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    U.S. and Mexico Try to Promote Trade While Curbing Flow of Fentanyl

    In her Mexico City visit, Treasury Secretary Janet L. Yellen sought to deepen economic ties while countering drug trafficking.The United States and Mexico sought to project a united front on Thursday in their efforts to deepen economic ties and crack down on illicit drug smuggling as the Biden administration looks to solidify its North American supply chain and reduce reliance on China.At the conclusion of three days of meetings in Mexico City, Treasury Secretary Janet L. Yellen announced that the U.S. and Mexico would begin working more closely to screen foreign investments coming into both countries with a new working group to weed out potential national security threats.The collaboration comes as the administration looks to ensure that allies such as Mexico are able to partake of the billions of dollars of domestic energy and climate investments that the United States is deploying. However, as the administration seeks closer cross-border economic integration, it wants to ensure that Mexico is not the recipient of potentially problematic investments from countries such as China.“Increased engagement with Mexico will help maintain an open investment climate while monitoring and addressing security risks, making both our countries safer,” Ms. Yellen said at a news conference on Thursday.In Mexico, Ms. Yellen has had to strike a delicate balance, pushing her counterparts there to work harder to confront fentanyl trafficking into the U.S. while trying to deepen economic ties at a time when China is also investing heavily to build factories there.Ms. Yellen has embraced Mexico, America’s largest trading partner, as a friendly ally during her trip — visiting drug-sniffing dogs and holding talks with top Mexican leaders. But there is growing frustration within the Biden administration over what officials perceive as President Andrés Manuel López Obrador’s unwillingness to invest in efforts to combat fentanyl trafficking in the region. An increasing number of U.S. officials have become more outspoken in recent months over the need to pressure Mexico to do more to crack down on fentanyl.“The illicit trafficking of fentanyl devastates families and communities and poses a threat to our national security while also undermining public safety in Mexico,” Ms. Yellen said.Nearly 110,000 people died last year of drug overdoses in the United States, a crisis that U.S. officials say is largely driven by the chemical ingredients for fentanyl getting shipped from China to Mexico and turned into the potent synthetic drug that is then trafficked over the southern border into the United States.Mr. López Obrador has generally rejected the notion that fentanyl is produced in his nation and described the U.S. drug crisis as a “problem of social decay.” He has argued that American politicians should not use his country as a scapegoat for the record number of overdoses in the United States. The growing number of fentanyl-related deaths have fueled calls by Republican presidential candidates to take military action against Mexico.In February, Anne Milgram, the Drug Enforcement Administration administrator, said her agency was still not receiving sufficient information from Mexican authorities about fentanyl seizures or the entry of precursor chemicals in that country, and that the United States was increasingly concerned over the number of laboratories used to produce fentanyl in Mexico.Both Republicans and Democrats are specifically concerned over a port in Manzanillo, Mexico, which they say is a prime hub for fentanyl precursors.Fernando Llano/Associated PressAnd in October, on the eve of Secretary Antony J. Blinken’s visit with President López Obrador in Mexico, Todd Robinson, the State Department’s assistant secretary of the bureau of international narcotics and law enforcement affairs, told The New York Times that the Mexican president was not acknowledging the severity of the drug crisis in the region.The Mexican president would rather be in the category of “someone who has a problem but doesn’t know it,” he said.Mr. Robinson, as well as officials in the Treasury Department, also believe Mexico must do more to bulk up its ports to intercept fentanyl precursors coming from China. Both Republicans and Democrats are specifically concerned over a port in Manzanillo, Mexico, that they say is a prime hub for fentanyl precursors.The United States in the meantime has increasingly relied on the tools of the Treasury Department to target drug organizations in Mexico that are trafficking the dangerous drug to the United States.Brian Nelson, the under secretary for terrorism and financial intelligence at the Treasury Department, said in an interview in October that the department would continue to use sanctions to pressure cartel organizations and suppliers of fentanyl chemicals.“We will continue to use our tools to map and trace the network’s suppliers of the precursor drugs that are flowing into Mexico from foreign countries, including China; the money laundering organizations that support the financial flows that enable this criminal enterprise,” Mr. Nelson said.The Treasury Department accelerated those efforts this week with the creation of a new “counter-fentanyl strike force” that will aim to more aggressively scrutinize the finances of suspected narcotics dealers. On Wednesday, Ms. Yellen announced that the Treasury Department was imposing new sanctions against 15 Mexican individuals and two companies that are linked to the Beltrán Leyva Organization, a major distributor of fentanyl into the U.S.At the same time that the Biden administration is trying to curb the flow of drugs coming from Mexico, Ms. Yellen emphasized a desire for more trade between the two countries and noted that the U.S. benefits from imports of Mexican steel, iron, glass and car parts.The 2022 Inflation Reduction Act law in the U.S. allows American consumers to benefit from tax credits for electric vehicles that are assembled in Mexico, and Ms. Yellen said that she wants to see the automobile sector supply chain more tightly integrated between the two countries.“The United States continues to pursue what I’ve called friend-shoring: seeking to strengthen our economic resilience through diversifying our supply chains across a wide range of trusted allies and partners,” Ms. Yellen said.At the news conference, Ms. Yellen pushed back against the idea that the U.S. was encouraging Mexico to adopt more rigorous foreign investment safeguards because it wanted to deter Chinese investment there.“As long as there are appropriate national security screens and those investments don’t create national security concerns for Mexico or the United States, we have absolutely no problem with China investing in Mexico to produce goods and services that will be imported into the United States,” Ms. Yellen said. 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    China’s economy has a ‘steep hill to climb’ despite positive export surprise, HSBC says

    Exports in U.S. dollar terms rose by 0.5% year-on-year in November, defying expectations for a 1.1% decline among analysts polled by Reuters.
    “There’s not going to be follow-through on the export side in the next few months, and of course on the domestic side with imports contracting again, that just highlights that there is still a steep hill to climb when it comes to generating that accelerating growth in mainland China,” HSBC’s Chief Asia Economist Frederic Neumann said.

    Hong Kong observation wheel, and the Hong Kong and Shanghai Bank, HSBC building, Victoria harbor, Hong Kong, China.
    Ucg | Universal Images Group | Getty Images

    The Chinese economy still has a “steep hill to climb” despite a surprise pickup in exports and is unlikely to be bolstered by further fiscal stimulus, according to HSBC’s Chief Asia Economist Frederic Neumann.
    Exports in U.S. dollar terms rose by 0.5% year-on-year in November, defying expectations for a 1.1% decline among analysts polled by Reuters. However, imports fell in U.S. dollar terms by 0.6% over the 12 months, well below a consensus forecast of a 3.3% increase.

    Yet economists have noted that external demand is still relatively weak, and that policy support from Beijing that focuses on the supply side will struggle to make inroads into reigniting domestic demand to compensate.
    Neumann told CNBC’s “Squawk Box Europe” on Thursday that the Chinese economy remains weak, and that the positive export figure, released earlier Thursday, should be taken with a pinch of salt.
    “Some of the Asian numbers have looked better on the trade front — Korea as well, Taiwan, for example — but this is a lot of inventory adjustment coming through the global system,” he noted.
    “There’s not going to be follow-through on the export side in the next few months, and of course on the domestic side with imports contracting again, that just highlights that there is still a steep hill to climb when it comes to generating that accelerating growth in mainland China.”
    This global inventory adjustment, particularly among U.S. importers, combined with base effects pushing up the numbers, means the positive export surprise does not necessarily mean exports are accelerating meaningfully, he suggested.

    Demand for Chinese goods has fallen this year as global growth slows.

    “All the forward-looking indicators — new orders for electronics, for example, new export orders — they all suggest that there is not a pick-up in demand and in fact, it’s more likely the U.S. economy will slow into next year, European demand looks still wobbly and so does the rest of EM [emerging markets], so where is that demand going to come from for a sustained export cycle?” Neumann said.
    “That’s really a bit of a headache then for Asian policymakers including in mainland China, because they need to rely on domestic demand to really get the engine going again, and for that we haven’t seen evidence of that happening just yet.”
    The value of China’s exports to the U.S. rose by 7% in November from a year ago, according to CNBC calculations of official data. In contrast, China’s exports to the European Union fell by 14.5% year-on-year in November and those to the Association of Southeast Asian Nations fell by 7%, the analysis showed.
    The government has tapped fiscal stimulus to shore up its ailing post-pandemic recovery and contain its spiraling debt crisis among the country’s property developers, and the International Monetary Fund forecasts GDP growth of 5.4% this year, and 4.6% in 2024.

    Neumann said there was no doubt that there are still “very powerful levers” available to Beijing despite its substantial debt pile, but that the economic growth numbers are not sufficiently “catastrophic” to warrant further fiscal action that may increase that debt burden.
    “It is not as if we see mass unemployment, it’s not as if we don’t see construction in infrastructure, for example — we do see that, so in some sense, the numbers aren’t bad enough to really trigger a big, big stimulus,” he said.
    “That is I think a little bit of a disappointment for the market, because you’re still hoping for the bazooka, but guess what? Growth is just not so bad that you really need to bring out those big, big stimulus packages at the moment, so we just stay muddling through here for a while and it’s hard to see that pattern changing over the next few months.”
    – CNBC’s Evelyn Cheng contributed to this report. More

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    Europe and Asia React to U.S. Push for Tech and Clean Energy

    Other governments, particularly in Europe, are trying to counter the Biden administration’s industrial policies with their own incentives.The United States has embarked on the biggest industrial policy push in generations, dangling tax breaks, grants and other financial incentives to attract new factories making solar panels, semiconductors and electric vehicles.That spending is aimed at jump-starting the domestic market for crucial products, but it has implications far outside the United States. It is pushing governments from Europe to East Asia to try to keep up by proposing their own investment plans, setting off what some are calling a global subsidy race.Officials, particularly in Europe, have accused the United States of protectionism and have spent months complaining to the Biden administration about its policies. Governments in the European Union, in Britain and elsewhere are debating how to counteract America’s policies by offering their own incentives to attract investment and keep their companies from relocating to the United States.“I think we all deny that there is a subsidy race, but up to a certain extent, it’s happening,” said Markus Beyrer, the director general of BusinessEurope, Europe’s largest trade association.The United States is deploying nearly $400 billion in spending and tax credits to bolster America’s clean energy industry through the Inflation Reduction Act of 2022. Another $280 billion is aimed at facilities that manufacture and research semiconductors, as well as broader technological research.The Biden administration says the full agenda will unleash $3.5 trillion in public capital and private investment over the next decade. It is both a response to the hefty subsidies offered by governments in China and East Asia and an attempt to rebuild an American factory sector that has been hollowed out by decades of offshoring.Fredrik Persson, left, and Markus Beyrer, executives of BusinessEurope, a large trade group. “I think we all deny that there is a subsidy race, but up to a certain extent, it’s happening,” Mr. Beyrer said.Virginia Mayo/Associated PressThe administration says the investments will put the United States in a better position to deal with climate change and make it less dependent on potentially risky supply chains running through China.But the spending has sparked concerns about taking government resources away from other priorities, and adding to the debt loads of countries when high interest rates make borrowing riskier and more expensive. Gita Gopinath, the first deputy managing director of the International Monetary Fund, said in an interview in October that the spending race was “a matter of concern.”Ms. Gopinath pointed to statistics showing that whenever the United States, the European Union or China enacts subsidies or tariffs, there is a very high chance that one of the other two will respond with its own subsidies or tariffs within a year.“We are seeing a tit-for-tat there,” Ms. Gopinath said.The spending competition is also straining alliances by giving the companies that make prized products like batteries, hydrogen and semiconductors the ability to “country shop,” or play governments against one another other as they try to find the most welcoming home for their technologies.Freyr Battery, a company founded in Europe that develops lithium ion batteries for cars, ships and storage systems, was partway through building a factory in Norway when its executives learned that the Inflation Reduction Act was under development. In response to the law, the company shifted production to a factory in Georgia.“We think it is a really ingenious piece of modern industrial policy, and consequently, we’ve shifted our focus,” Birger Steen, Freyr’s chief executive officer, said in an interview. “The scaling will happen in the United States, and that’s because of the Inflation Reduction Act.”Mr. Steen said the company was keeping the Norwegian factory ready for a “hot start,” meaning that production could scale up there if local policies become friendlier. The company is talking to policymakers about how they can compete with the United States, he said.Some countries are reaping direct benefits from U.S. spending, including Canada, which is included in some of the clean energy law’s benefits and has mining operations that the United States lacks.Canada’s lithium industry stands to benefit as battery manufacturing moves to the United States and companies look for nearby sources of raw material.Brendan George Ko for The New York TimesKillian Charles, the chief executive at Brunswick Exploration in Montreal, said in an interview that Canada’s lithium industry stood to benefit as battery manufacturing moved to the United States and companies looked for nearby sources of raw material.But in most cases, the competition seems more zero-sum.David Scaysbrook, the managing partner of the Quinbrook Infrastructure Partners Group, which has helped finance some of the largest solar and battery projects in the United States, said that America’s clean energy bill was the most influential legislation introduced by any country and that other governments were not able to replicate “the sheer scale” of it.“Other countries can’t match that fiscal firepower,” he said. “Obviously, that’s a threat to the E.U. or other countries.”The United States has sought to allay some of its allies’ concerns by signing new trade agreements allowing foreign partners to share in some of the clean energy law’s benefits. A minerals agreement signed with Japan in March will allow Japanese facilities to supply minerals for electric vehicles receiving U.S. tax credits. American officials have been negotiating with Europe for a similar agreement since last year.But at a meeting in October, the United States and Europe clashed over a U.S. proposal to allow labor inspections at mines and facilities producing minerals outside the United States and Europe. Officials are continuing to work toward completing a deal in the coming weeks, but in the meantime, the lack of agreement has cast a further pall over the U.S.-E.U. relationship.Biden administration officials have continued to defend their approach, saying that the Inflation Reduction Act does not signal a turn toward American protectionism and that climate spending is badly needed. Even with such significant investments, the United States is likely to fall short of international goals for curbing global warming.John Podesta, the senior adviser to the president for clean energy innovation, said in a conversation at the Brookings Institution in October that foreign governments had been doing “a certain amount of bitching.” But he said the U.S. spending had ultimately spurred action from other partners, including a green industrial policy that Europe introduced early this year.“So with the bitching comes a little bit more shoulder to the wheel, so that’s a good thing,” he added.Ursula von der Leyen, president of the European Commission, presented the European Union’s Green Deal Industrial Plan in Brussels in February after the United States enacted the Inflation Reduction Act.Yves Herman/ReutersIn addition to the Green Deal Industrial Plan, which the European Union proposed in February, the bloc has approved a significant green stimulus program as part of an earlier pandemic recovery fund, and additional spending for green industries in its latest budget.Japan and South Korea have proposed their own plans to subsidize green industries. In the technology industry, South Korea and Taiwan both approved measures this year offering more tax breaks to semiconductor companies, and Japan has been setting aside new subsidies for major chipmakers like TSMC and Micron.Europe also proposed a “chips act” last year, though its size is significantly smaller than the American program’s. And China has been pumping money into manufacturing semiconductors, solar panels and electric vehicles to defend its share of the global market and prop up its weakening economy.The competition has also given rise to anxieties in smaller economies, like Britain, about the ability to keep up.“The U.K. is never going to compete on money and scale at the same level as the U.S., E.U. and China because we are firstly under fiscal constraints but also just the size of the economy,” said Raoul Ruparel, the director for Boston Consulting Group’s Center for Growth and a former government special adviser.British officials have made it clear that they don’t intend to offer a vast array of subsidies, like the United States, and are instead relying on a more free-market approach with some case-by-case interventions.Some economists and trade groups have criticized this approach and Britain’s resistance to creating a sweeping industrial strategy to shape the economy more clearly toward green growth, with the assistance of subsidies.“The question is, do you want to capture the economic benefits along the way and do you want to tap into these sources of growth?” Mr. Ruparel asked.TSMC is building a $7 billion plant in Kikuyo, Japan. Japan has been setting aside new subsidies for major chipmakers like TSMC and Micron.Kyodo News, via Getty ImagesSome experts insist fears of a subsidy race are overblown. Emily Benson, a senior fellow at the Center for Strategic and International Studies, said the scale of overall spending by the United States and the European Union was not significantly different, though European spending was spread out over time.“I don’t see some huge kickoff to this massive subsidy race that will completely upend global relations,” Ms. Benson said.Business leaders and analysts said the frustration in the European Union stemmed partly from broader economic concerns after the conflict with Russia. The combination of higher energy prices and tougher competition from the United States and China has pushed down foreign direct investment in Europe and sparked other fears.Fredrik Persson, the president of BusinessEurope, said the companies his group represented had “a very strong reaction” to the Inflation Reduction Act.“We fully support the underlying direction with the green transition, but it came at a sensitive moment,” he said.Madeleine Ngo More

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    From Unicorns to Zombies: Tech Start-Ups Run Out of Time and Money

    After staving off collapse by cutting costs, many young tech companies are out of options, fueling a cash bonfire.WeWork raised more than $11 billion in funding as a private company. Olive AI, a health care start-up, gathered $852 million. Convoy, a freight start-up, raised $900 million. And Veev, a home construction start-up, amassed $647 million.In the last six weeks, they all filed for bankruptcy or shut down. They are the most recent failures in a tech start-up collapse that investors say is only beginning.After staving off mass failure by cutting costs over the past two years, many once-promising tech companies are now on the verge of running out of time and money. They face a harsh reality: Investors are no longer interested in promises. Rather, venture capital firms are deciding which young companies are worth saving and urging others to shut down or sell.It has fueled an astonishing cash bonfire. In August, Hopin, a start-up that raised more than $1.6 billion and was once valued at $7.6 billion, sold its main business for just $15 million. Last month, Zeus Living, a real estate start-up that raised $150 million, said it was shutting down. Plastiq, a financial technology start-up that raised $226 million, went bankrupt in May. In September, Bird, a scooter company that raised $776 million, was delisted from the New York Stock Exchange because of its low stock price. Its $7 million market capitalization is less than the value of the $22 million Miami mansion that its founder, Travis VanderZanden, bought in 2021.“As an industry we should all be braced to hear about a lot more failures,” said Jenny Lefcourt, an investor at Freestyle Capital. “The more money people got before the party ended, the longer the hangover.”Getting a full picture of the losses is difficult since private tech companies are not required to disclose when they go out of business or sell. The industry’s gloom has also been masked by a boom in companies focused on artificial intelligence, which has attracted hype and funding over the last year.But approximately 3,200 private venture-backed U.S. companies have gone out of business this year, according to data compiled for The New York Times by PitchBook, which tracks start-ups. Those companies had raised $27.2 billion in venture funding. PitchBook said the data was not comprehensive and probably undercounts the total because many companies go out of business quietly. It also excluded many of the largest failures that went public, such as WeWork, or that found buyers, like Hopin.Carta, a company that provides financial services for many Silicon Valley start-ups, said 87 of the start-ups on its platform that raised at least $10 million had shut down this year as of October, twice the number for all of 2022.This year has been “the most difficult year for start-ups in at least a decade,” Peter Walker, Carta’s head of insights, wrote on LinkedIn.Venture investors say that failure is normal and that for every company that goes out of business, there is an outsize success like Facebook or Google. But as many companies that have languished for years now show signs of collapse, investors expect the losses to be more drastic because of how much cash was invested over the last decade.From 2012 to 2022, investment in private U.S. start-ups ballooned eightfold to $344 billion. The flood of money was driven by low interest rates and successes in social media and mobile apps, propelling venture capital from a cottage financial industry that operated largely on one road in a Silicon Valley town to a formidable global asset class akin to hedge funds or private equity.During that period, venture capital investing became trendy — even 7-Eleven and “Sesame Street” launched venture funds — and the number of private “unicorn” companies worth $1 billion or more exploded from a few dozen to more than 1,000.But the advertising profits gushing from the likes of Facebook and Google proved elusive for the next wave of start-ups, which have tried untested business models like gig work, the metaverse, micromobility and cryptocurrencies.Now some companies are choosing to shut down before they run out of cash, returning what remains to investors. Others are stuck in “zombie” mode — surviving but unable to grow. They can muddle along like that for years, investors said, but will most likely struggle to raise more money.Convoy, the freight start-up that investors valued at $3.8 billion, spent the last 18 months cutting costs, laying off staff and otherwise adapting to the difficult market. It wasn’t enough.As the company’s money ran low this year, it lined up three potential buyers, all of whom backed out. Coming so close, said Dan Lewis, Convoy’s co-founder and chief executive, “was one of the hardest parts.” The company ceased operations in October. In a memo to employees, Mr. Lewis called the situation “the perfect storm.”Such port-mortem assessments, where founders announce their company is closing and reflect on lessons learned, have become common.One entrepreneur, Ishita Arora, wrote this week that she had to “confront reality” that Dayslice, her scheduling software start-up, was not attracting enough customers to satisfy investors. She returned some of the cash she had raised. Gabor Cselle, a founder of Pebble, a social media start-up, wrote last month that despite feeling that he had let the community down, trying and failing was worth it. Pebble is returning to investors a small portion of the money it had raised, Mr. Cselle said. “It felt like the right thing to do.”Amanda Peyton was surprised by the reaction to her blog post in October about the “dread and loneliness” of shutting down her payments start-up, Braid. More than 100,000 people read it, and she was flooded with messages of encouragement and gratitude from fellow entrepreneurs.Ms. Peyton said she had once felt that the opportunity and potential for growth in software was infinite. “It’s become clear that that’s not true,” she said. “The market has a ceiling.”Venture capital investors have taken to gently urging some founders to consider walking away from doomed companies, rather than waste years grinding away.“It might be better to accept reality and throw in the towel,” Elad Gil, a venture capital investor, wrote in a blog post this year. He did not respond to a request for comment.Ms. Lefcourt of Freestyle Ventures said that so far, two of her firm’s start-ups had done exactly that, returning 50 cents on the dollar to investors. “We’re trying to point out to founders, ‘Hey, you don’t want to be caught in no man’s land,’” she said.One area that is thriving? Companies in the business of failure.SimpleClosure, a start-up that helps other start-ups wind down their operations, has barely been able to keep up with demand since it opened in September, said Dori Yona, the founder. Its offerings include helping prepare legal paperwork and settling obligations to investors, vendors, customers and employees.It was sad to see so many start-ups shutting down, Mr. Yona said, but it felt special to help founders find closure — both literally and figuratively — in a difficult time. And, he added, it is all part of Silicon Valley’s circle of life.“A lot of them are already working on their next companies,” he said.Kirsten Noyes More

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    E.U. Relaxes Trade Rules on Electric Cars From Britain

    The NewsThe European Union plans to postpone strict local-content rules that would have led to costly tariffs imposed on cars traded between the bloc and Britain beginning Jan. 1.“This removes the threat of tariffs on export of E.U. electric vehicles to the U.K. and vice versa,” Maros Sefcovic, the European Union’s executive vice president, told journalists in Brussels Wednesday.The tariffs would have forced consumers in Britain and the European Union to pay more for many electric vehicles. Andrew Testa for The New York TimesWhy It Matters: Relief for carmakers that were facing tariffs.The proposal provides for a three-year delay in the trade rule, and represents a huge reprieve for many carmakers, especially those with plants in Britain. Eighty percent of cars made in Britain are exported, with 60 percent of them going to the European Union. The delay means that British electric vehicles with batteries made outside Europe will no longer face tariffs of up to 10 percent starting in three weeks.European carmakers would have faced similar hits in their sales of cars to Britain, a major market. The delay will probably be seen as a win for Prime Minister Rishi Sunak’s British government, which lobbied for the change along with the European car industry.Background: Europe and Britain do not make enough batteries.The rule would have made it virtually impossible for cars made in Britain with batteries from Asia to be imported tariff-free into the European Union. Neither Britain nor the Europe Union is manufacturing enough batteries for the rising number of electric vehicles expected to be produced in coming years. Batteries are the most expensive components of electric vehicles.Local origin rules are designed to discourage automakers from importing expensive parts, and to encourage local production. But this rule would have been counterproductive, the auto industry argued, by forcing consumers to pay more for many electric vehicles. Those higher prices could have opened the door for electric vehicles from outside Europe, especially China, whose makers are churning out low-cost models that have gained traction in Britain.What Happens Next: Time for the battery industry “to catch up.”The proposal still needs the support of European Union governments. Early indications are that it will be welcomed by auto industry. An extension would give “the European battery industry time to catch up,” the Society of Motor Manufacturers and Traders, a British trade group, said Wednesday in a statement.Mr. Sefcovic also said the European Union planned to provide 3 billion euros ($3.25 billion) to encourage local manufacturing of batteries. More

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    Bank of England warns that higher rates ‘have yet to come through’ to an already weak economy

    The Bank of England hiked interest rates by more than 500 basis points between December 2021 and August 2023 in a bid to combat soaring inflation.
    “The full effect of higher interest rates has yet to come through, posing ongoing challenges to households, businesses and governments,” the Financial Policy Committee said.

    A member of the public walks through heavy rain near the Bank of England in May 2023.
    Dan Kitwood | Getty Images News | Getty Images

    LONDON — The Bank of England on Wednesday warned that although household finances are faring better than expected, higher borrowing costs have yet to fully feed through to the economy.
    In its half-yearly Financial Stability Report, the central bank noted that “the overall risk environment remains challenging” amid a sluggish domestic economy, further risks to global growth and inflation and heightened geopolitical tensions.

    The Bank of England hiked interest rates by more than 500 basis points between December 2021 and August 2023, taking its main rate to a 15-year high in a bid to combat soaring inflation. Its Financial Policy Committee highlighted in the report that long-term interest rates in both the U.K. and the U.S. are now around their pre-2008 levels.
    “The full effect of higher interest rates has yet to come through, posing ongoing challenges to households, businesses and governments, which could be amplified by vulnerabilities in the system of market-based finance,” the FPC said.
    “So far, and while the FPC continues to monitor developments, U.K. borrowers and the financial system have been broadly resilient to the impact of higher and more volatile interest rates.”

    Since its last FSR in July, household income growth has been greater than expected, the FPC noted, which has reduced the share of households experiencing high cost-of-living adjusted debt-servicing ratios. Meanwhile, a lower expected path for the Bank of England’s main interest rate has reduced the extent to which that share is likely to rise.
    “Nevertheless, household finances remain stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments,” the FPC said.

    “Arrears for secured and unsecured credit remain low but are rising as the impact of higher repayments is felt by borrowers.”
    Companies’ ability to service their debt has improved on the back of robust earnings growth, and the FPC expects the corporate sector to remain largely resilient to the impact of higher rates and weaker economic activity.
    “But the full impact of higher financing costs has not yet passed through to all corporate borrowers, and will be felt unevenly, with some smaller or highly leveraged UK firms likely to remain under pressure,” the FPC added.
    “Corporate insolvency rates have risen further but remain low.” More

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    Private payrolls increased by 103,000 in November, below expectations, ADP says

    Private payrolls grew by 103,000 workers in November, below the downwardly revised 106,000 in October and the 128,000 Dow Jones estimate.
    After leading job creation for most of the period since Covid hit in early 2020, leisure and hospitality recorded a loss of 7,000 jobs.
    Services-related industries provided all the job gains for the month, as goods-producers saw a net loss of 14,000.

    A postal worker wearing a Santa hat, sorts through mail and packages during a media tour hosted by the US Postal Service at the Los Angeles Processing and Distribution Center, the largest in the country, equivalent to 29 football fields, on November 30, 2023. 
    Frederic J. Brown | AFP | Getty Images

    Private sector job creation slowed further in November and wages showed their smallest growth in more than two years, payrolls processing firm ADP reported Wednesday.
    Companies added just 103,000 workers for the month, slightly below the downwardly revised 106,000 in October and missing the 128,000 Dow Jones estimate.

    Along with the modest job growth came a 5.6% increase in annual pay, which ADP said was the smallest gain since June 2021. Job-changers saw wage increases of 8.3%, making the premium for switching positions the lowest since ADP began tracking the data three years ago.
    After leading job creation for most of the period since Covid hit in early 2020, leisure and hospitality recorded a loss of 7,000 jobs for the month. Trade, transportation and utilities saw an increase of 55,000 positions, while education and health services added 44,000 and other services contributed 15,000.
    Services-related industries provided all the job gains for the month, as goods-producers saw a net loss of 14,000 due to declines of 15,000 in manufacturing, despite the settlement in the United Auto Workers strikes, and 4,000 in construction. Recent layoffs in Silicon Valley and on Wall Street also did not show up in the data, as both sectors posted gains on the month.
    “Restaurants and hotels were the biggest job creators during the post-pandemic recovery,” said ADP chief economist Nela Richardson. “But that boost is behind us, and the return to trend in leisure and hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024.”
    Companies with between 50 and 499 employees led job creation, with an addition of 68,000. Small businesses contributed just 6,000.

    The ADP report comes two days before the more widely watched nonfarm payrolls count from the Labor Department. The two reports can differ widely, though the numbers for private payrolls were close in October as the Labor Department reported growth of 99,000, just 4,000 below the revised ADP tally.
    Including government jobs, nonfarm payrolls increased 150,000 in October and are expected to show growth of 190,000 in November, according to Dow Jones.
    Another sign that the labor market is loosening came Tuesday, when the Labor Department reported that job openings declined to 8.73 million in October, the lowest level since March 2021. More

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    U.S. consumers will soon wake up to ‘out of control’ interest on their credit cards, economist says

    Consumer spending is being financed by credit cards where interest is “over the top, out of control, off the hook right now,” economist Carl Weinberg told CNBC.
    Weinberg sees a retrenchment in spending in the new year, as debt burdens rise — though probably not enough to push the U.S. economy into a recession.
    Monica Defend, head of the Amundi Investment Institute, said she sees a coming pullback in consumer spending as sufficient to trigger a recession in the first half.

    The U.S. economy should be able to avoid a recession next year — but a sharp pullback in consumer spending is among the biggest risks of that occurrence, according to economist Carl Weinberg.
    “Consumers are just waking up to the fact that they’re financing their spending by running up their credit cards, and that the interest on those credit cards is over the top, out of control, off the hook right now,” the chief economist of High Frequency Economics told CNBC’s “Squawk Box Europe” on Wednesday.

    “That’s going to lead to, I think, a retrenchment in consumer spending, as we get into the new year.”
    Weinberg’s base case assumes a slowdown in growth, rather than a recession.
    “But the risk is, and I agree it’s a nontrivial risk, that consumers get into trouble,” Weinberg said, noting figures from the New York Federal Reserve showing a rise in delinquencies on credit cards.
    “Real incomes have just started coming back again, and not by nearly enough to cover some of the increases in the debt burdens that we’re seeing. So credit to the household sector, consumer credit cards, that’s where the downside risk is. That’s where the risk to this Goldilocks forecast is, and I’m watching it.”
    A “Goldilocks” scenario is one in which an economy is growing enough to avoid a recession and a negative hit to the labor market, but not so strongly that it fuels inflation.

    A U.S. recession in the first half of next year is the base case for Monica Defend, head of the Amundi Investment Institute.
    “Financing and financial conditions, eventually, will start to bite the U.S. consumer that is progressively depleting the excess savings that have been … protected during 2023,” Defend said Wednesday on “Squawk Box Europe.”
    “Consumption will slow down, we’re seeing the labor market progressively cooling, and this is going to continue. And therefore, we do expect a technical recession in the United States first and second quarter.”
    Many strategists see the U.S. as having achieved a “soft landing” for its economy through interest rate hikes. They nevertheless remain cautious on the outlook for 2024, as they warn of the delayed and unpredictable impacts of higher rates.
    U.S. growth has stayed strong this year, as other major economies — including the euro zone and U.K. — have stagnated.
    Investment stimulus delivered by initiatives such as the Inflation Reduction Act will not be enough to overcome the slowdown in consumption, Defend said Wednesday.
    “During the pandemic, there has been substantial transfers from the government into households and, therefore, consumers. If you look at saving rates, it has been really peaking, but now is pointing south quite remarkably,” she said.
    “Because of this and the excess savings actually depleting, we don’t think that the U.S. consumer will be able to stand and to maintain the same levels it had over the last two years.” More