Aurelia Butler

This time last year, most economists expected the US Federal Reserve would be spending 2023 facing down a recession while fighting against the biggest wave of inflation for a generation.Instead, the US has achieved the strongest growth of any large economy, unemployment is close to record lows, and price pressures are showing signs of creeping back to the central bank’s target of 2 per cent. That better than expected run of data has led Fed chair Jay Powell to end the year by betting the credibility of the board he chairs on next year being almost as good as this one.At its most recent rate-setting meeting, the Fed released its latest data showing that officials’ expect the central bank to cuts its benchmark federal funds rate — currently at a 22-year high of between 5.25 per cent and 5.5 per cent — by 75 basis points over the coming 12 months. Baked into the forecasts from the Federal Open Market Committee is a belief that the US economy will achieve its soft landing, with inflation returning to the Fed’s goal, growth slowing only mildly and unemployment still reasonably low.“You couldn’t draw up a more perfect economic scenario than the FOMC’s forecasts,” said Stephen Stanley, chief US economist at Santander. “If it happens, that would be tremendous. But there are only downside risks.”Some believe that Powell’s confidence is premature and that officials’ dovishness could make it more difficult to emerge smoothly from months of elevated interest rates.“The Fed’s projections are definitely a rosy view of the economy in 2024,” said James Rossiter, head of global macro strategy at TD Securities. “It’s certainly the outcome they desire, but we’re not sure they’re going to get away with it.” The FOMC’s newfound optimism on the economy has taken many by surprise. “Powell has a tough job. And over the past 18 months, he’s been very impressive,” said Gavyn Davies, chair of Fulcrum Asset Management. “But the Fed’s guidance has been very volatile lately.”As recently as November, the Fed chair described the disinflation process as likely to be “lumpy” and “bumpy”. By mid-December, Powell was making the last mile of the fight to vanquish inflation sound a lot more straightforward.“Inflation keeps coming down. The labour market keeps getting back into balance. And it’s so far so good,” he told reporters. “We kind of assume that it will get harder from here, but so far it hasn’t.”After good news on inflation over the past quarter, officials expect the core personal consumption expenditures price index — their preferred measure of price pressures, which leaves out energy and food prices — to slow to 2.4 per cent next year, 2.2 per cent in 2025, and then hit their 2 per cent goal in 2026.This smooth shift downwards — when coupled with the belief they can lower borrowing three times in 2024 — implies rate-setters think this wave of inflation has been mostly a supply-side phenomenon. That is, it was caused by pandemic-era shortages in labour and goods, not too much federal spending and loose monetary policy.If they are right, then — barring any supply shocks, such as an oil-price jump or renewed disruption to global trade — price pressures should dissipate, even as the Fed eases.Many analysts share rate-setters’ assessment and their projections for prices. “The general inflation picture is one of rapid normalisation,” said Rossiter at TD Securities. “That gives the Fed some comfort.”But others warn that upside risks remain.“If the progress we’ve see on inflation stalls and it doesn’t look as though we’re on such a clear path to 2 per cent in inflation, then the Fed’s tone will have to change,” said Stanley.“I’m a little sceptical; I don’t think we’re going to continue to see the rapid improvement that we’ve seen in the past few months.” Davies said favourable core PCE readings in the first three months of 2024 would be crucial in determining whether the Fed can cut rates during the spring. “A soft landing looks more probable now than six months ago because of the improvements in core inflation,” he said. “But it’s not a certainty.”Since the December vote, officials have said that they intend to focus more in 2024 on the full employment aspect of their mandate than inflation. One of the surprises of this year was the strength of the labour market, with unemployment remaining low, at just 3.8 per cent in November. The FOMC expects the jobless rate to tick up only modestly — to 4.1 per cent, a level still on par with full employment — as price pressures fall.Such episodes of “immaculate disinflation”, where double-digit price rises have been conquered without a significant rise in joblessness, are rare. Some economists think that the Fed’s forecasts are tantamount to wishful thinking.“If the Fed were to avoid pre-emptive cuts, and leave interest rates unchanged until the second half of next year, then you would begin to see a material increase in the unemployment rate,” said Andrew Patterson, an economist at Vanguard. “To get inflation down to 2 per cent, we think you’d need to see wage growth at 3.5 per cent and unemployment rise to around 4.5 per cent.”“We think there will be a recession in 2024. While it won’t be a major one, we are expecting to see a rise in unemployment to 4.6 per cent. That’s a fairly sizeable increase from what we have today,” said TD Securities’ Rossiter. “All of the central banks are hoping for a perfect landing. But it’s hard to have that conviction in an environment where there are so many geopolitical risks. Despite how smoothly things have been going, we think 2024 is going to be a bumpy ride.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayI’m Valentina Romei, the FT’s economics reporter, and I am standing in for Martin Sandbu, who is on holiday this week. With Christmas upon us, it felt like a good time to talk about the long-term performance of the US economy relative to that of Europe.In a world in which we report monthly economic growth down to the decimal point, you might be excused for thinking that the topic of the economic performance of two of the world’s largest economies over the past few decades is not controversial.Yet, it is. There is an everlasting discussion on whether the two economies should be measured by market exchange rates — which, by definition, is heavily affected by exchange fluctuations — or purchasing power parity, which aims at showing what people can do with their money in each country, with quite complex calculations. On market exchange rates, the EU economy was estimated at 68 per cent of that of the US in 2023, down from parity in 2007. At purchasing power parity, the output of the member states is 6 per cent smaller than that of the US, down from parity in 2007, according to calculations based on IMF data. Many argue that the size of the economy is not the best measure of economic performance, with gross domestic product per capita growth being a better indicator, as it is ultimately what helps boost living standards.The discussion about whether to measure GDP per capita at exchange rates or PPP is even hotter. EU per capita output shrunk markedly relative to that of the US over the past two decades, while it has been very volatile in an upward trend in terms of PPP. In today’s column, I want to emphasise the advantages of using a third and simpler way to compare economic performances: using real GDP growth in national currency. This does not allow you to say which region or country is more prosperous in any given year, but it accurately shows which one grew faster, or at least as accurately as national data goes. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.On that measure, using volumes in euros for the EU as reported by Eurostat, US GDP has grown much faster than that of the EU over the past two decades. However, the two economies have expanded at a similar pace in terms of output per capita. This is because the EU population has stagnated, while that of the US continued to grow. So, that settles it you might think, as you recover from the Christmas meals: on the measure that matters, the EU and the US have been growing at similar levels. This must mean they have similarly successful economic models. Unfortunately, it’s not quite so simple. This is because the US is still outperforming the eurozone and the UK, with per capita output growth rates since 2003 at 26 per cent, 18 per cent and 12 per cent respectively. The US performance has also dwarfed that of France, Spain and Italy. The latter has not grown for the past two decades, which in the EU is better only than Greece, whose economy has not yet recovered to pre-financial crisis levels. The chart below allows you to compare GDP per capita trends across many economies, just look for the country in the search box. 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 complicating factor in the story is that the EU average is boosted by poorer countries catching up with the rest of the region. GDP per capita in many countries, including Poland, Bulgaria, Romania and the Baltic countries, more than doubled over the same period. This is about four times the growth rate of the US. Some central European countries, such as Croatia, Czech Republic and Slovenia, have also strongly outperformed the US over the past two decades. Regional differences are not a peculiarity of Europe. Data for US states is not historically comparable as the Bureau of Economic Analysis has updated its state GDP figures since 2017 but not yet for the years before. Assuming the change in methodology affects states in similar ways, some states, such as North Dakota, Washington and Utah, have greatly outperformed others, particularly Louisiana, since 2005. But the outperforming states including the richer ones with large economies, such as California or New York, also show strong growth rates.You can compare growth rates across US states in the chart below:You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Many say that the outperformance of the US compared with the EU should not be a reason for concern as, in addition to demographics, it largely reflects the energy shock that hit Europe. The US was not as affected by the energy price surge following Russia’s full-scale invasion of Ukraine because it is an energy exporter. Stronger US growth is also the result of the European sovereign debt crisis and the large US fiscal stimulus. I am not sure this is reassuring considering that most of these factors will continue to weigh on Europe’s growth potential. At the same time, the impact of poorer countries catching up with richer ones could soon wane. That moment does not seem so far away considering that Poland’s GDP per capita is nearly 70 per cent that of Germany, up from only 42 per cent in 2003.The last point to make is about Germany, whose GDP per capita at constant prices grew at a similar pace to that of the US over the past two decades.That reflects the country’s rebound from when it was named the “sick man of Europe” in the early 2000s. Back then its economy was dragged down by the cost of reunification and an inefficient labour market, but a series of reforms has helped the country to become a strong EU performer in the pre-pandemic period. Yet, clouds are gathering on the outlook for the German economy. Its current economic downturn is, for many, a sign of an existential threat to its economic model. The IMF forecasts that Germany will underperform the US over the next five years regardless of the measure you choose. 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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Just three years ago, economists had predicted China would overtake the US economy by the end of the decade. Now, that looks unlikely. But it will not be the current real estate crisis that stands in the way. A record-low birth rate is the country’s biggest obstacle.China’s fertility rate is estimated to have touched a record low of 1.09 last year. Births were below 10mn for the first time. This year, expect a third straight year of decline with births a tenth lower to well below 9mn. It is a vicious cycle. An economic slowdown should mean young couples delay having children. The resulting decline in fertility rates eventually pushes the economy’s productivity rates lower. On current estimates the population rank in the world will fall precipitously. In 1990, China had over a fifth of the world’s people according to UN data. But sometime in 2050s that proportion will have fallen to just over half that proportion, less than that of high income nations. By the end of the century 40 per cent of the populace will be over the age of 65. The reversal of Beijing’s decades-old “one child” policy has had little effect. In fact, since that was scrapped in 2016 births have declined 50 per cent. Other official incentives and policies, including cash bonuses for births and discouraging divorces by implementing a 30-day “cooling-off period”, have not helped. The immediate impact will be felt by companies in related sectors such as baby formula and dairy products. Manufacturers in Japan and South Korea, where birth rates have already dipped below one child per woman, have battled slim profit margins. Companies such as Maeil Dairies and Megmilk Snow Brand rely on exports to China for growth, as do Australian makers. A longer-term economic impact comes from a shrinking labour force. China already has worker shortages in manufacturing. Younger workers, aged 16 to 24, shun factory jobs. Beijing expects a shortage of nearly 30mn manufacturing workers by 2025. The resulting rise in labour costs will weigh on both local and international companies with factories in China. Labour cost rises there have already outpaced those in Thailand and Vietnam. Demographic pressures have long been an issue in Asia. But China’s share of global manufacturing means its low birth rate will affect international companies as well.If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline. More

U.S. stock futures traded in a mixed fashion Thursday, with moves limited as investors prepare for the end of what has been a strong year on Wall Street.By 05:05 ET (10:05 GMT), the Dow futures contract was just 5 points, or 0.1%, lower, while S&P 500 futures had gained 7 points, or 0.2%, and Nasdaq 100 futures had risen by 55 points or 0.3%.The three main indices had another positive session on Wednesday, with the blue-chip DJIA gaining over 110 points, or 0.3%, the broad-based S&P 500 index rising 0.1% and the tech-heavy Nasdaq Composite climbing 0.2%.The averages are all on track to notch their ninth straight winning weeks, in what has been an impressive late rally. The DJIA and S&P 500 are poised to end 2023 higher by 13% and 24%, respectively, with the latter within 0.5% of its highest closing level, which was set in January 2022. The Nasdaq Composite has jumped an impressive 44%, boosted by a rebound by the mega-cap tech names.These gains have been driven by raised expectations that the Federal Reserve will start cutting interest rates early in 2024, and investors will study economic data on jobless claims and pending home sales later in the session for further clues.Apple (NASDAQ:AAPL) received a boost Wednesday when a U.S. appeals court paused a government commission’s import ban on the sales of its flagship smartwatches following a patent dispute with Masimo (NASDAQ:MASI) over its medical monitoring technology.This decision allows Apple to continue importing and selling infringing Apple Watches while the court considers whether to put the ban on hold for the duration of the appeals process.”We are thrilled to return the full Apple Watch lineup to customers in time for the new year,” Apple said in a statement.Still, a final decision could cost Apple millions of dollars and potentially force a settlement or some kind of technological workaround by the tech giant.The U.S. dollar retreated to a fresh 5-month low Thursday, on course for an annual loss of just under 3%, snapping two straight years of strong gains.At 05:05 ET, the US Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 100.370, down at levels last seen in July.The prime driver for the recent dollar losses was the unexpectedly dovish stance the Federal Reserve took at its December meeting, opening the door to rate cuts next year.Other major central banks, including the European Central Bank and the Bank of England, have also ended their series of rate hikes, but they have also tried to emphasize their inflation-busting credentials.Markets are pricing in a 88% chance of a Fed cut in March 2024, according to CME FedWatch tool, while futures imply more than 150 basis points of easing next year.There is more U.S. labor market data to study later Thursday, in the form of weekly jobless claims, but the key to the dollar’s outlook will be the pace inflation falls in 2024.The Chinese auto market is set to get even more crowded after smartphone maker Xiaomi (OTC:XIACF) unveiled its first electric vehicle earlier Thursday, and announced ambitious future plans.”By working hard over the next 15 to 20 years, we will become one of the world’s top 5 automakers, striving to lift China’s overall automobile industry,” Xiaomi Chief Executive Lei Jun said at the launch event.The new car, to be known as the SU7, is expected to make the most of its shared operating system with the company’s popular phones, and occurs as the phone company seeks to diversify beyond its core business to EVs.Oil prices drifted lower Thursday as traders digested continued tensions in the Red Sea as well as further evidence of growing U.S. crude stockpiles.By 05:05 ET, the U.S. crude futures traded 1.1% lower at $73.31 a barrel, while the Brent contract dropped 0.9% to $78.86 per barrel. Prices dropped nearly 2% on Wednesday as major shipping firms began returning to the Red Sea, however disruptions still remain over fears of further attacks by Yemen’s Iran-backed Houthi militia on ships in the region.Germany’s Hapag Lloyd said on Wednesday it still believes the Red Sea is too dangerous and will continue to send ships around the Cape of Good Hope.Away from the Middle East, data from the American Petroleum Institute industry group on Wednesday showed U.S. crude stocks rose 1.84 million barrels in the week ended Dec. 22.Official numbers from the Energy Information Administration are due later Thursday, after having risen by 2.9 million barrels the prior week as U.S. crude output rose to a record 13.3 million barrels per day. More

BEIJING (Reuters) -Chinese smartphone maker Xiaomi (OTC:XIACF) took the wraps off its first electric vehicle on Thursday and promptly announced it was aiming to become one of the world’s top five automakers.The sedan, dubbed the SU7 with the SU short for Speed Ultra, is a highly anticipated model that Chief Executive Lei Jun touted as having “super electric motor” technology capable of delivering acceleration speeds faster than Tesla (NASDAQ:TSLA) cars and Porsche’s EVs.But the car – likely to go on sale in several months – is making its debut at a time when China’s auto market – the world’s largest – is wrestling with a capacity glut and slowing demand that have stoked a bruising price war.That didn’t stop Xiaomi Chief Executive Lei Jun from outlining big ambitions.”By working hard over the next 15 to 20 years, we will become one of the world’s top 5 automakers, striving to lift China’s overall automobile industry,” he said at the unveiling.Those plans include building “a dream car comparable to Porsche and Tesla,” he added.The SU7 is also expected to appeal to customers due to its shared operating system with Xiaomi’s popular phones and other electronic devices. Its drivers will have seamless access to the company’s existing portfolio of mobile apps. “Xiaomi is a well-established consumer electronics brand with hundreds of millions of ‘Mi Fans’, or members of its smart device ecosystem,” said Bill Russo, CEO of Shanghai-based advisory firm Automobility.”As such, they have a significant opportunity to break through as the automobile becomes a smart device.” The SU7 will come in two versions – one with a driving range of up to 668 km (415 miles) on a single charge and another with a range of up to 800 km. By comparison, Tesla’s Model S has a range of up to 650 km.Pricing has yet to be announced. Lei said the cost would “indeed be a bit high, but one that will have everyone will think is justified.” Amid one of the coldest Decembers for China on record, the SU7 was also being positioned to appeal to consumers worried about winter. Lei said it had fast-charging capabilities in low temperatures and is equipped with advanced tech allowing it to recognize obstacles under challenging conditions such as falling snow.The autonomous driving capabilities of Xiaomi cars would be at the forefront of the industry, he also said.Lei’s ambitions failed to boost Xiaomi’s share price however with the company’s Hong Kong-listed stock giving up earlier gains to finish 0.3% lower.China’s fifth-largest smartphone maker has been seeking to diversify beyond its core business to EVs amid stagnating demand for smartphones – a plan it first flagged in 2021. Other Chinese tech companies that have partnered with automakers to develop EVs include telecoms giant Huawei and search engine firm Baidu (NASDAQ:BIDU).Xiaomi has pledged to invest $10 billion in autos over a decade and is one of the few new players in China’s EV market to gain approval from authorities who have been reluctant to add to the supply glut.Its cars will be produced by a unit of state-owned automaker BAIC Group in a Beijing factory with an annual capacity of 200,000 vehicles.In an extremely crowded Chinese EV market, its biggest competition will likely come from BYD (SZ:002594) which commands a one-third share while Tesla has 9%, according to third-quarter figures from Zheshang Securities. More