Aurelia Butler

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Germany has struggled since Russia’s 2022 invasion of Ukraine pushed up energy costs, and its vast, industry-heavy economy is now in its fourth straight quarter of zero or negative growth, weighing on all of the euro zone. “There is still no recovery for the German economy,” the Bundesbank said. “Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession.”This weak performance has raised questions about the sustainability of the German economic model and critics argue that much of its energy-reliant heavy industry is now being priced out of international markets, warranting an economic transformation.The government, however, has pushed back on gloomy projections, arguing that it is merely a perfect storm of high energy costs, weak Chinese demand and rapid inflation that temporarily holds back growth but does not fundamentally question economic strategy.For now the weakness will persist, the Bundesbank argues.Foreign industrial demand is trending down and the order backlog is dwindling. Firms are also holding back investment, partly because financing costs have risen sharply since the European Central Bank pushed up interest rates to a record high to combat inflation, the central bank said.High nominal wage growth is also impacting firms and strikes in key sectors, such as transport, could also weigh on growth in the quarter.Disruption of shipping in the Red Sea will, however, not have a significant impact because there is plenty of spare capacity in shipping and because freight costs are only a minor part of the overall cost of goods, the Bundesbank said.While the outlook is weak, the bank said it expects no major deterioration in the labour market, which has insulated the economy so far, and Germany was not facing a broad-based, prolonged recession.”The weak phase in the German economy that has been ongoing since the beginning of the Russian war of aggression against Ukraine will thus continue,” the bank added. More

Germany’s decade-long property boom has unravelled since a sudden bout of inflation forced the European Central Bank (ECB) to hike interest rates, while the domestic economy was hit by more expensive energy imports and sluggish exports. The price of owner-occupied residential property fell by just over 4% last year according to industry data. The German statistics office put the decline at 8.9% for the first nine months of the year.Yet the Bundesbank, the ECB’s biggest shareholder, estimated that prices were still 15-20% above where they should be based on Germany’s current demographic and economic situation.”The overvaluation may not have been fully corrected yet despite a considerable reduction,” the Bundesbank said in its monthly report. “This continues to pose a certain risk of price corrections.”It said the price-to-income ratio was 20% higher than its reference value while the long-term relationship between property prices, interest rates and incomes showed an overvaluation of between 10% and 15%. For flats in German cities, the relationship between purchase price and rent lay 20% above its long-term average, the Bundesbank said.As people were less able to afford to buy, they turned to renting. Renting a city flat was 5.5% dearer according to Bulwiengesa, a property consultant and analysis firm. New lease contracts were 6.3% more expensive for multi-family homes, according to data from Germany’s association of Pfandbrief banks. The ECB is widely expected to start cutting rates this year and even Bundesbank President Joachim Nagel, an early supporter of rate hikes, said the “greedy beast” of inflation had now been tamed. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.A Chinese rival to Tesla said it was increasing investment and hiring thousands of new staff to survive a “bloody sea” of competition. He Xiaopeng, chief executive of Xpeng, said the Volkswagen-backed company would add 4,000 staff and invest Rmb3.5bn ($486mn) in autonomous driving and artificial intelligence technologies.However, Guangzhou-headquartered Xpeng “will buck the trend” during a year that was a “knockout round” for Chinese carmakers, He said in a letter to staff published by local media. “Many business partners are pulling back and are afraid to invest . . . This is an opportunity for our development,” He said.He added that Xpeng, which was founded in 2014, had been in a “bloody sea” of competition since its founding 10 years ago. “We believe persistence will bring success in the end,” he said. Xpeng did not immediately respond to a request for comment on the letter. He’s letter comes at a time Brussels and Washington are increasingly concerned about excessive electric vehicle manufacturing capacity in China. The FT reported that US officials have warned China that Washington and its allies will take fresh action if Beijing tries to ease its overcapacity problems by dumping products on international markets, including EVs and lithium batteries.China’s auto exports hit a record 4.9mn last year, up from 1.1mn the year prior, as the nation overtook Japan as the world’s biggest car exporter. Of that, only about 1.2mn were EVs — 29 per cent of which were Tesla vehicles — while the remaining 75 per cent were internal combustion engine cars, according to data from Shanghai consultancy Automobility.The capacity utilisation rate of China’s auto manufacturing sector has hovered around 70 to 75 per cent in recent quarters, below the range of 76 to 82 per cent that prevailed before 2020, according to Gavekal Research, a Beijing research group.The push towards exports came as Chinese EV production rose 38 per cent to 9.5mn cars last year. While the pace of growth has slowed, the share of EVs among new car sales rose from 26 per cent in 2022 to 32 per cent last year.The slowing pace of sales growth has fuelled expectations among auto executives for a wave of consolidation that will leave only a handful of companies in the world’s largest car market.Wang Chuanfu, the founder of the world’s biggest EV maker BYD, was more positive about the market outlook, telling a conference on Sunday that the penetration rate of Chinese EV sales would hit 50 per cent this year, according to local media.Beijing has signalled an increasing willingness to intervene in the EV market following a series of western complaints, as well as domestic concerns over the EV sector displaying signs of a boom-and-bust cycle that has beset Chinese industrial development for decades.Xin Guobin, vice-minister of industry and information technology, warned in January that Beijing would take “forceful measures” to address “blind” construction of new EV projects by some local authorities and enterprises. He also warned about insufficient external consumer demand.Earlier this month, China’s commerce ministry and eight other agencies announced plans to support the “healthy development” of the country’s overseas EV expansion, including co-operating more with foreign partners and utilising free trade deals. Experts said this was a further sign that Beijing wanted to allay international concerns over a wave of Chinese EV exports. More

The loan prime rate (LPR) normally charged to banks’ best clients is calculated each month after 20 designated commercial banks submit proposed rates to the People’s Bank of China (PBOC).In a survey of 27 market watchers conducted this week, 25, or 92.6%, of all respondents expected a reduction to the five-year LPR on Tuesday. They projected a cut of five to 15 basis points.Meanwhile, seven, or 25.9%, of all the participants predicted a cut in the one-year tenor.Most new and outstanding loans in the world’s second-largest economy are based on the one-year LPR, which stands at 3.45%. It was lowered twice by a total of 20 basis points in 2023.The five-year rate influences the pricing of mortgages and is 4.20% now. It was last trimmed in June 2023 by 10 basis points.The strong expectation of a reduction to the mortgage reference rate comes after the central bank-backed Financial News reported on Sunday that the benchmark LPR could fall in coming days, with five-year tenor more likely to be reduced.”Lowering five-year LPR will help stabilise confidence, promote investment and consumption, and also help support the stable and healthy development of the real estate market,” the newspaper said on its official WeChat account.While a slowing economy has hastened the need for lower rates, such moves have been constrained by uncertainties around the timing of U.S. rate cuts and risks of rapid yuan declines and capital outflows.The LPR is loosely pegged to the medium-term policy rate, and the two sets of rates usually move in tandem. Market watchers said a recent reduction to banks’ reserve requirement ratio (RRR) and major lenders’ latest cuts to deposit rates should allow banks to cut the LPR.China’s central bank left the MLF rate unchanged as expected on Sunday when rolling over maturing medium-term loans, with uncertainties around the timing of an easing by the Federal Reserve limiting Beijing’s room to manoeuvre on monetary policy.The PBOC’s decision to cut RRR and fully roll over maturing MLF loans “underscores the continued commitment to an expansionary monetary policy stance aimed at bolstering economic growth and stability,” said Tommy Xie, head of Greater China research at OCBC Bank.”We see the chance of an imminent LPR cut this month to further support market sentiment.” More

The West African monetary union debt management agency UMOA Titres said in a statement that Niger had failed to make a repayment of principal which was due on Feb. 16. It noted that this occurred in the context of Niger being subject to sanctions imposed by the conference of heads of state and government of the West African Economic and Monetary Union (known by its French acronym, UEMOA). “This situation is carefully monitored by UMOA-Titres in collaboration with the institutions concerned,” it said in a statement. Niger has been suspended from the regional financial market, and the regional central bank by the Economic Community of West African States (ECOWAS) and UEMOA following a military coup in July that ousted President Mohamed Bazoum.The country announced last month, along with neighbours Mali and Burkina Faso, that it was leaving ECOWAS with immediate effect. The regional bloc has a summit planned for Feb. 24 to discuss the situation. ($1 = 604.0000 CFA francs) More

SINGAPORE (Reuters) – (This Feb. 16 story has been corrected to say S$6 billion top up to fund helping with sales tax instead of S$6 billion in vouchers in paragraph 9, and clarifies that the S$1 billion over five years is for developing industry and talent in AI in paragraph 14)Singapore’s Finance Minister Lawrence Wong announced on Friday a “significant adjustment” to the tax system with implementation of the 15% global minimum corporate tax rate spearheaded by the Organisation for Economic Cooperation and Development (OECD).The prime minister-in-waiting also expanded government spending to help households battle inflationary pressures in the city-state and to grow the economy and jobs.Wong told parliament the tax adjustment could lead to a reduction in the tax base as multinational companies re-evaluate their plans and said he did not expect the move to generate revenue gains for Singapore.OCBC economist Selena Ling called the move “quite sobering” but said the trade-reliant economy had no choice since more countries – key trading and investment source markets – were implementing the OECD’s minimum corporate tax rate.Wong announced an overall small surplus of S$0.8 billion or 0.1% of GDP for fiscal year 2024, “essentially a balanced fiscal position”, he said. The government’s medium-term fiscal position was tight but its overall stance was “appropriate as we are providing targeted support”, Wong said.”Our key priority is to ensure a strong, innovative and vibrant economy.”Support for households in one of the world’s most expensive countries would be topped up by another S$1.9 billion ($1.41 billion), while a S$1.3 billion support package would also be introduced for companies, including a corporate income tax rebate of up to S$40,000.The population of 5.9 million is also dealing with hikes in sales tax that started last year, and an upcoming scheduled increase in water tariffs. Wong announced a S$6 billion top up to a fund to help Singaporeans cope with the sales tax hike.Inflation in Singapore has fallen from its peak of 5.5% early last year but remains higher than pre-pandemic levels at 3.3% in December.”The best way to deal with inflation is to ensure firms, workers are more productive and that real incomes rise,” he said.Wong said he was targeting growth of 2% to 3% each year over the next decade “by focussing on productivity and innovation”.Singapore expects higher GDP growth at 1% to 3% this year after it plunged from 3.8% in 2022 to 1.1% in 2023. A new tax credit would be created to support high-value economic activities, manufacturing, research and development and green transition, and S$3 billion would be added to an R&D fund, as well as S$1 billion over five years for development of artificial intelligence talent and industry. The government will also spend an additional S$300 million a year on healthcare support for its ageing population, which is expected to drive up overall spending to 20% of GDP by 2030 from the current 18%. Wong also announced a new fund for the energy transition, with an initial inject of S$5 billion. TAX CHALLENGEWong said he would push ahead with implementing pillar 2 of BEPS 2.0 – an OECD project under which more than 140 countries have agreed to bring the minimum effective tax rate of large corporates to 15%.But it was uncertain how much additional revenues that would pull in and how long it would last in a country that has long been attractive to investors because of its low tax rates.”We may even see a reduction in our tax base if MNE’s (multinational enterprises) shift some of their activities to other jurisdictions,” he said.In Singapore, the current headline rate is 17%, but some investors pay an effective rate that is as low as 4%.Ling, the OCBC economist, said this would level the playing field for countries and it remained to be seen how multinational companies would react. “Singapore has never competed on cost or tax alone,” she said.Wong said Singapore made no apology for pursuing growth, but the government would not push for economic expansion at all costs as there constraints in labour, land and carbon.Singapore, he said, would be an “economy that benefits the many rather than the few”.($1 = 1.3457 Singapore dollars) More

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