Economy

Stay informed with free updatesSimply sign up to the More

In its December meeting, Norges Bank kept the policy rate steady at 4.5%. The bank had indicated a potential reduction in the policy rate come March if the economy developed as projected. However, the December inflation data showed a decrease to 2.2% from November’s 2.4%, contrary to the central bank’s expectation of an increase to 2.8%. Core CPI-ATE also declined from 3.0% to 2.7%, slightly below the forecasted 2.8%.Despite the lower-than-expected inflation, Capital Economics does not believe this will lead Norges Bank to accelerate its planned rate cut to the upcoming week. Historically, even when inflation rates were below the bank’s forecasts, the policy rate remained unchanged, influenced by factors such as strong wage growth and the weak Norwegian krone. Current wage growth trends and the trade-weighted exchange rate support the analysts’ view that the central bank will stick to its March timeline for the rate cut.The pace and extent of future rate cuts by Norges Bank after March are less certain, according to Capital Economics. The bank’s own forecasts suggest a more conservative approach, with the policy rate hitting 3% by early 2027. However, the firm cautions against relying too heavily on these projections, citing the historical inaccuracy of central banks’ forecasts for their own policy rates.Capital Economics expects the Norwegian economy to grow steadily in the coming years, implying that there is no urgency for aggressive rate cuts. Policymakers have expressed concerns about maintaining overly tight monetary policy, aiming to avoid undue economic restrictions while achieving inflation targets within a reasonable timeframe.The firm also forecasts a decline in core inflation, albeit at a slower rate than last year, as the labor market eases and wage growth potentially slows. This, combined with a predicted strengthening of the krone, is expected to contribute to lower services inflation. Considering these factors, Capital Economics believes Norges Bank will move towards a more neutral monetary stance, with the equilibrium real rate estimated to be between -0.5% and +0.5%, according to a central bank research paper published in 2022.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

BEIJING (Reuters) -China will launch an investigation into U.S. government subsidies to its semiconductor sector over alleged harm caused to Chinese mature node chipmakers, the commerce ministry said on Thursday.Unlike the cutting-edge chips that power artificial intelligence models, mature node chips are cheaper, easier to manufacture, and used for less complex tasks, including home appliances and communications systems.The investigation is the latest salvo in Beijing’s policy of retaliating against Washington’s ever-broadening scope of restrictions targeting China’s semiconductor industry, which the Biden administration has alleged could go on to dominate global supply chains and help the Chinese military become technologically superior to its U.S. counterpart.”The Biden administration has given a large amount of subsidies to the chip industry, and U.S. enterprises have thus gained an unfair competitive advantage and exported relevant mature node chip products to China at low prices, which has undermined the legitimate rights and interests of China’s domestic industry,” China’s commerce ministry said in a statement.Soon after the commerce ministry’s announcement, the China Semiconductor Industry Association published its own statement supporting the probe.The association, whose board is made up of executives from the country’s largest chip companies, said the Biden administration’s CHIPS and Science Act, which in 2022 pledged $52.7 billion in subsidies for U.S. semiconductor production, research, and workforce development, “seriously violated the basic laws of the market economy”.Beijing’s accusation echoes the Biden administration’s reasoning for announcing a tariff hike on all Chinese chip imports in September, and a probe into China’s mature chip node industry last month, which U.S. Trade Representative Katherine Tai said had expanded capacity, artificially lowered prices and hurt competition using Chinese state funds.Washington has also over the past three years tightened export controls targeting the sale of advanced U.S.-made AI chips to China. It is unclear what retaliatory action will come out of the Chinese government’s probe but U.S. firms such as Intel (NASDAQ:INTC) that sell mature node chips to the Chinese market could be affected.Intel did not immediately respond to a request for comment.While China’s semiconductor industry overall lags behind that of the United States, Beijing is widely seen to have retaliated against Washington’s chip curbs using measures such as limiting exports of rare earth metals and launching an investigation into U.S. AI chipmaker Nvidia (NASDAQ:NVDA) over suspected violations of its anti-monopoly laws. More

Vice President-elect Vance stated that Trump plans to sign “dozens of executive orders,” while Trump reportedly told Senate Republicans in a private meeting that more than 100 orders could be issued beginning on Day 1.Analysts at Wolfe Research believe Trump’s Day 1 actions will concentrate on immigration, deregulation, bureaucracy reform, and potentially tariffs. These measures align with Trump’s campaign promises and are seen as top priorities for the incoming administration.Trump’s executive orders in the immigration sector are expected to have the most immediate impact. According to Wolfe, the transition team has hinted at comprehensive plans that could be enacted swiftly, including the potential termination of work authorization for over 3 million individuals on various forms of discretionary status.“When combined with the end of Biden’s parole programs, we estimate this could create a drag on labor force growth that peaks at over 200k/month in mid-2025,” Wolfe analyst Tobin Marcus said in a note.Deregulation is also on the agenda, with Trump likely to take steps such as lifting the pause on LNG exports and halting ongoing rulemaking processes like Basel III Endgame. However, the majority of deregulation efforts cannot be executed solely through executive orders and will require a longer rulemaking process.Moreover, Trump is expected to implement reforms targeting the federal bureaucracy and workforce, including mandatory return-to-office policies and hiring freezes.Trump’s plans include the controversial “Schedule F” proposal, which would convert certain civil service positions to political appointments.These changes are expected to be realistic from Day 1 and are likely to survive legal challenges, but Wolfe Research does not anticipate a significant impact on the markets or the overall size of the federal workforce.Meanwhile, the stance on tariffs remains uncertain, with no new specific plans reported for Day 1. While there have been discussions at the staff level, the absence of concrete Day 1 tariff plans suggests a slower approach to implementing major tariffs, with the possibility of initial surgical steps or ultimatums.“The main risk to this outlook is if Trump follows through on his Day 1 threats of 25% tariffs against MEX/CAN,” Marcus noted.“Our base case is still that he declares victory and calls this off, but recent signals from Trump and Canadian officials have made us increasingly concerned,” he added. More

Stay informed with free updatesSimply sign up to the More

WASHINGTON (Reuters) – Donald Trump came to Washington eight years ago vowing to rewrite U.S. trade relationships, shrink a massive goods trade deficit and rebuild America’s industrial base with new tariffs.The president-elect is about to embark on an even more aggressive effort in his second term, pledging to impose 10% duties on all U.S. imports and 60% on goods from China. Just how that will play out is unclear, but data from his first run at upending the trade landscape show it did shift U.S. imports away from China to other countries, especially Mexico and Vietnam. Still, the U.S. trade deficit continued to grow, topping $1 trillion over the last four years, and factory employment has flatlined amid an overall jobs boom since the COVID-19 pandemic.STEEL SLIDESteel producers in the U.S. benefited the most from Trump’s tariffs, winning a 25% global duty while aluminum producers saw a 10% duty. Those were somewhat diminished after Trump’s first administration negotiated quota deals with Mexico and Canada and the Biden administration followed up with quota deals for the European Union, Britain and Japan.Meanwhile, China’s dominance of these sectors globally has kept prices low, contributing to lower capacity use rates.Some plants initially revived by the duties, including a U.S. Steel mill in Granite City, Illinois, visited by Trump in 2018 to herald the industry’s resurgence, have shut down blast furnaces. A Missouri aluminum smelter revived by the tariffs also was idled last year by Magnitude 7 Metals.  Trump’s biggest first-term trade impact was to shatter decades of political consensus favoring ever-lower trade barriers that had allowed China to become the world’s largest goods producer. Indeed, when Trump left office in 2021, the theme was taken up and amplified by President Joe Biden. “Waking the world up to the economic threat from China was one of the top accomplishments of Trump’s first-term trade agenda, as was the renegotiation of some of our major trading relationships,” including a North American free trade deal, said Kelly Ann Shaw, a trade adviser during Trump’s first term.”We’re now having a healthy debate in America about what industries we want to keep, which supply chains are critical and where we should focus our trading relationships,” said Shaw, a trade lawyer at law firm Hogan Lovells in Washington.Trump’s tariffs of 25% on $370 billion of Chinese imports helped reduce the U.S. trade deficit with China from $418 billion in 2018 to $279 billion in 2023. But as companies shifted production elsewhere, new winners emerged: Mexico and Vietnam. The growth of their U.S. trade surpluses more than made up for China’s decline.RETALIATION, PRICING COSTSThis shift came at considerable cost. China hit back with retaliatory tariffs of 25% on U.S. soybean exports and largely shifted aircraft purchases away from Boeing (NYSE:BA) to rival Airbus for years.U.S. whiskey distillers were hit by EU retaliation over metals tariffs, but exports rebounded when those tariffs came off, said Chris Swonger, CEO of the Distilled Spirits Council of the United States.  In the 2020 “Phase 1” trade deal that ended the U.S.-China trade war, Beijing pledged to boost its purchases of U.S. goods and services by $200 billion over two years, but failed to do so as COVID-19 hit.China’s promised increases in U.S. soybean volumes instead went to Brazil and Argentina. Scott Gerlt, the chief economist for the American Soybean Association, said that’s a permanent shift. “We never recovered the volume of China soybean exports since that trade war,” Gerlt said. “A lot of land came into production in Brazil. Brazil surpassed us in exports to China.”   The shift could help China weather a new trade war, but the crop remains the top U.S. export to China.Commercial aircraft once held the top spot but have been slow to recover, while motor vehicle shipments to China also declined as China’s electric vehicle industry has surged. Displacing them is crude oil, going from zero a decade ago to $13 billion in 2023.   The U.S. remains highly dependent on China for technology imports, including smartphones, laptop computers and video game consoles. Many of these products were spared Trump’s first-term tariffs, but duties of 60% or more would raise costs considerably.     China’s vast scale and efficiencies in sectors such as electronics and toys cannot be easily replicated elsewhere, creating difficult choices for companies facing steep tariffs, said Mary Lovely, a trade economist who is a senior fellow at the Peterson Institute for International Economics. “These are enormous enterprises. How do you recreate that in another country that’s a tenth of the size of China? You don’t,” Lovely added.Trump’s first-term tariffs did not cause a spike in consumer price inflation, but they were limited in scope and caused only one-time price increases, said Doug Irwin, an economics professor at Dartmouth College who specializes in trade.”Tariffs are just a tax, and so they lead to a one-off level increase in the price of those goods,” Irwin said. “They’re not this continuous rise in the general price level, which is inflation.”The price impact from further tariffs also depends on factors such as U.S. fiscal and monetary policy that may lift the dollar’s value, trade retaliation that could lower other domestic goods prices, and whether or not importers or exporting firms absorb some of the tariff costs.TARIFF REVENUETrump also has pledged to pay down U.S. debt with tariff revenues. On Tuesday, he promised to create an “External Revenue Service” to collect tariffs, duties and all revenue from foreign sources. Collections from his punitive duties since 2018 suggest a vast increase would be needed to make a dent in U.S. deficits now approaching $2 trillion a year before an expected extension of expiring tax cuts, estimated to add more than $4 trillion in new debt over a decade. Total (EPA:TTEF) collections from the China, steel, aluminum and solar panel tariffs have totaled $257 billion over seven years, a rounding error amid cumulative deficits of $12.57 trillion during that time. The conservative-leaning Tax Foundation estimates that a 10% universal Trump tariff would raise about $1.7 trillion over 10 years, including accounting for a negative impact on economic growth. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldIt’s only around 96 hours until Donald Trump’s inauguration day, and still the excitingly random tales about his prospective trade policy keep coming. This week’s was a Bloomberg story quoting his advisers contemplating a plan of gradually increasing import tariffs by between 2 and 5 per cent a month, presumably slowly turning the thumbscrew to extort concessions from trading partners.It’s not the worst idea that’s been floated — using coercive tariffs to annex Greenland and the Panama Canal is comfortably ahead — but it’s still a bad one. It features a problem we’re likely to see recurring: trade policies that fail to account for the global macroeconomy and specifically the currency markets having lives of their own.A standard side-effect of import taxes is to appreciate the exchange rate, thus undoing some or all of their effects. (To be fair, this is understood by some of Trump’s more economics-adjacent advisers, certainly by Scott Bessent, his nominee as Treasury secretary.) Thus, the tariff plans run directly counter to Trump’s intermittent desire to manage the dollar lower for competitive reasons and to close the trade deficit. Last week, the Chinese renminbi hit a 16-month low against the dollar, apparently reacting to tariff talk.If anything, gradualism will worsen the tariff effect. Currency markets are forward-looking. It’s quite possible Trump will get the currency offset when his policy is announced but before the effect of the tariffs themselves.In any case, the hope that the administration can sustainably manage the dollar lower is improbable. The standard reference is usually to the 1985 Plaza Accord, which sought to weaken the US currency. But not only does Plaza routinely get more credit than is due, the necessary macroeconomic adjustments will almost certainly be absent.The mythology of Plaza — and the subsequent 1987 Louvre Accord to stabilise the dollar — often overstates its importance. As economics textbooks would predict, the dollar had rocketed higher in the early 1980s because of Ronald Reagan’s loose fiscal and the Fed’s tight monetary policy. But by 1985 it had clearly overshot and was already starting to fall. The Plaza announcement essentially gave it an extra push downwards.Bessent contends that the 1980s and 1990s saw fiscal and monetary co-ordination to manage currencies. This is, shall we say, exceedingly hard to see in the data. The US promised to tighten fiscal policy at Plaza to help soften the dollar, but its tendency to run chronic deficits did not change.The situation is in any case different now. President Joe Biden’s spending plus relatively high US interest rates have again led to appreciation, but the dollar is not hugely overvalued as it was in 1985. The IMF prudently gives a wide range to its estimates of fair value for exchange rates to avoid being dragged into currency disputes, but the midpoint of that spread has the dollar overvalued by 5.8 per cent relative to its estimated real equilibrium rate, not a dramatic misalignment.Relative to 1985, the dollar has also been quite stable. Managing it would mean pushing from a standing start, not helping it on its way. The US bullying China into appreciating the renminbi might produce a one-off shift, but perhaps with dangerous consequences for financial stability. In recent years China has had to intervene in markets to strengthen as well as weaken its currency, last week being one example. It’s certainly not persistently holding it down for competitive reasons as in the 2000s.Currencies are not trained spaniels which overcome their natural exuberance and obey ministers who shout “Down!” or “Stay!” They react to economic fundamentals much more than to official exhortations, or even official foreign exchange market intervention.In this context, even without tariffs, Trump (with a Republican Congress) is highly unlikely to become the first fiscally conservative Republican president since Dwight Eisenhower and deliver a tighter-fiscal-looser-monetary policy mix. He wants to extend expiring tax cuts from his first administration and add more.The non-partisan Tax Foundation research organisation says that, even factoring in tariff revenue from a massive 20 per cent tariff on all imports plus a hike of 50 per cent on those from China, these cuts will cost around $3tn over 10 years — that’s just over 10 per cent of one year’s GDP.Supposedly offsetting or even outweighing those cuts is a streamlining programme by the Doge (Department of Government Efficiency) project co-run by Elon Musk. But if you expect feasible and sustainable spending control from a rabble of ignorant tech bros crashing round the federal bureaucracy, I’ve got a cryptocurrency-financed artificial intelligence-designed bridge from Mar-a-Lago to Greenland to sell you.Musk’s men are less likely to engineer a smoothly purring Rolls-Royce of a federal government than build a rusty Cybertruck with a flat battery. Before Doge has even started, Musk has already cut its annual target savings in half, from a delusional $2tn to having a “good shot” at a merely quixotic $1tn. Successfully steering a currency’s value through the maelstrom of the modern foreign exchange markets is fiendishly hard. Two of Trump’s signature policies — tariffs and tax cuts — are pushing in the opposite direction. If the currency slides under Trump it will more likely be reflecting weakening confidence in US institutions and growth prospects. That will not be a Plaza Accord for our times. It will be evidence of the wrong-headed trade and macroeconomic policy for which investors and governments around the world are bracing.alan.beattie@ft.com More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThis article is an on-site version of the Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersLast week I listed several policy areas that I think will be fiercely contested between the “populist” and the “mainstream” or “oligarchic” (depending on your sympathies) flanks of both US political parties. As several of you made sure to remind me, I neglected to discuss immigration beyond mentioning it in passing. As is obvious to all, the wide rift within the Trump coalition on this issue is now clearly exposed. One reader replied to last week’s newsletter predicting that “the oligarchs lose on immigration and tariffs and win on everything else”. Personally, I’m not so sure — on immigration at least it looks like Donald Trump doesn’t mind selling out his Maga supporters to the asks of the Big Tech companies hurrying to kiss his ring.The Republicans will of course rule the roost for the foreseeable future, and the contest between Maga populists and tech bro oligarchs will continue to play out in the headlines, or rather the social media feeds, as well as behind closed doors in the White House and at Mar-a-Lago. But I think it’s also important to think about where the Democratic party goes from here. It’s a fitting topic for this last Free Lunch column of the Biden era — Ed Luce’s elegy of which you should definitely read.Timothy Snyder recently wrote a blog post calling for Democratic politicians to form a “shadow cabinet” along the lines of the UK model — in a follow-up he warmed to the label “people’s cabinet” — to hold Trump’s actual government to account. If an effective opposition is to be achieved, it matters which alternative policies it chooses to propose. Hence the question of where Democrats go from here on the economy.I have been asking influential Democratic economists about this and I think the jury is still out and will stay out for some time. It is clear that the outgoing Biden team is not going to take any lectures from those in its own party who criticised them along the way. Here is Treasury secretary Janet Yellen in her valedictory speech last night:. . . the US economy has done remarkably well in the aftermath of the pandemic. This fact becomes even more apparent when the recovery is placed in the proper context, namely by comparing US economic outcomes to those in other advanced economies, to performance in past recessions, and to what economists forecasted. US outperformance becomes clearer still if one considers an important counterfactual: what likely would have happened under an alternative approach that focused only on inflation and not on unemployment . . . This is a big intra-Democratic debate: whether the fiscal largesse of the Biden administration was excessive (in terms of good policy, and in terms of causing electorally fatal inflation). Yellen is unrepentant: An important ‘what-if’ exercise would ask: how much more unemployment would have resulted from a fiscal contraction sufficient to keep inflation at the Fed’s 2 per cent target? The answer is ‘a lot’ . . . Estimates from representative models find that the unemployment rate would have had to rise to 10 to 14 per cent to keep inflation at 2 per cent throughout 2021 and 2022. That would have meant an additional 9mn to 15mn people out of work.Jared Bernstein, the outgoing chair of the White House Council of Economic Advisers (CEA), is clear about how the emphasis on restoring full employment set this administration apart from earlier Democratic presidencies. “We learned the lessons about insufficient fiscal support leading to recoveries that became jobless or wageless,” he told me. “The president, in his first big economic speech in February 2021, talked about the urgency to get back to full employment as soon as possible — he used that phrase five times.”But that judgment remains contested. “‘Big fiscal’ will face a huge headwind inside the Democratic party, probably larger than it deserves to face,” says Jason Furman, a predecessor of Bernstein’s in the Obama White House CEA. “I’m worried that next time we do too little instead of too much, as a reaction to what I think was too much” under Biden, he told me. (Bernstein, meanwhile, insists that the fiscal impulse was negligible once the initial pandemic recovery spending package wore off, as I also referred to last week.)The question of whether Democrats will “overcorrect” is clearly important. There are signs of something similar in the immigration debate, where some House Democrats have just supported a Republican bill. But it seems wide open as to where Democrats will end up on the economy. There is “broader agreement on the direction of travel on immigration and cultural issues than in economics”, Furman thinks. So “it is easy to predict” that the next Democratic presidential candidate will have course-corrected on trans issues or immigration, say, but Furman says that “on trade and labour markets, I don’t know”.The Biden team expresses confidence that some of its tenets of economic policy are here to stay — “I don’t think there is any swan song at all,” Bernstein told me. He lists “the idea of a worker-oriented trade policy — that workers are not just consumers but also producers”, sustaining employment through shocks without a recession, and industrial policy as potential lasting legacies.Yellen, too, clearly wants to retain the focus on  . . . the adverse structural trends that make it difficult for so many families to achieve or maintain a middle-class life. Traditional supply-side approaches wrongly assume that policies such as deregulation and tax cuts for the rich will fuel broader economic growth and prosperity. Modern supply-side economics, in contrast, rejects this trickle-down approach. Instead, it aims to expand our economy’s capacity to produce in a manner that is both inclusive and environmentally sound. It seeks to reverse decades-long under-investment in infrastructure, the labour force, and research and development that have held back productivity growth.Will the next Democratic leadership and future presidential hopefuls hew to this line, let alone the unabashedly populist perspective Biden himself has sometimes embraced? (The slogan was “grow from the bottom up and from the middle out rather than trickle down”, remember, and Biden was keen to be seen as a union man.) It will depend, in part, on how much Bidenomics is seen among Democrats at least as an economic if not electoral success as time passes.That’s hardly guaranteed. Furman remarks that Bidenomics delivered “good GDP growth, good employment, but high inflation — and supporters would say the good things came because of the policies and the bad things were exogenous, while opponents would say the opposite”. I think he also speaks for a good chunk of the Democratic economics establishment — the chunk that was left without that much influence in the Biden years — in asserting that Bidenomics was more political than technocratically evidence-based, compared with previous big Democratic policy achievements such as Obama’s healthcare reform. At the same time, he accepts that, in plain electoral terms, it’s not crazy to think that Biden didn’t do enough in a populist direction. So a lot will depend on what we learn about the electoral factors behind November’s result as more knowledge comes in. In the end, the most important influence on Democratic economic thinking may therefore well be what Republicans do and how that plays for them. Some of Bidenomics’ ideological shifts — if not its style, let alone its beneficiaries — will see continuity in the Trump administration. If that is politically successful, preferences for a more inward-looking and protectionist economy with a more dirigiste government may triumph in both parties. If it goes badly, Democrats will be wise to run on a strong reaction to Trumpism — and jettison big parts of Bidenomics at the same time.Other readablesRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereIndia Business Briefing — The Indian professional’s must-read on business and policy in the world’s fastest-growing large economy. Sign up here More