Economy

BERLIN (Reuters) -The German government has imposed a freeze on most new spending commitments in what officials on Tuesday said was a necessary step as Chancellor Olaf Scholz’s coalition grapples with a deepening budget crisis.The government’s spending plans were thrown into disarray by a court ruling last week that blocked the government from transferring 60 billion euros ($65 billion) in unused funds from the pandemic towards green initiatives and could starve some German industry of support to keep it competitive in a weak economy.The ruling has strained Scholz’s three-way coalition, which pitches the pro-spending Greens against hawks in the fiscally conservative Free Democrats (FDP) over whether to suspend self-imposed limits on raising new debt. The finance ministry has frozen future spending pledges across almost the entire federal budget, a letter by the budget state secretary showed, in a sign of how seriously it was taking the potential fallout to its finances.The measure applies to all ministries and a 200 billion-euro fund that was set up to support companies through the pandemic and the energy crisis after Russia’s invasion of Ukraine. The 200 billion-euro fund is also now under threat by a prospective legal challenge from the resurgent main opposition Christian Democrats (CDU), which had brought the successful lawsuit against the 60 billion-euro climate fund last week. Economy Minister Robert Habeck has warned that the court ruling could severely impact Germany’s ability to support its industry through a green transition and keep jobs and value creation from moving abroad. That could include planned chip factories, the expansion of the battery supply chain and the decarbonisation of steel, government sources said on Monday. “These funds are not an add-on that one can carelessly do without … the loss to the economy if investments were not made now would be even greater,” Habeck told a news conference at a digital summit in the city of Jena.The ruling had set off a “chain reaction” whose consequences needed further discussion, he said, stressing that Monday’s extended budget freeze would give the government room to take money from elsewhere to save certain projects. “And exactly how we will go about this, that’s being urgently prepared and discussed behind the scenes and is not something for a press conference on the sidelines of a digital summit,” he added. DEBT BRAKE SUSPENSION? Kevin Kuehnert, a high-ranking member of Scholz’s Social Democrats (SPD) party, joined those calling for the government to suspend a constitutionally enshrined debt brake to free up more spending. Finance Minister Christian Lindner has so far opposed such a move. Cutting 60 billion euros from the budget by “reversing the transformation of our society, no longer supporting companies in international competition and thus losing jobs in Germany, that’s not something the SPD was elected to do,” Kuehnert said. In an apparent show of unity however, Habeck from the Greens party and Digital Minister Volker Wissing from the FDP emphasised their good working relationship at the digital conference. “For us, collaboration behind the scenes looks the same as on stage,” Wissing said.Public opinion appears to be divided on how the government, whose popularity has sunk during a weak economy and rising inflation, should proceed. According to a survey by the RTL/ntv broadcaster, 44% of Germans believe the government should plug budget holes by making cuts elsewhere, while 38% think it should largely forgo projects that had been earmarked in the 60 billion-euro fund.The CDU on Tuesday said the 2024 budget as it stands was not fit for purpose as a result of the court verdict. However, there were also signs that the CDU’s decision to take the government to court could rebound on federal states where the party heads the local government. Hendrik Wuest, the state premier of the CDU-run government in North Rhine-Westphalia, said the federal government had to ensure that money kept flowing to industry in his state.”The many thousands of employees, especially in energy-intensive companies, need the security that they will be supported,” he told the Rheinische Post newspaper. “The SPD-led federal government must stop spreading uncertainty among employees. That is irresponsible.” ($1 = 0.9168 euros) More

In Australia, early data from the Melbourne Institute indicates a slight decline in October inflation by 0.1%, which could lower the annual rate from September’s 5.6% to around 5.2%. The global downtrend in inflation has been attributed to factors such as oil price corrections after supply restrictions by Saudi Arabia and Russia, and an easing of supply chain issues.Michele Bullock, Governor of the Reserve Bank of Australia, expressed concern over persistent demand pressures despite these easing conditions. She also pointed out the troubling practice of businesses passing on costs to consumers. In response to the US’s low-inflation announcement last Tuesday, the Australian dollar gained strength against its US counterpart, rising from 63.7 to 65.8 cents. This shift impacts local pricing and may reduce the pressure on domestic interest rates.With these international economic shifts, Australian financial markets are predicting a low likelihood of further interest rate increases and are even considering the possibility of cuts in the upcoming year. This scenario offers some breathing room for Australia’s Reserve Bank, potentially allowing it to diverge from global interest rate trends.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

(Reuters) – U.S. stock index futures inched lower on Tuesday as investors stayed on the sidelines ahead of artificial intelligence chip leader Nvidia (NASDAQ:NVDA)’s quarterly report and the release of the Federal Reserve’s meeting minutes.A technology-fueled rally led the S&P 500 and the Nasdaq to register their highest closing level in over three months on Monday, as investors continued to bet that the Fed was at the end of its rate hiking cycle.Big Tech stocks, which have powered most of the S&P 500’s gains this year, now face an important test with Nvidia due to report third-quarter results after markets close.The chip designer is expected to deliver yet another blockbuster revenue forecast but the real focus will be on the impact of widening U.S. curbs on sales of its high-end chips to China.”The market is expecting a large pick-up in revenue growth in Q3, with expectations of an even bigger number for Q4,” said Stuart Cole, head macro economist at Equiti Capital.However, given potential headwinds such as a slowdown in China, the company’s 2024 guidance could be key for the stock’s performance going forward, Cole added.Shares of Nvidia were flat in premarket trading while other megacap stocks were mixed.Before the quarterly report, minutes of the Fed’s November meeting are likely to offer more cues on the monetary policy path after evidence of slowing inflation boosted expectations that U.S. interest rates had peaked. The minutes are due to be released at 1400 ET (1900 GMT).Traders have fully priced in the probability that the Fed will hold interest rates steady in December, with 28% betting on the likelihood that the central bank will deliver a rate cut as soon as March, according to the CME Group’s (NASDAQ:CME) Fedwatch tool.This week is light in terms of economic data, with a report on existing home sales due later in the day. Trading volumes are also expected to be thin ahead of the Thanksgiving holiday.On the retail earnings front, Lowe’s (NYSE:LOW) Cos fell 4.2% after the home improvement chain projected a bigger drop in annual comparable sales than earlier and trimmed its profit forecast for the year. Best Buy (NYSE:BBY) slipped 3.1% after the electronics retailer said it expects a steeper drop in annual comparable sales, while Kohl’s Corp (NYSE:KSS) shed 4.4% on missing third-quarter sales estimates. At 7:18 a.m. ET, Dow e-minis were down 56 points, or 0.16%, S&P 500 e-minis were down 6.5 points, or 0.14%, and Nasdaq 100 e-minis were down 23.25 points, or 0.14%.Among other stocks, U.S.-listed shares of Baidu (NASDAQ:BIDU) gained 2.0% as China’s biggest internet search engine provider’s third-quarter revenue beat estimates. More

This article is an on-site version of our Chris Giles on Central Banks newsletter. Sign up here to get the newsletter sent straight to your inbox every TuesdayHello again. This week, Argentina has voted for another economic experiment by electing the radical libertarian Javier Milei as president. Experience suggests it will not go well. As the main analysis shows, the extra difficulty for the South American nation is the success of many other emerging economies which have been trying economic orthodoxy. Elsewhere, the October inflation figures have been exceptionally well behaved in the US, UK and eurozone, leading financial markets to disregard all the central banker talk about higher for longer. Do you think central bankers are now behind the curve, still broadly correct or facing impossible communications challenges? Email me at [email protected] tortoises and emerging haresSince I started a career in economics more than three decades ago, it has been something of a regularity that you shouldn’t underestimate emerging economies. Measured properly at purchasing power parity exchange rates, China caught up with the US as the largest economy in the world in 2014 (accurate to 1 percentage point of each nation’s share of global GDP) and was definitively ahead by 2018. I know people will complain about PPP exchange rates and at market exchange rates things can look different, but PPP is the only proper way to do these long-term comparisons. The US can still be the world’s most powerful economy despite producing fewer goods and services than China. On a broader canvas, advanced economies accounted for more than 60 per cent of global GDP in 1991 and are now down to about 40 per cent. Although these are economic facts, few thought advanced economies had much to learn from emerging markets in the fields of central banking, inflation management and financial stability. Until now. Robin Brooks, chief economist of the Institute of International Finance, tells me, “the large emerging economies have run monetary policy better than developed markets”. He said they were faster to spot the inflationary threat, faster to raise rates and kept their credibility more than the Fed, ECB or BoE. He is not remotely alone. In its recent World Economic Outlook, the IMF (slightly grudgingly) noted: “Monetary policymaking in many [emerging economies] is better equipped than 15 years ago to serve as an anchor of stability.”It’s impossible not to come roughly to this conclusion when you look at the monetary policy response to the global inflation shock starting in late 2020. After all, emerging markets central banks began to increase interest rates in early 2021, about a year ahead of their big counterparts on both sides of the Atlantic. They correctly worried about global supply chains, imported inflation as their currencies weakened against a rampant US dollar and the potential for temporary price rises to become persistent as the chart below shows. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Emerging market central banks were not just faster to respond to inflationary pressures, they have been quicker to ease policy with interest rates in Brazil, Chile, Peru, Costa Rica, Hungary, Poland, Georgia and Kazakhstan on the way down. It’s one thing to praise emerging central banks for their rapid action. The medicine also needs to work. Separate data from Oxford Economics shows that monthly rates of core inflation — excluding food and energy prices — have already come down close to desired levels in the big emerging economies of eastern Europe, Latin America and Asia as the chart from Oxford Economics shows. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.By far the most detailed research on what emerging market central banks have done right is published in a Peterson Institute of International Economics paper. It concludes that emerging economies started monetary tightening earlier allowing the process to be more gradual, both controlling inflation better and allowing commercial bankers more time to adjust without failing, unlike Silicon Valley Bank and Credit Suisse. The kicker:“In these critical areas of central banking, emerging markets appear to have overtaken the ‘masters’.” Elina Ribakova, non-resident fellow at PIIE and one of the authors of the report, told me the key to superior performance was that emerging market central banks had not made strict forward guidance to keep monetary policy extremely loose for a long time during the pandemic and so they did not “muffle their response to inflation”.The innovation in the paper is an extremely detailed look at the communication of emerging market central banks using various forms of AI and machine learning approaches. Readability and transparency of emerging market central bank statements and other communication is at or above the level of the Fed and ECB, it found. But the area of difference was that as the pandemic subsided in late 2020, emerging economy central banks responded to the inflation threat faster, were clearer in their communications, did not rely on failing fancy economic models and did not get bogged down in side issues. They were still behind the inflation curve, but not as far. As the sentiment index chart below shows, where hawkish statements are positive and dovish ones negative, emerging market central banks had tended to equivocate in the past, but were decisive this time and well ahead of the Fed and ECB. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Ribakova tells me there was a sliver of luck in all of this because many emerging economies had experienced more recent bouts of inflation, but she added “the clarity of statements” and focus on what really mattered was better than that in advanced economies. The one area emerging central banks still really needed to improve, she said, was in making sure they followed their words with action. Some caveatsI can’t write an analysis like this without highlighting some caveats. First, the plaudits go to many, but not all emerging economies. Argentina and Turkey do not win any prizes. As MUFG wrote in a note last week: “It is hard to be constructive on EMs on a homogenous basis.”Second, the IMF rightly points out that emerging economies had a worse pandemic and lost more output relative to previous expectations than developed economies.It also says that inflation is likely to prove stickier in emerging economies because households are not yet sufficiently forward looking, implying that price stability mandates are not yet fully embedded in thinking. We shall see, however, because as the fund’s chart from the same document below suggests, EM inflation expectations for 2023 and beyond are as good or better than those in developed economies. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.A chart that mattersI said I would bring you the latest inflation numbers from the UK, US (CPI) and eurozone. The chart shows that recent months have much better annualised inflation performance than comparisons over longer periods. 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 I’ve been reading and watching Olivier Blanchard at the Peterson Institute warns that higher interest rates make public finances much less sustainable. It’s quite a change from his previous position, showing how much interest rates matter. He elaborates in Unhedged. Matt King argues that high government debt is associated with low interest rates not high ones. Governments keep interest rates down when debts are high, he argues, and economies are weaker, leading to lower rates. I am not sure the causality works, but it is an interesting read. We’ve heard a lot about how higher interest rates are complicating the lives of people in the green tech sector. Catherine Mann, an external member of the BoE’s Monetary Policy Committee, talks about how environmental policy affects monetary policy. Her conclusion: it’s complicated. Martin Wolf pivots and finds the case for monetary policy loosening is growing.Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

The group has put forth a proposal for a tax measure that could generate an additional £423 million in national investment revenue weekly by focusing on individuals with substantial assets. This initiative is presented as an alternative to what they consider harmful economic reform policies, such as reducing inheritance taxes.Supporters of the Patriotic Millionaires UK have highlighted data from surveys indicating broad public and millionaire support for wealth taxes. They argue that such measures would help relieve the financial burdens faced by working people by ensuring fair taxation of the wealthy. The group’s actions today aim to bring attention to these issues and influence policy decisions in the lead-up to tomorrow’s anticipated fiscal update.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

Strategists expect an increasingly fraught geopolitical backdrop and greater divergence across key regions, compounding uncertainty and market volatility for investors.
Goldman Sachs Asset Management noted that elections in the U.S., U.K., South Africa, India, Taiwan and Russia will add to the odds of the global economy diverging from its current path.
Lazard Chief Market Strategist Roland Temple said the most economically consequential geopolitical situation is China’s multi-faceted tension with the West over competition and Taiwan.

Israeli soldiers transfer detained Palestinians out of the Gaza Strip on November 20, 2023, as battles between Israel and the Hamas movement continue.
Gil Cohen-magen | AFP | Getty Images

Geopolitical risks will be the key threat to the economic outlook for 2024, as large-scale wars converge with a slew of pivotal elections across major global powers.
As the world’s financial institutions map out the investment landscape for next year, they expect an increasingly fraught geopolitical backdrop and greater divergence across key regions, compounding uncertainty and market volatility.

In a global risk survey carried out among 130 businesses last month by Oxford Economics, almost two fifths of respondents viewed the Israel-Hamas war as a very significant risk to the global economy over the next two years.
Yet worries over relations between China and Taiwan and Russia and NATO were similarly widespread, and geopolitical tensions were the top business concern over both the near and medium term, with 62% of businesses citing geopolitics as a very significant risk to the global economy.
“Deglobalisation and persistently higher oil prices, both of which could be triggered by an intensification of geopolitical tensions, are also fairly prominent in the latest survey,” Oxford Economics researchers said.
The International Monetary Fund expects global growth to slow to 2.9% in 2024, amid widening divergence between regions — stronger growth is projected in the U.S. and large emerging markets, while China and the euro area are expected to struggle.
In its 2024 investment outlook published Monday, Goldman Sachs Asset Management noted that elections in the U.S., U.K., South Africa, India, Taiwan and Russia will add to the range of possibilities for the global economy to diverge from its current path.

The Wall Street giant’s asset management arm noted that concerns over government debt sustainability and the fiscal trajectory in the U.S. may mount in the run-up to the presidential election of next November, while domestic socioeconomic risks — such as strikes in certain industries amid stubbornly high inflation — could persist across major economies and further weigh on growth.
“Rising geopolitical tensions could trigger more trade restrictions across the globe, resulting in further economic fragmentation. We expect economies to continue to invest heavily in their economic security over the next 12 months and beyond,” GSAM strategists wrote.
“This may be driven by developed markets ‘re-shoring’ and ‘friend-shoring’ critical supply chains that remain highly interdependent and, in some cases, over-concentrated, such as leading-edge semiconductors.”
Russia-Ukraine, Israel-Hamas, China-Taiwan
The view was echoed by Roland Temple, chief market strategist at Lazard, who said in a global outlook report last week that, while predicting the course of any single geopolitical crisis is fraught, what is clear is that “the global trajectory is toward more frequent conflicts of increasing consequence.”
“Navigating the evolving — at times treacherous — geopolitical landscape will likely require access to deep wells of expertise, as geopolitical issues that could have been ignored in the past now stand to directly impact companies’ supply chains and customer bases,” Temple said.
“Ongoing geopolitical conflicts and tensions are likely to depress growth further, while adding to inflationary pressures that are beyond the control of central banks.”
Temple predicted that the Russia-Ukraine conflict will extend well into 2024, as the Ukrainian counteroffensive loses momentum due to the encroaching winter, while concerns mount over the reliability of Western funding and military aid.

“While a negotiated settlement is likely the only way to end the war, both sides remain far from the point of agreeing to capitulate on their grand designs — that is, for Russia to control all of Ukraine and for Ukraine to control all of its sovereign territory,” he said.
As for the Middle East, the most “combustible situation” would be a spill-over of the Israel-Hamas conflict into nearby states, including Iran, which could “spiral into a regional conflict with global and military implications.” The primary risk of this form of escalation would be a disruption of the transit of energy supplies through the Strait of Hormuz, through which around 20% of global oil supply is shipped.
But Temple argued that all parties, including Iran, Israel and the United States have strong incentives to avoid this outcome, and that the most economically consequential geopolitical situation is China’s multi-faceted tensions with the West over competition and Taiwan.
“Early 2024 Taiwan elections will set the stage for the rest of the year. The Democratic Progressive Party (DPP) is currently well ahead of the more Beijing-friendly Kuomintang (KMT),” he noted.
“A DPP victory would likely escalate tension with Beijing as the DPP is seen as favoring a formal declaration of independence, a red line for the Chinese government.”

A clear result of both direct industrial competition between China and the U.S. and concerns over China’s intentions in Taiwan is growing supply chain fragmentation, as trade tariffs and barriers along with post-Covid logistical concerns have led developed economies to pursue “friend-shoring” or “near-shoring” policies.
“These plans are proving more difficult than policymakers might have envisioned, given inertia around supply chains and the challenge of cultivating the necessary skills among workers in new locales,” Temple said.
“Still, geopolitical tension is contributing to economic fragmentation which, at least in the short run, may dampen global growth and contribute to inflationary forces.”
On a positive note, Temple suggested that sustained disinflation should allow the U.S. Federal Reserve and other central banks to consider cutting interest rates as early as the second quarter, which should “mitigate headwinds to growth and invigorate capital expenditures in anticipation of a cyclical economic rebound.”
Security and semiconductors
GSAM Head of Asset & Wealth Management Marc Nachmann and his team expect critical mineral supply chains to receive attention due to their growing importance in the clean energy transition, along with their potential vulnerability to supply shocks.
As a result, GSAM suggested investors should avoid trying to time the market or make calls on binary political or geopolitical outcomes, but instead take a proactive approach to asset allocation based on “extensive bottom-up research.”
“We think companies that successfully align with corporate and government efforts to boost the security of supply chains and resources as well as national security will emerge as long-term winners,” the strategists said, adding that firms with pricing power, durable business models and strong balance sheets should be the focus.
“Public equity market may present opportunities to gain targeted exposure to more established firms that produce semiconductors and to semiconductor manufacturing equipment, as well as to industrial automation and technology companies that are facilitating the reshoring of manufacturing.”
Demand for natural gas products is likely to rise, as nations seek affordable, reliable and sustainable energy, GSAM predicted, while growing and more complex security threats create opportunities for cybersecurity platforms and aerospace and defense technology providers. More

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Living in south-east London, I find the relatable rich all around me. Neighbourhoods such as Dulwich and Blackheath are full of the well-off middle classes — big mortgages, school fees and skiing holidays, usually made possible by at least one parent working in the City. But these are also places where being in the top 1 per cent of income earners doesn’t go far — and where mortgage rate rises and inflation can hit hard.The combination of coming off a fixed-rate mortgage and facing across-the-board price rises can easily add £2,000 to monthly outgoings. UK take-home pay, if you earn £200,000, is approximately £9,500 a month. This can make a huge difference for those at the bottom end of the 1 per cent.It’s not just the UK either. The Bank of America’s Consumer Checkpoint Survey for October 2023 found that there had been a fall in both necessity and discretionary spending for households earning more than $125,000. (Other lower-earning groups showed rises or stayed more or less flat.) Indeed, in the US, the term “richcession”, a recession that hits those on six-figure salaries, is being bandied about. So, are the rich having to tighten their belts and, if so, how?One of the good things about being well off is that there’s more to cut back on. A 2022 CNBC survey of millionaires had respondents saying they were “more price conscious” when shopping — with a third saying they were dining out at restaurants less often. This very much chimes with what I’m seeing. People who used to eat out twice a week are now doing so twice a month. Interestingly, struggling one percenters may actually enjoy some of this everyday economising. We’ve all read magazine features where customers who normally shop in high-end supermarkets suddenly discover the joys of the cured-meats selection in their local discounter store, or who start cooking meals that they’d once have ordered in.Less enjoyable perhaps, but also common, is to rationalise holidays. “We can still go away in the summer and ski, but mini-breaks and autumn holidays are out” is a common refrain. A friend who works in luxury travel tells me he’s seeing fewer of the lower 1 per cent, “but the very rich are spending more than ever”. This, he says, is likely down to the price of airfares, which have remained high and act as a barrier. Thailand for half-term is fast becoming a pre-pandemic memory.Others are having to go further than holidays. The Financial Times recently reported that, in the UK, there had been a rise in interest in properties near grammar schools and other good state schools. The reason? Well, for many of the struggling 1 per cent, school fees (assuming two or more kids) are the single biggest outgoing. A good state school can cut your outgoings in half.Just don’t expect any sympathy if you’re moaning about this sort of economising. A woman who went on Mumsnet, the UK online parenting forum, earlier this year to complain that private school fees had increased so much that she was considering home-schooling received short shrift from many commentators and was told to “read the room”. Indeed, it’s probably a good idea generally not to do the “poor little rich person” act on social media, because you’ll always reach someone who makes your predicament look like a joke.But enough about the not-quite-rich. What about the really rich, for whom all of this is pocket change? Well, some of them are economising too, even though they don’t need to. Financial psychologist Brad Klontz points out that there are plenty of rich people who have always lived well within their means. For them, comparative frugality is just business as usual — and, as modest people, they’re very unlikely to tell you about it on Instagram.However, he adds, some of the ostentatious wealthy may be curbing their spending, even if they don’t need to. This, he says, often happens with those who have more diverse social groups — including people who are being forced to economise. “We are tribal creatures,” says Klontz. “Here, economising isn’t virtue signalling, it’s wanting to show you belong to your group.” Thus, the guy worth £200mn flies business class so as not to distance himself from his friend who earns £200,000 a year.Klontz adds that there are certain groups of wealthy people who find economising harder. “You have high income people who grew up low income. Some of them have made it a life goal not having to economise and they really don’t want to start doing it now.”However, he adds that the people who find it hardest of all are those who should have started doing it a long time ago when times were better. “There’s a cohort of rich people who are high-income but low-net-worth and who live paycheck to paycheck and may have run up debts to finance their lifestyles.” Until recently, he says, there had been enough money sloshing around to live like this. “But now, for them, the chickens may be coming home to roost.” Rhymer is reading . . . Radio Iris, by American author Anne-Marie Kinney. Described as The Office meets Kafka, the novel is about a daydreaming receptionist who is unsure what her company actually does. We soon realise the business is falling apart, but so too is reality around it. Eerie and surreal. Follow Rhymer on X @rhymerrigbyThis article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment More