Economy

WASHINGTON (Reuters) – U.S. budget wrangling could further delay funding approval for new agreements with Pacific island nations meant to counter Chinese influence, creating an opportunity for Beijing in the strategically vital region, congressional and other sources say.After years of painstaking negotiations, the Biden administration signed new 20-year funding programs this year for the Federated States of Micronesia (FSM), the Marshall Islands (RMI) and Palau under which Washington is responsible for their defense and provides economic assistance, while gaining exclusive military access to strategic swathes of the Pacific.After failing to secure funding earlier this year, lawmakers proposed including $2.3 billion for those programs, called the Compacts of Free Association (COFA), in the National Defense Authorization Act (NDAA), which is currently being negotiated. But congressional sources say this looks impossible as lawmakers argue over spending priorities, raising concerns that a further delay could create an opening for China, which has been wooing financially strapped Pacific economies.A congressional staffer familiar with the debate told Reuters that House Republicans from the Natural Resources and Foreign Affairs committees had said the COFA package must be offset by funding cuts elsewhere to get it over the finish line in the NDAA, which would authorize a record $886 billion in spending for 2024. “We had all been working towards getting it included in the NDAA. Ultimately, when push came to shove, the offset issue was not resolved,” the source said.New Republican House Speaker Mike Johnson’s office had “doubled down” and the COFA package had now dropped out of consideration for the NDAA because of the unresolved offset demands, the source said.”It’s feeling pretty dead in the NDAA context,” the source said, adding that focus had turned to finding other legislation to secure the COFA funding.One possibility is the Biden administration’s supplemental budget request, said the staffer. The fate of that request, which covers foreign policy priorities such as Ukraine and the war in the Middle East, remains uncertain. Johnson’s office did not respond to requests for comment.The State Department and White House National Security Council also did not respond.A protracted delay would be particularly troublesome for Palau, which had been counting on new COFA funds to make up budget shortfalls and where calls for deals with China have been on the rise, the sources said. Joseph Yun, chief U.S. negotiator for the renewed COFA deals, told Reuters U.S. credibility was at stake. He said the COFA agreements essentially provided for the northern half of the Pacific between Hawaii and the Philippines to remain under U.S. defense control and failure to move forward could be “strategically disastrous.””It is really incomprehensible given the amount we’re talking about … why Congress cannot get its act together,” Yun said. “What we risk is China getting in where we really don’t want them – in places like Palau, RMI, FSM. And they have a history of doing that,” he said. “We’re … making the situation quite dangerous by not enacting the compacts.” More

The U.S. economy grew at an even stronger pace then previously indicated in the third quarter, the product of better-than-expected business investment and stronger government spending, the Commerce Department reported Wednesday.
Gross domestic product, a measure of all goods and services produced during the three-month period, accelerated at a 5.2% annualized pace, the department’s second estimate showed. The acceleration topped the initial 4.9% reading and was better than the 5% forecast from economists polled by Dow Jones.

Primarily, the upward revision came from increases in nonresidential fixed investment, which includes structures, equipment and intellectual property. The category showed a rise of 1.3%, which still marked a sharp downward shift from previous quarters.
Government spending also helped boost the Q3 estimate, rising 5.5% for the July-through-September period.
However, consumer spending saw a downward revision, now rising just 3.6%, compared with 4% in the initial estimate.
There was some mixed news on the inflation front. The personal consumption expenditures price index, a gauge the Federal Reserve follows closely, increased 2.8% for the period, a 0.1 percentage point downward revision. However, the chain-weighted price index increased 3.6%, a 0.1 percentage point upward move.
Corporate profits accelerated 4.3% during the period, up sharply from the 0.8% gain in the second quarter.

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This article is an on-site version of our Disrupted Times newsletter. Sign up here to get the newsletter sent straight to your inbox three times a weekToday’s top storiesFar-right ministers in Israel piled pressure on Benjamin Netanyahu to spurn a broader hostage-for-prisoner release deal with Hamas, even as talks continue in Qatar over extending the temporary truce in Gaza.HSBC chief Noel Quinn warned that the lifting of the bankers’ bonus cap could “unleash inappropriate amounts of risk” but Deutsche Bank boss Christian Sewing urged Brussels to consider scrapping the cap to keep European lenders competitive. Bim Afolani, the new minister for the City of London, said yesterday that UK regulators needed to be more comfortable with corporate risk-taking. “There’s no point having the safest graveyard,” he said.There were signs of stabilisation in the UK property market as mortgage approvals rose more than expected in October to a three-month high.For up-to-the-minute news updates, visit our live blogGood evening.The OECD today delivered a gloomy outlook for the global economy, highlighting sticky inflation, a softening of growth, slower trade expansion and faltering business and consumer confidence.It also warned that the European Central Bank and Bank of England might have to hold interest rates at their current highs until 2025 — much longer than markets are expecting.The US Federal Reserve on the other hand might start cutting in the second half of 2024, the OECD said. Expectations of early reductions have grown this week after Fed official Christopher Waller said he was “increasingly confident” monetary policy was “well positioned” to get inflation back to 2 per cent. The much stronger state of the US economy compared with Europe was highlighted again today by an upwards revision of GDP growth for the third quarter to 5.2 per cent from an initial estimate of 4.9 per cent. The OECD forecast that average inflation in the G20 economies would ease only gradually, falling to 5.8 per cent in 2024 and 3.8 per cent in 2025, compared with 6.2 per cent in 2023. (If you’re a Premium subscriber, you can read more on why inflation is proving stickier than expected in Chris Giles’s latest Central Banks newsletter).As regular DT readers will know, opinion is divided over the future direction of inflation and interest rates. There is a marked difference, for example, between investors already celebrating the prospect of rate cuts and central bankers warning it is too early to take their feet off the pedal.Investor optimism is strongest in the US, where bonds are on track for their best monthly performance in nearly four decades, fuelling a dramatic comeback from the early autumn sell-off. Caution is much more noticeable across the Atlantic, where policymakers argue the “last mile” in the fight against rising prices will be the hardest. The BoE’s Jonathan Haskel was the latest to try to dampen expectations, saying yesterday there was no chance of cutting UK rates “anytime soon”, highlighting that it could take at least a year for the labour market to loosen to pre-pandemic levels.The latest data on prices is at least heading in the right direction. New figures today showed inflation falling more than expected in Spain and Germany ahead of eurozone-level data tomorrow. In Germany it hit 2.3 per cent, the lowest since June 2021. Across the Channel, industry numbers yesterday showed UK shop price inflation slowed from 5.2 per cent to 4.3 per cent in November, the lowest rate in over a year.As for growth, the OECD said the global figure would weaken to 2.7 per cent next year — the slowest since the financial crisis, except from the first year of the pandemic — before picking up to 3 per cent in 2025, as price rises slow and real income grows. For the US it expects 1.5 per cent next year and 1.7 per cent in 2025 and for the UK 0.7 per cent followed by 1.2 per cent.Need to know: UK and Europe economyUK grocery inflation may be slowing but the competition watchdog today accused food companies of pushing up prices more than costs. It said about three-quarters of branded goods makers, notably baby formula manufacturers, had increased their profitability and contributed to higher prices. Financial Times analysis shows the impact of high borrowing costs on British companies: the number of business closures in 2022 overtook creations for the first time since 2010.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Nato warned that Russia intended to destroy Ukraine’s power and heating infrastructure in the coming months. Kyiv is also involved in a battle against its own oligarchs whose influence has shrunk as the war has progressed. But are the institutions in place to stop a new generation emerging?Need to know: Global economyThe UAE is accompanying its hosting of the COP28 summit, which starts tomorrow in Dubai, with $200bn in clean energy investments. A Big Read explains its bid for climate influence.Early data suggested Cyber Monday sales in the US this week were forecast to hit a record $12bn — the biggest online shopping day ever. The huge spend over the holiday weekend, including Black Friday, could however give retailers a festive hangover, says US financial editor Brooke Masters. Chief economics commentator Martin Wolf says the power of its alliances means the US is likely to keep its status over China as the world’s pre-eminent economic superpower.Vietnam’s decision to raise tax rates for multinationals to bring it into line with a global agreement to crack down on avoidance could hit foreign direct investment. A top exporter of electronics and textiles, Vietnam’s FDI has hit records as global companies search for a manufacturing alternatives to China.Panama is shutting one of the world’s largest copper mines after its Supreme Court struck down a Canadian company’s contract to operate it amid large protests over issues ranging from environmental damage to perceived corruption. Cobre Panamá accounts for more than 1 per cent of global copper output.Need to know: businessBarclays is considering dropping thousands of clients at its investment bank as part of a strategic overhaul to boost profits and cut £1bn of costs. Its shares are trading close to their lowest level since the pandemic, and Barclays’ valuation is among the cheapest of any major global bank. Deloitte and KPMG are asking staff to use burner phones when they visit Hong Kong, a sign of the increasing difficulties facing global companies in a city long known as an international business hub.You were the future once. The FT revealed GM was scaling back plans for its Cruise self-driving business after California regulators took the cars off the road last month.Uber said it would allow London black cabs on its platform next year in an effort to win over its old enemy the Licensed Taxi Drivers’ Association, which represents around two-thirds of the city’s 15,000 black cabbies.Saudi Arabia’s sovereign wealth fund and private equity group Ardian is buying a 25 per cent stake in London Heathrow airport from the Ferrovial infrastructure company for £2.4bn. EasyJet reinstated its dividend for the first time since the pandemic in the latest evidence confirming the bounceback in air travel. The low-cost carrier swung back to profit of £455mn after a loss of £178mn last year following a record summer. A new UK “anti-greenwashing rule” will ban asset managers using vague references to “sustainability”. Funds must now show companies meet a “credible” environmental or social standard, have the potential to improve against this criteria, invest in tangible solutions to problems affecting people or the planet, or a mixture of these.The World of WorkThe latest question for FT careers expert Jonathan Black: Should I switch non-profit work for the corporate world? What do you think?Black also tackles listeners’ problems in a special “agony aunt” episode of the Working It podcast, tackling possessive bosses, overpaid colleagues and working from abroad.Delphine Strauss highlights the long hours and large debts suffered by care workers stranded by the UK’s migration clampdown.Some good newsThe first commercial long-haul flight powered by so-called sustainable aviation fuels — in this case a mix of waste cooking oil, animal fats and other unorthodox ingredients — took off from London for New York. Although green campaigners are sceptical, the aviation industry hailed the Virgin Atlantic fight as a milestone.A Virgin Atlantic Boeing 787 took off from Heathrow yesterday in the first transatlantic flight using 100% sustainable aviation fuel More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.German inflation fell more than expected to 2.3 per cent in November, raising questions about whether the European Central Bank may soon need to consider cutting interest rates.The figure — mirroring a similar undershoot by Spanish inflation relative to forecasts earlier on Wednesday — signals that eurozone inflation is also likely to fall below expectations when that data is released on Thursday.Some economists responded by cutting their forecasts for eurozone annual price growth, which was already expected to drop from 2.9 per cent in October to a more than two-year low of 2.7 per cent in November. Goldman Sachs cut its forecast to 2.5 per cent.“As disinflation is not only a German phenomenon but widely spread across the entire eurozone, the ECB runs the risk of underestimating the disinflationary momentum as much as it underestimated the inflationary momentum two years ago,” said Carsten Brzeski, global head of macro research at Dutch bank ING.Germany’s federal statistical agency said annual consumer price growth had slowed in all categories, helping the EU harmonised rate of inflation in the eurozone’s largest economy to fall to a more than two-year low of 2.3 per cent.That was down from 3 per cent a month earlier, and from a peak of 11.6 per cent a year ago. Economists polled by Reuters had forecast a much smaller drop to 2.7 per cent.Analysts said the fall in German services inflation from 3.9 per cent in October to 3.4 per cent in November was an encouraging sign that underlying price pressures were abating, even if it reflected a post-summer fall in package holiday prices.Tomasz Wieladek, economist at investor T Rowe Price, said: “If it turns out that the slowdown in German services inflation is broad-based, this would be a pretty good indicator that monetary policy is significantly too tight, given that a lot of the effect of the 2023 tightening is still to come through.”German energy prices fell 4.5 per cent in November, while food prices rose at a slower pace of 5.5 per cent. Core inflation, excluding energy and food, was 3.8 per cent, down from 4.3 per cent a month earlier. The figures prompted investors to increase their bets on an early ECB rate cut, sending Germany’s two-year bond yield down to an almost six-month low of 2.84 per cent. The euro fell 0.26 per cent against the US dollar.The figures prompted investors to increase their bets on an early ECB rate cut, sending Germany’s two-year bond yield down to an almost six-month low of 2.84 per cent. The euro fell 0.26 per cent against the US dollar.However, ECB policymakers have warned that the “last mile” of bringing inflation down to their 2 per cent target could be bumpy.German central bank boss Joachim Nagel has forecast that inflation in the country would rise again to more than 3 per cent as energy and food subsidies were removed. ECB president Christine Lagarde said this week it was “not the time to start declaring victory”.The OECD on Wednesday forecast that the ECB would not start cutting rates until 2025 because of persistent price pressures, pointing out that more than half of the items in inflation baskets in the US, the eurozone and the UK still showed annual rates of more than 4 per cent. “Today’s data were a dovish surprise from a monetary policy perspective,” said Martin Wolburg, economist at Generali Investments. But he predicted the main disinflationary drivers of falling energy prices and slowing food inflation would “peter out” next year, keeping German inflation higher than 2 per cent throughout 2024.Separate Spanish data published on Wednesday showed that inflation in the country declined for the first time since June, after lower fuel and tourism prices helped to bring down the headline rate, defying expectations for it to keep rising.The harmonised index of consumer prices in Spain was up 3.2 per cent in November, falling from 3.5 per cent in the previous month and below the 3.7 per cent level forecast by economists in a Reuters poll. Core inflation, excluding energy and fresh food, dropped from 5.2 per cent to 4.5 per cent. More

Cohn — who was chief economic advisor to former U.S. President Donald Trump from 2017 to 2018 — does not see the Fed cutting interest rates until the second half of 2024.
Drawing on 100-year average data, Cohn said the U.S. economy is “back to a normal, but we all forgot what normal is.”

President Donald Trump praises departing economic adviser Gary Cohn (L) during a Cabinet meeting at the White House, Washington, March 8, 2018.
Kevin Lamarque | Reuters

The U.S. economy is “back to normal” for the first time in two decades, but the market is getting ahead of the likely pace of interest rate cuts, according to IBM Vice Chairman Gary Cohn.
The market is narrowly pricing a first rate reduction from the Federal Reserve in May 2024, according to CME Group’s FedWatch tool, with around 100 basis points of cuts expected across the year.

The central bank in September paused its historically aggressive monetary tightening cycle with the Fed funds rate target range at 5.25-5.5%, up from just 0.25-0.5% in March 2022.
Cohn — who was chief economic advisor to former U.S. President Donald Trump from 2017 to 2018 and is a former director of the National Economic Council — does not see the Fed starting to unwind its position until at least the second half of next year, after similar moves from other major central banks that began hiking sooner.
“You don’t want to be early to leave when you’re the last one to come to the party. You have to be the last one to leave the party, so the Fed is going to be the last one to leave this party,” Cohn told CNBC’s Dan Murphy on stage at the Abu Dhabi Finance Week conference on Wednesday.
“The economy will clearly turn down before the Fed had starts to cut interest rates, so I strongly believe that for the first half of ’24, we will see no rate activity in the Fed. Maybe [in the third quarter], we’ll start hearing rumblings of some forward guidance of lower rates.”

The U.S. consumer price index increased 3.2% in October from a year ago, unchanged from the previous month but down considerably from a pandemic-era peak of 9.1% in June 2022.

Despite the sharp rise in interest rates, the U.S. economy has so far remained resilient and avoided a widely predicted recession, fueling bets that the Fed can engineer a fabled “soft landing” by bringing inflation down to its 2% target over the medium term without triggering an economic downturn.
Cohn highlighted that U.S. consumer debt has soared to record highs of over $1 trillion, and that consumer spending is persisting despite tightening financial conditions. He said the consumer and the broader economy is “back to a normal, but we all forgot what normal is.”
“We haven’t seen normal for over two decades. We went through a decade plus of zero interest rates, we went through a decade of quantitative easing, zero interest rates and the Fed trying to see if they could create inflation,” he said.

“We’ve gone from the Fed not being able to create inflation — we now know the answer, the Fed can’t create inflation, but the market can — to us trying to unwind a shorter term inflationary shock. We’re back into a normal world.”
He noted that the 100-year average for 10-year U.S. Treasury yields is around 4.5%, and that the 10-year yield has moderated from the 16-year high of 5% logged in October to around 4.3% as of Wednesday morning. Meanwhile, inflation is “running back towards the mean” of between 2% and 2.5%.
“So every piece of economic data, if you look, is sort of heading back towards its very long term average. If you look at these over 100-year generational cycles, we seem to be running into that phase right now,” Cohn added.
Correction: The headline of this story has been updated to reflect Cohn’s quote. More

COLOMBO/TOKYO (Reuters) -Sri Lanka and a group of its creditor nations said on Wednesday they have reached an agreement in principle on debt restructuring, a key step needed for the South Asian nation to emerge from its severe economic crunch.The deal will help Sri Lanka clear the first review of a bailout under the International Monetary Fund (IMF) executive board program by the year end, which would trigger a second IMF tranche of about $334 million.”This agreement serves as a key milestone in Sri Lanka’s ongoing endeavour to achieve public debt sustainability and to foster economic recovery,” said Sri Lanka’s treasury secretary Mahinda Siriwardana.The small island nation, mired in its worst financial crisis in decades, has been trying to reach restructuring deals with creditors since last year after defaulting on its foreign debt in May 2022 due to record-low foreign exchange reserves.Sri Lanka’s finance ministry said the agreement in principle covered approximately $5.9 billion of outstanding public debt and consisted of a mix of long-term maturity extension and reduction in interest rates.Japan co-chairs Sri Lanka’s official creditor committee, together with France and India, which is comprised of 15 nations. China, which has already struck a deal with the island nation, is Sri Lanka’s largest bilateral creditor and has not joined this group as a formal member.”I expect this case will be applied as a leading case in dealing with debt problems in middle income nations,” said Japan’s top financial diplomat, Masato Kanda, describing the agreement as a “major achievement”.The Paris Club of creditor nations, which includes Japan, said the agreement could be formalised in the coming weeks.According to data from Sri Lanka’s finance ministry, its external debt was $36.6 billion at the end of June this year. Once the debt restructuring is completed, Sri Lanka hopes to reduce its overall debt by $16.9 billion.RESTRUCTURING MILESTONE”This is a key milestone for debt restructuring,” said Udeeshan Jonas, chief strategist at equity research firm CAL Group. “The good news is that this activates the second IMF tranche and that also means ADB (Asian Development Bank) and other funding comes into place helping the government’s borrowing requirements to come down.””The next step will be for Sri Lanka to negotiate a deal with the sovereign bondholders,” Jonas added.Sri Lanka’s overseas bonds extended gains after the debt agreement was officially confirmed, with longer-dated notes rising as much as 1.6 cents on the dollar to just over 50 cents at 1213 GMT time, according to Tradeweb data.Sri Lanka’s finance ministry said it would next focus on striking similar deals with other bilateral creditors for debt amounting to $274 million. It will also try to reach agreement with bondholders who hold the bulk of the island nation’s $12.5 billion worth of international sovereign bonds.The debt restructuring proposal sent by private creditors in October did not receive a favourable response from Sri Lanka’s finance ministry, which said it had “serious reservations” about the construct of proposed macro-linked bonds.Kanda said negotiations were “on track” with bilateral creditors and they were working on details of a memorandum of understanding. He declined to comment on details such as the interest rates that would be applied to the restructured debt, or the repayment period. The IMF did not immediately respond to request for comment.”These engagements will ensure that the overall debt treatment granted to Sri Lanka is consistent with the IMF program parameters,” the official creditor committee said in a statement.The agreement with the group of creditor nations comes about a month after the island nation reached a deal with the Export-Import Bank of China covering about $4.2 billion of outstanding debt.”As far as the information we have is concerned, conditions set by China are comparable to ours,” Kanda said. More

Cohn, speaking with CNBC’s Dan Murphy, emphasized the need for the Federal Reserve to maintain its current interest rate levels, which have hovered between 5.25% and 5.5% since September, to stay in step with other central banks’ unwinding strategies. He suggested that the Fed would likely await signals of an economic downturn before considering any action on rates.The persistence of October’s inflation rate at 3.2%, unchanged from the previous month and significantly reduced from the June 2022 peak of over 9%, indicates that the U.S. economy may be on course for a “soft landing,” dispelling some concerns over a potential recession. This stability is seen despite aggressive measures taken to curb inflation and soaring consumer debt levels, which have surpassed $1 trillion.Cohn also highlighted the return to average economic benchmarks, with Treasury yields nearing their hundred-year average of around 4.5% and inflation trending towards its historical norm of 2-2.5%. These indicators, he suggests, point to an overarching return to economic steadiness after a prolonged era of quantitative easing and near-zero interest rates.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

LONDON (Reuters) – British home prices will fall again in 2024 after dropping 4% this year as the Bank of England keeps interest rates higher for longer, eroding how much buyers can afford to borrow and deterring some from entering the market, a Reuters poll found.The COVID-19 era of record low borrowing costs and a desire for more space drove a boom in home prices that later fizzled out as the BoE embarked on an aggressive rate hiking campaign to tame consumer price inflation. Policymakers have raised Bank Rate by more than 5 percentage points in under two years to 5.25%, making once-cheap mortgage rates a lot more expensive. The Bank Rate is not expected to fall until well into next year.Average home prices were expected to drop 4.0% this year and 2.0% next before rising 3.0% in 2025, medians in the Nov. 15-29 poll of 18 property market experts showed. In a poll published in September those forecasts were -4.0%, 0.0% and +3.3%.”Lower mortgage rates and real income growth should start to put a floor under further price falls. Even so, a deteriorating economic picture will likely mean prices remain flat in 2024,” said Aneisha Beveridge at estate agency Hamptons.The most pessimistic forecaster for next year predicted a 7.5% drop while the most optimistic saw a 5.0% rebound.London homes, still a big draw for foreign investors, will fare better than nationally and only fall 3.7% this year and a more modest 0.5% in 2024 before rising 4.3% the following year.”In a dangerous world and an increasingly hot world – Brazil has just recorded its record temperature of 44.8 degrees Celsius – London looks set to regain its position as a ‘supplier of choice’ for international residential buyers,” said Tony Williams at consultancy Building Value.Shares in high-end developer Berkeley, which has a larger exposure to the capital than its peers and is seen as a bellwether of the London market, are up more than 20% this year.Despite borrowing costs remaining high – a separate Reuters poll suggested they would not start to fall until at least July and even then only gradually – a more than 85% majority of respondents to an extra question said purchasing affordability for first-time buyers would improve over the coming year.”With prices falling in both real and nominal terms and wages rising we expect affordability for first-time buyers will improve on current levels. We also expect more competitive rates in 2024 will help,” said Marcus Dixon at real estate management firm JLL.Lenders have accelerated mortgage price cuts as competition intensifies and slowing inflation increases market bets on future rate cuts.Some homebuilders such as Persimmon (LON:PSN) have also said they expect to build more properties this year than previously thought, although rival Barratt said annual building targets would be 20% lower than last year.The bulk of specialists who answered another question – 10 of 13 – said the proportion of homeowners to renters would increase.”As well as security of tenure the attractions of being a first-time buyer in 2024 will increase as mortgage costs fall but rents continue to rise,” said Ray Boulger at mortgage broker John Charcol.Private rental prices rose 6.1% in the 12 months to October, the biggest annual increase since data collection started in 2016, data from the Office for National Statistics showed earlier this month.(Other stories from the Reuters quarterly housing market polls) More