Economy

FRANKFURT (Reuters) – The European Central Bank will need at least until spring before it can reassess its policy outlook and market expectations for an interest rate cut in March or April are premature, ECB policymaker Bostjan Vasle said on Monday. The ECB left interest rates unchanged last week and guided for steady policy in coming months, even as investors piled pressure on the bank to follow the U.S. Federal Reserve in signalling rate cuts given an a string of unexpectedly benign inflation data. But Vasle, Slovenia’s central bank governor, pushed back on market bets and even argued that financing conditions may no longer be restrictive enough, given tumbling bond yields and expectations for 150 basis points of rate cuts in 2024.”Market expectations for interest rates cuts are premature in my view, both with regard to the start of cuts and the totality of moves,” Vasle told Reuters.”The market pricing has lowered the level of restriction and this recent accommodation priced into interest rates is inconsistent with the stance appropriate to return inflation to target,” said Vasle, who is considered among the more conservative members of the ECB’s rate-setting Governing Council. Sources close to the discussion last week told Reuters that a revision of the ECB’s message before March was unlikely, making any rate cut before June difficult.Markets now see a 50-50 chance of a rate cut in March while a cut is fully priced in by April and more than two moves are seen by June. But Vasle argued that the ECB may need to see the back of the first quarter to even contemplate revising its stance.”We will receive limited new data before the January meeting so it won’t be before March or April that we get more information about inflation, growth, fiscal policy and the labour market,” Vasle said. “We will need to understand the underlying trends better, and we need the new projections, too.”Although inflation, last at 2.4%, has likely bottomed out for now, it is seen increasing again before it can drop to 2% by the second half of 2025.”Inflation could increase back already at the turn of the year, and then hover in a 2.5% to 3% corridor through the first half of next year,” Vasle said. “So it’s appropriate to wait and observe price growth through this period and reassess our outlook.”Wages are also a unknown as workers who lost a chunk of their real incomes to high inflation in recent years demand compensation.However, labour markets are behaving differently than the historical norm.Unemployment normally rises when the central bank tightens policy and growth stalls as a result. This time, the labour market remains exceptionally tight even with the bloc near recession, as firms hoard labour in preparation for a rebound. “Most of the wage formation is going to happen in the first quarter and we need to see if workers demand extra compensation or whether firms absorb some of the wage growth via margins,” Vasle said. More

India’s fiscal deficit in the first seven months of the financial year ending on March 31, 2024 was 8.04 trillion Indian rupees ($96.86 billion), or 45% of the estimate for the whole year, according to data released by the government last month. However, the government has collected only 100.5 billion rupees from selling stakes in government-run firms as of Dec. 13, against its full-year target of 510 billion rupees, Karad told lawmakers. “It is difficult to anticipate the quantum of actual proceeds from divestment during the current financial year 2023-24,” because stake sales depend on factors including market conditions and investor appetite, Karad said. The Indian government could miss its stake sale target for the fifth straight year, and will struggle to raise even half of the proceeds it had targeted from planned sales of state-run firms this year, Reuters reported last month.($1 = 83.0235 Indian rupees) More

TOKYO (Reuters) – Japan business lobby Keidanren chief Masakazu Tokura said on Monday the Bank of Japan must normalise monetary policy as early as possible, amid speculation the central bank could shift away from more than a decade of stimulus policy in the coming months.Speaking on the first day of the BOJ’s two-day policy setting meeting, the outspoken Keidanren head said the central bank’s stimulus policy, including negative interest rates, should be ditched in the “not so distant future”. He cited changes in real interest rates.In the United States, inflation and real interest rates have stabilised, while in Japan, real interest rates may have turned into negative territory, prompting speculation Japan could alter its longstanding policy of monetary easing, Tokura said.”I don’t know if it happens this year, April or … further down the road,” he said of a monetary policy change.”The BOJ is aiming to put a complete end to deflation so I understand they are cautious, making sure to make it right,” he said.Tokura added that business circles were striving to continue sustainable wage hikes and structural wage hikes if possible by raising base salaries next year as well.”(The) market does not want interest rate policy that is not in harmony with fundamentals, which would kill the economy,”he said. More

It Took 10 Years to Grow This Christmas Tree. The Price? $105 Dec. 18, 2023 Amid wild cost fluctuations and extreme weather conditions, a small army of workers toiled for years at Wyckoff’s Christmas Tree Farm in Belvidere, N.J. The goal? Producing this year’s crop, including this seven-foot Norway Spruce, which is sold for $105. […] More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy“It turns out that inflation was transitory after all; it just took longer.” Such a view is being heard a lot following the sharp fall in US CPI inflation from a high of 9.1 per cent in June 2022 to its latest November reading of 3.1 per cent. Yet it is an interpretation that is misleading, and it is one that puts even more pressure on the US Federal Reserve to prematurely pursue big and early cuts in its policy interest rates.My discomfort with the return of the transitory narrative is not because of the complexity of “the last mile” in the battle of inflation. Yes, the outright deflation in the goods sector could well reverse before the disinflation in services accelerates sufficiently to ensure a smooth convergence to the Fed’s 2 per cent inflation rate. Yes, core inflation is proving more stubborn than the energy-led fall in headline inflation. And yes, there are genuine questions about the lagged impact of past rate rises and the appropriate inflation target for an economy with an insufficiently flexible supply side over the medium term.These are all valid issues that are insufficiently internalised by markets. But even if the path to the Fed’s 2 per cent target was smooth from here, which it won’t be, the “it just took longer” formulation is flawed. At the most fundamental level, it ignores the series of consequential changes that have been caused by the persistency of high inflation for more than two years.Simply put, the transitory characterisation should be viewed through a behavioural analysis rather than a narrow time lens. By deeming it temporary and quickly reversible, a transitory phenomenon calls for policymakers and economic actors to “look through it” — that is, not alter their behaviour in any meaningful manner. That is not what happened in response to the latest inflation shock.There is no doubt that high inflation has changed a lot already. Despite being inherently dovish, the Fed was forced to raise interest rates by some 5 percentage points in the most compressed hiking cycle in decades. Some banks failed due to mismanagement of the impact of higher rates on their balance sheets. Highly leveraged sectors, such as commercial real estate, are suffering. Transaction volumes in the housing market collapsed with many owners reluctant to sell because it would mean taking on a mortgage with higher rates for their replacement homes. And the list goes in.The forward-looking aspect of “it just took longer” is also problematic. In the past few weeks, it encouraged a huge market-led loosening of financial conditions. And this was before the fall in yields was further turbocharged last Wednesday by Fed chair Jay Powell’s surprisingly dovish remarks at a press conference that constituted a sudden reversal of his comments just 12 days earlier.The risk is that the Fed, uncomfortable with the disconnection between its forward policy guidance and market pricing, is pressured into policy actions that please markets but prove inconsistent longer-term with the central bank’s mandate. That would not be new. It played out in January 2019 with a policy U-turn when Powell unveiled new language that opened up the possibility that the next move in rates would be down, six weeks after the central bank put markets on notice of further rises. There was also the April 2020 decision to purchase exchange traded funds of high-yield, or junk, bonds. And in November 2021 to March 2022, there was the slow winding down of large-scale asset purchases.The specific risk today is that, wishing to avoid unsettling market volatility, the Fed validates the market loosening with sizeable rate cuts but then is forced to reverse course later. The more the Fed gives in to investor expectations for sizeable and early rate cuts in 2024 — including getting closer to the six cuts priced in for next year — the more the markets will press for an even more dovish policy stance. If investors price in additional rate cuts, it is harder for the Fed to pursue its mandate without a big market reaction.The Fed’s divergence with the market will prove hard to fix quickly while its policy divergence with the Bank of England and European Central Bank will widen. The more this continues, the greater the risks to economic wellbeing and financial stability.Rather than being inclined to opt for the easy shortcut associated with the “it just took longer” narrative, both markets and policymakers would be well advised to focus on how much the world has changed in the past few years. The inflation round-trip is neither simple nor complete. The resulting shift in the configuration of the global economy and financial markets will be felt for several years. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Rishi Sunak was quick to declare victory in November when he met his goal of presiding over a halving of inflation. But the prime minister had less room for rejoicing over one of the other pledges he set out at the start of the year: his vow to grow the economy. The story of 2023 has instead been one of near-stagnation — a lost year which was confirmed last week as the Office for National Statistics reported a 0.3 per cent drop in gross domestic product between September and October. That left output no higher than in January. Activity is forecast to remain tepid next year with high borrowing costs and the legacy of the worst inflationary upsurge in a generation weighing on the economy. “The country’s economic prospects remain quite bleak, frankly — we are treading water,” said Jagjit Chadha, director of the National Institute of Economic and Social Research. “Given the UK’s low productivity, I suspect growth will be imperceptible for the rest of the decade.”The retreat in headline inflation to 4.6 per cent is now easing some of the pressure on household finances, but the economy has yet to show much vigour. Output in many industries, including IT, financial services, transportation, retail and real estate was lower in October than at the start of the year.Construction, manufacturing and hospitality managed to produce more in October than at the start of the year, but their performance has still trended downward in the latest months. Health and education were the sectors that compensated for the fall in the rest of the economy since January. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.What’s more, the volume of total UK exports was down 6.8 per cent in the three months to September compared with the last quarter of 2022, driven by a sharp contraction in goods exports.“The UK economy has been battling against a cocktail of headwinds from the cost of living crisis, rising interest rates, volatile energy prices, Brexit, the fallout from Covid, a low productivity problem and a long-term shortage of investment,” said Victoria Scholar, at the investment platform Interactive Investor. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Households were still facing double-digit rates of food price growth at 10.1 per cent as of October. Adjusted for inflation, wages are only 1.3 per cent above January’s levels and still below their levels for most of 2022. In October, consumers were buying less than last year even if they were spending more money, particularly on food. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Meanwhile, tenants are struggling with the fastest rental growth since records began in 2016, while the average mortgage rate is at the highest since 2009. More households face higher borrowing costs as their fixed-term deals expire. Mortgage arrears have already started rising and business insolvencies are at the highest level since 2009. The financial pressures have taken a toll on households’ morale and spending. Reported life satisfaction, happiness and feeling that life is worthwhile have all declined this year, and they are well below their pre-pandemic levels, according to the Office for National Statistics.The UK is by no means the only country performing weakly. The German economy was no bigger in the three months to September than in the last quarter of 2022, with similar outcomes for Italy, France and the eurozone. However, the UK compares poorly with the US where output grew 2.4 per cent over the same period.The lost year for growth is likely to extend into 2024, according to the Bank of England which in November foresaw no expansion at all next year. Economists polled by Consensus Economics have revised down their UK growth expectations for next year to 0.3 per cent, down from a 0.8 per cent forecast in May. That said, the slowdown in inflation suggests reasons to expect that the cost of living crisis will ease. Some issues that have kept the UK economy in stagnation “are now clearly dissipating,” said Tomasz Wieladek, chief European economist at investment company T Rowe Price. Crucially, households’ inflation expectations have fallen. “This means . . . cost of living considerations are now less of a drag in consumer confidence and private consumption,” he explained. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.UK price growth slowed to 4.6 per cent in October from its October 2022 peak of 11.1 per cent. It is expected to have declined further to 4.4 per cent in November when the data is published on Wednesday.This means the BoE doesn’t need to generate a deep recession to bring inflation back to its 2 per cent target. “A year ago, that looked like a distinct possibility,” said Paul Dales, economist at Capital Economics. Easing inflation means wages have started to rise faster than price growth since June, boosting spending power. It also means that. with rate cuts expected for next year, some popular mortgage rates are coming down from their summer peak. After hovering at historically low levels for most of 2023, consumer confidence has finally started to improve — and so has business morale. Business investment rebounded in 2023 and was up 3.7 per cent in the three months to September compared with the last quarter of 2022, helped by a generous tax break that became permanent in the Autumn Statement. That followed a long period of stagnation, however, meaning business investment is still only about 4.9 per cent above what it was in Q2 2016, when the UK voted to leave the EU.While 2023 has been tepid at best, some forecasters had expected it to be considerably worse. Bank of England predictions in 2022 that the country was facing a “prolonged” recession were not borne out — pointing to welcome signs of resilience. “It’s a miracle the economy didn’t contract given the double whammy [it] faced this year from the cost of living crisis associated with high inflation and the fastest and largest rise in interest rates since the late 1980s,” said Dales.Against that backdrop, he argued, a stagnant economy can be described as a “score-draw rather than a loss”. More

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