Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Federal Reserve is “not far” from having the confidence to start cutting interest rates, its chair Jay Powell has said, bolstering hopes that the central bank will lower borrowing costs in the coming months. Powell told US senators on Thursday that the Federal Open Market Committee was “in the right place” on monetary policy while it waited for proof that almost two years of higher rates had tamed inflation. “We’re waiting to become more confident that inflation is moving sustainably to 2 per cent,” the Fed chair said, referring to the central bank’s official inflation target. “And when we do get that confidence, and we’re not far from it, it will be appropriate to dial back the level of restriction so that we don’t drive the economy into recession.” Powell’s comments will add to hopes the Fed is at last preparing to ease monetary policy after months of holding rates at a 23-year high of between 5.25 per cent and 5.50 per cent — part of its quest to quell price pressures that surged as the US economy emerged from the pandemic. Futures prices imply investors have priced in a quarter-point cut by July, with many betting the move will actually come in June. The personal consumption expenditures prices index, the headline inflation gauge used by the Fed to measure progress against its 2 per cent target, is now at just 2.4 per cent, having hit a high of 7 per cent in 2022. Powell was speaking in Washington just hours after European Central Bank president Christine Lagarde signalled the central bank could begin lowering interest rates in June. Stocks and bonds were both higher on Thursday, with the S&P 500 up 1.2 per cent while yields on rate-sensitive two-year Treasuries hovered around three-week lows at 4.52 per cent. The Fed’s rate-setters next meet on March 20, when the FOMC is widely expected to keep interest rates on hold. The Fed will also unveil a new so-called “dot plot”, detailing how many times officials think the central bank will cut rates in 2024. Analysts have forecast the Fed will make three or four cuts over the second half of 2024. The continued strength of the US economy has defied many forecasters and allowed the Fed to take a cautious approach to cutting rates, confident that higher borrowing costs will not trigger a sharp rise in unemployment. “We’re doing the best of anybody,” Powell said. “We’ve got the strongest growth and the lowest inflation of the advanced economies.” The US’s nearest economic rival in terms of the size of total gross domestic product, China, was having “significant difficulties”, he added.The ECB on Thursday also downgraded its growth forecasts for the fourth time in a row, saying it expected the eurozone economy to expand 0.6 per cent this year, compared with the previous estimate of 0.8 per cent. Many economists expect the to Fed upgrade its US GDP projections at the March vote. Additional reporting by Jennifer Hughes in New York More

Layoff announcements in February hit their highest level for the month since 2009, Challenger, Gray & Christmas reported Thursday.
With a series of high-profile layoff waves, tech leads the way this year in cuts with 28,218, though that number has fallen 55% from the same period a year ago.

More than 75 employers were taking resumes and talking to prospective new hires at a career fair in Lake Forest, CA on Wednesday, February 21, 2024. 
Paul Bersebach | Medianews Group | Orange County Register | Getty Images

Layoff announcements in February hit their highest level for the month since the global financial crisis, according to outplacement firm Challenger, Gray & Christmas.
The total of 84,638 planned cuts showed an increase of 3% from January and 9% from the same month a year ago, with technology and finance companies at the forefront.

From a historical perspective, this was the worst February since 2009, which saw 186,350 announcements as the worst of the financial crisis was seemingly coming to an end. Financial markets bottomed the following month, paving the way for the longest economic expansion on record, lasting until the Covid pandemic in March 2020.
For the year, companies have listed 166,945 cuts, a decrease of 7.6% from a year ago.
“As we navigate the start of 2024, we’re witnessing a persistent wave of layoffs,” said Andrew Challenger, the firm’s labor and workplace expert. “Businesses are aggressively slashing costs and embracing technological innovations, actions that are significantly reshaping staffing needs.”
With a series of high-profile layoff waves, tech leads the way this year in cuts with 28,218, though that number has fallen 55% from the same period a year ago. Layoff announcements at financial firms have risen 56% compared with the first two months of 2023.
Other industries planning significant cuts include industrial goods manufacturing (up 1,754% from a year ago), energy (up 1,059%) and education (up 944%).

The layoff numbers, however, are not feeding through to weekly jobless claims, suggesting that unemployment is short-lived and workers are able to find new positions. Initial filings for unemployment insurance totaled 217,000 in the most recent week, unchanged from the previous period and exactly in line with Wall Street estimates.
Challenger’s experts say companies most often cite restructuring plans as the main reason for the reductions in workforce. Artificial intelligence has been cited for just 383 cuts, though “technological updates” in general have been at the root of more than 15,000 reductions, or nearly as much as all the years combined since 2007.
“In truth, companies are also implementing robotics and automation in addition to AI. It’s worth noting that last year alone, AI was directly cited in 4,247 job reductions, suggesting a growing impact on companies’ workforces,” Challenger reported.

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The European Central Bank has signalled June is the earliest it is likely to cut interest rates after it lowered its forecasts for inflation, predicting it will reach its 2 per cent target next year.The central bank maintained its benchmark deposit rate at an all-time high of 4 per cent at its meeting on Thursday. But it lowered its inflation forecast for this year from 2.7 per cent to 2.3 per cent, and trimmed it for 2025, opening the door to possible rate cuts in the coming months.“We are making good progress towards our inflation target and we are more confident as a result,” said ECB president Christine Lagarde. “But we are not sufficiently confident. We clearly need more evidence and more data. We will know a little more in April, but we will know a lot more in June.”Lagarde rejected the idea that there was “no rush” to cut rates. Instead, she said the ECB governing council had “just begun discussing the dialling back of our restrictive stance” even though it did not discuss whether to immediately cut rates at this week’s meeting.Carsten Brzeski, an economist at Dutch bank ING, said: “This time the message was mercifully clear from Lagarde that they are looking to cut in June. The bigger question is how fast will they cut from that point.”The central bank also reduced its 2024 growth forecast for the fourth quarter in a row, saying it expected eurozone gross domestic product to rise just 0.6 per cent this year, down from its previous estimate of 0.8 per cent.Even as the economy slows to a crawl, several rate-setters have expressed concern that rapid wage growth could keep pushing inflation above the ECB’s 2 per cent target — particularly in the labour-intensive services sector. Underlining these worries, the ECB said it expected core inflation — which excludes volatile energy and food prices — to be 2.6 per cent this year, slightly lower than its previous forecast of 2.7 per cent.Lagarde said the ECB was “laser-focused” on wage growth and profit margins to seek “confirmation of what we are beginning to see, which is moderation on the wage front and an absorption of those higher wage costs by the profit margins”.“I wish everything was closer to our target — but we are not there yet,” she said, but added: “I am not saying that we will wait until we see everything at 2 per cent.”Ann-Katrin Petersen at the BlackRock Investment Institute said inflation was likely to remain sticky enough to avoid a return to the negative rates the ECB had in place two years ago. “With a still tight labour market and subdued productivity, domestic price pressures could keep inflation near or above 2 per cent,” she said.The ECB’s decision to leave rates on hold follows a similar move by the Canadian central bank on Wednesday and is expected to be mirrored by the US Federal Reserve and the Bank of England when they meet in two weeks’ time. Stickier than expected inflation readings have prompted investors to shift their bets this year on when the major central banks will start cutting borrowing costs from the spring to the summer.Federal Reserve chair Jay Powell said on Thursday that the US central bank was “not far” from having the confidence it needed to start cutting interest rates from their current 23-year high of between 5.25 and 5.5 per cent. The eurozone economy stagnated for much of last year and has been slower to recover from the double shock of the pandemic and Russia’s invasion of Ukraine than most advanced economies, in particular the US.Inflation in the eurozone has dropped rapidly from its peak above 10 per cent to 2.6 per cent in February. Yet services inflation has come down more slowly from its record annual rate of 5.6 per cent last July to 3.9 per cent in February. Lagarde said services-dominated domestic inflation was the one area that was not declining.She also said the ECB would announce the results of its operational framework review on March 13, when it is expected to announce how it will continue providing liquidity to commercial banks and the optimal size of its bond portfolio in the future.Additional reporting by Claire Jones in Washington and Stephanie Stacey in London More

The European Central Bank has once more held its key interest rates.
Staff projections now see economic growth of 0.6% in 2024, from a previous forecast of 0.8%.
They presented a more positive picture on inflation, with the forecast for the year brought to an average 2.3% from 2.7%.

The European Central Bank on Thursday lowered its annual inflation forecast, as its confirmed a widely expected hold of interest rates.
ECB President Christine Lagarde, meanwhile, suggested market pricing for a June rate cut was coming into line with policymakers’ outlook.

Staff projections for inflation in 2024 were updated to an average 2.3% from 2.7%. Looking ahead, staff see inflation hitting the ECB’s 2% target in 2025 and cooling further to 1.9% in 2026.
They meanwhile updated their forecast for economic growth for 2024 to 0.6% from 0.8%, as the euro zone’s economic activity escapes its current stagnation. They then project gross domestic product expansion of 1.5% in 2025 and 1.6% in 2026, slightly weaker than the December outlook.
“We are in the disinflationary process and we are making progress,” Lagarde said during a press conference on Thursday.
“We are more confident as a result, but we are not sufficiently confident, and we need more evidence, more data, and we know this data will come in the next few months. We will know a little more in April and a lot more in June.”
Policymakers have repeatedly signaled May as a key date, since wage settlements are set to be released that month.

The ECB will be “laser-focused” on two areas of inflation that could surprise, namely wage growth and profit margins, Lagarde said. There could also be a downside surprise to the outlook if monetary policy dampens demand more than expected or the global economic environment worsens unexpectedly, she added.

Expectations ‘converging’

The announcement increased market bets on rate cuts taking place in the summer of this year.
Market expectations had already shifted to a June cut in recent weeks. The ECB’s key rate is currently 4%, up from -0.5% in June 2022, following a run of 10 hikes.
Lagarde said Thursday that market pricing “seems to be converging better” with the ECB’s own view. Policymakers were earlier this year spurred to firmly push back on market bets on cuts in March or April.
Lagarde also said Thursday that the ECB would not need to wait for headline inflation to hit its 2% target before taking a decision.
Euro zone inflation eased to 2.6% in February from 2.8% in January. However, the core figure which strips out energy, food, alcohol and tobacco proved stickier, at 3.1%.

‘Relatively dovish’

Antonio Serpico, senior portfolio manager at Neuberger Berman, said that the most likely scenario involved rate cuts beginning in June of 25 basis points per meeting, for a total of 150 basis points or more in total.
“The numbers were quite reassuring actually, we were not expecting any cut today,” he told CNBC’s Silvia Amaro.
“Today’s decision looks to be relatively dovish,” he said, given that both growth and inflation forecasts moved lower.
“That means that the ECB governing council is seeing growth as more sluggish and lower than what they saw it before… and also in terms of headline inflation and core inflation, the new projections are definitely weaker than the older ones.”
The main variable will be the stickiness of core inflation, driven by a tight job market, he added.
Core inflation projections were updated to 2.6% in 2024 from 2.7%, and to 2.1% in 2025 from 2.3%. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Tired of depressing news of economic recession and sluggish growth? Italy to the rescue. Bel paese has emerged as the stronger performer among large European economies over the past four years. This week Italy’s statistics office revised up its backward output figures to show that in the final three months of 2023, the economy was 4.2 per cent from the level in Q4 2019, before the pandemic. This is the best recovery of any major European economy and it is about double the pace registered in France and the UK over the same period. It is also much stronger than the no-growth registered in Germany.  You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Before you double-check that we’re talking about Italy — the long-term stagnant economy — it’s worth keeping in mind that the unusually strong performance is largely explained by the “super bonus”, the generous tax relief on home improvements introduced in 2020. It’s difficult to grasp the enormousness of this measure. Italy’s investment, which includes housing, is up 30 per cent compared with Q4 2019, before the pandemic, the fastest rate ever recorded in the country since comparable data began in 2000. This compares with investment growth of only 4 per cent for France and 7 per cent for the UK over the same period, while Germany registered a 5 per cent investment contraction. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Italy’s better economic performance than some of its peers is “due to the strong tax incentives in construction,” confirmed Nicola Nobile, economist at Oxford Economics. Tax incentives “helped construction activity much more than in other countries, for instance, the 0.2 per cent quarter-on-quarter GDP growth posted in Q4 last year [was] entirely driven by construction,” said Nobile. Construction output in December 2023 was down 13 per cent in Spain, dropped 7 per cent in Germany and was flat in France, according to Eurostat data. In Italy it was up 40 per cent from 4 years before. But the boom could go into reverse as the measure is withdrawn, economists warn. The incentives initially covered up to 110 per cent of expenses, but the discount was lowered to 90 per cent in 2023 and 70 per cent from January this year. It is also now more difficult to attain than in previous years and the measure is slated to end in 2025.“A correction in investment is imminent,” said Melanie Debono, economist at the consultancy Pantheon Macroeconomics. She added applications for the “super bonus” soared more than expected at the end of 2023 as builders and households rushed to take advantage of the measure before the changes in January, and have since been declining. Separate data published last week showed that the measure also cost a fortune. Official data showed that the budget deficit in 2023 was 7.2 per cent of GDP, well above the government’s 5.3 per cent. This is more than double the eurozone average, a worrying figure for a country with a debt equivalent to about 140 per cent of GDP and that pays over €80bn in interest payments every year. “The impact of this measure on the fiscal deficit was very large for the last few years, as the cost continued to overshoot the official estimate,” said Nobile. But probably the more disappointing part is that the latest strong performance barely lifted the country from its long-term economic stagnation. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Compared with 2000, Italy’s economy is only 9 per cent larger, a small fraction of the 30 per cent to 40 per cent growth seen in other major economies. While tackling energy efficiency and housing decorum, the measure did little to tackle the country’s long-term challenges, such as poor productivity growth and the oldest population in Europe. Well, that’s not much for uplifting news after all. More

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Despite signs of cooling price gains following a sudden uptick two years ago, officials at the central bank overseeing the 20-country eurozone currency bloc have been recently unwilling to roll out borrowing cost reductions early this year.Instead, analysts are focusing on the ECB’s communication. Economists at ING said in a note that they are curious to see if President Christine Lagarde will calibrate her messaging to pave the way for a potential cut in June this year. Lagarde is due to hold a press conference at 1345 GMT.This is a developing story. Please check back later for updates. More