Aurelia Butler

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Africa’s second most populous country announced earlier this month that it intended to formally go into default, having been under severe financial strain in the wake of the COVID-19 pandemic and a two-year civil war that ended in November 2022.It had been supposed to make the payment on Dec. 11, but technically had up until Tuesday to provide the money due to a 14-day ‘grace period’ clause written into the $1 billion bond. According to two sources familiar with the situation, bondholders had not been paid the coupon as of the end of Friday Dec. 22, the last international banking working day before the grace period expires. Ethiopian government officials did not respond to requests for comment on Friday or over the weekend, but the widely-expected default will see it join two other African nations, Zambia and Ghana, in a full-scale “Common Framework” restructuring.The East African country first requested debt relief under the G20-led initiative in early 2021. Progress was initially delayed by the civil war but, with its foreign exchange reserves depleted and inflation soaring, Ethiopia’s official sector government creditors, including China agreed to a debt service suspension deal in November.On Dec. 8, the government said parallel negotiations it had been having with pension funds and other private sector creditors that hold its bond had broken down.Credit ratings agency S&P Global then downgraded the bond, to “Default” on Dec. 15 on the assumption that the coupon payment would not be made. More

The eurozone economy is set for only modest growth next year despite wages rising faster than inflation for the first time in three years, according to a Financial Times poll of economists.Almost two-thirds of the 48 economists surveyed by the FT said they believed the single currency bloc was already in a recession — usually defined as two consecutive quarters of gross domestic product shrinking from the previous quarter.“We would not describe this as a fully fledged recession; instead we would still characterise this as stagnation,” said Paul Hollingsworth, chief European economist at BNP Paribas. “What’s more, we continue to see a gradual recovery in 2024, rather than further deterioration.”Most respondents forecast that the current contraction would be shallow and shortlived, with mildly positive growth returning in the first quarter of 2024. However, they expected next year to bring only weak growth and warned that high interest rates, potential energy market turmoil and geopolitical instability could yet cause a deeper downturn.On average, the economists polled by the FT forecast that the eurozone economy would grow by just over 0.6 per cent next year. Most were more pessimistic than the European Central Bank and the IMF, which have forecast that the bloc’s economy will grow 0.8 per cent and 1.2 per cent next year respectively.Several economists said the potential election of Donald Trump as US president for the second time and the possibility of Ukraine losing its war against Russia were among the risks that could drag Europe’s single currency bloc into a period of even weaker growth. Vítor Constâncio, former ECB vice-president, said the big risks for Europe were a “recession in Germany or Italy and a Trump victory”.Holger Schmieding, chief economist at Berenberg, said a Trump victory was the main threat for Europe’s economic outlook. “If the US abandons Ukraine and threatens the EU with a trade war, Europe and the world would suffer more than the US,” he said.Mahmood Pradhan, head of global macroeconomics at Amundi Asset Management, said the biggest risk for the eurozone was a “prolonged restrictive stance of monetary policy — including a faster pace of balance-sheet unwinding — and less supportive fiscal policy, especially in Germany”.Two-thirds of those surveyed thought Germany’s economy would return to positive growth next year after it shrank for much of 2023. But Mark Wall, chief European economist at Deutsche Bank, said “significantly tighter fiscal policy in Germany”, after the country’s top court left the government with a €60bn hole in its budget, meant its economy would contract 0.2 per cent.More than half of economists thought there could still be another energy supply shock next year, even though Europe entered this winter with its natural gas storage tanks almost completely full and oil prices have fallen since the start of Israel’s war against Hamas in Gaza.“Europe remains supply-constrained when it comes to energy, so any concerns regarding energy supply could see a sharp rise in prices,” said Katharine Neiss, chief European economist at PGIM Fixed Income.Inflation in the eurozone is expected to fall close to the ECB’s 2 per cent target in less than two years, according to the economists. They forecast that consumer prices would rise on average by just over 2.5 per cent next year and slightly below 2.1 per cent in 2025.Those forecasts are slightly below those of the ECB, which earlier in December predicted euro area price growth would average 2.7 per cent next year and 2.1 per cent in 2025.Wage growth is expected to be just under 4 per cent next year in the eurozone, according to the average prediction in the FT poll, which is weaker than the 4.6 per cent forecast by the ECB but would still mean real household income grows for the first time in three years.Most economists are more gloomy on the outlook for the labour market next year than the ECB. On average, they forecast unemployment would rise from a record eurozone low of 6.5 per cent in October to 6.9 per cent at the end of next year. “Beyond political and geopolitical risks, the greatest endogenous threat to the eurozone economy would be a slump in the labour market,” said Sylvain Broyer, chief European Middle East and Africa economist at S&P Global Ratings. “In such a case, the rise in real incomes on which the soft landing script hinges could vanish into thin air.”Residential house prices will fall a further 1.6 per cent next year, the economists forecast on average, reflecting sluggish growth and significantly higher mortgage rates across Europe. Nearly half of respondents also said they were anxious about a potential crisis brewing in the commercial property sector, while a quarter said this was not a concern.How did last year’s predictions fare?Not bad. A year ago Europe was still getting to grips with the energy crisis caused by Russia’s full-scale invasion of Ukraine, which helps explain why most economists polled by the FT were slightly too pessimistic on both growth and inflation.On average, they forecast the eurozone economy would shrink just under 0.01 per cent this year and inflation would average slightly above 6 per cent. Thanks to a swift shift away from a heavy reliance on Russian gas imports to other sources of energy, the bloc has not performed quite as badly as many feared. The ECB forecast this month that growth would be 0.6 per cent and inflation would be 5.4 per cent this year. 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 financial journalist and author of ‘More: The 10,000-Year Rise of the World Economy’In most Hollywood horror movies, the monster is incredibly hard to kill. Not until the final moments of the film will it be dispatched and, even then, enough doubt will be created to leave room for a sequel.So it has been with the great speculative era on the financial markets. A pandemic, a Russo-Ukraine war and even substantially higher interest rates have not finished off the risk-taking bonanza.Take the technology sector as a starter. Much of its value lies in the future profits companies are expected to earn because of their superior growth potential. When bond yields rise as they have this year, investors should in theory use a higher rate to discount those future profits taking into account the time stocks have to be held to receive them. That means valuations should fall, not rise. But the price/earnings ratio of the US technology sector is well above its three-year average and the sector’s shares have jumped more than 50 per cent so far this year.Second, take the overall market valuation, as measured by the cyclically adjusted price/earnings ratio, or Cape. This averages profits over 10 years to allow for the economic cycle. In March 2022, as the US Federal Reserve started to push up interest rates, the Cape was 34; on the latest figures, the ratio has dropped only to 31, still well above the historical average. And markets have continued to rally in December.Then there is bitcoin. The late, lamented Charlie Munger, the long-term colleague of Warren Buffett, said that investing in cryptocurrencies was “absolutely crazy, stupid gambling”. As if to prove his point, the past 18 months have seen the collapse of the crypto exchange FTX, and Binance — one of its biggest competitors — suffering a $4.3bn fine for money laundering and the forced departure of its founder. There could not be more alarm bells sounding if the entire New York City fire department was racing, with sirens blazing, past investors’ doors. But the bitcoin price has more than doubled this year.One explanation for the continuation of investors’ risk appetite is that, while nominal interest rates have risen over the past couple of years, they have been outpaced by inflation; the real returns on cash and bonds have not been attractive. That has maintained the allure of risky assets.Now inflation has fallen, real interest rates are mildly positive in the US, making cash and bonds theoretically more appealing. But investors do not expect this to last. The stock market rally in November was driven by the widespread expectation that the Federal Reserve would be able to start cutting rates in 2024.But there is more to the frenzy than the prospect of a change in monetary policy. Surveys show that American voters are not happy with their economy, even though it has actually been doing remarkably well. In the third quarter, gross domestic product grew at an annualised rate of 5.2 per cent. The economy has been supported by fiscal policy, with the budget deficit running at about 5.7 per cent of GDP in the current year. In other words, American pocketbooks are sufficiently flush that they can afford a little gamble.So what could finally bring the speculative era to an end? In any individual asset class, a collapse usually arrives when investors lose confidence in the fundamentals that have been driving prices higher. For tech stocks, this could occur if regulation (or geopolitical tensions) severely damage their profits outlook, For cryptocurrencies, regulation is also a risk, as is the collapse of an exchange that results in big losses for institutional investors. However, it does not seem as if the boom in tech stocks and crypto is being driven by the use of large amounts of leverage. Historically, the trigger for a more general collapse in risk appetites has been a tightening in credit conditions. That was the reason for the plunge in mortgage-backed securities in 2007 and 2008, which then filtered through to concern about the health of the banking system. So it might be that a sharp fall in tech stocks or cryptocurrencies would simply cause speculators to switch to another asset class. A more general collapse in risk appetite may require a really dramatic geopolitical event, such as war between the US and China over Taiwan, or a central bank miscalculation in monetary policy, either by failing to contain inflation or being too tight for too long and causing a deep recession. These may seem like extreme outcomes but it usually takes an explosion to kill a movie monster.  More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.European plans of creating a battery supply chain for electric cars independent of China face big delays as companies focus on the US market because of clean energy subsidies, a top manufacturer has warned. Chris Burns, a former Tesla engineer who heads Australian battery materials producer Novonix, told the Financial Times that the US Inflation Reduction Act was drawing producers away from Europe.Novonix, which manufactures the battery component graphite that is vital for the electric car transition, plans to focus on the US market because of incentives in the $369bn act, which the EU and UK have failed to match.“We’ve always looked at expansion into Europe but financing becomes the biggest challenge,” said Burns. “Our focus is on delivering the Riverside site [in Tennessee where it intends to produce graphite] and starting the next site in North America. It will keep us more than busy to the end of this decade.”Burns’s comments highlight the challenge Europe faces in building a supply chain independent of China, the world’s leading supplier of graphite and other raw materials needed for batteries, without an injection of subsidies.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 challenge is particularly daunting for the anode component of the battery, which is made out of graphite, as China controls 75 per cent of this part of the supply chain, according to Benchmark Mineral Intelligence. China’s manufacturers are increasingly targeting Europe and nearby regions for expansion after Washington moved to curb their presence in the US with tougher regulations. Beijing also increased export controls on graphite in October. Shanghai Putailai, a manufacturer of battery materials, announced in May plans to invest $1.3bn in building a plant in Sweden, while Chinese rival Ningbo Shanshan is weighing a similar investment in Finland. In addition, Canadian battery materials group SRG Mining, which has partnered with Chinese technology group C-One, said it plans to build a $300mn-$500mn facility in Morocco to serve the US and European markets.Novonix is aiming to produce 20,000 tonnes of graphite a year at Riverside in Tennessee before expanding further in North America to 150,000 tonnes annually. Investors in Novonix include Korean battery maker LG Energy Solutions and Phillips 66, the US oil refining group that provides a critical source of non-Chinese coke needed to make graphite from the UK’s Humber refinery.“We’ve looked at Europe and the UK on the idea of sourcing from Humber,” Burns said. “But those plans will be in the future.”Burns said Novonix could start drawing up plans for a European plant later this decade but that would depend on commitments from carmakers and cell manufactures to buy its future supply. More