Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK business activity expanded more than expected in February fuelling hopes that Britain’s recession could already be over, according to a closely watched survey. The S&P Global flash UK PMI composite output index, a measure of the health of the private sector, rose to 53.3 in February, up from 52.9 in January and the highest since May 2023, according to data on Thursday. This was also higher than the 52.9 forecast by economists polled by Reuters and above the 50 mark, which indicates a majority of businesses reporting rising activity. The survey pointed to renewed price pressures, such as the shipping crisis in the Red Sea and sustained wage growth, which will support policymakers’ caution over cutting interest rates too quickly this year.Chris Williamson, chief business economist at S&P Global Market Intelligence, said the results pointed to the economy growing at a rate of 0.2-0.3 per cent in the first quarter of 2024, “allaying fears that last year’s downturn will have spilled over into 2024 and suggesting that the UK’s recession is already over”.But the survey also signalled supply chain delays were at their highest level for more than 18 months, linked to Red Sea shipping disruptions, which meant the selling price of goods rose at its fastest pace for nine months.Service sector inflation also ticked up driven by higher wage costs, which boosted costs for businesses and resulted in rising output prices, according to the survey. “With growth accelerating and prices on the rise again . . . policymakers are increasingly likely to err on the side of caution when considering the appropriateness of cutting interest rates,” said Williamson.The results, based on interviews conducted between February 12 and 20, showed that growth was driven by the services sector, with an index of 54.3. Some respondents noted that boosted activity was due to less restrictive funding costs.Manufacturing activity fell, continuing a 12-month trend. However, the rate of decline eased to the lowest level since November 2023. Business optimism over prospects for the year ahead was at its highest level for two years, boosting an expansion in hiring. The UK economy entered a technical recession in the second half of 2023, as GDP contracted by 0.3 per cent in the final quarter, official data showed last week.However, the PMI results suggest the economy has already rebounded from the downturn. The UK results were significantly stronger than those in the eurozone, where the composite PMI only rose to 48.9 in February, up from 47.9 in the previous month but still below to 50 mark. More

TORONTO (Reuters) – Limited exposure to U.S. commercial real estate (CRE) is giving shareholders hope that Canada’s big banks can weather the storm that has rocked rivals in the United States and Europe.However, investors will be on alert for signs of stress when Canada’s top six banks next week post first quarter earnings, that will continue to be pressured by high bad loan provisions. The beleaguered U.S. CRE sector has taken a toll on banks in Europe and Asia, with borrowers at the risk of defaulting on loans as high interest rates and low occupancies hit valuations.The recent sell-off of New York Community Bancorp (NYSE:NYCB) has soured sentiment and dragged down U.S. peers, reviving fears of a global contagion stemming from the sector. “While the space is undoubtedly challenged … it will be largely unimpactful to the Big-6 Canadian banks given their diverse loan books,” Canaccord Genuity analyst Matthew Lee said.Canadian Imperial Bank of Commerce, the country’s fifth largest lender, has the biggest CRE exposure at 11% of its loan book, quarterly filings show. Around 10% of total loans at the top three Canadian banks involved CRE, while National Bank of Canada (OTC:NTIOF)’s exposure was 8%, the banks said at the end of fiscal 2023. Of the country’s six biggest banks, National Bank of Canada has no exposure to office real estate in the U.S., while Bank of Nova Scotia’s lending is minimal, filings showed.The others have said their portfolios are largely diversified, with U.S. office accounting for less than 1% to 2% of overall lending books, with many holding back on new loans. Big U.S. banks have a relatively small exposure compared to some regional lenders, which face many challenges including unanticipated losses in office and multi-family properties.Earnings from Canada’s top six banks are expected to fall between 3.8% and nearly 16%, LSEG data shows, largely due to them setting aside large provisions for bad loans and a slower pace of lending. “If you look at their (Canada banks) results, the one big change that we see is they’re not lending as much commercial and personal. That’s really it,” said Shilpa Mishra, managing director in BDO’s capital advisory services.Canadian insurer Sun Life Financial (NYSE:SLF) Inc cut the value of its U.S. office property portfolio by 26% in its latest quarter, underscoring the risk to banks. BRIGHT SPOT Canada’s top banks have expanded in the U.S. due to limited options in a highly regulated and competitive home market.But hurdles, including the U.S. Justice Department’s probe in TD’s anti-money laundering lapses and Royal Bank of Canada’s capital injection to rescue its U.S. unit City National, have made some investors wary.”The challenge in the U.S. is that it’s just not as profitable … So, the question is, you’re deploying capital, what is your expected return on that?,” Colin White, CEO and portfolio manager at Verecan, said. “You just can’t see the returns in the U.S. that they (Canadian banks) are able to see in Canada,” White added.Capital markets revenues are expected to rebound, however, as deal activity resumes after a long lull. Earnings from the segment are expected to grow 16% from the prior quarter in total for the large Canadian banks, RBC Capital Markets said. “There’s a backlog of businesses in Canada that needs to transition and many business owners have held off going to market over the last year. This has resulted in pent up activity in the deal making space,” BDO’s Mishra said. More

While the bank said it can operate effectively “regardless of any losses”, the accounts have broader implications – from reputation and independence to state finances.The following explainer looks at the risks and costs associated with losses at the ECB and the national central banks across the 20-nation euro zone. WILL THAT AFFECT THE ECB’S REPUTATION? The ECB printed trillions of euros over almost a decade, despite copious warnings from conservative economists. The losses could amplify critical voices, especially if central banks ask for additional capital from their governments, which some may portray as a public bailout. The losses, which have already reduced state incomes and may lead to additional expenditure, could prompt governments to question how the central bank operates, a potential risk to legitimacy and ultimately independence.While official bodies from the International Monetary Fund to the Organisation for Economic Co-operation and Development (OECD) argue that losses are not an indication of policy error, the broader public may struggle to understand the nuances, especially because central banks operate differently to any other firm.Sustained losses could also damage central bank credibility because then investors would assume it would be printing currency over a longer period.WILL THE LOSSES AFFECT GOVERNMENT BUDGETS?Governments across the euro zone enjoyed a dividend payout from their central banks for decades, so losses also mean a loss of income to budgets. If provisions are exhausted and losses must be carried forward as is the case now, even future profits become inaccessible to shareholders since the bank must first make up for losses, then rebuild provisions, before any dividends can be paid. WILL THE ECB NEED RECAPITALISATION?Central banks do not operate like commercial banks and can even function with negative equity. Indeed, the Reserve Bank of Australia and the Czech National Bank, among others, have negative equity, as did Germany’s Bundesbank for some of the 1970s.However, some, including the central bank of the Netherlands, have warned a negative equity situation cannot be maintained for an “extended period” and a government recapitalisation may be required.The central banks of the Netherlands, Belgium and Germany have all warned in the past that more large losses are likely.Sweden’s Riksbank – which is not part of the euro zone – has already said that according to its new statutes, it must apply to parliament for recapitalisation because its capital fell below the required threshold.WILL THAT AFFECT THE ECB’S FRAMEWORK REVIEW?The ECB is currently reviewing its operational framework, including how it will provide liquidity to lenders in a new normal of central banking.Over the past decade, it provided “abundant” funds and there is still 3.5 trillion euros ($3.8 trillion) of excess liquidity sloshing around in the financial system, years after ultra-easy monetary policy was abandoned.One issue under consideration is how much the ECB pays lenders on their excess liquidity parked at the bank overnight. Some policymakers argue that the ECB should remunerate a smaller portion of bank deposits at the 4% deposit rate, thereby lowering its own interest rate expense at the cost of bank earnings. However, there is little monetary policy justification for such a move and the ECB’s only mandate is price stability, so a move to shore up its own finances might be legally contentious.Still, a longer period of losses may be deemed unacceptable because it questions the sustainability of the framework, so this could provide an acceptable justification for reducing payments to commercial lenders.($1 = 0.9215 euros) More

The ECB, which has raised rates at an unprecedented pace over the past two years, has a bloated balance sheet after a decade of financial stimulus and commercial banks now earn hefty interest on the trillions of euros it printed during the era of anaemic inflation.”The loss… reflects the role and necessary policy actions of the Eurosystem in fulfilling its primary mandate of maintaining price stability and has no impact on its ability to conduct effective monetary policy,” the ECB said.The ECB, the central bank for the 20-nation euro area said its loss before the release of provisions was 7.9 billion euros after a loss of 1.6 billion euros in 2022. Once all risk provisions are wiped out, a loss of 1.3 billion euros will be carried forward, to be offset against future profits, its financial accounts showed. The bank said it was still well-capitalised and could operative effectively regardless of any losses.”The ECB is likely to incur further losses over the next few years as a result of the materialisation of interest rate risk, before returning to making sustained profits,” the bank said.Unlike commercial banks, a central bank can operate with depleted provisions and even negative equity. However, these losses can raise credibility concerns, deprive governments of dividend earnings and could influence a looming debate over a new operational framework.For an explainer on why central bank losses matter, click here.The core of the problem is the ECB’s large scale money printing operation, the hallmark of its stimulus efforts under former President Mario Draghi. The ECB printed cash to buy government bonds in the hope that abundant and cheap credit would rekindle economic growth and push inflation back up to 2%. When interest rates were negative, this had little cost to the ECB but it must now pay a 4% interest rate on the funds it handed to lenders. Commercial banks still sit on 3.5 trillion euros worth of excess liquidity across the euro zone and it could even take a decade to extract this cash from the financial system without causing instability.Meanwhile the ECB earns only a modest interest income on the bonds it bought during the stimulus scheme. The ECB’s balance sheet holds some potential risk, too, because the value of these very bonds has dropped sharply since their purchase. But the ECB has again decided against writing down their value because they are held until maturity, mostly with fixed coupons and tend to have long durations.”The ECB can operate effectively and fulfil its primary mandate of maintaining price stability regardless of any losses,” it said. More

This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayWasn’t it supposed to be about the economy? Putting a question mark on James Carville’s insight from the 1992 US presidential contest is the best way to capture the strangeness of this year’s US presidential election. Today’s article confronts how the economy is behaving differently — in a good way — from what it has done for many decades, yet political polling doesn’t seem to reflect that at all. But first, a word of thanks to Tej Parikh for brilliantly keeping Free Lunch going last week. If you missed it, go back now to read his piece on signs of weakness in the US economy, as it provides useful background for the puzzle we’re about to discuss. Almost as old as the Carville quote is the head-scratching about why Americans do not vote in line with their economic interests. The anti-Carville thesis came of age with What’s the Matter with Kansas, Thomas Frank’s 2004 book about how the Midwestern state shifted to cultural rather than economic voting patterns. The debate about “culture versus economics” has been raging ever since, of course, and reached fever pitch after the election of Donald Trump in 2016. It has also gone international, with the need to explain the rise of nativist populism in virtually all western countries.As regular Free Lunchers will know, I have long been on the economics side of this. Without denying that the political polarisation we see in varying degrees everywhere takes a cultural expression, we need to recognise the economic disempowerment that generally triggers those “values conflicts”. My favourite example is how even in Sweden, the rise of nativist populism can be attributed to groups being left behind economically.This sort of analysis is leading people like myself to support policies of the sort the Biden administration has adopted. They are the best chance to give a better deal to those left behind by the structural economic changes of the past 40 years, and that should reduce the allure of illiberal, anti-democratic nativist movements.But the current political situation in the US forces me to ask whether I was wrong. More precisely: why, given that President Joe Biden’s policies are reversing a lot of the past economic damage, is he not getting credit for this in voter support? Does it mean economics was not at the root of things after all?Before attempting an answer, let’s just survey the facts. First, consider the evidence that the policies are, in fact, undoing the past damage. Economist Arin Dube’s Substack covers some of the striking developments in real wages since the pandemic. In his words:Using data from the household-based Current Population Survey through December 2023, the average wage for the middle quintile of workers (based on hourly earnings) stands higher than: 1) prior to December of 2019 (right before the pandemic), 2) December of 2020 (right before the start of the Biden presidency), and 3) what would be expected based on trends from the five years prior to the pandemic (2015-2019).You can see this visually on his graph (it greys out the most disruptive period when the composition of jobs changed when a lot of lower-paid people were fired and then hired again) — click here for a larger version.And the news is even better when looking at the low paid. While middle-of-the-road workers enjoy higher real wages than four years ago and higher than they could have been expected to enjoy without the pandemic, they did suffer real wage stagnation during the worst inflationary period. But if you include those below the middle — Dube looks at the lowest 60 per cent and 80 per cent — their real wages didn’t fall even then, because wage growth has been so much stronger at the bottom end of the labour market. (In another post, Dube also shows how strong labour markets have narrowed racial wage and job disparities to their lowest levels on record).In fact, this lifting of wages at the bottom has undone nearly 40 per cent of the previous four-decade increase in wage inequality.That, then, is the main achievement of the large fiscal spending on workers that has been so strongly criticised by those who think Biden should have been less generous and worried more about inflation. Then there are the industrial effects of Biden’s manufacturing subsidy programmes, which have produced a jump in manufacturing construction and infrastructure spending. There are more US factory jobs than at any point since the end of 2008.So the economic achievements are clear (although as Tej pointed out last week, they may be starting to wane). But the second important fact, then, is that political polling hardly reflects these economic outcomes at all. Paul Krugman has been looking at this puzzle for some time, offering two part-explanations. One points to how people tend to say things are going well for themselves even as they say they are going badly for the country. That’s what the FT’s very own poll suggests, which finds a much larger share of respondents assessing their personal economic situation positively than the economic conditions of the country as a whole (46 per cent compared with 27 per cent; both figures have risen in the past three months). So perhaps it’s the media’s fault: people are wrongly cued to think that the general situation is worse than what their personal experience tells them — a misanthropic version of the Lake Wobegon effect, as it were.Krugman’s other explanation relies on the observation that survey responses to economic questions have become strikingly partisan: people tend to say economic conditions are good (bad) when their party is (not) in power (see John Burn-Murdoch’s chart below). Krugman highlights how this bias is stronger among Republican than Democratic voters, which would increase the negative bias at the moment. Perhaps this can account for the most striking finding of the same FT poll: a higher share of voters — 42 to 31 per cent — say they trust Trump rather than Biden most to handle the economy.These sets of facts, of course, just elaborate the puzzle. Why doesn’t the undeniable economic progress show up in political polling? Is it that Carville is passé, and political support is not (or no longer) about the economy? Or is it still the economy, stupid, but we are missing something and if so what?If the answer is simply that the economy no longer matters, then we have no reason to be puzzled by the polls, and we may as well be reconciled to a Trump victory in November. But if, like me, you find it hard to think the economics-to-voting link no longer exists, what could the explanation be? I have three suggestions, neither of which I can defend with enough conviction to hope to be entirely persuasive.One is blaming the media: people think the economy is doing worse than it is and are intending to vote accordingly (against the incumbent). But surely people do know what their real wage is.Another is that it’s the polling that is misleading. That’s easy to say and hard to substantiate, because I know of no indication pollsters are doing their work less well than they used to. (Although there is a case being made that more biased polling is being “weaponised”.) But I do want to cast our minds back to the 2022 midterm election, where the polls made a lot of people whose understanding of US politics I had previously deferred to, expect a “red wave” Republican triumph that never materialised (as you will remember, the GOP barely retook the House and failed to take the Senate). When I dug into the election results back then, I saw signs that Biden’s economic policies did indeed bear electoral fruit. It has made me much more cautious about US polling since. Could conventional wisdom be blindsided again in November? If so, we’ll gloat that “it’s still the economy, stupid”. A third possibility of saving the economics-to-voting link is that it’s not the polling but the economic data that is off. Not that the outcomes I described above haven’t happened, but that these are not what most give people a sense that the economy isn’t working. What could it be instead? My best guess is that even though most Americans have seen constantly rising real wages since the pandemic, they still have good reason to see the economy as a broken system that is stacked against them. An intriguing new study suggests that people’s unhappiness with the economy does not come down to the sort of outcomes I listed above. Instead, there is a deeper, older and presumably harder-to-remove sense of being disempowered, as individuals cannot insure themselves against uncertainty or protect themselves against the greed of others. This is surely linked to the growing feeling of being taken advantage of by Big Tech, which Cory Doctorow sets out so well in his thesis about “enshittification”.As my colleague Rana Foroohar described it in her excellent column this week, the economic malaise comes from recognising how concentrated economic power has become. And so the economics-to-voting link may well remain strong, but people will try to vote for whoever they think is most likely to break up that concentration of power. The paradox is that Biden has done more than anyone since Franklin D Roosevelt to move in that direction. But the pretend iconoclast of real estate heir Trump has the better rhetoric on wanting to break things up. So my takeaway is that it’s still the economics, stupid. But it is understandable, if frustrating, that people do not dare to believe that the all-too-rare case of an ultimate establishment figure belatedly committed to radical reform — which Biden is, like FDR before him — can be for real. Other readablesThere are lessons to draw from the seeming performance of Russia’s economy — but not what President Vladimir Putin would have you think, I argue in my latest FT column. And here’s another sign of decline to add to those mentioned in the piece: Moscow is postponing a lot of ambitious road-building projects.It’s a US election year — and perhaps the country’s most consequential election ever — so get prepared by signing up to our new newsletter, US Election Countdown.Could a hydrogen economy be built by extracting naturally occurring hydrogen from the Earth’s crust? Geologists are starting to say a hydrogen gold rush is possible.Poland’s Prime Minister Donald Tusk has taken an iron broom to clean up the previous government’s desecration of the rule of law. How is it going?My colleague Chris Giles has written an excellent column on how to get the European economy to perform better — in which he, with great reluctance, conditionally joins the high-pressure economy fan club.Numbers newsRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

CAPE TOWN (Reuters) – South Africa will evaluate the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) held at the central bank annually and withdraw from it when funds are available, Finance Minister Enoch Godongwana told Reuters on Thursday. Godongwana said in his annual budget speech on Wednesday that the government was changing the framework governing the GFECRA account to allow it to draw down 150 billion rand ($8 billion) over the next three years to limit its borrowing.South Africa is struggling with an ailing economy and high debt ahead of a general election on May 29 that could see the governing African National Congress party lose its parliamentary majority for the first time since the end of apartheid 30 years ago.Godongwana told Reuters that using the funds to reduce the country’s debt liability was more effective than allocating them to spending.”We are facing a major challenge of debt which is crowding out all other spending,” said Godongwana.The GFECRA account captures gains and losses on the country’s foreign currency reserve transactions and has a balance of more than 500 billion rand, larger than plausible reserve losses from rand appreciation, the National Treasury said.The treasury said the GFECRA drawdown would result in a saving of about 30 billion rand in debt-servicing costs over the next three years and help reduce the debt-to-GDP ratio, now projected to peak at 75.3% of GDP in 2025/26 from an estimate of 77.7% seen in November. Some analysts had proposed that the money be used to pay down the debts of struggling state-owned companies such as Transnet, the ports and logistics firm.But Godongwana said giving money to Transnet would “just be putting money in a hole.” Instead, he said, the firm should implement its turnaround strategy and use its balance sheet to resolve the challenges it faces.Part of that strategy involves privatising parts of the business that Transnet can no longer maintain, a contentious issue for labour unions, particularly so in an election year.Analysts said the government having more frequent access to the GFECRA proceeds also raises concerns of the money being used to clear up fiscal mismanagement.Godongwana said the framework developed would protect against this but he added that if not closely guarded, there was a risk that future administrations could undo those safeguards.($1 = 18.8901 rand) More

TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the country’s inflation was accelerating as a trend as a tight labour market pushes up wages, reiterating the bank’s conviction that conditions for ending negative interest rates were falling into place.Speaking in parliament, Ueda said Japan’s economy was likely to experience a positive cycle, in which higher job and wage growth leads to moderate rises in inflation.”Service prices continue to rise moderately,” he said on Thursday. “Trend inflation is also gradually accelerating. We will guide monetary policy appropriately in line with such moves.”He added that Japan was in a “state of inflation,” rather than deflation, and is likely to see prices keep rising.The 10-year Japanese government bond yield rose after the remarks, as investors focused on the chance of a near-term end to negative rates. It last stood at 0.725%.Sources have told Reuters the BOJ was on track to end negative rates in coming months despite Japan’s economy slipping into a recession, on growing signs that companies will continue to offer bumper pay amid a tightening job market.A Reuters poll showed more than 80% of economists expected the BOJ to pull short-term interest rates out of negative territory in April.Expectations that Japan’s borrowing costs will remain very low, however, have pushed down the yen to around 150 against the dollar, a level seen by markets as heightening the chance of yen-buying intervention by Japanese authorities. The dollar stood at 150.26 yen on Thursday.Finance Minister Shunichi Suzuki told the same parliament meeting that authorities were watching currency moves with a high sense of urgency.He said the government had no “defence line” that could trigger action, as it was focusing more on the degree of volatility in exchange-rate markets.Former BOJ board member Makoto Sakurai said the central bank could end negative rates as soon as March, but go slow with raising borrowing costs further.”The BOJ will soon end negative rates but keep monetary conditions accommodative for several years, thereby giving the government time to pursue structural reforms,” he told Reuters on Thursday. More

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