Aurelia Butler

LONDON (Reuters) -Economists at UK-based banks Barclays (LON:BARC) and NatWest believe the U.S. Federal Reserve could ramp up the pace of its interest-rate rises in March, by delivering a half-point hike, following data on Friday a key gauge of inflation. NatWest said on Friday it also expects 25-basis point hikes at the May and June meetings, which would take the terminal rate to 5.75%, up from an earlier estimate of 5.25%. “Given (Friday’s) inflation backdrop, and the fact our monthly core inflation profile now shows the Fed’s preferred core PCE deflator holds above 4% y/y through July, we are raising our Fed funds terminal rate forecast to 5.75%,” said NatWest Markets chief U.S. economist Kevin Cummins (NYSE:CMI) in a note on Friday. Barclays on Monday also said persistent inflationary pressures and economic resilience could lead the Fed to hike rates by 50 basis points next month, especially if the non-farm payrolls data due before the Fed’s meeting in March was strong.”The bond market has moved to “higher for longer,” feeding negative reactions in credit,” the bank said.Economic data had indicated inflation was starting to slow, prompting the Fed to downshift to a quarter-point rate rise at its Jan. 31-Feb.1 policy meeting, but the numbers since then may have thrown into doubt Fed chair Powell’s view that the “disinflationary process” has begun. Strong labour market data, sticky consumer prices, rising producer prices and now accelerating PCE price index – the Fed’s preferred measure of inflation – have prompted markets to price in additional rate hikes and price out rate cuts at the end of the year. Money markets now price in a terminal Fed funds rate of around 5.4% by the July meeting, up from 4.50-4.75% currently, according to Refinitiv data. That’s up from an estimated peak of 5.2% just two weeks ago.NatWest and Barclays, as well as a raft of other banks, including Goldman Sachs (NYSE:GS) believe there will be more rate hikes from the Fed. More

WASHINGTON (Reuters) – U.S. House Republicans are eyeing $150 billion in spending cuts that reflect a hardline drive to target education, healthcare and housing – particularly efforts to address racial inequities that conservatives deride as “woke” – as they push forward in talks on the federal debt ceiling.House of Representatives Budget Committee Chairman Jodey Arrington said Republicans are assembling a budget along the lines of a budget proposal developed by Russell Vought, who served as Republican President Donald Trump’s budget chief.”It is consistent with what’s in his budget,” Arrington said in an interview. The congressman, whose party controls the House, did not provide specifics of what cuts he would suggest to his fellow Republicans, who return to Washington on Monday after a two-week break.Republican House Speaker Kevin McCarthy has vowed not to allow an increase in the $31.4 trillion legal limit on federal borrowing without an agreement from President Joe Biden’s Democrats in Congress to rein in federal spending. Failing to lift the debt ceiling could trigger a default on the federal government’s debt that would take a heavy toll on the American and probably world economies. A prolonged 2011 debt-cap standoff led to a cut in the government’s top-tier credit rating.During Biden’s State of the Union speech early this month, Republicans loudly vowed not to pursue cuts to the Social Security retirement or Medicare healthcare programs. They also mostly oppose military cuts. That leaves them scouring only a sixth of the budget for cuts.Arrington said the $150 billion in cuts he is eyeing would mostly hit nondefense discretionary spending, whose programs cost about $900 billion in the last fiscal year ended Sept. 30. Even eliminating those programs wouldn’t erase the roughly $1.6 trillion deficit – a measure of how far the government runs into the red each year.BALANCE ‘ASPIRATIONAL’That makes the conservative goal of a balanced budget within 10 years “aspirational” for now, Arrington said. Vought, whose plan also calls for $150 billion in cuts, said Democratic control of the Senate makes limited austerity more politically realistic.”We’re in divided government. So what’s the easiest place to cut spending? It’s the bureaucracy, and that’s where we want to focus the fight,” Vought said in an interview, adding that he would go after programs he considered “significantly woke and unaccountable.”Vought, who directed the Office of Management and Budget between 2019 and 2021 and now heads a conservative think tank, said the cuts he proposes would eventually slice the deficit by just a third if they were sustained for 10 years.Biden and Senate Majority Leader Chuck Schumer say they will not discuss spending cuts until after the debt ceiling is raised, which is needed to cover the costs of spending and tax cuts previously approved by Congress.Nonetheless, Treasury Secretary Janet Yellen said in an interview the fiscal year 2024 budget Biden plans to unveil on March 9 would contain “substantial deficit reduction over the next decade.” TARGET LISTVought’s proposals move the debate forward from the back-and-forth on Social Security and Medicare that dominated much of the past month.He did not provide a full accounting of the proposed $150 billion in cuts, but said it included about $25 billion from the Department of Education, including what he called “woke” policies such as score-improvement programs and culturally responsive schooling.Republicans have increasingly used “woke” as a pejorative term regarding liberal views on race, gender and sexuality, for example attacking school courses about U.S. racial injustice and LGBTQ rights.Vought said he would seek cuts to the departments of Housing and Urban Development and Health and Human Services, as well as to foreign aid, and to Centers for Disease Control and Prevention programs aimed at preventing chronic and sexually transmitted diseases.He said his ideas have been best received in the conservative House Freedom Caucus.Arrington said his goal is to return domestic spending to its fiscal 2022 level, while keeping defense spending flat, in the fiscal 2024 budget proposal House Republicans aim to unveil by April 15.He said his main priority is producing a 2024 budget that can serve as a baseline for years of spending reductions.”You can save over $1.5 trillion over that 10 years,” he said. “That’s real savings.”Another Budget Committee Republican, Freedom Caucus member Ralph Norman, described in general terms a debt-ceiling playbook, backed by other conservatives, that aligned with Vought’s plan.Like other committee hardliners, Norman wants to cut nondefense discretionary spending to pre-pandemic levels. The conservatives also want to hold defense spending steady and increase outlays on security along the U.S.-Mexico border.McCarthy spokesman Mark Bednar said federal spending growth was “entirely unsustainable, and House Republicans were elected to bring it to an end.”    The House Budget Committee’s top Democrat, Brendan Boyle, expressed skepticism that the hardliners’ plan would win wide backing: “Republicans needed 15 rounds just to elect a speaker, so I can’t imagine they will have an easy time advancing a budget that all of their members will support.”    But budget committee and Freedom Caucus member Bob Good, one of 20 hardline conservatives who forced McCarthy to undergo 15 floor votes before being elected House speaker, said the political drama surrounding the speakership election should empower McCarthy to take a hard position with Biden and Schumer.     “When Kevin McCarthy says Republicans won’t vote for doing what we’ve always done and just raising the debt ceiling without meaningful spending cuts and reforms, I think the president and the Senate majority leader will recognize that he’s telling the truth,” Good said. 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BEIJING (Reuters) – China’s factory activity is expected to have continued to grow in February, a Reuters poll showed on Monday, suggesting that the flashes of domestic demand seen since the zero-COVID policy ended are now strong enough to rekindle upstream sectors.Domestic orders and consumption drove output higher and saw economic activity in the world’s second-largest economy swing back to growth in January, and economists expect manufacturers to have consolidated that position now that the country’s COVID-19 epidemic has “basically” ended.The official manufacturing purchasing managers’ index (PMI) is expected to have improved to 50.5 in February, compared with 50.1 in January, according to the median forecast of 29 economists in a Reuters poll.An index reading above 50 indicates expansion in activity on a monthly basis and a reading below indicates contraction. The official manufacturing PMI, which largely focuses on big and state-owned firms, and its survey for the services sector, will be released on Wednesday.Despite COVID passing through the population faster than economists expected following the abandonment of the government’s strict “zero-COVID” policy in early December, factory gate prices fell in China in January, suggesting the country’s manufacturing sector was still struggling to recover.Optimism is building, however, and Goldman Sachs (NYSE:GS) wrote in a note on Sunday that it expects “a strong NBS manufacturing PMI reading of 51 in February,” owing to “continued improvements in steel demand and coal consumption.” On Friday, China’s central bank announced that the domestic economy is expected to generally rebound in 2023, although the external environment remains “severe and complex.”The People’s Bank of China also pledged to start improving social expectations and boosting confidence, with a focus on supporting the expansion of domestic demand. More

Three decades ago, China’s annual economic output was about $433bn in current dollar terms, making its economy roughly the size of an Austria or South Africa today.It is now comfortably the world’s second biggest economy — with current-dollar gross domestic product of $17.7tn — and in the post-financial crisis era it has easily been the single biggest contributor to global GDP growth. Between the beginning of 2010 and the end of 2020, China’s economy grew by about $11.6tn in current-dollar terms. That’s the equivalent to adding about six and a half Russias, almost four UKs or Indias, nearly three Germanys, more than two Japans, or more than 50 Greeces. It’s like adding an Indonesia every year for a decade. Let’s set aside quibbles about the accuracy of Chinese economic data using current dollars etc. The point of this numberwang is to show that China has clearly been THE essential engine of global economic growth for the past decade plus.Why are we going over this again? Well, a few weeks ago we wrote about the IMF’s Article IV report on China. FT Alphaville subsequently had a chat with Sonali Jain-Chandra, the IMF’s mission chief for China, to dig a bit deeper into some of the issues (such as the ongoing property-market shenanigans) and find out what we should be thinking about that doesn’t necessarily hit the headlines. Our biggest takeaway was that the IMF has become much gloomier on the longer-term growth potential of China, having marked down forecasts for 2024-28 by more than a percentage point, decelerating to just 3.4 per cent by 2028. Here’s a chart showing the most recent forecasts versus those the IMF made in the last Article IV report a mere year ago, and the one from 2021.As Jain-Chandra pointed out, some of this was inevitable. But it is also a consequence of policy choices — and with the right policies the slowdown can be ameliorated. Here’s her view: “As the Chinese economy reaches closer to the frontier it is natural that growth would slow down from the 8-10 per cent growth seen in the past few decades. A slowdown was therefore inevitable, but that does not mean that higher than expected growth is not within reach. In fact our analysis shows that China has the potential to grow faster than our current medium-term projection if it adopts a comprehensive set of reforms aimed at boosting productivity and counteracting a declining labor force.”A separate “selected issues” report published after the Article IV puts more flesh on the bone. The main issues are well known. A rapidly ageing population means much slower labour-force growth in coming years, and productivity growth has already fallen sharply as the easy gains from investment in technology and skills have mostly been made. But there are some idiosyncratic issues that is increasingly weighing down China’s economic potential, according to the IMF:What is unique in the case of China is the additional pressure from diminishing returns of investment-led growth, as excessive investment — driven by record-high domestic savings — has been channeled towards relatively less productive SOEs, activities such as real estate, which are less growth-enhancing over the longer term, and to further increase China’s already comparatively very large public capital stock. This pattern of investment in China has sped up the decline in aggregate productivity, and hence, potential growth.Basically, it looks like China has now found itself in a classic middle-income trap, a term the World Bank invented back in 2006 to describe the phenomenon of emerging economies that never, well, actually emerge. On one hand, almost all the countries that have managed to spring themselves free from the mid-income trap are in Asia: South Korea, Taiwan, Hong Kong and Singapore, for instance. On the other, the current global economic environment is radically different today. Globalisation, for example, is sputtering.If China’s economy keeps downshifting then the implications are . . . not great. Going by World Bank data — via the St Louis Fed’s FRED database — China accounted for more than one in three dollars of economic growth in the 2010-2020 period. It can probably claim indirect credit for a lot more, thanks to the knock-on impact in countries like Brazil and Australia. What could possibly replace it? Let’s just say we’re still sceptical India will prove the answer.The IMF is not the only institution worried about the global implications of a secular downshift to China’s growth. Last October FTAV highlighted how the BlackRock Investment Institute was also low-key freaking out about the longer-term outlook for China and what it might mean for the rest of the world.While the relaxation of Covid-caused lockdowns has improved China’s near-term economic outlook, BlackRock’s Alex Brazier and Serena Jiang reckon that China’s potential growth rate could fall to just 3 per cent by the end of the decade. In the past, when countries faced a slowdown, they could still rely on Chinese consumers and companies to buy up their cars, chemicals, machinery, fuel — even as consumers at home tightened their belts. And they could rely on China to continue supplying an abundance of cheap products as China’s rapidly growing working population enabled it to keep production costs low. Not so anymore. Recession is looming now for the US, UK and Europe. But this time, China won’t be coming to its own, or anyone else’s, rescue.It now looks like the US and Europe might escape recessions (fingers x’d). But the longer-term fallout from stalling Chinese growth could still be stupendous. More

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyIt took time but it is finally happening. Recent US economic data releases are inserting more forcefully the notion of “sticky inflation” into economic discussions. This comes after too many people — not just market participants and policymakers, but also a few economists — were inclined to prematurely declare victory in the important battle against the damaging price increases.The evolving deliberations, however, should go well beyond the immediate dynamics of price formation. They should also extend to structural issues, as tricky as these are.The initial surge in inflation was driven, first, by high food and energy prices and, subsequently, by broad-based price increases in the goods sector as a whole. Several items overshot, such as used cars, thereby setting the stage not only for a moderation but also an outright drop in their prices. As a result, too many rush to embrace continuous and orderly disinflation as the dominant theme of 2023.This reassuring picture seemed supported by January data releases on inflation and economic activity, fuelling the “immaculate inflation” narrative and revitalising some members of Team Transitory who had been vocal in 2021 before being humbled by the persistent inflation. Federal Reserve chair Jay Powell mentioned disinflation 11 times in the press conference that followed the February 1 policy announcement. He pointed markets to the upcoming Fed minutes for details on a possible dovish pivot in policy. Investors priced in not just a lower peak policy rate for this cycle but also cuts for the second half of the year. Stocks, bonds and Bitcoin rose in price.The rush to a comforting narrative reflected a mix of cognitive traps and unusual economic fluidity. It could not, however, withstand the subsequent upside data surprises for inflation, jobs and activity. Nor could it withstand last week’s release of minutes that said very little, if anything on a pivot and disinflation. Equities slid back while bond yields spiked higher.With measures of expected inflation also rising, Fed officials are being forced back to a more cautious tone with some even suggesting reversing the February 1 downshift in rate increases from 0.50 to 0.25 percentage points.There is now growing recognition that there is a limit to goods disinflation and that price increases in the services sector may prove quite stubborn. This better understanding of short-term inflation dynamics is a necessary step to avoid the Fed falling far behind for the third time in two years — a pattern that fuels the combined threat of persistently high and destabilising inflation, recession, job losses and widening inequality of income and opportunity. It is not sufficient, however. It needs to be accompanied by a stronger policy architecture and a constructive evolution in the policy debate away from the Fed being “the only game in town”, chasing an increasingly elusive and outdated inflation target. In my opinion, the fundamental medium-term characterisation of the US economy has shifted from one of deficient aggregate demand to one of deficient aggregate supply. Yes, the pandemic contributed to this but there is a lot more going on.Some of the driving forces include the overdue green transition in energy and elsewhere, changing globalisation, a multiyear quest to enhance supply chain resilience and a labour market that struggles to fill a record excess of job openings. Those who agree the supply side of the domestic and global economy is most deterministic for inflation, growth and social outcomes immediately confront two tricky issues. One is what to do about a Fed inflation target that is too low for such a world and yet hard to revise given that the world’s most important central bank has already undermined its credibility. The second is how to better incorporate policymaking agencies beyond the Fed in a co-ordinated fight against inflation. Congress needs to help: first, by enhancing Fed accountability and requiring it to update its policy framework, as well as follow the example of the Bank of England in structurally inserting outside views in its policy formulation process; and second, by formulating a more comprehensive approach to easing supply side constraints.The recent US policy advances on energy transition issues provide a foundation to build on for a future of high, inclusive and sustainable growth, together with genuine financial stability. Let’s hope the administration can secure sufficient congressional bipartisanship to take advantage of this important window. More

Joe Biden’s administration hopes to unleash a green revolution by offering hundreds of billions of dollars in subsidies to clean energy companies, but the US president’s flagship legislation also threatens to spark a fresh trade war.The Inflation Reduction Act, which was passed by US Congress last summer, earmarks around $369bn in grants, loans and tax credits for the rollout of renewable energy and clean technologies across the US. Since the law passed, $90bn of investment has been committed to clean energy projects in the country, ranging from solar panel factories to electric vehicle plants and battery hubs. And, across many sectors, companies are rewarded for building equipment nationally, or sourcing components and critical minerals from the US or countries that the US has a free trade agreement with. As a result, the law has alarmed US trading partners, including Europe and Japan, who fear they will lose out to the US on new jobs and business investment. French President Emmanuel Macron said recently that the new climate law threatened to “fragment the West”.European Union officials have also accused Washington of discriminating against European companies and breaking global trade rules overseen by the World Trade Organization — particularly in the electric vehicle sector, where companies score the full tax credit if they manufacture cars in North America.David Kleimann, a trade expert and visiting fellow at Bruegel, the European think-tank, says that, while the IRA is a welcome piece of climate legislation, it also includes “trade-distortive subsidies” including provisions to manufacture in the US, which are prohibited under World Trade Organization rules.In response, the EU is working on its own raft of green subsidies, beginning with proposals to loosen up the bloc’s strict state aid rules. However, corresponding subsidies on either side of the Atlantic have prompted concerns that companies will “subsidy shop” — playing governments against each other and locating their businesses in the most lucrative domain. Earlier this month, French finance minister Bruno Le Maire and German economy minister Robert Habeck staged a rare joint visit to Washington, DC, meeting with US trade representative Katherine Tai, commerce secretary Gina Raimondo and Treasury secretary Janet Yellen. Habeck said that, along with conveying the “European view of the problems” at the meeting, the pair had discussed concerns that the IRA could prompt a “bidding war on subsidies”. Le Maire said they had all agreed on the need for “full transparency about the level of subsidies and tax credits” awarded to companies. But some analysts have estimated that the overall level of subsidies awarded under the US legislation could be much higher than forecast by the Congressional Budget Office.“What’s fascinating about the structure of these subsidies and tax credits is that how big they are depends entirely on how responsive the consumers are, how responsive the companies are and what the economic conditions are,” says Chad Bown, of the Peterson Institute.“We’ve got a range of estimates of how big the subsidies could be, depending on how much we think consumers and companies [will] choose to access them.”There are also concerns that subsidies on both sides of the Atlantic could distort industries and potentially lead to overcapacity. Bown says an excess of renewable energy could be good thing. “It’s hard to imagine having too much clean energy,” he says. “Even if there was too much for the US market, [and] they had to dump it out there to the rest of the world.”With more clean energy available, it could reduce demand for oil, which he suggests would be a positive result.In addition, US officials argue that clean energy innovation and investment in the country would bring advantages to Europe and elsewhere by driving down clean energy costs and opening up opportunities for other investors.“The challenge of dealing with the climate crisis requires . . . a transformation of the global economy on a size and scale that’s never occurred in human history,” said John Podesta, the White House official in charge of rolling out Biden’s green subsidy package, last week. “So there’s plenty of room for everybody to participate in that.” More