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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Inflation is expected to have jumped back up across much of Europe, casting doubt over investors’ hopes that the European Central Bank will start cutting interest rates as early as March.French figures released on Thursday morning showed inflation rising in line with economists’ expectations to 4.1 per cent in the year to December, up from 3.9 per cent in November after a phase out of energy subsidies.Inflation is likely to rise more sharply in Germany, where data due to be released on Thursday afternoon is expected to show a jump in annual consumer price growth to 3.8 per cent in December, up from 2.3 per cent a month earlier, according to economists polled by Reuters.Consumer price growth in the eurozone has been slowing for six months, bringing it close to the ECB’s 2 per cent target. Bond and equity markets rallied in the final weeks of 2023 as investors bet borrowing costs would start to fall in the spring.However, the reduction of government subsidies on gas, electricity and food that began last year is expected to trigger a re-acceleration of annual inflation in much of Europe. The pick-up in inflationary pressure reflects a comparison with a year earlier when Berlin paid the gas bills of most households and Paris heavily subsidised electricity costs — driving down the cost of utility bills temporarily. Prices also look set to be pushed up after the German government was forced to scrap several other subsidies and increase taxes to help fill a €60bn hole in its budget plans left by a constitutional court ruling against its use of off-balance sheet funds.“The expected increase in German inflation in December, but also the prospects of a further re-acceleration of German inflation as a result of the fiscal woes should be enough to push back markets’ rate cut expectations,” said Carsten Brzeski, global head of macro at Dutch bank ING.One area where prices could rise in response to lower government subsidies is eating out, after Berlin raised the VAT rate on restaurant meals from a temporarily reduced level of 7 per cent back up to 19 per cent at the start of this year. Figures for the overall eurozone, due on Friday, are expected to show inflation rose from 2.4 per cent in November to 3 per cent in December, ending six months of consecutive declines.Investors will be watching the figures closely for signs of how soon the ECB is likely to start cutting rates, after raising its benchmark deposit rate sharply from below zero to 4 per cent in response to the biggest surge in prices for a generation.Swap markets are pricing in about 1.6 percentage points of rate cuts by the ECB this year, with a 60 per cent chance of cuts starting in March.However, the ECB last month pushed back against speculation about imminent rate cuts, forecasting inflation in the bloc would rise from an average of 2.8 per cent in the fourth quarter of last year to 2.9 per cent in the first quarter of this year.Isabel Schnabel, an ECB executive board member, said last month that inflation may “pick up again temporarily” because of energy prices and the withdrawal of various government support measures.She predicted inflation would then “gradually” drop to the ECB’s 2 per cent target by 2025, adding: “We still have some way to go.”Almost 60 per cent of respondents in a Financial Times survey of economists last month predicted eurozone inflation would slow to the 2 per cent threshold in 2024, although some said it was likely to speed back up again from there.  More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a former professor of economics and senior adviser at the Bank of EnglandClimate change has happened, it was caused by humans, and it’s going to carry on. Mean temperatures have risen, and are going to carry on rising. This means a greater probability of weather extremes.The main policy priority in response should be to green our power generation and the rest of our industrial lives, and persuade the rest of the world to follow. It’s of much less concern how it affects central banking; but it is affecting central banking and will do so more and more.One effect is that as we invest in greening our power, industrial processes and our food supply, we have to divert resources out of consumption and into investment. This will bid up real interest rates to encourage the switch. And central bank rates will rise to accommodate it. Along the transition path, and perhaps at its end point, we may feel poorer than if we had done nothing, devoting more of what we earn to adapt to the new climate and prevent further change. To steer a shift towards investment by lowering consumption, central banks might find themselves achieving that via higher inflation — eroding real wages with higher prices, rather than forcing nominal wages down through a recession and unemployment. Of course, the whole point of forcing the transition is that our more distant futures are much less impoverished. But what we will feel initially is more scarcity, not less, and central bank policies will reflect that.The extreme weather events will disrupt work and life, causing temporary shortages and dislocation. These periods will look a bit like now, where the war in Ukraine reduced the supply of food and energy. We will see bouts of higher inflation that central banks are forced to look through, unable to respond quickly enough to do anything about them.This extra volatility generates more risk for the economy and for banks, insurance companies and other intermediaries exposed to it. At the moment this kind of risk does not seem likely to be systemic yet for western Europe, but it could be in the US, Canada or Australia — areas already prone to extreme weather. And European financials may be exposed enough indirectly. The extra risks will raise the cost of finance as those exposed protect themselves, coaxed along by regulators who will worry that the private sector is relying on the state to cap those prospects.This extra risk as the earth warms will drive the price of risky assets down and so-called “risk free” bonds higher. For those sovereigns that have enough fiscal space to handle climate problems, this will look like a reduction in their cost of finance at the expense of the private sector, and more fragile states.The transition itself ought not to be a risk for lenders. Policy has been slow moving and changes are usually telegraphed far in advance. Banks ought to be able to manage a slow process of shifting lending out of carbon intensive businesses or fossil fuels, and into greener things. Market-based finance should be able to navigate the same gradual path. But there could be sudden changes in political sentiment and policy in areas such as carbon taxes and allowable activities, perhaps triggered by natural disasters. This would expose financial intermediaries if policy was not joined up.Pressure has resulted in mention of climate change objectives in central bank mandates to get central banks to help with transition. But the green transition should be forced through by governments with carbon taxes and/or outright bans on activities that harm the climate. Tilting purchases in quantitative easing programmes towards “green” bonds is no more than a symbolic act — the UK bought less than £20bn corporate bonds out of a total of £895bn in its QE operations — and complicates monetary policy. Adding climate criteria to bank regulations also makes financial stability policy more complex and would be redundant with the right taxes. Pulling these levers is better than doing nothing at all. But not much. If we do nothing else, we will head towards climate chaos and not notice that we only tweaked central bank tools. There is also a risk that delegating climate matters to central banks generates complacency, convincing people that the hard decisions have been taken, when the opposite is the case.The more jobs we give to central banks, the more they are likely to conflict, and the harder it is to hold them to account. The best toolkit for the green transition is a simple, old-fashioned mandate, and forceful government action to either tax or replace carbon intensive activities with climate-friendly ones.   More

The year gone by played out as if the pandemic had never happened. The widely anticipated global recession never came. Markets surged. Disinflation was the buzzword. The post-pandemic world unexpectedly resembled 2019 — the year before the coronavirus supposedly changed our lives forever. Yet in the end, 2023 was a reminder that most years turn out to be a mix of the surprising and the predictable. Not all the purely contrarian bets would have paid off. Europe’s economy fell farther behind the US. American mega cap tech stocks again led the charge.With that in mind, my top 10 predictions for 2024 focus on how current trends will evolve. The price of money, inflation and big tech will remain at the heart of the global conversation, though not in quite the same ways. Meanwhile, politics will command centre stage for a simple reason: the world has never seen a bigger year for elections. Democracy in overdriveElections are scheduled to occur in more than 30 democracies including the three largest — the US, India and Indonesia. In all, 46 per cent of the global population will have an opportunity to vote, the largest share since 1800 when such records first began, says Deutsche Bank research. And voters will bring their dissatisfaction with them.The recent rise of angry populists reflects a deeper trend — distrust of incumbents. In the 50 most populated democracies, seated politicians won re-election 70 per cent of the time in the late 2000s; now they win 30 per cent of the time. Leaders of India and Indonesia buck this trend but US president Joe Biden exemplifies it.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Incumbents used to enjoy the obvious advantage of high office and high visibility, but that is no longer a guarantee of popularity. Over the past 30 years, US presidents have seen their approval ratings wither away in their first terms, to lower and lower levels. At just 38 per cent, Biden’s approval rating is at a record low for this stage of a presidency. And many of his developed world peers are no more popular. These trends foretell upheaval in the roster of world leaders. Bond vigilantes versus politicians The surreal calm of 2023 gave way to mild euphoria in the closing weeks of the year as inflation fell faster than expected, creating hopes that interest rates will keep falling. This overlooks one key trend.In a campaign season political leaders are much more likely to raise than cut spending, which means mounting deficits. In the US, Biden spending programmes have already pushed the deficit up to 6 per cent of GDP, double its long-term trend and five times the average for developed economies.The key issue is the “term premium”, or the added pay-off bond investors demand for the risk of holding long-term debt. In the 2010s, with inflation low and central banks buying bonds by the billions, that risk disappeared. Only now, debts and deficits are much larger than before the pandemic, inflation has not fully retreated, and central banks are no longer big bond buyers. Even if inflation fades further, investors probably will demand something extra to keep absorbing the huge supply of government bonds. That means interest rates, long-term rates in particular, will not fall anywhere near as much as they did in previous disinflation cycles.Backlash against immigration For many reasons — from labour market shortages in the western world to war in Ukraine — immigration has exploded, up since 2019 by 20 per cent in Canada, near 35 per cent in the US and near 45 per cent in the UK. These flows are a huge plus to economies facing worker shortages, even if they are unpopular. Dutch rightwing populist Geert Wilders came first in the national ballot last year on a migrant-bashing platform. Migrants also became a campaign issue in Poland, which has become less welcoming of new waves of refugees — despite a particularly dire need. Poland’s working age population growth rate had turned negative, before the influx of immigrants turned it around. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The next hotspot is the US, the largest nation with surging immigration and a 2024 election. Though the immigrants are reducing wage pressure, helping to lower inflation, the blowback is already loud and clear, led by Donald Trump. Its main target is illegal immigrants, who outnumbered legal immigrants by 2mn to 1.6mn in 2023. Whoever wins the election, the backlash is likely to spill over and slow the flow of immigrants — and the benefits they bring.The no-bust cycleInterest rates rose so sharply, it seemed almost certain that indebted businesses would fail quickly, consumers would hunker down immediately, markets would tank, recession would strike, and the world would face a classic bust in 2023. But the economy, at least in the US, proved remarkably resilient. One reason: Americans are locked into lower rates. Investment grade companies have been selling bonds with longer terms, which now average 12 years, so the burden of recent rate hikes has yet to strike. US homeowners still pay an average mortgage rate of 3.75 per cent — roughly half the rate on new mortgages. Another: during the 2010s action shifted from public to private financial markets, where there are signs of weakening, including slower flows to private funds and fewer sales of PE-owned companies. But private firms don’t have to report returns as frequently as public funds do, so the weakness won’t be fully visible for a while. The air could still come out slowly of both the economy and the markets. In a way that’s already happening, as seen in the public markets. The S&P 500 has not made a new high in two years, and is now 20 per cent above its 150-year trend, down from 45 per cent in late 2021. With borrowing costs still relatively high, the economy is likely to slide downward as well, though possibly avoiding the classic bust. European resilience In 2023, the US economy grew at 2.5 per cent, five times faster than Europe, widening a gap that has been growing for years if not decades. Europe can seem hopeless, and trashing its economic prospects rarely inspires much pushback.But against a backdrop of zero expectations, even small changes for the better can rekindle animal spirits and Japan demonstrated that point last year. Europe could do the same this year. As the Ukraine war-related energy crunch eases, inflation has collapsed from over 10 per cent to 2.5 per cent. Real wages were falling, now they are growing at a pace of 3 per cent, the fastest in three decades, giving consumers a lot of spending power.Europeans were hit harder by recent rate hikes than Americans because they have more mortgages and other long-term loans with floating rates. Now, having absorbed much of the pain of tighter money, Europe faces less pain down the road than the US does. Also, the trillions amassed by consumers during the pandemic are largely spent in the US, but continue to grow in Europe. Excess household savings currently amount to 14 per cent of annual incomes, up from 11 per cent two years ago, according to JPMorgan. The markets are taking notice. Excluding the mega cap stocks, which juiced US returns, the average stock in Europe outperformed the mighty US market in 2023. And the signs above point to a wider comeback in 2024.China fadingMany China watchers continue to parrot the Beijing party line, that growth is purring along at 5 per cent — perhaps double its real potential. Asked why Beijing is not taking more aggressive steps to rescue a faltering economy, the answer from Chinese policymakers is, well, the official growth rate is fine, why take more action?You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Behind this absurdity are global bragging rights. President Xi Jinping aims for China to overtake the US as the world’s dominant economy, and his officials closely track its progress in nominal dollar terms — not in PPP terms, which is commonly used among western academics. In nominal terms, China’s GDP is now 66 per cent of US GDP, down from 76 per cent in 2021. Aggressive stimulus could weaken the renminbi, further shrinking the economy in dollar terms — and leaving the paramount leader farther from his goal. Better to keep up the charade, and pretend China is not fading.Global investors are looking past this nonsense, and will continue to reduce their exposure to China. Net foreign direct investment into the country has just turned negative for the first time. Beijing can avoid a crisis with this extend-and-pretend game, but that won’t keep its economy and markets from losing share to its peers.Emerging outside ChinaNot so long ago, many smaller emerging economies thrived by selling raw materials to the largest one, and grew in lockstep with China. No longer. The link has broken. Now a fading China is more of an opportunity than a challenge for the rest of the emerging world.China until recently was drawing more than 10 per cent of global foreign direct investment, and as those flows reversed, the big gainers were rival emerging countries, led by Vietnam, India, Indonesia, Poland and above all Mexico, which has seen its share more than double to 4.2 per cent. Investors are moving to countries where they can trust the economic authorities. During the pandemic, emerging world governments refrained from borrowing too heavily. Central banks avoided large bond purchases, and moved more quickly than developed world peers to raise rates when inflation returned. Even Turkey and Argentina, once emblems of irresponsibility, have embraced policy orthodoxy.At the start of 2023, many observers feared that rising rates would rekindle the instability of the 1990s, when dozens of emerging nations were defaulting each year. What happened? Two minor emerging markets (Ghana and Ethiopia) and not a single major one defaulted in the course of the year. Emerging nations are surprising for their resilience, not their fragility, and the world is likely to start taking notice in the coming year. Dollar decline Late in 2022, the value of the dollar hit a two-decade high against other major currencies and has since drifted downward. History suggests that dollar down-cycles last around seven years. And signs are the decline could accelerate. Even now, the dollar remains overvalued against every major currency.Most economists are still confident that the dollar won’t fall much because there is no alternative and investors will never tire of buying US debt. Too confident. At over 10 per cent of GDP, the US twin deficit — including the government budget and the current account — is more than twice the average for other countries. Since 2000 US net debts to the rest of the world have more than quadrupled to 66 per cent of GDP — while on average other developed countries were reducing their debt load and emerging as net creditors.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The search for alternatives is on. Foreign central banks are moving reserves to rival currencies, and buying gold at a record pace. The United Arab Emirates recently joined Russia and other oil producers who accept payment in currencies other than the dollar. And if America’s rising debt burden slows its economy faster than expected — a real possibility — the dollar faces a double-barrelled threat in 2024.Splintering the Magnificent SevenIn 2023 the big US tech stocks boomed anew on the widespread assumption that they are the only firms rich enough to capitalise on the next big thing, artificial intelligence. Yet only three of the seven are major players in AI: Microsoft, Alphabet and Nvidia. Only one, Nvidia, is making real money on AI. The rest, blessed by association with the buzzword du jour, saw their stock market value rise well in excess of their earnings growth.This is a familiar syndrome: a new innovation excites investors, who pour money into any company loosely related to that innovation, until they realise that most aren’t going to make money on it anytime soon. This happened in the dotcom era, and it is happening now. Already expectations for 2024 earnings by the big seven are fracturing: rising rapidly for Nvidia, barely at all for Apple, and shrinking for Tesla.AI mania is unfolding against an unusual backdrop, in that the rest of the tech sector is in a mini recession. Venture capital funding has fallen sharply. Led by Amazon, Alphabet and Microsoft, more than 1,100 technology firms laid off workers last year; the net loss of 70,000 jobs made tech the only sector, outside motion pictures, to downsize in 2023. A further culling, not a boom, is more likely in 2024.Hollywood’s Napoleon complexNo doubt the pandemic left many people leery of indoor spaces, but for the most part bars, restaurants and other entertainments are packed again. Movie theatres, however, are not. Ticket sales have yet to top 900mn in the US domestic market, down from 1.2bn in 2019 and nearly 1.6bn at the peak in 2002.Hollywood’s problems are well known, including the challenges from streaming services and other online media, and the limits of its blockbuster action film formula. Underplayed in all this is a growing tendency to filter scripts through a progressive lens, increasing their appeal to the liberal 30 per cent of the population, at the risk of alienating the rest. One can hear the axes grinding in many new releases but perhaps most crudely in Napoleon, a politicised parody of one of history’s most complex figures.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.In Ridley Scott’s telling, the emperor was neither grand military strategist, nor champion of republican revolution, nor civil service and education reformer — just a cranky little murderer. The film ends with a scroll of battlefield death tolls. Asked whether he had seen it, a French-born conservative friend told me “of course not”. He knew Hollywood would render Napoleon to fit its own political worldview. That may draw applause from the Academy — it won’t help revive box office revenues.The writer is chair of Rockefeller International and an FT columnistPhotographs: AFP/Getty Images/Bloomberg/Reuters/Dreamstime/Kevin Baker/Apple More

The Dutch flower-growing industry has called for the scheduled introduction of new post-Brexit border checks to be delayed until 2025, citing “significant concerns” about industry readiness for the changes.The UK government is due to start introducing new paperwork requirements for EU business sending animal and plant products to the UK from the end of January, with physical inspections starting in April. The call for a delay from the Dutch association of wholesalers in floricultural products (VGB) was issued in a letter to the UK government, seen by the Financial Times. It also warned that key computer systems were not fully ready.“The proposed timelines raise significant concerns within our industry,” wrote VGB director Matthijs Mesken. He added the additional requirements were coming into effect ahead of a critical point in the year with high trading volumes driven by Valentine’s Day, Easter and Mothering Sunday.The UK government has been adamant there will be no further delays to the introduction of the new border, which has been postponed five times since the UK-EU Trade and Cooperation Agreement came into force on January 1 2021.It will be introduced in three phases: starting with the introduction of Export Health Certificates on January 31; followed by physical inspections on medium- and high-risk plant and animal products on April 30; and then, from October 31, safety and security declarations on all goods.Hendrik Jan Kloosterboer, the secretary of Anthos, another Dutch trade association representing the nursery plants and flower bulb industry, said there was “great concern” about shifting physical inspections of delicate plants to port border posts and the delays this would cause.“We fear that it will have a big impact on logistics and cause damage to products like big mature trees, with root balls, where loading can take five to six hours by skilled people. So it is simply not possible to offload these products at the border,” he said. Trade and border experts echoed his concerns, saying there were serious doubts that EU-based small businesses were aware of the requirement to obtain complex certificates for food and animal products from the end of January.James Barnes, the chair of the Horticultural Trades Association, which represents the UK plants and nursery industry, pointed out that the process of importing a petunia from the Netherlands had already increased from 19 to 59 steps since Brexit, and the move to now introduce checks at the border would add yet further costs and delays.“We think that the new border is a disaster waiting to happen,” he said, “The fundamental issue is that the infrastructure isn’t in place to cope with the volume of trade that’s coming through.”The UK government has admitted that the new risk-based checks will cost businesses £330mn in additional red tape charges, but argued they are essential for maintaining UK biosecurity as well as creating a level playing field for British exporters who faced similar checks when exporting to the EU.But business and trade groups have warned that the new checks on EU exporters risk reducing the number of smaller EU businesses prepared to trade with the UK — mirroring what happened in 2021 when many UK SMEs gave up exporting to the bloc.Marco Forgione, director-general of the Institute of Export and International Trade, which represents importers across the UK, said there was strong anecdotal evidence that EU companies were not ready for the changes.“We have a growing anxiety that the state of preparedness in the EU is very low,” he said. “Even recognition that things are going to change is very low, and it decreases as you go down the size of business.”Flowers grown in the Netherlands on sale in a London market More