Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.European plans of creating a battery supply chain for electric cars independent of China face big delays as companies focus on the US market because of clean energy subsidies, a top manufacturer has warned. Chris Burns, a former Tesla engineer who heads Australian battery materials producer Novonix, told the Financial Times that the US Inflation Reduction Act was drawing producers away from Europe.Novonix, which manufactures the battery component graphite that is vital for the electric car transition, plans to focus on the US market because of incentives in the $369bn act, which the EU and UK have failed to match.“We’ve always looked at expansion into Europe but financing becomes the biggest challenge,” said Burns. “Our focus is on delivering the Riverside site [in Tennessee where it intends to produce graphite] and starting the next site in North America. It will keep us more than busy to the end of this decade.”Burns’s comments highlight the challenge Europe faces in building a supply chain independent of China, the world’s leading supplier of graphite and other raw materials needed for batteries, without an injection of subsidies.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The challenge is particularly daunting for the anode component of the battery, which is made out of graphite, as China controls 75 per cent of this part of the supply chain, according to Benchmark Mineral Intelligence. China’s manufacturers are increasingly targeting Europe and nearby regions for expansion after Washington moved to curb their presence in the US with tougher regulations. Beijing also increased export controls on graphite in October. Shanghai Putailai, a manufacturer of battery materials, announced in May plans to invest $1.3bn in building a plant in Sweden, while Chinese rival Ningbo Shanshan is weighing a similar investment in Finland. In addition, Canadian battery materials group SRG Mining, which has partnered with Chinese technology group C-One, said it plans to build a $300mn-$500mn facility in Morocco to serve the US and European markets.Novonix is aiming to produce 20,000 tonnes of graphite a year at Riverside in Tennessee before expanding further in North America to 150,000 tonnes annually. Investors in Novonix include Korean battery maker LG Energy Solutions and Phillips 66, the US oil refining group that provides a critical source of non-Chinese coke needed to make graphite from the UK’s Humber refinery.“We’ve looked at Europe and the UK on the idea of sourcing from Humber,” Burns said. “But those plans will be in the future.”Burns said Novonix could start drawing up plans for a European plant later this decade but that would depend on commitments from carmakers and cell manufactures to buy its future supply. More

SINGAPORE (Reuters) – The dollar was trying to find a floor on Tuesday in holiday-thinned trade, pressured by signs that inflation in the world’s largest economy is cooling that will likely give the Federal Reserve room to ease interest rates next year.The yen meanwhile steadied near its recent five-month peak on the prospect that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks globally embarked on aggressive rate-hike cycles.Currency moves were largely muted in the day after Christmas, with markets in Australia, New Zealand and Hong Kong still out for the Boxing Day public holiday.Against the greenback, the euro slipped 0.06% to $1.1019, but was not too far from a more than four-month top of $1.1040 hit last week.Sterling was little changed at $1.2701, while the Australian and New Zealand dollars were huddled near their recent five-month peaks.The dollar index languished near a five-month low of 101.42 hit last week, and was last at 101.65.Data released on Friday showed U.S. prices fell in November for the first in more than 3-1/2 years, pushing the annual increase in inflation further below 3% and boosting market expectations of an interest rate cut from the Fed next March.The reading came a week after Fed policymakers opened the door to rate cuts in 2024 at the central bank’s final policy meeting for the year, a move that drove the dollar lower.”The Fed has made considerable progress on inflation, as core started the year closer to an annual rate of 5%, though the job is not yet done in ensuring inflation is on a sustained trajectory toward its 2% target,” Wells Fargo analysts said in a note.In Asia, the yen rose 0.1% to 142.20 per dollar, drawing additional support from comments by BOJ Governor Kazuo Ueda, who signalled the possibility of a policy shift.Ueda said on Monday the likelihood of achieving the central bank’s inflation target was “gradually rising” and it would consider changing policy if prospects of sustainably achieving the 2% target increase “sufficiently”, though he said the BOJ had not decided on a specific timing to change its ultra-loose monetary stance.”BOJ Governor Ueda did not provide any policy guidance in his speech yesterday, though he was hopeful that Japan was finally getting out of the low-inflation environment,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.A slew of data out on Tuesday showed Japan’s jobless rate was unchanged at 2.5% in November from the previous month, while business-to-business service inflation was steady at 2.3% last month.Elsewhere, the kiwi gained 0.1% to $0.63145, while the Aussie last bought $0.68065. More

The data underscores the Bank of Japan’s (BOJ) view that rising service prices will start to replace cost-push inflation as a key driver of price gains, and help achieve its 2% inflation target on a sustainable basis.The year-on-year rise in the services producer price index, which measures what companies charge each other for services, was unchanged from October and higher than a 2.0% gain in September, BOJ data showed. BOJ Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank’s 2% inflation target was “gradually rising”, and that next year’s wage outlook was key to the timing of an exit from ultra-loose monetary policy.He has repeatedly stressed the need for wages to keep rising, heightening market attention to developments in service prices, which reflect the wage pressures companies face. More

TOKYO (Reuters) – Bank of Japan Governor Kazuo Ueda must change his communication style that is confusing markets into believing an exit from ultra-loose monetary policy is imminent, former BOJ board member Takako Masai told Reuters.Less than a year into the job, Ueda has already wrong-footed markets twice in comments about the policy outlook including on Dec. 7, when he elaborated on what the BOJ could do after ending its negative interest rate policy.Bond yields and the yen surged on the comments, made in parliament, by fuelling market expectations the BOJ could end negative interest rates as early as in December. The BOJ made no change this month to its ultra-loose policy and dovish guidance.Ueda’s hawkish remarks in parliament contrasted with recent comments by several board members warning against any premature debate of an exit, casting doubt on whether the governor was properly representing the board’s view in public, Masai said in an interview on Monday.”As chair of the policy meetings, the governor shouldn’t speak beyond what has been decided at the board,” said Masai, who served at the BOJ’s nine-member board from 2016 to 2021.”The sequence of the BOJ’s recent communication is confusing and may narrow its options” on the exit timing by prompting traders to price in the chance of imminent action, Masai said.With inflation exceeding the BOJ’s 2% target for well over a year, many market players expect the central bank to lift short-term rates out of negative territory next year, with some betting on action as early as January.In a country that has experienced decades of stagnant price and wage growth, creating a positive wage-inflation cycle and making sure it stays will likely take time, Masai said.Ending ultra-loose policy soon would deviate from the government’s focus on achieving durable wage growth, and ensuring Japan does not revert to deflation, she added.The government has yet to officially declare that Japan is permanently out of deflation. Prime Minister Fumio Kishida has made a full exit from deflation his policy priority, and announced a range of steps to prod firms to boost wages.”It’s hard to see the BOJ change policy as quickly as markets expect, such as in January or April, when taking into account the (dovish) comments of each board member and the government’s assessment of the economy,” she said.The BOJ board holds a policy-setting meeting eight times a year. The governor serves as chair of each meeting, and explains the board’s decision at a post-meeting news conference.Masai is currently chairperson at private think tank SBI Financial and Economic Research Institute. More

Residual anger about high inflation in recent years appears to have soured consumers’ views of the economy.
That discontent comes even as a strong labor market, appreciating home values and a stock market rebound has made some positive about their financial situation.

Grocery items are offered for sale at a supermarket on August 09, 2023 in Chicago, Illinois.
Scott Olson | Getty Images

When Kyle Connolly looks back at 2023, she sees it as a year defined by changes and challenges.
The newly single parent reentered the workforce, only to be laid off from her job at a custom home-building company in November. At the same time, Connolly has seen prices climb for everything from her Aldi’s grocery basket to her condo’s utility costs.

In turn, she’s cut back on everyday luxuries like eating out or going to the movies. Christmas will look pared down for her three kids compared to years prior.
“I’ve trimmed everything that I possibly can,” said the 41-year-old. “It sucks having to tell my kids no. It sucks when they ask for a little something extra when we’re checking out at the grocery store and having to tell them, ‘No, I’m sorry, we can’t.'”
Economic woes have seemed more apparent within her community in Florida’s panhandle. Connolly has noticed fewer 2022 Chevy Suburbans on the road, replaced by older Toyota Camry models. The waters typically filled with boats have been eerily quiet as owners either sold them or tried to cut back on gas costs. Fellow parents have taken to Facebook groups to discuss ways to better conserve money or rake in extra income.
The struggles among Connolly and her neighbors highlight a key conundrum puzzling economists: Why does the average American feel so bad about an economy that’s otherwise considered strong?

‘High prices really hurt’

By many accounts, it has been a good year on this front. The annualized rate of price growth is sliding closer to a level preferred by the Federal Reserve, while the labor market has remained strong. There’s rising hope that monetary policymakers have successfully cooled inflation without tipping the economy into a recession. 

Yet closely watched survey data from the University of Michigan shows consumer sentiment, while improving, is a far cry from pre-pandemic levels. December’s index reading showed sentiment improved by almost 17% from a year prior, but was still nearly 30% off from where it sat during the same month in 2019.
“The main issue is that high prices really hurt,” said Joanne Hsu, Michigan’s director of consumer surveys. “Americans are still trying to come to grips with the idea that we’re not going back to the extended period of low inflation, low interest rates that we had in the 2010s. And that reality is not the current reality.”

Still, Hsu sees reason for optimism when zooming in. Sentiment has largely improved from its all-time low seen in June 2022 — the same month the consumer price index rose 9.1% from a year earlier — as people started noticing inflationary pressures recede, she said.
One notable caveat was the drop in sentiment this past May, which she tied to the U.S. debt ceiling negotiations. The 2024 presidential election has added to feelings of economic uncertainty for some, Hsu said.

Inflation vs. the job market

Continued strength in the labor market is something economists expected to sweeten everyday Americans’ views of the economy. But because consumers independently decide how they feel, jobs may hold less importance in their mental calculations than inflation.
There are still more job openings than there are unemployed people, according to the latest data from the Bureau of Labor Statistics. Average hourly pay has continued rising — albeit at a slower rate than during the pandemic — and was about 20% higher in November than it was in the same month four years ago, seasonally adjusted Labor Department figures show.
That’s helped boost another widely followed indicator of vibes: the Conference Board’s consumer confidence index. Its preliminary December reading was around 14% lower than the same month in 2019, meaning it has rebounded far more than the Michigan index.

While the Michigan index compiles questions focused on financial conditions and purchasing power, the Conference Board’s more closely gauges one’s feelings about the job market. That puts the latter more in line with data painting a rosier picture of the economy, according to Camelia Kuhnen, a finance professor at the University of North Carolina.
“You think that they’re talking about different countries,” Kuhnen said of the two measures. “They look different because they focus on different aspects of what people would consider as part of their economic reality.”
A hot job market can be a double-edged sword for sentiment, Michigan’s Hsu noted. Yes, it allows workers to clinch better roles or higher pay, she said. But when those same workers put on their consumer hats, a tight market means shorter hours or limited availability at their repair company or veterinarian’s office.

Silver linings for some

Other reasons why consumers feel positively about the economy this year can only be true for certain — and often wealthier — groups, economists say.
UNC’s Kuhnen said Americans would be pleased if they are homeowners seeing price appreciation. Another reason for optimism: If they had investments during 2023’s stock market rebound.
Without those cushions, people on the lower end of the income spectrum may feel more of a pinch as higher costs bite into any leftover savings from pandemic stimulus, Kuhnen said. Elsewhere, the resumption of student loan payments this year likely also caused discontent for those with outstanding dues, according to Karen Dynan, a Harvard professor and former chief economist for the U.S. Treasury Department.

Marissa Lyda moved with her husband and two kids to Phoenix from Portland earlier this year, in part due to lower housing costs. With profits from the value gained on the property she bought in 2019, her family was able to get a nicer house in the Grand Canyon state.
Yet she’s had to contend with an interest rate that’s more than double what she was paying on her old home. Though Arizona’s lower income tax has fattened her family’s wallet, Lyda has found herself allocating a sizable chunk of that money to her rising grocery bill.
The stay-at-home mom has switched her go-to grocer from Kroger to Walmart as value became increasingly important. She’s also found herself searching harder in the aisles for store-brand food and hunting for recipes with fewer ingredients.
Her family’s financial situation certainly doesn’t feel like it reflects the economy she hears experts talking about, Lyda said. It’s more akin to the videos she sees on TikTok and chatter among friends about how inflation is still pinching pocketbooks.
“I look at the news and see how they’re like, ‘Oh, best earnings, there’s been great growth,'” the 29-year-old said. “And I’m like, ‘Where’s that been?'”

‘Just trying to hold on’

Economists wonder if social media discourse and discussion about a potential recession have made Americans think they should feel worse about the economy than they actually do. That would help explain why consumer spending remains strong, despite the fact that people typically tighten their belts when they foresee financial turmoil.
There’s also a feeling of whiplash from the runaway inflation that snapped a long period of low-to-normal price growth, said Harvard’s Dynan. Now, even as the annual rate of inflation has cooled to more acceptable levels, consumers remain on edge as prices continue to creep higher.
“People are still angry about the inflation we saw in 2021 and, in particular, 2022,” Dynan said. “There’s something about the salience of … the bill for lunch that you see every single day that just maybe resonates in your brain, relative to the pay increase you get once a year.”

Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., December 13, 2023. 
Kevin Lamarque | Reuters

Another potential problem: The average person may not completely understand that some inflation is considered normal. In fact, the Federal Reserve, which sets U.S. monetary policy, aims for a 2% increase in prices each year. Deflation, which is when prices decrease, is actually seen as bad for the economy.
Despite these quandaries, economists are optimistic for the new year as it appears increasingly likely that a recession has been avoided and the Fed can lower the cost of borrowing money. For everyday Americans like Connolly and Lyda, inflation and their financial standing will remain top of mind.
Lyda has cut treats like weekly Starbucks lattes out of the budget to ensure her family can afford a memorable first holiday season in their new home. In 2024, she’ll be watching to see if the Fed cuts interest rates, potentially creating an opportunity to refinance the loan on that house.
“You just have to realize that every season of life may not be this huge financial season,” Lyda said. “Sometimes you’re in a season where you’re just trying to hold on. And I feel like that’s what it’s been like for most Americans.” More

TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank’s inflation target was “gradually rising” and it would consider changing policy if prospects of sustainably achieving the 2% target increase “sufficiently”.While companies are becoming more open to raising wages and prices, the key is whether wages will continue rising next year and lead to further increases in service prices, Ueda said.”If the virtuous cycle between wages and prices intensifies and the likelihood of achieving our price target in a sustainable and stable manner rises sufficiently, we will likely considering changing policy,” Ueda said, offering the clearest sign to date of the chance of ending ultra-easy monetary policy.Ueda said the BOJ had not decided on a specific timing to change the loosest monetary stance of any major central bank, due to uncertainties over economic and market developments.”We will carefully examine economic developments as well as firms’ wage- and price-setting behaviour, and thereby decide on future monetary policy in an appropriate manner,” he said.The language differed slightly from Ueda’s usual phrase calling for the need to “patiently” maintain ultra-loose policy for the time being.The Japanese government bond market shrugged off Ueda’s remarks, with yields falling as the BOJ conducted a regular bond buying operation across the curve.With inflation exceeding the target for well over a year, many market players expect the BOJ to lift short-term interest rates out of negative territory next year, with some betting on higher rates as early as January.Ueda said Japan’s prolonged experience of low inflation and stagnant wage growth likely heightened public perceptions that prices and wages would remain stuck around zero.Changing such perceptions and creating a cycle in which wages and prices rise in tandem would have benefits such as leading to more efficient allocation of labour, he said.Achieving positive inflation will also push up nominal interest rates and give the central bank room to substantially lower rates when needed to prevent the economy from slipping back to deflation, Ueda said.He pointed to recent progress, such as a gradual acceleration in service inflation and signs of change in the way companies set prices and pay.”The likelihood of Japan’s economy getting out of the low-inflation environment and achieving our price target is gradually rising, though the likelihood is still not sufficiently high at this point,” Ueda said.”Since there are extremely high uncertainties surrounding the economy and prices at home and abroad, it’s necessary to examine how firms’ wage- and price-setting behaviour will change,” he added. More

The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.”We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.”This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.The bank will next convene to set its benchmark rate on Feb. 16.The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle. More

Central Bank Governor Elvira Nabiullina said last month that Russia’s depleted labour force was causing acute labour shortages and threatening economic growth as Moscow pumps fiscal and physical resources into the military.Hundreds of thousands of Russians left the country following what the Kremlin calls its special military operation in Ukraine which began in February 2022, including highly-qualified IT specialists.Those who took flight either disagreed with the war or feared being called up to fight in it. The outflows intensified after President Vladimir Putin, who earlier this month lauded a historically low jobless rate of 2.9%, announced a partial military mobilisation of around 300,000 recruits in September 2022.Putin has said he sees no need for a new wave of mobilisation for now.Izvestia, citing the author of the research, Nikolai Akhapkin, said that labour shortages had sharply increased in 2022 and 2023. It said that drivers and shop workers were in particularly high demand.According to official data, cited by the newspaper, the number of vacancies in the total workforce rose to 6.8% by the middle of 2023, up from 5.8% a year earlier.”If we extend the data presented by Rosstat (the official statistics agency) to the entire workforce, the shortage of workers in 2023 will tentatively amount to 4.8 million people,” the newspaper cited the new research as saying.It noted that Labour Minister Anton Kotyakov had said that workforce shortages were felt hard in the manufacturing, construction and transportation sectors, forcing companies to raise wages to try to attract more employees. The newspaper cited Tatyana Zakharova of Russia’s University of Economics named after G.V. Plekhanov as saying that the labour shortages would probably persist next year, as vacancies for factory workers, engineers, doctors, teachers and other professions would he especially hard to fill.She cited poor demographics and “the migration of the population” as among the reasons for the labour shortages. More