Aurelia Butler

While historically common (1960s) and adopted by some nations (e.g., Poland), Germany’s current economic situation presents obstacles.Germany’s sluggish economic growth is a key obstacle. The country is projected to grow at an average rate of just 0.5% annually in the coming years, far below the levels required to accommodate a substantial increase in defense expenditure without impacting other sectors. Historically, faster economic growth allowed Germany and other nations to manage high defense spending more effectively, as rising GDP inherently increases government revenue. Without accelerating economic growth, Germany would need two decades to gradually increase defense spending to 4% of GDP, a timeline that is politically and strategically impractical, Commerzbank added.Reducing spending in other areas of the federal budget offers a partial solution, but the scope for such savings is limited. To close the gap through budgetary cuts alone, Germany would need to reduce federal civilian spending by nearly 20% over four years. Potential savings from social spending cuts and government efficiency improvements would be insufficient to fully fund increased defense spending. While reallocating funds from climate initiatives, such as through more efficient carbon pricing, could generate savings, this would likely face significant political opposition.Financing the defense increase through debt is another option, but it raises legal and economic concerns. Such an approach would nearly double Germany’s budget deficit from 2% to 4% of GDP, violating European debt rules and the constitutional debt brake. The current reliance on shadow funds to finance core state tasks like defense is unsustainable in the long term, emphasizing the need for these expenditures to be integrated into the regular budget.Germany’s rising risk premiums on government bonds further complicate debt-based financing. As noted by Commerzbank, weak economic growth has already led to noticeable increases in financing costs for government bonds. To ensure sustainable debt levels, structural reforms are crucial to boost economic growth and tax revenue. Increasing productivity and investing in growth sectors can reduce the burden on public finances and improve the country’s ability to fund higher defense spending. More

Argentina achieved a record $18.9 billion trade surplus in 2024, according to official data released on Monday, which largely coincided with libertarian President Javier Milei’s first full year in office, reflecting the impact of his economic policies.Milei’s administration inherited spiraling inflation, depleted international reserves, and extensive economic imbalances that led to a very high probability of a credit event, according to Moody’s. “Decisive fiscal adjustment, alongside measures to halt monetary financing were put in place and have proven effective in addressing imbalances,” it said. Argentina’s financial markets have been buoyant due to Milei’s tough “zero deficit” policies, cooling inflation and the government’s commitment to meet its debt obligations.Moody’s upgraded Argentina’s credit rating for the first time in five years, following a downgrade in 2020 as disrupted debt restructuring talks amid the global pandemic increased the country’s risk of slipping into default.Argentina’s outlook has also been revised to “positive” from “stable” on Friday, as the government continues to make progress on its macroeconomic stabilization program. More

The East-African country has been struggling with heavy debt and looking for new financing lines since last year due to nationwide protests against proposed tax increases. Domestic financing costs have started to decline amid a monetary easing cycle and this could continue if the Kenyan government effectively manages its fiscal consolidation, opening doors for external funding options, the report said.”Given low inflation and a stable exchange rate, there is potential for further reductions in domestic borrowing costs as past monetary policy rate cuts pass through to lower long-term borrowing costs,” Moody’s said. The agency added that a new International Monetary Fund program would enhance Kenya’s external financing while other multilateral creditors such as the World Bank will continue to be significant financing sources, even without the IMF funding.The agency affirmed Kenya’s local and foreign-currency long-term issuer ratings at “Caa1”, citing still elevated credit risks driven by very weak debt affordability and high gross financing needs relative to funding options. More

In the absence of clarity on U.S. trade policy, “risk-on should persist,” strategists at MRB Partners said in a Friday note, underpinned by solid U.S. economic growth and gradually strengthen in the rest of the world. But the downside of this economic outlook is that “it will put a floor under DM [developed market] inflation (and bond yields), with the risks tilted to the upside in the U.S.,” they added.While Trump’s recent remarks have many breathing a sigh of relief as the president didn’t come out swinging on day one in office, “President Trump made clear during his campaign that tariffs were coming, and he has spent his first week issuing a number of statements about upcoming tariffs and other trade restrictions (and taxes, etc.),” the strategist said. Despite MRB Partner’s base-case scenario that U.S. tariffs will be applied “selectively and moderately,” trade restrictions are likely to lead to higher inflation just as they did during the first Trump administration.While the economic picture for the U.S. in the 2025 is far more comforting than that of 2017 –when Trump first took office and the U.S. was still struggling with a negative output gap, which was deflationary– the inflationary backdrop is more acute increasing the risk the spillover from higher tariffs to inflation will be greater this time.   “The U.S. economy is more inflationary and wage pressures much greater than in the late-2010s, so the spillover into other areas of the CPI basket will be greater this time,” MRB said. The big worry, according to the strategists, is that U.S. and global financial markets are “not priced for such an outcome, and not by a long shot.””U.S. asset prices and the dollar are both discounting a good economic outcome, yet such growth is somehow not expected to cause higher inflation,” they said. Should this outcome become a reality and Treasury yields break to the upside, then investors will need to de-risk, they added. More

WASHINGTON (Reuters) -The U.S. State Department issued a “stop-work” order on Friday for all existing foreign assistance and paused new aid, according to a cable seen by Reuters, after President Donald Trump ordered a pause to review if aid allocation was aligned with his foreign policy.The cable, drafted by the Department’s foreign assistance office and approved by Secretary of State Marco Rubio, said waivers have been issued for military financing for Israel and Egypt. No other countries were mentioned in the cable.The move risks cutting off billions of dollars of life-saving assistance. The United States is the largest single donor of aid globally – in fiscal year 2023, it disbursed $72 billion in assistance.Just hours after taking office on Monday, Trump ordered a 90-day pause in foreign development assistance pending a review of efficiencies and consistency with his foreign policy but the scope of the order was not immediately known.The State Department cable said effective immediately, senior officials “shall ensure that, to the maximum extent permitted by law, no new obligations shall be made for foreign assistance” until Rubio has made a decision after a review.It says that for existing foreign assistance awards stop-work orders shall be issued immediately until reviewed by Rubio.”This is lunacy,” Jeremy Konyndyk, a former USAID official who is now president of Refugees International, said. “This will kill people. I mean, if implemented as written in that cable … a lot of people will die.””There’s no way to consider this as a good-faith attempt to sincerely review the effectiveness of foreign assistance programming. This is just simply a wrecking ball to break as much stuff as possible,” Konyndyk said.Trump’s order is unlawful, argued a source familiar discussions in Congress on the move. “Freezing these international investments will lead our international partners to seek other funding partners – likely U.S. competitors and adversaries – to fill this hole and displace the United States’ influence the longer this unlawful impoundment continues,” the source said on condition of anonymity.WAIVERS A USAID official, who requested anonymity, said officers responsible for projects in Ukraine have been told to stop all work. Among the projects that have been frozen are support to schools and health assistance like emergency maternal care and childhood vaccinations, the official said. Across the board, “decisions whether to continue, modify, or terminate programs will be made” by Rubio following a review over the next 85 days. Until then Rubio can approve waivers. Rubio has issued a waiver for emergency food assistance, according to the cable. This comes amid a surge of humanitarian aid into the Gaza Strip after a ceasefire between Israel and Palestinian militants Hamas began on Sunday and several other hunger crises around the world, including Sudan. But Konyndyk said emergency food assistance was just a minority of all humanitarian assistance, adding that nutrition, health and vaccination programs will have to stop, as would relief aid to Gaza and Syria as well as services to refugee camps in Sudan.”It’s manufactured chaos,” said a former senior official with the U.S. Agency for International Development (USAID), speaking on condition of anonymity. “Organizations will have to stop all activities, so all lifesaving health services, HIV/AIDS, nutrition, maternal and child health, all agriculture work, all support of civil society organizations, education,” said the official.The State Department cable also said waivers have so far been approved by Rubio for “foreign military financing for Israel and Egypt and administrative expenses, including salaries, necessary to administer foreign military financing.”Israel receives about $3.3 billion in foreign military financing annually, while Egypt receives about $1.3 billionOther states identified for such financing in 2025 include Ukraine, Georgia, Estonia, Latvia, Lithuania, Taiwan, Indonesia, the Philippines, Thailand, Vietnam, Djibouti, Colombia, Panama, Ecuador, Israel, Egypt and Jordan, according to a request to Congress from former President Joe Biden’s administration. That request also said foreign military financing would “also seek to bolster the Lebanese Armed Forces’ ability to mitigate instability and counter malign Iranian influence.”The Lebanese military is currently trying to deploy into the south of the country as Israeli troops withdraw under a ceasefire deal that requires Iran-backed Hezbollah weapons and fighters to also be removed from the area. More

“The upshot is that while an appreciating dollar is a headwind for the world economy in the short run, it is usually not as harmful as often suggested,” economists at Capital Economics said in a recent note. The U.S. dollar has appreciated by 7% in trade-weighted terms compared to a year ago, reaching a fresh record high. In real terms, the dollar is the strongest since the Plaza Accord in 1985.As most traded goods are priced in dominant currencies, chiefly the U.S. dollar, as the greenback strengthens, trade becomes more expensive globally.While a “strong dollar poses a headwind to trade through this ‘invoice channel’, the share of trade that is negatively affected tends to be overstated,” the economists added.Services trade, which accounts for a fifth of overall world trade, is much less affected by dollar strength. While falls in commodity prices, can mitigate increases in import prices, potentially dampening inflationary impacts.Financial conditions tightening from dollar strength, meanwhile, pose a smaller threat to emerging markets than in the past, the economists said, with currency risks at their lowest levels in decades. More

DAVOS, Switzerland (Reuters) – British industry and energy minister Sarah Jones said that meetings in Davos this week with CEOs considering where to make their next investment had been positive as the government took its growth mantra to the Swiss mountains.”People are enthusiastic with the message that they’re getting from the government … what people want to see is evidence that we mean it,” Jones told Reuters on the sidelines of the World Economic Forum annual meeting.Official data has shown Britain’s economy stagnated in the three months to September and the Bank of England has forecast that it flatlined again in the last three months of 2024, adding to pressure on the government, which faced a recent steep rise in borrowing costs as a result of a wider bond market wobble.”Of course businesses are interested in what’s happening with interest rates, what’s happening with taxation, all of these things,” Jones said, speaking on Thursday. “Regulation … just knowing what the rules of the game are, and understanding who to talk to as well, and how to navigate your way through investing in the UK.” Although Britain’s high-profile mission to Davos to rally support for its economic plans gave investors and financiers some encouragement, several told Reuters they needed to see the government deliver on growth rather than just talk about it.Senior bankers and executives, who spoke on condition of anonymity, said there was a worried mood in the business community and one way to make investment in Britain more attractive was by making it more appealing to entrepreneurs.One Davos attendee told Reuters that a change announced on Thursday to the rules around how wealthy, often foreign residents, pay tax on overseas income was “a small step in the right direction”.Concerns over Britain’s debt levels have shown up in the bond markets, adding to its borrowing costs at the start of the year before they eased more recently. Official data this week showed Britain ran a bigger-than-expected budget deficit in December, swelled by debt interest costs and a one-off purchase of military homes.”In the end, to make debt sustainable you’ve got to grow the economy,” finance minister Rachel Reeves told Reuters on Thursday. “We are taking out those barriers that have stopped businesses investing and growing in Britain,” Reeves said, adding: “I’m confident we can get those growth numbers up.” The worry for businesses is that Reeves may have little choice but to make more spending cuts to keep her fiscal pledges, piling more pressure on the economy, one executive said. More

WASHINGTON (Reuters) -U.S. existing home sales increased to a 10-month high in December, but further gains are likely to be limited by elevated mortgage rates and house prices, which are keeping many prospective buyers on the sidelines.Despite the bigger-than-expected rise reported by the National Association of Realtors on Friday, home sales in 2024 were the lowest in three decades. The median house price last year hit a record high of $407,500. While housing supply has improved, it remains below pre-pandemic levels.”With mortgage rates close to 7% and generally soft homebuying sentiment, strength in existing home sales is unlikely to be sustained,” said Alice Zheng, an economist at Citigroup (NYSE:C). “We do not expect much further upside for housing demand near-term.” Home sales rose 2.2% last month to a seasonally adjusted annual rate of 4.24 million units, the highest level since February. Existing home sales are counted at the closing of a contract, and December’s sales likely reflected transactions that took place at least three months earlier when mortgage rates were relatively low.  Economists polled by Reuters had forecast home resales would rise to a rate of 4.19 million units. Sales increased in the densely populated South, the West and Northeast, but fell in the Midwest. Sales surged 9.3% on a year-on-year basis, the largest gain since June of 2021, mostly driven by transactions for houses worth $500,000 and above. A total of 4.06 million previously owned houses were sold last year, the lowest number since 1995.A survey from mortgage finance agency Fannie Mae (OTC:FNMA) on Wednesday predicted weak existing home sales in the first half of the year, noting that “new homes are now priced competitively with existing homes and are far more available.” It forecast the popular 30-year fixed-rate mortgage would average 6.7% in the first quarter and edge down to 6.6% in the second quarter.Mortgage rates increased late last year in tandem with U.S. Treasury yields, which have jumped amid economic resilience, especially in the labor market, and investor worries that President Donald Trump’s plans for tax cuts, broad tariffs and mass deportations could fan inflation.The Federal Reserve has scaled back its projected interest rate cuts for this year to only two from the four it estimated in September, when it launched its policy easing cycle. The average rate on a 30-year fixed-rate mortgage is just below 7% having risen from as low as 6.08% at the end of September.The U.S. central bank’s cautious approach to rate cuts this year was underscored by a separate report from S&P Global showing a rise in inflation in January, with businesses paying higher prices for inputs and passing on the increased costs to consumers. Consumers’ inflation expectations also jumped in January, a report from the University of Michigan showed, amid fears of higher prices for goods should the Trump administration press ahead with tariffs on imports.Consumers’ one-year inflation expectations rose to an eight-month high of 3.3% from 2.8% in December. Long-run inflation expectations climbed to 3.2% from 3.0% last month. Progress lowering inflation to the Fed’s 2% target has virtually stalled, though underlying price pressures subsided in December.AFFORDABILITY HEADWINDS U.S. stocks were trading slightly lower. The dollar slid against a basket of currencies after Trump said on Thursday his conversation with Chinese President Xi Jinping last week was friendly and he thought he could reach a trade deal with China. Trump has, however, promised tariffs on Canadian and Mexican goods in February. U.S. Treasury yields declined.”Inflation data make it unlikely that the Fed will cut rates at the March meeting and the probability of a cut in May is a coin flip,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:LPLA). “As rates remain elevated, housing affordability will be a major headwind for potential homebuyers.”While the stock of houses on the market has improved compared to 2023, entry-level homes remain scarce. That is keeping home prices elevated.The median existing home price shot up 6.0% from a year earlier to $404,400 in December. It increased 4.7% to a record high of $407,500 in 2024. Most of the single-family homes sold in December were in the $250,000-$750,000 price range. Housing inventory fell 13.5% to 1.15 million units last month, which is typical in winter. Supply increased 16.2% from one year ago. Inventory needs to rise by roughly 30% to return to pre-pandemic levels. At December’s sales pace, it would take 3.3 months to exhaust the current inventory of existing homes, up from 3.1 months a year ago. A four-to-seven-month supply is viewed as a healthy balance between supply and demand.Properties typically stayed on the market for 35 days in December, compared to 29 days a year ago. First-time buyers accounted for 31% of sales versus 29% a year ago. They made up a record low of 24% in 2024. Economists and realtors say a 40% share is needed for a robust housing market.All-cash sales constituted 28% of transactions last month, down from 29% a year ago. Distressed sales, including foreclosures, represented only 2% of transactions, unchanged from last year.”The upshot is that buying activity should remain stagnant,” said Ruben Gargallo Abargues, an assistant economist at Capital Economics. More