Aurelia Butler

Good morning and happy new year. Welcome to the inaugural FirstFT of 2023.Moscow said a Ukrainian air strike on army barracks in the Russian-occupied town of Makiivka killed 63 soldiers, in one of the bloodiest blows to the Kremlin’s ground forces since the start of the war. The defence ministry said four high-explosive missiles struck the town’s temporary deployment base — a school building that stood near an ammunition dump and weapons cache. Two additional missiles were shot down by Russian air defences, it added, without saying when the attack occurred. Russian military bloggers suggested casualties were far greater than the official figures, claiming that hundreds of newly mobilised troops had died or were missing. While not taking credit for the strike, the Ukrainian military said in a Telegram post that the Makiivka attack took place on New Year’s Eve, killing 400 Russian soldiers and injuring 300. The air strike shows the damage western-supplied Himars missiles can inflict on Russian forces, who were forced to retreat in the face of a Ukrainian counter-offensive in the east and south last year. But it also underlines poor tactical judgment from the Russian army commanders, according to analysts.FT View: The goal for 2023 must be to give Kyiv all the aid it needs to bring the conflict to an end — on its terms, writes our editorial board. Five more stories in the news1. Japan to offer families ¥1mn per child to leave Tokyo As the government attempts to reverse decades of demographic decline, economic migration and the lure of the world’s biggest metropolis, the Japanese government will offer families up to ¥1mn ($7,600) per child if they swap overcrowded Tokyo for municipalities outside the city, according to officials familiar with the plan.2. Hong Kong home sales drop to lowest level in 15 years Hong Kong home sales have fallen 40 per cent year-on-year to their lowest level since the 2008 global financial crisis, data from the local land registry and projections from real estate agencies have shown. The slump in one of the world’s priciest real estate markets is expected to only bottom out by mid-2023.3. Recession predicted to hit a third of the world this year A third of the global economy will be hit by recession this year, the head of the IMF has said, as she warned that the world faces a “tougher” year in 2023 than the previous 12 months. The US, EU and China are all slowing simultaneously, said IMF managing director Kristalina Georgieva.4. Turkish exports hit record high in 2022 Turkey recorded a 13 per cent rise in exports by value, with sales hitting $254bn in 2022, President Recep Tayyip Erdoğan said yesterday. The new record comes as the slump in the value of the lira made businesses’ products more competitive overseas, with the country also benefiting from closer economic ties to Russia. 5. Commodities boom raises fear of big losses for retail investors Retail trading volumes in commodity futures and the largest commodity-focused investment funds surged in 2022. But while commodities have had a much better recent record than that of stocks and bonds, some market participants and analysts have voiced fears about retail traders wading in to a highly volatile market dominated by specialised players.The day ahead New US Congress sworn in When the 118th US Congress is sworn in on Tuesday, seven fresh faces will join the ranks of the 100-member Senate. Meet the newcomers, who include a hoodie-wearing stroke survivor, a Trump-backed author and an ex-mixed martial arts fighter. Related read: A handful of members of the hard-right and mostly pro-Trump Freedom Caucus have explicitly vowed to vote against lawmaker Kevin McCarthy becoming Speaker of the House. In memoriam Pelé’s family will hold a burial for the superstar Brazilian footballer after a procession through São Paulo. Across the world at the Vatican, Pope Emeritus Benedict XVI will lie in state at Vatican. (Independent, AP) What else we’re reading Business trends, risks and people to watch in 2023 FT reporters around the globe break down what to look for this year in the corporate world in sectors from energy to private capital and technology. Read our analysis to get a jump start on the new year.Go deeper: Don’t miss Alphaville’s 2023 outlook research report dumpMillennials shatter oldest rule in politics People have tended to become more conservative as they grow older. From the “silent generation” born between 1928 and 1945 to “Gen X”, who came along between 1965 and 1980, this pattern has held firm — until now. The change has striking implications for UK Conservatives and US Republicans.Taiwan’s military reforms fall short, experts say China’s more than two-decade push to build armed forces capable of realising its national ambitions has left Taiwan’s military dangerously outgunned. And the island’s recently announced conscription reform was little more than an emergency measure to end a chronic shortfall in military headcount, military analysts say.The start-ups seeking a cure for old age The fantasy of living forever has endured for centuries, from finding renewal in a fountain of youth to gaining immortality from a philosopher’s stone. But as many people now spend their last decades in poor health, scientists are on a quest to further increase not just lifespan but also healthspan: the number of healthy years we live.Stopping China’s growth cannot be a goal for the west Do we want China to fail? That question came up at a recent seminar Gideon Rachman attended for western policymakers and commentators. But the question instead should be: how do we manage the continuing rise of China? Gideon writes. Take a break from the news The clue 1-across on the latest cryptic crossword puzzle is: Mist shrouds river in flood (6). See if you can guess the answer. More

The UK will face one of the worst recessions and weakest recoveries in the G7 in the coming year, as households pay a heavy price for the government’s policy failings, economists say. A clear majority of the 101 respondents in the FT’s annual poll of leading UK-based economists said the inflationary shock caused by the pandemic and the Ukraine war would persist for longer in the UK than elsewhere, forcing the Bank of England to keep interest rates high and the government to run a tight fiscal policy. More than four-fifths expected the UK to lag its peers, with GDP already shrinking and set to do so for much or all of 2023.The result is expected to be an intensifying squeeze on household incomes, as higher borrowing costs add to the pain already caused by soaring food and energy prices.“The 2023 recession will feel much worse than the economic impact of the pandemic,” said John Philpott, an independent labour market economist. Others described the outlook for consumers — especially those on low incomes or mortgage deals that were set to expire — as “tough”, “bleak”, “grim”, “miserable” and “terrible”. “The combination of falling real wages, tight financial conditions and a housing market correction are as bad as it gets,” said Kallum Pickering, senior economist at Berenberg bank.

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The UK is not alone in facing these challenges: Kristalina Georgieva, the IMF managing director, warned at the weekend that a third of the global economy and half of the EU would be hit by recession this year. Most economists said the economy would at least return to growth by the end of the year as inflation ebbs, with Paul Dales, at the consultancy Capital Economics, asserting: “2024 will be much better than 2023.”But Britain’s downturn looks set to be both deeper and more prolonged. Forecasts compiled by Consensus Economics show UK GDP shrinking by 1 per cent in 2023, compared with a contraction of just 0.1 per cent for the eurozone as a whole and growth of 0.25 per cent in the US.The UK is unusually exposed to the global surge in energy prices and interest rates — with a reliance on gas that is not matched by storage capacity, and a high proportion of mortgage obliged to renew fixed-rate deals in any given year.The UK is also unusual in the extent to which its workforce has shrunk since the pandemic. Charlie Bean, a former BOE chief economist, said high inflation was likely to be more persistent in the UK than elsewhere, because its labour market was “unsustainably tight even in the absence of the Ukraine shock”. Anna Leach, deputy chief economist at the CBI, said this would “continue to apply a brake to growth for companies, drive industrial unrest and push up domestically-generated inflation”. “The UK suffers from an energy shock as bad as Europe’s, an inflation problem . . . as bad as the US and a unique problem of lack of labour supply from the combination of Brexit and the NHS crisis,” said Ricardo Reis, a professor at the London School of Economics.But even once the recovery was under way, most said Britain would continue to lag because of fundamental problems that policy mistakes had made worse — poor productivity, weak business investment, government neglect of public services and the damage to trade done by Brexit.“The UK is in a structural hole, not a cyclical downturn,” said Diane Coyle, professor at Cambridge university, who saw little prospect of an improvement in living standards “unless some sanity returns to our trade relations with the EU” and “until we have a government with an adequately long-term economic strategy it can get through parliament”.Many saw similarities with the policy missteps and industrial conflict of 1970s and said the recovery, once it began, would be a feeble one, unfolding “in the long shadow of Brexit” and in the absence of any plan to boost long-term growth.More than a quarter of respondents said Brexit would be a continuing drag on growth, with Jonathan Portes, professor of economics and public policy at King’s College, London, calling it a “slow puncture for the UK economy”. Several said its corrosive effects would become increasingly clear to voters.“When they visit the EU on holiday, they will be surprised at how unable they are to afford things that they used to be able to,” said John Llewellyn, partner at the advisory group Independent Economics.A significant minority said the UK was suffering from ministers’ outright incompetence.“By now, the economy is in much deeper trouble than it needed to be if it had been competently managed,” said Panicos Demetriades, a former governor of the Cypriot central bank, calling the UK “the ‘sick man’ of the G7”.Stephen King, senior economic adviser at HSBC, pointed to the “painful need to restore fiscal credibility in the light of the Truss/Kwarteng fiasco” and Ray Barrell, honorary professor of economics at Brunel university, said encouraging public sector strikes looked like “the last bid for middle-class votes by a failing government”. But while economists agreed on the UK’s bleak prospects, there was no consensus on what policymakers should do about it in the short term.The Bank of England has warned that interest rates will probably need to rise again in 2023 to return inflation to the 2 per cent target, but by how much, or for how long, is less clear. Jagjit Chadha, director of the National Institute for Economic and Social Research, said that with inflation set to fall rapidly from mid 2023, a “gradual” increase should be enough to hit the target in 2024, with “no need to jump in rapid steps to something much higher than 4 per cent”.Some fear the central bank could go too far. Kitty Ussher, chief economist at the Institute of Directors, said that because it took time for higher interest rates to take effect, people would not “fully believe that inflation is falling” until mid 2023. This could make the BOE feel “under pressure to keep taking action, running the risk of . . . an unnecessarily harsh recession”.Others warned that even if headline inflation fell rapidly, it would be a “slow grind” to reach the 2 per cent target. “The Bank will need to be tough to dampen core inflation,” said Jessica Hinds, economist at Fitch Ratings. The consistent message from several former BOE rate-setters — including Charlie Bean, Kate Barker, Michael Saunders and founder MPC member DeAnne Julius — was that wherever interest rates peak, they are unlikely to fall quickly. “Crucially, the recent upward shift in inflation expectations needs to be reversed,” Barker said. With elections approaching, the government will not want to raise taxes again after the massive fiscal consolidation announced in October.Vicky Pryce, chief economic adviser at CEBR, was among respondents who felt big tax changes in 2023 were unlikely, arguing that chancellor Jeremy Hunt had done enough to placate markets. She said: ‘Its [the government] own fiscal rules are in no way constraining.’ © Matt Alexander/PASome respondents felt this made big tax changes in 2023 unlikely, arguing that chancellor Jeremy Hunt had done enough to placate markets. “Its own fiscal rules are in no way constraining,” said Vicky Pryce, chief economic adviser at CEBR, while Yael Selfin, chief economist at KPMG, called it “counterproductive to increase the tax burden during a recession”.But others said even a small downgrade to the relatively optimistic forecasts of the Office for Budget Responsibility, the fiscal watchdog, could force the chancellor to reconsider, as it would erase his headroom against the target to set debt on a falling path as a percentage of GDP. The bigger question, say the economists, is whether the government can resist the growing pressure to raise public sector pay, given the spate of strike action, and prop up crumbling public services.“It’s likely that the government will eventually cave into public sector wage demands, in which case tax rises are inevitable,” said Martin Ellison, professor of economics at Oxford university.Despite deep gloom over the UK’s long-term prospects, some respondents found silver linings. Silvia Ardagna, economist at Barclays, noted that unemployment was likely to stay low despite the recession, with employers hoarding labour after their recent struggles to recruit.

Several former BOE rate-setters, including Charlie Bean, have said that wherever interest rates peak, they are unlikely to fall quickly. © Daniel Acker/Bloomberg

Bronwyn Curtis, a non-executive director at the OBR, was optimistic “that alternatives to Russian gas will accelerate”, while financial pressures could prompt labour market dropouts to return. Meanwhile, Susannah Streeter, an analyst at Hargreaves Lansdown, saw “tentative signs of greater co-operation with Europe”, while Ussher said that from spring onwards, there would be “a fillip to sentiment” from heating being turned off and benefits uprated in line with inflation.But despite these glimmers of hope, few expect the UK to lay the foundations for long-term growth in the year ahead. Ian Plenderleith, a former MPC rate-setter, said the recovery would look less like the emergence of green shoots, and more like “a bit of scrubland”.Richard Davies, director of the Economics Observatory and a former Treasury adviser, predicted that even once inflation had receded, prices would remain high and households would be under intense pressure. He added: “The real roots of prosperity come from productivity rising consistently. I am less optimistic here.” 

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Italy is the eurozone country most susceptible to a debt crisis as the European Central Bank raises interest rates and buys fewer bonds in the coming months, economists say.Nine out of 10 economists in a Financial Times poll identified Italy as the eurozone country “most at risk of an uncorrelated sell-off in its government bond markets”. Italy’s rightwing coalition government, which took power in October under prime minister Giorgia Meloni, is attempting to follow a path of fiscal rectitude. It has budgeted for the country’s fiscal deficit to fall from 5.6 per cent of GDP in 2022 to 4.5 per cent in 2023 and 3 per cent the following year.But Italian public debt remains one of the highest in Europe at just over 145 per cent of gross domestic product. Marco Valli, chief economist at Italian bank UniCredit, said the country’s “higher debt refinancing needs” and “potentially tricky” political situation left it most vulnerable to a sell-off in bond markets.Rome’s borrowing costs have risen sharply since the ECB started to increase interest rates last summer. The 10-year bond yield climbed above 4.6 per cent last week, almost quadruple the level of a year ago and 2.1 percentage points above the equivalent yield on German bonds.Meloni has expressed dismay at the ECB’s’ willingness to carry on raising rates despite the risks to growth and financial stability. “It would be useful if the ECB handled its communication well . . . otherwise it risks generating not panic but fluctuations on the market that nullify the efforts that governments are making,” she said at a press conference last week. The new Italian government had “given investors few reasons to worry for now”, said Veronika Roharova, head of euro area economics at Swiss bank Credit Suisse. “But concerns could resurface as growth slows, interest rates rise further and [debt] issuance picks up again,” she added.ECB rate-setters have insisted they will continue to raise rates in half-point increments during the early months of this year. Klaas Knot, Dutch central bank governor and one of the governing council’s hawks, told the FT the central bank was only just beginning the “second half” of its rate-increasing cycle. However, analysts believe the ECB is overestimating the risks to inflation — and underestimating the prospect of a recession. IMF managing director Kristalina Georgieva said at the weekend that half of the EU will be hit by recession this year. Four-fifths of the 37 economists polled by the FT in December forecast the ECB would stop raising rates in the first six months of 2023 and two-thirds predicted it would start cutting them the following year in response to weaker growth.On average they predicted that the ECB’s deposit rate would peak at just under 3 per cent, below the level investors are betting on as indicated by the price of interest rate swaps.A separate FT poll of more than 100 leading UK-based economists said that Britain would endure one of the worst recessions and weakest recoveries in the G7 in 2023. Central banks around the world have been raising rates sharply to tackle inflation, which has surged to multi-decade highs in many countries, as energy and food prices soared following Russia’s invasion of Ukraine and the ending of coronavirus pandemic lockdowns pushed up demand for goods and services. The ECB was slower than many western central banks to start raising rates, but since last summer it has tightened policy at an unprecedented pace, lifting its deposit rate from minus 0.5 per cent to 2 per cent in six months.“The ECB was too slow [in] recognising that inflation was not temporary, but is now getting up to speed,” said Jesper Rangvid, professor of finance at Copenhagen Business School. “I am still afraid, though, that ECB will not tighten enough because of troubles this would cause in Italy.”The ECB is due to start shrinking its €5tn bond portfolio by €15bn a month from March by only partially replacing maturing securities, putting further upward pressure on Italian borrowing costs. Ludovic Subran, chief economist at German insurer Allianz, said the eurozone risked a repeat of the bloc’s 2012 bond market meltdown “as fiscal capabilities are different across countries without the ECB’s heavy lifting”. Italian cabinet ministers have criticised the ECB over its aggressive monetary tightening. Defence minister Guido Crosetto wrote on Twitter that the ECB’s policies “made no sense” while deputy prime minister Matteo Salvini said higher rates “will burn billions in Italian savings”.Silvia Ardagna, chief European economist at UK bank Barclays, said Italy’s “high stock of debt, elevated fiscal deficit and need of additional energy support measures . . . makes markets very concerned”.The ECB has unveiled a new bond-buying scheme, known as the transmission protection instrument, which is designed to tackle an unwarranted rise in a country’s borrowing costs. However, more than two-thirds of the economists polled by the FT in December said they expected the ECB to never use it. Mujtaba Rahman, managing director for Europe for the consultancy Eurasia Group, said a deeper than expected recession next year “could put high-deficit, high-debt countries under even more pressure” adding that this would “probably make for a softer path for monetary policy by the ECB”. Additional reporting by Amy Kazmin in Rome More

JERUSALEM (Reuters) -The Bank of Israel raised its benchmark interest rate by half a point on Monday, and will likely continue its increases a bit more in coming months, saying it seeks to curb inflation running above 5%.The central bank as expected lifted its key rate to a 14-year high of 3.75% from 3.25%. In April, policymakers began raising the rate from 0.1% and have been aggressive during a front-loading process, but most analysts believe the tightening cycle is close to over.Bank of Israel Governor Amir Yaron said monetary policy was already “restrictive” but expressed concerns over inflation, even though it is lower than in much of the West. The labour market is tight and the new government is set to spend heavily to meet coalition agreements.While the central bank’s own economists project the key rate at 4% in a year’s time – meaning there would be just one more quarter-point hike – Yaron could not commit to that peak.Speaking to reporters, he said the pace of hikes would continue to be data dependent. “We won’t hesitate to raise rates further,” Yaron said, adding he expects inflation to start easing in the second quarter. “I believe that interest rates in general will have to remain at a high level.”Despite the rate hikes, Israel’s annual inflation rose to a 14-year high of 5.3% in November from 5.1% in October – well above the government’s 1%-3% annual target range and fuelling public anger at spiking living costs.The central bank’s staff sees inflation at 3% in a year, easing to 2% in 2024.”We are determined to reduce the inflation rate and to return it to within the target range,” Yaron said.A new government led by Benjamin Netanyahu, whose coalition partners have made hefty budget demands, took office this week. Yaron cautioned against a spike in the deficit and debt burden.”It is important that the new government acts with the necessary responsibility with regard to fiscal policy” and on public sector wage agreements, he said. “It is important to remember that the Israeli economy cannot take for granted the high regard from the rating entities and international financial institutions.”Israel’s economy grew an annualised 1.9% in the third quarter from the second quarter, slower than a 7.4% pace the prior three months.Growth is expected at 2.8% in 2023, revised down from 3%, and 3.5% in 2024, according to the Bank of Israel’s updated forecast. More

“We are not here for adventures,” he said, seeking to calm market jitters over the return of Lula.A former mayor of Sao Paulo, Haddad took office with the challenge of presenting a credible fiscal framework after Congress passed a package increasing Brazil’s spending cap to ramp up social expenditures. In his first speech in office, Haddad said the government would not accept the “absurd” 220 billion-real ($41.19 billion) primary deficit forecast in this year’s budget, indicating it will work to reduce it.He pledged to fight inflation, promising to send to Congress the proposal for a new fiscal anchor in the first half of the year seeking to ensure public debt sustainability.But he did not mention Lula’s decision the day before to extend a costly tax exemption on fuels, in what some saw as a striking political setback for the new minister. Prior to taking office, Haddad had stated that the measure – which has an annual impact of 52.9 billion reais – would not be extended.Speaking to journalists after the event, he said Lula asked for an extension so that a decision on resuming fuel taxes could be taken once the new board of state-owned oil company Petrobras is installed. The taxes boost federal revenue but harm Lula’s popularity. A lawyer with a master’s degree in economics and a doctorate in philosophy, Haddad has been viewed with distrust by the market for fear of uncontrolled spending.He sought to dispel these concerns on Monday, saying the harmonization of fiscal and monetary policy would happen “for sure.” Haddad said he will also try to democratize access to credit and establish a more transparent tax system.($1 = 5.3416 reais) More