Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Supply chain wobbles are back. Just as the effects of pandemic-era backlogs and port closures have unwound, two continental shipping passages, the Suez and Panama canals, are suffering from obstructions to trade traffic. Unlike the past few festive seasons, there is less concern about any delays spoiling Christmas. Most toy and food stocks have already been built up ahead of the latest blockages. The problems have however introduced a new risk for the global economy in 2024.Around 12 per cent of global trade passes through the Red Sea, which is bookended by the Suez Canal to the north and the Bab-el-Mandeb strait — known as the Gate of Tears — to the south. Since mid-November more than 10 transiting vessels have been attacked by Yemen’s Iran-aligned Houthi militants. Many shipping companies have responded by postponing journeys through the region — a crucial passage between Asia and Europe. Oil company BP announced on Monday that it had paused shipments through the strait, citing a “deteriorating security situation”.Since the region is an important freight channel for oil, liquefied natural gas and consumer goods, resulting shortages and bottlenecks could push up inflation. Transport costs are rising too. Insurance premiums for some ships traversing the region are increasing. Maersk also announced it would reroute ships around the Cape of Good Hope. If more followed, global trading costs would push higher. The route around Africa adds an additional 3,200 miles and nine extra days of travel on a typical journey between Asia and Europe, notes Clarksons, a shipping services provider. Oil and gas prices have not risen significantly so far.Problems in the Suez also risk combining with shocks elsewhere. Across the world, the Panama Canal is suffering from low water levels linked to drought. The channel between the Pacific and Atlantic Ocean is operating at only 55 per cent of its normal capacity, according to Capital Economics. Transits have been restricted for the coming months, and prices have gone up. The canal normally carries 5 per cent of seaborne trade, particularly US fuels and grains bound for Asia.The knock-on implications for global inflation depend on how long both blockages persist, and whether other shocks pile on top. The New York Fed’s indicator of supply chain pressures has perked up, albeit from a low point. The aggregate impact is also unclear. For instance, European gas prices have actually fallen recently on the prospect that Asia-bound American LNG via the Panama Canal may be redirected to Europe.To contain the economic fallout, it is essential to get naval protection to the Red Sea quickly. A US-led international coalition to provide security for freight is gaining momentum. Meanwhile water levels in the Panama Canal have improved slightly. But neither development should make businesses or policymakers complacent that the issues are resolved.Some companies have already diversified their supply routes following the pandemic. This shock underscores the need for options. But the Suez and Panama Canal routes have few viable alternatives. They accounted for over half of the container shipping by volume scheduled between Asia and North America in the third quarter, according to estimates from trade analysis group MDS Transmodal. This means authorities must invest in the resilience of key trading chokepoints, both in terms of their security and climate adaptability, and by improving port efficiency and alternative transport routes.The pandemic and war in Ukraine may have been one-off events. But the shocks to the Panama and Suez canals are a reminder that with climate change and growing geopolitical risk, supply chain instability is here to stay. More

The government plans to cut the development ministry’s budget by a further 400 million euros ($438 million) next year, on top of a 530 million-euro cut already planned for 2024 before a constitutional court ruling forced the coalition to draw up new spending plans.”Germany is the second-largest donor in the world and these cuts have a signalling effect on other countries,” said Meike Riebau, director of advocacy and policy at Save the Children Germany.The budget for development stood at 13.4 billion euros in 2021 when the government took office. At the end of this legislative term, it will have around 3 billion less, said Lukas Goltermann, policy adviser at VENRO, an association of development and humanitarian non-governmental organisations in Germany. “I don’t think Germany has ever seen such a big cut in its development spending,” said Goltermann. “It’s important not only from a moral perspective but also from a strategic perspective.”Together with the U.S. and the EU, Germany provided more than 50% of official development assistance in 2022, Alina Hemm, consultant at Seek Development, said.”If Germany steps down from its forerunner role going forward, we are at risk of a huge deficit in development finance,” Hemm said. Global health, gender equality and agriculture, climate and social protection are the top development priorities in the German government’s coalition agreement.Chancellor Olaf Scholz has said the government will stick to its goals “but we must do so with less money which means cuts and savings”. Details on the cuts were announced on Tuesday and now each ministry will have decide how to put them into effect.”We are currently working on implementing the austerity decision,” a spokesperson for the ministry of economic cooperation and development said.Deborah Duering, a member of parliament for the Greens – part of the ruling coalition – spoke out against the cut.”It is not only a humanitarian imperative but also financially more sustainable to prevent crises rather than manage them later,” said Duering, who heads the economic cooperation and development committee in the Bundestag.Development aid is also key for Germany from a geopolitical and geoeconomic point of view, the experts said. “We can’t shape international agendas if we cut development aid,” said Stephen Klingebiel, head of Inter- and Transnational Cooperation at the German Institute of Development and Sustainability (IDOS).($1 = 0.9126 euros) More

UK inflation slowed sharply in November to 3.9 per cent, triggering a slide in the pound, a stock market rally and increased expectations of an interest-rate cut early next year. Wednesday’s number was well below the 4.4 per cent year-on-year increase in consumer prices predicted by economists in a Reuters poll, as inflation was tugged lower by petrol, food and leisure.The 3.9 per cent figure was also the lowest inflation rate since September 2021, according to the Office for National Statistics data, fuelling speculation about when the Bank of England will reduce interest rates from their 15-year high. The November data — the first time food inflation has been in single digits since June 2022 — will bolster Prime Minister Rishi Sunak, who has vowed to bring prices under control ahead of the election expected next year.Samuel Tombs, economist at the consultancy Pantheon Macroeconomics, said the “surprisingly sharp fall” in consumer price inflation made it more likely that the BoE would cut rates in the first half of 2024, “far earlier than it has been prepared to signal so far”.Markets now fully expect a 0.25 percentage point cut by May and anticipate that rates will fall by 1.34 percentage points over the course of next year — compared with expectations last Friday of a 1.07 percentage point decline.The pound fell by 0.6 per cent against the dollar to $1.265. The FTSE 100 initially rose to its highest point since May, and was trading up 0.6 per cent by midday, while government bonds also rallied.The yield on rate-sensitive two-year gilts, which moves inversely to price, dropped 0.17 percentage points to 4.12 per cent, the lowest since late May. Tombs added that consumer price inflation now looked set to fall “far more quickly” than the BoE’s Monetary Policy Committee predicted last month.Core inflation, which excludes energy and food prices, was 5.1 per cent in the year to November, compared with 5.7 per cent in the previous month, the ONS said. That was also comfortably below economists’ forecasts. The BoE voted this month to keep rates unchanged at 5.25 per cent, warning it was confronting more stubborn inflation than in the US and euro area. Headline CPI growth remains higher in the UK than equivalents in the US and the EU. The central bank has insisted it will not be rushed into lowering rates, as policymakers wait for conclusive evidence in the labour market that they have done enough to return inflation to its 2 per cent target. Seema Shah, chief global strategist at Principal Asset Management, said that market expectations of deep rate cuts next year looked “knee-jerk”, since the lower-than-anticipated figures amounted to “one data point and the BoE need a string of them”.She added that the BoE had been “unclear in its communications all year, very topsy turvy, and it’s created an unsettling environment for investors . . . The amount of swings in rate expectations is quite unbelievable”.Ben Broadbent, a BoE deputy governor, said on Monday that volatile, inconsistent data had made it hard to tell how fast wages were growing and why, adding to arguments for the MPC to wait longer before it cuts rates. As well as high wage growth, the MPC has homed in on persistently high services inflation, which it sees as a key gauge of domestic price pressures. But Wednesday’s figures offered some encouraging signs on that measure, with the CPI services rate easing from 6.6 per cent in October to 6.3 per cent in November. James Smith, economist at bank ING, said the decline in the headline CPI index was broad-based, driven by “discounting across the board” on consumer goods, including clothing, household goods and cars. Almost all of the 12 subcategories of the consumer price index saw their year on year rate either fall or hold steady. Chancellor Jeremy Hunt welcomed Wednesday’s data, saying it showed that “we are starting to remove inflationary pressures from the economy”. “Many families are still struggling with high prices so we will continue to prioritise measures that help with cost of living pressures,” he added. Wednesday’s figures come after declining inflation in October allowed Sunak to declare he had met his goal of halving inflation by the end of 2023. But economists emphasise that prices of many goods remain much higher than they were before inflation surged, limiting any feelgood factor among voters. Sandra Horsfield of Investec said it was not clear that the UK public would celebrate the fall in inflation as much as markets. “Lower inflation only means a slower (and still above target) rate of price rises,” she said, arguing that the electoral benefit of meeting Sunak’s promise “may be limited”. Rachel Reeves, shadow chancellor, said the decline in inflation would be a “relief to families”. But she added: “Prices are still going up in the shops, household bills are rising, and more than 1mn people face higher mortgage payments next year after the Conservatives crashed the economy.” More

LOS ANGELES/NEW YORK (Reuters) – Roxanne Ross of Florida is one of a growing number of Americans dodging higher interest rates on credit cards by instead turning to “buy now, pay later” services as they shop for holiday merchandise.Ross has her eyes on the latest version of Apple (NASDAQ:AAPL) AirPods for $249. But as of Monday, she was considering using Klarna, a buy now, pay later service, to spread the cost across four installments that stretch into next year.With U.S. credit card balances at record levels and defaults rising, more shoppers than ever are tapping buy now, pay later services on key shopping days to stretch their budgets. While they can be a tool for shoppers like Ross, who plans to continue taking out short-term, interest-free loans she has used for everything from plane tickets to hair extensions – consumer advocates are raising red flags about cash-strapped shoppers who are adding months-long loans with rates that can top out at 36% – the maximum lenders can charge in many states. Demand for debt counseling services is up significantly from last year, defying the seasonal slowdown experienced during the holidays, said Bruce McClary, spokesman for the ​​​​​​​National Foundation for Credit Counseling.The increased use of buy now, pay later loans from providers like Klarna, Affirm, PayPal (NASDAQ:PYPL) and Afterpay “signal an increase of short-term debt on top of the more than $1 trillion in outstanding credit card balances,” McClary said. Shoppers can purchase anything from a $3,253 Jil Sander leather tote bag marked 30% off from luxury retailer Farfetch (NYSE:FTCH), to groceries from Walmart (NYSE:WMT) and Burger King gift cards valued at up to $500 — getting the merchandise before it’s fully paid for.Walmart in 2021 pulled the plug on its layaway program, which allowed people to take home merchandise after completing a series of financed payments. The world’s biggest retailer, Walmart added buy now, pay later options through Affirm that same year, setting the stage for the industry’s capture of 5% of total e-commerce worldwide. Retailers pay fees of anywhere from 2% to 8% of the purchase price to buy now, pay later firms. In comparison, credit card processing “swipe” fees run 2% to 4%. Klarna’s holiday “hot deals” include 51% off the last generation iPhone 14 Pro through Walmart, with a price tag of $699. Consumer advocates warn that such loans nudge some shoppers to splurge on jewelry, trendy clothing, video game consoles or appliances they otherwise could not afford. Providers told Reuters they are giving shoppers alternatives to high-cost credit cards, and are only extending loans to people they believe are willing and able to repay. Credit analysts are also registering concern about the spike in shoppers turning to Affirm, Klarna and other ubiquitous payment schemes for gifts this Christmas, when higher costs for housing and food as well as borrowing on everything from credit cards to car loans squeeze budgets. “It feels like the holiday debt hangover could be particularly nasty this year,” Bankrate analyst Ted Rossman said.CHARGING 36% INTERESTThe services do check shoppers’ credit ratings to determine whether and what rate of interest to charge. Most heavily advertise 0% interest. But at Affirm, for example, interest-free loans accounted for 26% of its products in its latest quarter, while interest-bearing loans accounted for 74%, according to a company earnings presentation. While cash-flush consumers are users, data shows that the typical BNPL borrower “already has more debt, is already more financially vulnerable and under stress,” said Jennifer Chien, senior policy counsel for Financial Fairness at Consumer Reports.The loans generally do not help build credit, but they can hurt scores when shoppers miss a payment.Financially vulnerable households that use the loans to buy food and other essentials can see their debt snowball, which puts them in an even deeper hole, debt counselors warned.But even users who aren’t delinquent in their payments can quickly become overextended, raising the risk of spiraling costs, credit analysts warned.Seattle-area construction foreman Robert Boyer learned the hard way. He has a total balance of more than $4,000 from 18 different Affirm buy now, pay later loans on Amazon.com (NASDAQ:AMZN) merchandise, including a $700 drone, a hard hat, work boots and tools. Boyer, 51, has a previous bankruptcy years ago, and is careful not to run up credit card debt. A recovering addict, he says he got hooked on the instant gratification of buying with small monthly payments of $18 to $40. “I just wanted the stuff,” said Boyer, who admits he didn’t read the fine print. In a recent review of the debt, he found that the interest rates on his loans range from about 30% to 36%. “It’s a trap. I was absolutely caught in it,” said Boyer, who shared a screenshot showing that one $572 loan at the highest interest rate will ultimately cost him $747. He intends to repay everything in full, and doesn’t plan on taking on any more debt – even though the Affirm app shows he still has $1,630 of purchasing power at Walmart and the same amount at jeweler Zales. More

SINGAPORE (Reuters) – Heading into 2024, analysts say the U.S. recession they’d been forecasting for two years isn’t coming anymore. Everyone else, from companies to investors, is still bracing for a slowdown caused by tepid consumer demand.Dissonance between the habitually bullish investment bank analysts and the more circumspect money managers is not new. What’s different this time is the level of prudence and caution from some top companies as they outline their plans for next year.Real money managers are in no doubt about which side to trust. After months of being wrong footed, sell-side analysts are a bit too bullish about growth prospects, Fed rate cuts and a consumption recovery, they say.”Take a grain of salt maybe to measuring the efficacy of some of these sell-side forecasts,” says Patrick McDonough, a portfolio manager for PGIM Quantitative Solutions. “I would be a little bit more on the side of the companies.Consensus forecasts from major banks, including Goldman Sachs, Morgan Stanley, UBS and Barclays, are for global growth to be constrained in 2024 by elevated interest rates, pricier oil and a weakened China, but with low odds for a recession. A year ago, many banks were forecasting a U.S. recession.Businesses are sounding more grim than they did last year.In its collection of management commentary from 150 earnings calls in the third-quarter reporting season, Deutsche Bank last month said companies broadly characterized demand as being somewhat weak, but not alarmingly so. Companies have continued to cut inventories as they adjust to sluggish demand for goods.The words used by companies to describe demand included soft, sluggish, slow, lackluster, choppy, muted, constrained, challenging, weak, pressured and uneven, Deutsche said.Retailer Walmart (NYSE:WMT) said earlier this month that while it has been surprised by the resilience of the consumer this year in the face of rising prices, that behaviour was changing and it was turning cautious.Walmart’s chief financial officer John David Rainey told a Morgan Stanley consumer and retail conference earlier this month the firm wasn’t trying to ring an alarm bell, but that caution was “certainly a departure from what we saw in the first three quarters of the year”.In its latest earnings transcript, discount chain Dollar General (NYSE:DG) said gross profit was down, interest expenses had climbed and that it anticipated “customer spending may continue to be constrained as we head into 2024, especially in discretionary categories.”Consumer giant Procter & Gamble (NYSE:PG) sounded a more optimistic note. Andre Schulten, the company’s chief financial officer, recently said P&G was able to grow its share of volume and value in U.S. markets in the latest quarter, noting the “consumer remains strong.The disconnect does not perturb fund managers. What matters to them however is whether the Federal Reserve manages to avert recession and yet contain inflation, without hurting consumers.After leaving markets guessing for months, the Fed’s most recent update shows it recognizes  that need for balance and that officials are sensitive to the risks of over-tightening policy and pushing the economy into a faster than necessary slowdown.Several companies are already feeling the slowdown.”The consumer is starting to slow down a little bit and the consumer-based companies, which really are almost all the big companies at this point, are starting to talk about that,” said PGIM’s McDonough. The global asset manager has $1.27 trillion in assets.Consumer spending has indeed been cooling, as per surveys from the Institute for Supply Management (ISM). A November survey from the Conference Board showed about two-thirds of consumers still perceived a recession to be “somewhat” or “very likely” to happen over the next year.RECESSION IS COMING?The past two years haven’t been easy for macro pundits trying to reconcile the drivers of a post-pandemic bounce and trillions of dollars worth of stimulus in global markets alongside hawkish central banks.Indicators from manufacturing surveys to an inverted U.S. yield curve and a bumper fiscal spending plan all screamed slowdown, or even recession.Reuters polls conducted through 2022 and until mid-2023 consistently showed economists’ median probability for a U.S. recession within a year were above 60%. That probability is now closer to 45%.”To be fair, it’s been a difficult year,” said Chris Rands, a senior portfolio manager with the global multi-asset team at Nikko Asset Management.”If you were to go back and look historically, if you use U.S. lead indicators, for example, they’ve been telling you that the U.S. should have entered a recession 12 months ago.””But if you’ve been able to make that argument for 12 months, you’ve potentially got egg on your face.”Big banks forecast the global economy slowing in 2023, with a likely U.S. recession. Even the most bullish forecasts had the S&P 500 rising about 9% in 2023. It has rallied 21% so far.In 2022, sell-side analysts from major banks expected growth to stumble but for stocks to keep rising. The S&P 500 fell 19% that year.Forecasts for 2024 are more conservative, and laced with caveats. Even the most bullish Street forecasts for US stocks are for single-digit gains.”Companies talk to their bankers and to economists and consultants, and so on. And so they are all getting the same picture, which is there’s going to be a slowdown,” said Deutsche Bank’s Thatte.”They are biding their time and being cautious which makes sense. And so if growth picks up, they will respond accordingly.” More

LONDON (Reuters) -Like medieval King Canute’s unsuccessful attempt to command the incoming tide to stop, central banks’ attempts to push back against swelling interest rate cut bets seem forlorn.But like the story of the old Anglo-Norse monarch, there’s more to these old yarns than meets the eye.For many, the apocryphal tale of Canute ordering the tide to stop just illustrates foolish overconfidence in regal power. Yet chroniclers insist the wily king was in fact just showing his courtiers the limits of his earthly majesty in the face of overarching forces of god and nature.Stretching the analogy at bit, a similar nuance for central banks is important looking ahead to 2024.After acknowledging the interest rate cycle had turned, many Federal Reserve and other central bank officials now feel compelled to stop the tide from coming in too fast – scrambling to warn markets not to overstep the mark.On the face of it, that seems a bit futile – at least trying to frustrate long-maturity bond yields from pricing what many will reasonably see as a full cyclical downswing in rates over the years ahead. The Fed and others officials could prod and poke futures and short rates pricing by protesting against the now-assumed rate cut timings – but stopping a dash for 10-or 30-year coupons is a different matter altogether and largely outside its control as it hinges more on how the economy unfolds.Yet, the Fed will surely have known last Wednesday exactly what changed projections for next year would unleash. And with armies of researchers and market liaison staff – it will also know that rhetorical pushback on economically sensitive long rates won’t cut it once an easing cycle is started.After all, markets were already priced for 100 basis points of cuts when the standing Fed forecasts still had a median ‘dot’ pointing to one more hike this year. The fact they’re now pricing up to 150bps of cuts next year when the Fed policymaker average has shifted to cuts of 75bps is not greatly surprising.So, much like Canute, the Fed – and its counterparts in continental Europe where inflation is already back near target – may just be playing a game of optics while acknowledging the direction of travel in markets is both a little beyond their control now and possibly what they wanted anyway. Perhaps. ECB board member Isabel Schnabel’s dramatic switch from hawk to dove earlier this month is case in point – and any attempt at stanching the market flow after that switch may just seem mischievous.Publicly at least, central bankers often want to distance themselves from markets altogether – preferring to see price shifts as a force of nature as changeable as the wind, or indeed the tide.”One of the things I’ve learned is I don’t control markets and so they’re going to do what they’re going to do,” Richmond Fed President Thomas Barkin opined on Tuesday.And even though the Fed will insist it’s “data dependent” from here, Barkin seemed pretty comfortable with the state of play and what the Fed was indicating.NEW ‘RESTRICTIVE’ MANTRA What’s more, the ‘higher for longer’ mantra prevalent at most top central banks for so long has shifted subtly too – to “more restrictive for longer”. “It will be important for monetary policy to be restrictive for an extended period,” Bank of England Deputy Governor Sarah Breeden said on Wednesday.But of course “restrictive” is not strictly where rates are now. If rates above the Fed’s unchanged long-term neutral rate of 2.5% are technically bearing down on the economy, then that leaves a lot of potential easing while remaining ‘restrictive’. Even matching the markets’ slightly caffeinated 150bps would leave policy rates at a historically bruising 4.0%. What’s more, further disinflation only lifts the real policy rate from here as the economy slows, requiring some offset just to keep real rates where they are.And in the end, the Fed has no interest in triggering recession if inflation is contained – its dual mandate actually dictates otherwise.San Francisco Fed chief Mary Daly made that point crystal clear this week in an interview with the Wall Street Journal, pithily dismissing any suggestion of some scorched earth monetary policy.”We don’t give people price stability but take away jobs,” she said.So what then of the market thinking that Chicago Fed boss Austan Goolsbee this week claimed to be “confused” by – the relentless tide itself?In some respects, central banks allowing markets to ease credit conditions into the coming slowdown, while appearing to talk tough, could be seen as an impressive attempt at fine tuning the fabled ‘soft landing’. With the full force of past policy rate hikes yet to hit with its traditional lag, bond market easing now could balance the ship. For all the official comments attempting to halt the rush, money markets still imply – give or take 10bps or so – some 150bps of easing from the Fed and ECB next year and about 120bps from the BoE. Bank of America’s final global fund manager survey of the year perhaps gave a better picture of the cresting waves.Almost 90% of asset managers expect rates to be lower this time next year, 80% expect inflation will be lower and a record 62% see bond yields lower. And just as significantly, more funds saw global recession as the biggest tail risk to the year’s benign ‘soft landing’ consensus than saw sticky inflation or hawkish central banks as a threat.In less than two months, benchmark 10-year Treasury yields have dropped 113bps, British gilt yields have dropped 112bps and German bund equivalents have lost 95bps. And yet, all three borrowing rates are only roughly where they were 12 months ago – and at least twice where they were 12 months before that.There may be some way to go yet before high tide is reached and not a great deal that will stand in its way. The opinions expressed here are those of the author, a columnist for Reuters More

(Reuters) – Goldman Sachs on Wednesday advanced its expectation on the timing of interest-rate cut by the Bank of England to May from June, while maintaining the size of cut at 25 basis points per meeting until the policy rate reaches 3% in May 2025.British inflation plunged in November to its lowest rate in over two years, prompting investors to pile further into bets that the Bank of England will cut interest rates next year. More

Marcos, in a speech on Wednesday following the enactment of the budget, said his government was committed to “good fiscal stewardship”, promising to spend the budget, which is nearly a 10th higher than this year’s spending plan, efficiently.”We can be reckless, take the easy path, borrow, let our children pick today’s tab up tomorrow. But debt is not the kind of inheritance that we want to leave those who will come after us,” Marcos said.The government has yet to release a breakdown of the allocation, but the constitution mandates that the education sector gets a lion’s share of the national budget. The Philippines, which this year grappled with soaring inflation, expects 2024 to be another challenging year as it braces for the impact of the El Nino weather phenomenon.It has abandoned next year’s 6.5% to 8.0% gross domestic product growth target range and narrowed it to 6.5% to 7.5% to take into account impact of extreme weather, which could potentially dampen agricultural production. For 2025, the government said it would propose a 6.12 trillion pesos budget. ($1 = 55.8050 Philippine pesos) More