Economy

The central bank is considering two potential solutions to this issue. Workers may agree to spread wage increases over a longer period, or the bank might raise its policy rate to slow down the economy and curb wage gains. If wage growth does not decelerate, the bank might raise its policy rate, especially if underlying inflationary pressures persist. Rising wages can inflate the economy via demand and supply. Higher wages enhance households’ purchasing power, thus increasing demand and fueling inflationary pressures. However, while consumer expenditures have increased this year, spending per capita is lower, suggesting restrained spending despite income gains. Rapid wage growth without corresponding productivity gains or cost of living adjustments inflates business costs, which are often passed onto consumers through price hikes. This leads to an inflationary supply shock, a primary concern for the Bank of Canada and Deputy Governor Nicolas Vincent. Changes in pricing behavior have exacerbated these concerns, with firms increasing prices more frequently. The central bank aims to prevent an inflationary loop by urging wage restraint.However, there’s a risk of overtightening monetary policy. After a 475-basis-point increase in the policy rate, rising insolvencies, and high household indebtedness have led to many households financially struggling. This could result in significant job losses and a potential hard landing for the Canadian economy, posing financial stability risks and possibly leading to a deep recession.The Bank of Canada now faces a dilemma: should it prioritize returning inflation to its target, risking economic instability, financial stability risks, hard-landing probability, and a deep recession, or adopt a more cautious approach, risking persistent high inflation requiring a more robust intervention later? As of now, economists widely predict the Bank of Canada will maintain interest rates this week, considering current inflation data and the delayed impact of previous hikes.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

The carmaker reported $3.1 billion in profit from July through September, which included two weeks of walkouts by the United Automobile Workers.General Motors said on Tuesday that it made $3.1 billion in profit from July through September, a year-over-year decline of more than 7 percent that was due partly to the six-week strike by the United Automobile Workers, which has idled two of the company’s vehicle plants and 18 of its parts distribution centers.G.M. said the strike had lowered its earnings before interest and taxes by about $200 million in the final weeks of the third quarter, and by about $600 million since the fourth quarter started on Oct. 1. The automaker also estimated that the strike could cost it $200 million a week going forward.“We continue to be optimistic we will be able to reach an agreement as soon as possible,” G.M.’s chief financial officer, Paul Jacobson, said in a conference call with reporters, but he declined to say if the company believed it was near a deal on a new contract with the U.A.W.On Friday, G.M. gave the union a contract offer that included a 23 percent increase in wages over four years. That would lift the standard U.A.W. wage from $32 an hour to more than $40. At that wage, an employee working 40 hours a week would earn about $84,000 a year, not including extra pay for overtime or profit-sharing bonuses, which have topped $10,000 in the past two years.Mr. Jacobson said negotiations with the union were continuing. The union’s strike, which has targeted specific sites owned by Detroit’s Big Three automakers, has idled a G.M. pickup truck plant in Missouri and another in Michigan that makes large sport utility vehicles.In the third quarter, G.M. earned almost all of its profit in North America, which is largely driven by factories in the United States staffed by U.A.W. members. Its bottom line was hurt by a 42 percent drop in profits from its joint ventures in China, a small profit decline in its financial arm and a loss from its Cruise division, which is working to develop self-driving cars.Despite the strike, G.M. reported that its revenue rose about 5 percent in the third quarter, to $44.1 billion. It sold 981,000 vehicles globally in the quarter, about 15,000 more than a year earlier.The company’s quarterly results were better than analysts expected, and G.M.’s stock rose in premarket trading on Tuesday.Mr. Jacobson said that G.M. hoped to introduce redesigned S.U.V. models that would be more profitable than those they were replacing, and that the company would save money by slowing its planned rollout of electric vehicles. G.M. recently said it was pushing back the start of production of electric pickups at a plant in Orion, Mich., from 2024 to late 2025, in response to slower-than-expected growth in sales of E.V.s.While G.M. is now planning a slower ramp-up of E.V. production in 2025, it still aims to be able to produce one million electric vehicles a year in North America by the end of 2025, Mr. Jacobson said.“Our commitment to an all-E.V. future is as strong as ever,” he said. More

The European Central Bank is expected to halt the most aggressive series of interest rate rises in its history when policymakers meet in Athens this week.Yet, with eurozone inflation running at more than twice its target and the Israel-Hamas conflict pushing up energy prices, ECB president Christine Lagarde is expected to make clear that rates are likely to stay at — or above — their current level for some time. Most investors, looking at this year’s near-stagnation of the eurozone economy and the downward trajectory of inflation, view the chances of a further rise in eurozone rates as slim. “They will keep the option open for additional rate hikes, but the bar is pretty high for that to happen,” said Konstantin Veit, a portfolio manager at US investment group Pimco. Yet the idea of eurozone interest rates staying higher for longer than anticipated earlier this year is gaining ground, despite signs that the region’s economy is hardly growing. “Only a month ago, the market had three full rate cuts priced in for the ECB next year, but now it is pricing in slightly more than two,” said Veit. “There are still a lot of risks for inflation out there and it is too early to say exactly how soon the rate cuts will start.”In response to a double-digit surge in Europeans’ cost of living, the biggest for a generation, the ECB has raised borrowing costs at 10 consecutive meetings. This lifted its benchmark deposit rate from an all-time low of minus 0.5 per cent to a record high of 4 per cent.Officials remain cautious however about how long it will take to complete the “last mile” of their journey in returning inflation to their target of 2 per cent. Lagarde said this month that price pressures remain “undesirably high”, despite dropping to nearly a two-year low of 4.3 per cent last month. The rate is expected to drop even further in October, though data is not published until a few days after this week’s meeting. More evidence that economic activity was weakening and inflation was cooling came on Tuesday, when the latest survey of purchasing managers pointed to further declines in eurozone business output, a stepping up of job-cutting and a drop in price pressures affecting companies. The ECB’s own survey of banks also showed a continued contraction in the supply of credit to households and businesses from eurozone banks.  However, the conflict between Israel and Hamas has raised fears of wider tensions in the Middle East and pushed up oil and gas prices in recent weeks, which economists worry could keep inflation stubbornly high.“The attacks on Israel, and the potential knock-on effects on the oil market, pose a new upside risk to inflation,” said Dirk Schumacher, a former ECB economist who is now at French bank Natixis. “Downside risks to growth, at the same time, have also increased, complicating the picture further for the ECB.”Greek central bank governor Yannis Stournaras, who is one of the ECB’s 26 governing council members, told the Financial Times recently that it should avoid a “knee-jerk reaction” to the jump in energy prices caused by the Middle East conflict. ECB chief economist Philip Lane also played down fears, saying higher borrowing costs should prevent higher prices from causing a broader surge in consumer prices. “When rates are restrictive then the ability of firms to pass on those energy price increases into consumer prices is less,” Lane told the Dutch newspaper Het Financieele Dagblad.But Lane also voiced concern about soaring incomes, which rose 4.5 per cent in the region in the year to the second quarter. “We need to see wage growth slow down,” he said. “If inflation shocks are sufficiently large or persistent, the ECB will have to be open to doing more.”Rate-setters are also expected to discuss the possibility of tightening monetary policy via their balance sheet. Up for debate is whether to stop reinvesting the proceeds of a €1.7tn portfolio, bought in response to the pandemic, earlier than expected. The recent sell-off in bond markets, which drove government borrowing costs up to their highest levels for a decade, has made some nervous about shrinking the balance sheet, however. They say the ECB needs the flexibility to target the proceeds of maturing bonds more towards the debt of any country hit by a sharp divergence, or fragmentation, in financing costs compared to others. Italy’s borrowing costs have already risen more than those of Germany on concerns about Rome’s rising fiscal deficit, taking the closely watched spread between the two countries’ 10-year bond yields above 2 per cent for the first time in months.“Given the rise in long-term yields — with 10-year Italian yields around 5 per cent and additional fiscal risks — we expect the ECB to move cautiously,” said Sven Jari Stehn, economist at Goldman Sachs.Some ECB council members are also pushing for it to cut the interest it pays to commercial banks. Rate-setters would do so by increasing the minimum amount of reserves the sector needs to park at the central bank, on which lenders earn nothing. The idea is controversial as it seems mainly designed to reduce the heavy losses some eurozone national central banks are racking up rather than contributing to the fight against inflation.“If concerns about central bank losses intrude into policy and the ECB seems to have other objectives apart from price stability then it could negatively affect central bank credibility,” said Veit at Pimco. The debate is unlikely to be settled until the ECB completes a wider review of its operating framework. That review, which will assess the optimum size of its balance sheet, is due to be completed next spring. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK business activity shrank for the third consecutive month in October, according to a closely watched survey, indicating that high interest rates and prices are continuing to weigh on the economy.The S&P Global/Cips Flash UK composite purchasing managers’ output index, a measure of the health of the manufacturing and services sector, marginally increased to 48.6 in October from 48.5 the previous month.The reading remained below the 50 mark, indicating that a majority of businesses continued to report a contraction in their output.“The UK economy continued to skirt with recession in October, as the increased cost of living, higher interest rates and falling exports were widely blamed on a third month of falling output,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.The PMI indices are closely watched as a near real-time gauge of the economy as official statistics lag by several months. The PMIs suggested that high interest rates are hitting demand, employment and confidence across the economy.Ruth Gregory, economist at Capital Economics, said the readings supported “our view that a mild recession is under way and that the Bank of England has finished hiking interest rates”. The BoE is widely expected to leave interest rates unchanged at 5.25 per cent when it meets on November 2. However, economists warned that the PMIs are not a perfect predictor of economic growth. The flash estimates for September were later heavily revised. October’s preliminary results may be “taken with a pinch of salt”, said Sandra Horsfield, economist at Investec.The flash UK estimates, based on a survey conducted between October 12 and 20, showed that the services sector index ticked down to 49.2 in October from 49.3 in the previous month, indicating a modest decline in output. The final reading will be released at the end of the month. The manufacturing index improved to 45.2 from 44.3 in the previous month but marked eight consecutive months in negative territory — the longest such period since the financial crisis. Forward looking indicators, such as new orders, deteriorated in October with panellists citing caution among corporate clients, alongside stretched household budgets due to cost of living pressures. Business outlook for the year ahead also dropped to its lowest level since December 2022.Business lamented weaker exports, especially in the manufacturing sector, while companies reduced their job count for the second consecutive month.Some economists expect high inflation to come down this year, boosting real incomes and spending in the final quarter. But Thomas Pugh, economist at RSM UK, said: “Growth is likely to remain marginal over the next year, meaning that it wouldn’t take much of a deterioration, in sentiment or economic conditions, to tip the UK into a recession.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Taiwan’s leading presidential candidate has blasted China over a probe of Apple supplier Foxconn, accusing Beijing of unfairly targeting the Taiwanese company ahead of an election early next year. “China must not demand Taiwanese enterprises take sides,” said vice-president Lai Ching-te, the candidate from the ruling Democratic Progressive party and frontrunner for the January polls, accusing Beijing of pressuring Taiwanese companies “every time an election nears or [ordering] them to support certain candidates”. Such tactics “hurt everyone”, he added at a campaign event on Tuesday. “If they [Foxconn] are hit without their own fault, they will only lose confidence in China,” he said. “Once they start being afraid, they will gradually move to other countries and set up their production bases.”“That is a loss for China, too,” said Lai.The Global Times, the Chinese state-owned nationalist tabloid, reported on Sunday that Foxconn subsidiaries in several Chinese provinces were being investigated for tax and land use issues. Foxconn has said it will co-operate with the investigation.Taiwan was for many years one of the largest sources of foreign direct investment in China after Taipei lifted a ban on such activity 30 years ago. Although new Taiwanese investment in China peaked 10 years ago, Taiwan-owned companies such as Foxconn, the world’s largest contract electronics manufacturer, rank among the country’s largest private exporters and employers.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Beijing has denounced Lai as a separatist, and he has historically been aligned with a more pro-independence wing of the DPP, but he has pledged to maintain incumbent president Tsai-Ing-wen’s policy of preserving the status quo across the Taiwan Strait. Beijing claims Taiwan as part of its territory and has threatened to seize it by force if Taipei refuses to submit to its sovereignty.Chinese authorities have in the past also pressured local subsidiaries of Taiwanese companies at politically sensitive times, and have repeatedly urged Taiwanese companies to support peaceful ties.Foxconn’s billionaire founder Terry Gou is also vying for the presidency as one of three opposition candidates. He quit the Foxconn board last month after launching his campaign but he still holds a 12.5 per cent stake in the company.Gou has not commented on the probe, and his campaign office did not respond to requests for comment.The news of the Foxconn probe prompted unusual unity between Taiwan’s ruling party and its political opposition, with Ko Wen-je, candidate for the small Taiwan People’s party, also attacking China’s move.“China calls itself a great power. No matter if it is towards Foxconn or others, they should explain [the investigation],” Ko said at a meeting with foreign journalists on Tuesday.Ko, who is neck and neck in the polls with the candidate of the Kuomintang, the largest opposition party, has mostly campaigned on criticism of the government in Taipei, and advocates for a resumption of dialogue with China, which Beijing cut off after Tsai came to power in 2016.Lai called on China to “take good care of and cherish” Taiwanese companies, which he said had helped boost China’s economy, develop its industry and stabilised its society by creating large numbers of jobs.“Taiwanese companies have made a big contribution to China,” he said. “This is like the water benefiting the fish and the fish benefiting the water; it is a win-win situation.” More

Economists first underestimated inflation, then underestimated consumers and the labor market. The key question is why.Economists spent 2021 expecting inflation to prove “transitory.” They spent much of 2022 underestimating its staying power. And they spent early 2023 predicting that the Federal Reserve’s rate increases, meant to cure the inflation, would plunge the economy into a recession.None of those forecasts have panned out.Rapid inflation has now been a fact of life for 30 consecutive months. The Fed has lifted rates above 5.25 percent to hit the brakes on price increases, but the economy has remained surprisingly strong in the face of those moves. Americans are working in greater numbers than predicted, and recent retail sales data showed that consumers are still spending at a faster clip than just about anyone expected. For now, there is no economic downturn in sight.The question is why experts so severely misjudged the pandemic and postpandemic economy — and what it means for policy and the outlook going forward.Economists generally expect growth to slow late this year and into early next, nudging unemployment higher and gradually weighing inflation down. But several said the economy had been so hard to predict since the pandemic that they had low confidence about future projections.“The forecasts have been embarrassingly wrong, in the entire forecasting community,” said Torsten Slok at the asset manager Apollo Global Management. “We are still trying to figure out how this new economy works.”Economists were too optimistic on inflation.Two big issues have made it difficult to forecast since 2020. The first was the coronavirus pandemic. The world had not experienced such a sweeping disease since the Spanish flu in 1918, and it was hard to anticipate how it would roil commerce and consumer behavior.The second complication came from fiscal policy. The Trump and Biden administrations poured $4.6 trillion of recovery money and stimulus into the economy in response to the pandemic. President Biden then pushed Congress to approve several laws that provided funding to encourage infrastructure investment and clean energy development.Between coronavirus lockdowns and the government’s enormous response, standard economic relationships stopped serving as good guides to the future.Take inflation. Economic models suggested that it would not take off in a lasting way as long as unemployment was high. It made sense: If a bunch of consumers were out of work or earning tepid pay gains, they would pull back if companies charged more.But those models did not count on the savings that Americans had amassed from pandemic aid and months at home. Price increases began to take off in March 2021 as ravenous demand for products like used cars and at-home exercise equipment collided with global supply shortages. Unemployment was above 6 percent, but that did not stop shoppers.Russia’s invasion of Ukraine in February 2022 exacerbated the situation, pushing up oil prices. And before long, the labor market had healed and wages were growing rapidly.Economic models did not take in to account that people were saving money during the pandemic that enabled them to buy goods even when unemployed.Jim Wilson/The New York TimesThey were too pessimistic on growth.As inflation showed staying power, officials at the Fed started to raise interest rates to cool demand — and economists began to predict that the moves would plunge the economy into recession.Central bankers were lifting rates at a speed not seen since the 1980s, making it sharply more expensive to take out a mortgage or car loan. The Fed had never changed rates so abruptly without spurring a downturn, many forecasters pointed out.“I think it’s been very seductive to make forecasts that are based on these types of observations,” said Jan Hatzius, Goldman Sachs’s chief economist, who has been predicting a gentler cool-down. “I think that understates how much this cycle has been different.”Not only has the recession failed to materialize so far, but growth has been surprisingly fast. Consumers have continued shelling out money for everything from Taylor Swift tickets to dog day care. Economists have regularly predicted that America’s shoppers are near a breaking point, only to be proved wrong.Part of the issue is a lack of good real-time data on consumer savings, said Karen Dynan, an economist at Harvard.“It’s been months now that we’ve been telling ourselves that people at the bottom of the income distribution have spent down their savings piles,” she said. “But we don’t really know.”At the same time, fiscal stimulus has had more staying power than expected: State and local governments continue to divvy out money they were allocated months or years ago.And consumers are getting more and better jobs, so incomes are fueling demand.Economists are now asking whether inflation can slow sufficiently without a pullback in growth. A landing so painless would be historically abnormal, but inflation has already cooled to 3.7 percent in September, down from a peak of about 9 percent.Normal may still be far away.Still, that is too quick for comfort: Inflation was about 2 percent before the pandemic. Given inflation’s stubbornness and the economy’s staying power, interest rates may need to stay elevated to bring it fully under control. On Wall Street, that even has a tagline: “Higher for longer.” Some economists even think that the low-rate, low-inflation world that prevailed from about 2009 to 2020 may never return. Donald Kohn, a former vice chair of the Fed, said big government deficits and the transition to green energy could keep growth and rates higher by propping up demand for borrowed cash.“My guess is that things aren’t going to go back,” Mr. Kohn said. “But my goodness, this is a distribution of outcomes.”Neil Dutta, an economist at Renaissance Macro, pointed out that America had a baby boom in the 1980s and early 1990s. Those people are now getting married, buying houses and having children. Their consumption could prop up growth and borrowing costs.“To me, it’s like the old normal — what was abnormal was that period,” Mr. Dutta said.Fed officials, for their part, are still predicting a return to an economy that looks like 2019. They expect rates to return to 2.5 percent over the longer term. They think that inflation will fade and growth will cool next year.The question is, what happens if they are wrong? The economy could slow more sharply than expected as the accumulated rate moves finally bite. Or inflation could get stuck, forcing the Fed to contemplate heftier interest rates than anyone has gambled on. Not a single person in a Bloomberg survey of nearly 60 economists expects interest rates to be higher at the end of 2024 than at the end of this year.Mr. Slok said it was a moment for modesty.“I think we have not figured it out,” he said. More

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SenseTime, once the darling of China’s artificial intelligence sector, has been pushing to diversify away from unreliable government revenues by snapping up high-powered chips that every AI company wants.Its effort now seems doomed by the latest round of US government export controls preventing Nvidia and its rivals from selling the powerful chips, needed to train the latest AI systems, to Chinese customers and their foreign subsidiaries. Since it went public in 2021, SenseTime has been seeking to reduce its reliance on its core surveillance business, which sells AI-powered security cameras to Chinese authorities. However, the Hong Kong-based company’s move into data centres packed with cutting-edge AI chips — which it rents out to AI companies — now appears stymied by the US-China “chip war”. To add to SenseTime’s problems, analysts point to investors shying away.“No one wants to touch this space in China,” said Andy Maynard, head of equities at China Renaissance, noting that many foreign investors cannot invest in the surveillance sector due to the Biden administration’s recent move to ban some US investment in China’s quantum computing, advanced chips and artificial intelligence. “SenseTime needs a dramatic catalytic event in the company to turn its share price around,” he said.Shares in SenseTime have dived more than 75 per cent since June 2022. That was the date, six months after its initial public offering, that its cornerstone investors were allowed to sell the stock. The company — which is yet to turn a profit — now has a market capitalisation of $5.9bn, compared with $16.5bn at the time of its listing. The US last week said it was tightening rules on AI chip sales to China, in a blow to Chinese groups like SenseTime that rely on Nvidia and other companies selling high-performance semiconductors in the country.Washington’s tighter controls come as Chinese AI groups such as SenseTime and iFlytek are pivoting away from their traditional strength in surveillance technology, which relies heavily on unstable revenues from cash-strapped local governments. A digital news officer produced by SenseTime. Its A100 chips are highly prized following the growth of domestic AI start-ups More