.com