Economy

SAN FRANCISCO (Reuters) – A number of leading economists, including advisers to past U.S. presidents, have coalesced around the view that President-elect Donald Trump’s plans to broaden tariffs, cut taxes and curb immigration may not prove as inflationary as early analysis had suggested.At the same time, these economists said, any effort by Trump to exert control over the Federal Reserve would pose a real risk of reigniting price pressures, vexation with which helped get him elected. With two weeks to go before Trump’s inauguration, the uncertainty about what his second stint in the White House will mean for the U.S. economy was a central focus of discussion over the weekend at the American Economic Association conference in San Francisco, one of the premier annual gatherings of leading economists.Trump will inherit an economy growing at a brisk pace of around 3% even as inflation has come way down from its peak, with the unemployment rate at a historically low 4.2%. His economic agenda includes stiff tariffs, not just on China but on Mexico, Canada and the European Union that could lift prices of imported goods. He also aims to extend expiring tax cuts and possibly offer new tax breaks that could stoke demand just as the Fed is aiming to cool it. An immigration crackdown could dent the primary source of U.S. labor force growth, which some fear could fuel wage inflation.Nevertheless, former Fed Chair Ben Bernanke told the gathering, “Trump policies, whatever their merits on public finance grounds, probably will be modest in terms of their effect on the inflation rate.” Most of the expiring tax cuts were expected to be kept in place no matter which presidential candidate was elected, Bernanke and others point out, and congressional appetite for additional cuts against the backdrop of rising national debt may be limited. Bernanke, an adviser to the second Bush administration before leading the Fed, said that while immigration curbs might push up wages, they also mean fewer people buying goods and services, which could ease price pressures. And although the effect of tariffs “is very hard to forecast because we don’t know if the president wants to just put them on temporarily for bargaining purposes or whether he wants to keep them permanently,” said Bernanke, “barring some very unusual situation, including perhaps political risks, it doesn’t seem like that’s going to really shift the inflation path radically.”‘REMAIN ON TRACK’Some advisers to previous Democratic administrations shared Bernanke’s sanguine view. Christina Romer, an economics professor at the University of California, Berkeley, and a former Obama administration adviser, offered a similar analysis: “In terms of the overall macro economy … you won’t see a drastic change or things that are terribly frightening.”Still, she said, there are risks. Trump, for instance, could try to interfere with Fed Chair Jerome Powell’s attempts to bring inflation to heel.   “If there were an attack on Fed independence I think it would be very consequential,” said Romer, though the potential that doing so would undermine confidence and send financial markets into a tailspin makes the scenario unlikely in her view.Jason Furman, a Harvard economics professor who also advised former President Barack Obama, expressed a bit more worry, noting that even if Trump gains little sway over Fed policy over the next four years, he could pave the way for a successor to use partisan nominations or other means to chip away at Fed independence. And while he said he agreed that Trump’s policies would have a “relatively small” effect on inflation, he did make the point that even a few tenths of a percentage point on top of the current 2.4% inflation rate could be enough to put Fed rate cuts on hold this year and even prompt some hikes next year if price pressures don’t abate.Still, the current strength and momentum of the economy won’t easily be knocked off course, others noted.Karen Dynan, a Harvard economics professor who worked in the Obama administration, told a panel at AEA that while Trump’s proposed tariffs and immigration crackdown could pose headwinds to growth or fuel inflation or both, consumer and business confidence has been strong, bolstered by the prospect of future Fed rate cuts as well as stock market gains. Adding it all up, she said, “My own guess is there’s a good chance the economy’s going to remain on track, with this solid path forward and continued disinflation.”  More

Confidence among U.K. firms has tumbled to its lowest level since the market-rocking “mini-budget” crisis of fall 2022, according to a survey by the British Chambers of Commerce.
The trade group said sentiment had “declined significantly” in its largest poll since the Labour government’s debut budget last October, which included a hike in the amount many employers pay out in National Insurance (NI), a tax on earnings. 
The BCC cited firms in hospitality, manufacturing, construction and health-care expressing worries about how they would cover additional costs and saying they would likely scale back investment.

UK firms are planning to raise prices to cover higher tax payouts as confidence among businesses tumbled to its lowest level since the market-rocking “mini-budget” crisis of fall 2022, according to a survey by the British Chambers of Commerce.
The trade group said sentiment had “declined significantly” in its largest poll since the Labour government’s debut budget last October, which included a hike in the amount many employers pay out in National Insurance (NI), a tax on earnings. 

The BCC said 63% of businesses cited tax as a worry in the survey, up from 48% in the third quarter. More than half (55%) said they expect prices to go up in the next three months, primarily due to higher labor costs.
The percentage of companies saying they expected turnover to increase in the next twelve months fell to 49%, from 56%. Concerns about inflation and interest rates remained roughly steady.
The BCC cited firms across hospitality, manufacturing, construction and healthcare expressing worries about how they would cover additional costs and saying they would likely scale back investment.

“We recognize what [Reeves] said, that she’s got to increase taxes to fill her black hole, but what we need to see her do now is mitigate against that. What are we going to do to drive the economy?” Shevaun Haviland, head of the BCC, told CNBC’s “Squawk Box Europe” on Monday.
“Businesses are going to have to shoulder this tax increase, but what we want to see her do is act, and they need to act quickly. It’s important that they’re putting strategies in place, industrial strategy, trade strategy, infrastructure plan, for later on this year, but we need to see action now.”
U.K. borrowing costs have climbed following the October 2024 budget, exceeding the levels they spiked to following the “mini-budget” of September 2022, which saw then-Prime Minister Liz Truss announce sweeping, uncosted tax cuts.
However, economists say the recent rise in bond yields is not equivalent to the surge seen in 2022 as the moves have been significantly less dramatic and the macro backdrop — including a cooling of inflation — has changed.

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LONDON (Reuters) -Elon Musk said Nigel Farage should quit as leader of Britain’s right-wing Reform UK party in an abrupt withdrawal of support by the U.S. billionaire for the Brexit campaigner who is trying to shake up the British political establishment again.”The Reform Party needs a new leader. Farage doesn’t have what it takes,” Musk said on his social media platform X on Sunday, a few hours after Farage described him as a friend who made Reform look “cool”.Musk – a close ally of U.S. President-elect Donald Trump – had seemingly backed Farage and posed for a photograph with him last month.Reform won 4.1 million votes or 14% of the total and five seats in parliament in last July’s national election.Farage has previously said he is in negotiations with Musk about the billionaire donating to Reform to help it challenge the dominant Labour and Conservative parties.But Farage has distanced himself from comments made by Musk in support of British anti-immigration and anti-Muslim activist Stephen Yaxley-Lennon, known by the pseudonym Tommy Robinson, who is serving a prison sentence for contempt of court.Farage responded to Musk’s post on Sunday saying: “Well, this is a surprise! Elon is a remarkable individual but on this I am afraid I disagree. My view remains that Tommy Robinson is not right for Reform and I never sell out my principles.” Last month, Musk endorsed the Alternative for Germany, an anti-immigration, anti-Islamic party labelled as right-wing-extremist by German security services, ahead of national elections in February.Musk has previously sought to influence British politics and has criticised Prime Minister Keir Starmer repeatedly since anti-immigration riots last summer. The Tesla (NASDAQ:TSLA) founder last week backed calls for a national inquiry into the handling of cases of rape by men of Pakistani heritage of underage girls by the government’s prosecution service which Starmer previously ran.A 2014 inquiry found at least 1,400 children were subjected to sexual exploitation in Rotherham, northern England, between 1997 and 2013.The Times said Starmer was expected to address the criticism at a news conference on Monday by saying he gave the green light to prosecuting paedophile gangs in 2013 and reformed the way that child abuse cases are handled by prosecutors.But he was unlikely to criticise Musk directly given the billionaire’s proximity to Trump, the newspaper said.A spokesperson in Starmer’s office declined to comment.On Sunday, UK health minister Wes Streeting defended Starmer and another member of his cabinet, Jess Phillips, who incurred Musk’s ire for reportedly saying that any fresh inquiry into another gang rape case should be handled by the local authority.”It’s all very easy to sit there and fire off something in haste and click ‘send’ when people like Keir Starmer and Jess Phillips have done the hard yards of actually locking up wife beaters, rapists and paedophiles,” Streeting told the BBC. More

Lombard said that an easier belt-tightening effort was necessary in order to preserve economic growth, adding the budget bill currently being drafted would target a deficit in a range of 5.0% to 5.5% of gross domestic product (GDP).The previous government, which collapsed last month after opposition parties rejected part of its 2025 budget, had hoped to reduce the deficit to 5% this year from 6.1% in 2024.”We have to support the economy. I’m thinking about companies that are lacking confidence, we can’t hold growth back,” Lombard told France Inter radio.Lombard began consultations with opposition parties on Monday in an effort to preemptively win support before proposing the new budget bill in hope of avoiding a no-confidence vote like the one that brought down the previous government in early December amid a backlash against its belt-tightening proposals.France’s failure to pass a 2025 budget has spooked investors and ratings agencies, but the savings needed to get France’s public finances in line have proven too much for lawmakers in the deeply divided parliament. The previous government headed by Michel Barnier had targeted savings totalling 60 billion euros.To pass its budget, the new government will likely need support in particular from the Socialists, who have been pushing for higher taxes on the wealthy and on big companies.Lombard said the new bill would not create new taxes that were not already in the failed budget but that it would rework a planned additional tax on France’s biggest companies with the aim of bringing in about 8 billion euros as well as a tax hike on the wealthiest taxpayers.He added he was open to increasing a 30% flat tax on capital gains and income introduced by President Emmanuel Macron in 2018 to make France more attractive to global investors. The flat tax spurred criticism of Macron as a president for the rich.($1 = 0.9678 euros) More

Unemployment is at a record low 6.3% as firms continue to hire, a puzzle to some since the bloc’s economy has been stagnating for the past year and historical precedent would suggest growing labour market weakness in such an environment. Employment typically expands at about half the rate of real GDP growth but it has actually surpassed GDP growth since 2022, the ECB said.”The euro area labour market’s performance has been exceptional as compared with changes in output,” the ECB said in an Economic Bulletin article. “Rising profit margins enabled firms to retain their workers for longer than usual, despite falling revenues.”But real wages are now rising and catching up to historical trends while energy prices, a key input in costs, are stabilizing, reducing the disconnect between output and employment. Labour hoarding peaked in the third quarter of 2022 and firms’ ability to or willingness to hang onto their workers is now slowly diminishing, the ECB said. “The euro area labour market is expected to return closer to its historical correlation with output,” the ECB said. However, there is also no dramatic weakness ahead, the ECB argued.Some policymakers have been fearing a quick erosion in the labour market, which could reduce disposable incomes, weaken demand and lower inflation far more than the bank now predicts.However, the ECB’s study does not appear to back those fears.”The unemployment rate is expected to remain low over the coming quarters,” it said. “Overall, survey data suggest a relatively stable labour market looking ahead.” More

Musk, a close ally of U.S. President-elect Donald Trump, last month endorsed a German anti-immigration party ahead of a parliamentary election in February, and has repeatedly commented on British politics, demanding Prime Minister Keir Starmer resign.”I find it worrying that a man with enormous access to social media and huge economic resources involves himself so directly in the internal affairs of other countries,” Stoere told Norwegian public broadcaster NRK.”This is not the way things should be between democracies and allies.”If Musk were to involve himself in Norwegian politics, the country’s politicians should collectively distance themselves from such efforts, the prime minister said.Stoere’s minority government, consisting of his leftist Labour Party and the smaller Centre Party, is lagging right-wing parties in opinion polls ahead of parliamentary elections due in September this year.But Stoere reiterated that he plans to lead the government into the parliamentary election, rejecting calls from some in his own party to step down.”I’m very motivated to be party leader and prime minister, and to win the election,” he said.Musk, the world’s richest person, spent more than $250 million to help Trump get elected and has been asked by Trump to prune the federal budget as a special adviser.The German government last week accused Musk, who owns the social media platform X and is CEO of Tesla (NASDAQ:TSLA) and SpaceX, of trying to influence Germany’s upcoming election with a guest opinion piece for the Welt am Sonntag newspaper.German Vice Chancellor Robert Habeck said Musk’s support for Germany’s far-right Alternative for Germany (AfD) was a “logical and systematic” play by the billionaire for a weak Europe that will not be able to regulate as strongly. More

This week’s major focus will be the monthly US employment report, which  is expected to show on Friday that the world’s largest economy added 154,000 jobs in December, while the unemployment rate is expected to hold steady at 4.2%.Labor market data has been volatile in recent months amid disruptions from strikes and hurricanes. November data showed growth of 227,000 jobs, rebounding from a tepid rise in October.Investors will be hoping that the jobs report points towards solid economic growth, but not so strong that it makes it even harder for the Fed to keep cutting rates.A rise of around 150,000 would bring 2024 job creation to 2.134 million, which would be the lowest annual total, outside of a COVID-driven loss in 2020, since 2019’s 1.988 million. The Federal Reserve projected only two more rate cuts this year at its last policy-setting meeting, a substantial reduction for the four cuts seen in September, and the week’s numerous Fed speakers are likely to sound cautious about cutting rates much further.US stock futures were marginally higher Monday, with traders reluctant to take major positions ahead of the release of widely-watched economic data in another shortened trading week. By 03:55 ET (08:55 GMT), the Dow futures contract was up 35 points, or 0.1%, S&P 500 futures climbed 17 points, or 0.3%, and Nasdaq 100 futures rose by 97 points, or 0.5%.The major averages came off a losing week, amid concerns over the extent of future interest rate cuts by the Federal Reserve after the relatively hawkish comments that accompanied last month’s reduction.The New York Stock Exchange will also be closed Thursday to mourn the death of former President Jimmy Carter.Traders will be looking for clues about the strength of the economy, and thus the likely Fed moves, with the highly-influential monthly jobs report due out Friday. Investors are also watching the Job Openings and Labor Turnover Survey on Tuesday and Wednesday’s ADP Employment Survey, ahead of the Fed meeting at the end of this month.German consumer prices for December are due later in the session, ahead of Tuesday’s flash eurozone inflation data, and are expected to show that inflationary pressures remain subdued in the euro bloc.That said, Spain has already released its numbers for December, and its above-expectations print on the back of energy prices could be replicated elsewhere.Investors are looking for the European Central Bank to ease interest rates by 100 bps in the first half of 2025, and any signs that inflation is easing further would give the ECB scope to loosen policy and support a struggling economy. But a colder winter could complicate matters, particularly with natural gas prices at elevated levels, and given the end of a decades-long deal for Russia to supply gas to Europe via Ukraine.Justin Trudeau’s time as Canada’s Prime Minister looks to be running out, after a number of reports indicated he is set to step down as leader of the country’s ruling Liberal Party after nine years in office, potentially as early as Monday.If he does resign, it would likely spur fresh calls for a quick election to put in place a stable government to deal with the new Donald Trump-led administration across the border, which has already threatened substantial trade tariffs.Recent polls suggest the Liberals will badly lose to the official opposition Conservatives in an election that must be held by late October.The Canadian dollar rose against its US counterpart, with investors welcoming the chance of an early election to clarify the outlook, although gains were muted suggesting the news had been somewhat priced in.At 03:55 ET, USD/CAD fell 0.6% to 1.4365. Crude prices edged lower Monday, weighed by a strong dollar, but losses are minor as traders await the release of key US economic data later in the week.By 03:55 ET, the US crude futures (WTI) dropped 0.4% to $73.66 a barrel, while the Brent contract fell 0.4% to $76.20 a barrel.Crude prices reported two straight weeks of gains on hopes of improving demand in China, especially as Beijing prepares to unlock more stimulus measures in the coming months.Colder weather in the US and Europe is also expected to help boost oil demand, especially for distillates.But strength in the dollar has prompted some profit-taking Monday, as the greenback stayed close to two-year highs before a string of key economic readings this week which will provide clues as to the strength of the US economy, the largest consumer of energy in the world.Traders are also watching for any supply disruptions, with the Biden administration reportedly planning to impose more sanctions on Russia over its war on Ukraine. More

These come against a backdrop of unease over the U.S. interest rate outlook and potential for policy surprises under U.S. President-elect Donald Trump, with the euro and Chinese yuan already kicking off the new year on a weak footing.Here’s what’s in store for world markets in the coming week from Rae Wee in Singapore and Alun John, Amanda Cooper, Dhara Ranasinghe and Samuel Indyk in London.1/ JOB DONEMarkets have made their peace – mostly – with the idea that inflation will rise under Trump, given his pledges on tariffs, taxes and immigration. Traders barely expect two Federal Reserve rate cuts in 2025, but still, stocks are within sight of record highs and look set for more of the same this year. What they might find harder to stomach is evidence that growth is slowing. The Jan. 10 December non-farm payrolls report is forecast to show a rise of 150,000, versus November’s 227,000 jump.A rise of 150,000 would bring 2024 job creation to 2.134 million. It’s hardly shabby, but it would be the lowest annual total, outside of a COVID-driven loss in 2020, since 2019’s 1.988 million. And if there’s anything the market needs right now, it’s proof of the resilience of the world’s largest economy. 2/ MORE CHINA GLOOMChina faces a precarious start to 2025, as authorities seek to counter Trump’s threats of tariffs in excess of 60% on imports of Chinese goods. Chinese stocks are at three-month lows, having logged the weakest New Year start since 2016 During Trump’s first administration, Beijing allowed its currency to weaken to make exports cheaper and offset trade shocks. The yuan weakened more than 12% against the dollar in just over two years.Economists expect Trump to impose tariffs of nearly 40% this time around, which could potentially slice China’s growth by up to 1 percentage point.Beijing is reported to be mulling a weaker yuan again, though the potential magnitude of the tariffs make it almost impossible to resort to the same playbook.Tariffs aside, for the week ahead, China releases December trade and inflation figures, which should provide a sense of how the world’s second-largest economy closed out 2024. 3/ INFLATION TEST Investor bets on 100 bps of European Central Bank easing in the first half of 2025 face an early test from Tuesday’s December flash euro zone inflation data. German and French inflation numbers are due Monday. Any signs that inflation is easing further would give the ECB scope to loosen policy and support a struggling economy. But analysts warn that early-bird Spain’s above-expectations print on the back of energy prices could be replicated elsewhere. Energy could be a thorn in the ECB’s side with natural gas prices at 14-month highs. It’s not going to be repeat of 2022’s surge, but prices look set to remain elevated with less gas in storage compared to recent years, and the end of a decades-long deal for Russia to supply gas to Europe via Ukraine. 4/ LAGGARD AGAIN2024 tested European equity investors, marking another year where shares lagged global peers, but some reckon relief may be around the corner. There were bright spots — banks and aerospace & defence stocks which jumped 26% and 33% respectively. Investors are looking for a broadening out this year. There are also risks: uncertainty surrounding Trump tariffs being the main one. But the STOXX 600 index is cheap, trading at a 41% discount to the U.S. S&P 500. Britain’s FTSE 100 trades at an even steeper 50% discount to the U.S. benchmark. As the region gets comparatively cheaper it creates opportunity, and some investors are betting that 2025 could be the year where Europe’s equity markets rally strongly, if the economic outlook or geopolitical backdrop brightens. 5/ WHICH WAY NEXT?The S&P 500 may have surged over 20% in 2024 and notched up a two-year jump of around 53% in the strongest back-to-back annual performance since 1998, but warning signs flickered as the year ended.Unease that the Fed could pause rate cuts if inflation stays sticky or is pushed up by Trump tariffs is hurting sentiment, and investors liquidated global equity funds at the fastest rate in 15 years in the week to Dec. 18, LSEG Lipper data shows.The coming days will show whether December’s risk off sentiment was fleeting or the start of something deeper. Trump’s policy signals and the response to his plans from trade partners will be key. Also watch U.S. Treasury yields – they jumped 40 bps in December. Another surge could be the cue for the next round of stock selling. More