Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Ireland’s top central banker has said rate-setters are facing more uncertainty now than during the early stages of the coronavirus pandemic. Gabriel Makhlouf told the Financial Times that the outlook for next year was probably clouded by “more uncertainty than there was when we went into lockdown” as the agenda and actions of incoming US president Donald Trump were all but impossible to read. The president-elect has pledged to impose levies of up to 20 per cent on all US imports, with the tariffs rising to 60 per cent on China, once he returns to the White House on January 20. Most economists, including those at the European Central Bank, think a US-instigated global trade war would dent growth in the export-dependent Eurozone. Some analysts think the ECB should cut rates pre-emptively to guard against Trump’s second term in the White House as growth in the Eurozone has been weaker than expected, while inflation is falling quicker than anticipated towards the central bank’s 2 per cent goal. But, despite the risks, Makhlouf, who holds one of the 26 votes on the ECB’s governing council, said uncertainty was so rampant that “insurance cuts [to interest rates] really may not necessarily help [but] may actually create a different problem”.Makhlouf warned that it was unclear if Trump was really serious about tariffs, or if his threat was just a bargaining strategy to achieve other policy goals. While he acknowledged that additional barriers to trade would “not be good for the world”, he said the fallout for growth and inflation was all but impossible to quantify at this point in time. “There are so many caveats [and] so many variables that any scenario analysis risks giving people a wrong sense [that] we understand how all this is going to pan out.”Makhlouf said that the ECB needed to be “very vigilant”, but argued against calls for the central bank to start cutting rates by 50 basis points at a time at forthcoming meetings in early 2025. The ECB in December lowered borrowing costs for the fourth time this year by a quarter point. ECB president Christine Lagarde said that further cuts were likely next year and disclosed that some members of the governing council had argued in favour of a 50bp reduction in December.Makhlouf told the FT his preference was still “for gradual moves rather than big leaps”, unless “the facts and the evidence” suggest otherwise. “I have not seen, and I at the moment do not see, the need for a sudden big leap.”Makhlouf pointed to the risk that inflation may flare up again if the ECB eased too fast. “We haven’t declared victory [over inflation] yet” as “some elements” of services inflation were still “a bit” concerning. “We wouldn’t want to complicate our price stability objective by making these sort of insurance cuts,” he said. The ECB could respond when it had “more information” and understood more clearly was Trump’s policies meant for the outlook.Makhlouf said he expected borrowing costs in the Eurozone to fall to a level where they were neither restricting nor stimulating economic activity — a level often described by economists as the “neutral” rate. “I couldn’t tell you whether that will be at 2.75 [per cent], at 2.5 [per cent] or at 2.25 [per cent],” he said. Makhlouf indirectly suggested that the current market consensus that interest rates were to fall to 1.75 per cent by the second half of next year was off the mark. “People who are saying that [the neutral rate is] below 2 are probably ahead of themselves,” he said. More

(Reuters) – No sooner had the global economy started to put the aftermath of the COVID-19 pandemic behind it than a whole new set of challenges opened up for 2025. In 2024, the world’s central banks were finally able to start lowering interest rates after largely winning the battle against inflation without sparking a global recession.Stocks hit record highs in the United States and Europe and Forbes declared a “banner year for the mega-wealthy” as 141 new billionaires joined its list of the super-rich.But if this was supposed to be good news, someone forgot to tell voters. In a bumper election year, they punished incumbents from India to South Africa, Europe and the United States for the economic reality they were feeling: a merciless cost of living crisis brought on by cumulative post-pandemic price rises.For many, it might get tougher in 2025. If a Donald Trump presidency enacts U.S. import tariffs that spark a trade war, that could mean a fresh dose of inflation, a global slowdown or both. Unemployment, currently near historic lows, could rise. Conflicts in Ukraine and the Middle East, political logjams in Germany and France, and questions over the Chinese economy further cloud the picture. Meanwhile, rising up the rank of concerns for many countries is the cost of climate damage.WHY IT MATTERSAccording to the World Bank, the poorest countries are in their worst economic state for two decades, having missed out on the post-pandemic recovery. The last thing they need are new headwinds – for example, weaker trade or funding conditions.In richer economies, governments need to work out how to counter the conviction of many voters that their purchasing power, living standards and future prospects are in decline. Failure to do so could feed the rise of extremist parties already causing fragmented and hung parliaments.New spending priorities beckon for national budgets already stretched after COVID-19, from tackling climate change to boosting armies to caring for ageing populations. Only healthy economies can generate the revenues needed for that.If governments decide to do what they have been doing for years – simply piling on more debt – then sooner or later they run the risk of getting caught up in a financial crisis.WHAT IT MEANS FOR 2025As European Central Bank President Christine Lagarde said in her press conference after the ECB’s final meeting of the year, there will be uncertainty “in abundance” in 2025.It is still anyone’s guess whether Trump will push ahead with tariffs of 10-20% on all imports, rising to 60% for Chinese goods, or whether those threats were just the opening gambit in a negotiation. If he goes ahead with them, the impact will depend on what sectors bear the brunt, and who retaliates.China, the world’s second-largest economy, faces mounting pressure to begin a deep transition as its growth impetus of recent years runs out of steam. Economists say it needs to end an over-reliance on manufacturing and put more money in the pockets of low-income citizens.Will Europe, whose economy has fallen further behind that of the United States since the pandemic, tackle any of the root causes – from lack of investment to skills shortages? First it will need to resolve political deadlocks in the two biggest euro zone economies, Germany and France.For many other economies, the prospect of a stronger dollar – if Trump policies create inflation and so slow the pace of Federal Reserve rate cuts – is bad news. That would suck investment away from them and make their dollar-denominated debt dearer.Finally, add in the largely unknowable impact of conflicts in Ukraine and the Middle East – both of which may have a bearing on the cost of energy which fuels the world’s economy.For now, policymakers and financial markets are banking on the global economy being able to ride all this out and central bankers completing the return to normal interest rate levels.But as the International Monetary Fund signalled in its latest World Economic Outlook: “Brace for uncertain times”. More

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After the bonanza of recent central bank decisions, this week is much quieter with only the minutes of a few of those meetings due. There are no Federal Reserve speeches and U.S. data is of secondary importance.Otherwise the themes were largely the same, with the dollar underpinned by a relatively strong economy and higher bond yields, which in turn is a burden for commodities and gold.It is also a headache for emerging market countries, which are having to intervene to stop their currencies from falling too far and stoking domestic inflation.For now, the afterglow from the U.S. inflation report was enough to lift MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%.Japan’s Nikkei gained 0.7% and South Korea firmed 0.9%.S&P 500 futures added 0.3%, while Nasdaq futures firmed 0.4%. The S&P 500 fell almost 2% last week and the Nasdaq 1.8%, though the latter is still up 30% for the year.Analysts at BofA noted the S&P 500 was up 23% for the year, but if the 12 largest companies were excluded the gain was only 8%. They cautioned such extreme concentration was a vulnerability going into 2025.Wall Street had rallied on Friday when a key gauge of core U.S. inflation printed lower than expected at 0.11%, providing a partial antidote to the Fed’s hawkishness earlier in the week.Fed funds futures rallied to imply a 53% chance of a rate cut in March and 62% for May, though they only have two quarter-point easings to 3.75-4.0% priced in for all of 2025. A few months ago, the market had hoped rates would bottom around 3.0%.The prospect of fewer cuts has combined with expectations of more debt-funding government spending to pressure bond markets, with 10-year yields surging almost 42 basis points in just two weeks for the biggest such increase since April 2022.”The recent firming in core inflation has interacted with a rising threat of tariffs and immigration restrictions to temper the Fed’s inflation optimism,” noted JPMorgan economist Michael Feroli.”Given our inflation and unemployment rate forecasts, we continue to look for 75bp of cuts next year with a hold in January and a quarterly cadence thereafter.”In currency markets, the dollar index held near two-year highs at 107.970 having climbed 1.9% for the month so far. The euro looked vulnerable at $1.0432 having again tested support around $1.0331/43 last week. [USD/] The dollar was firm at 156.44, having gained 4.5% so far in December, but faces more threats of Japanese intervention should it challenge the 160.00 barrier.The strong dollar combined with high bond yields to weigh on gold, which stood at $2,624 an ounce after slipping 1% last week. [GOL/]The high dollar is also a burden for oil, already hampered by concerns over Chinese demand following dismal retail sales figures last week. [O/R]Brent was up 4 cents at $73.00 a barrel, while U.S. crude gained 12 cents to $69.58 per barrel. More

The Lloyds (LON:LLOY) Bank Business Barometer measure of confidence among companies fell by 2 points to 39%, still above its long-run average of 29%.Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, said the fall extended a drift down since the summer.”The key difference in this month’s results is that the fall in confidence is driven by firms’ own trading prospects,” he said. “There was, however, more positivity regarding the wider economy and, going into 2025, this offers some hope if companies continue to feel confident about the economy.” Britain’s economy contracted in September and October – the first consecutive monthly falls in output since the COVID-19 pandemic – as employers worried about the new government’s first budget which was announced on Oct. 30.The Bank of England last week forecast zero growth in gross domestic product in the final quarter of 2024 but it kept interest rates on hold as it awaited more clarity on the impact on inflation from the budget’s tax increases for employers.Lloyds’ gauge of price intentions increased slightly in December and remained well above the long-run average.A separate survey suggested the labour market was recovering some of its momentum in the run-up to the Christmas holidays.Online jobs website Adzuna said its measure of growth in vacancies rose by the most in 2024 so far in November, up by 2.3% from October, driven in part by the logistics sector.Average salaries advertised on Adzuna last month rose by 6.5% from a year earlier, the biggest increase since April 2021.Official data last week showed unexpectedly fast pay growth across the economy of 5.2%, well above the rate of around 3% which the BoE views as consistent with stable inflation. However, Andrew Hunter, co-founder of Adzuna, said employment trends were soon likely to reflect the impact of the budget as well as the slowdown in the economy.”Right now we are seeing a very competitive hiring landscape,” Hunter said. “Yet we expect that the wider macroeconomic environment may begin to impact hiring figures early next year.” More

Miller, wife of Trump’s designated homeland security adviser Stephen Miller, will join Trump’s Department of Government Efficiency (DOGE), an informal advisory body that Trump has said will enable his administration to “slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies.””Katie Miller will soon be joining DOGE! She has been a loyal supporter of mine for many years, and will bring her professional experience to Government Efficiency,” Trump posted in a message on his social media platform Truth Social.Musk and Ramaswamy recently revealed plans to wipe out scores of federal regulations crafted by what they say is an anti-democratic, unaccountable bureaucracy, but have yet to announce members of the DOGE team. Musk has said he wants to slash the number of federal agencies from over 400 to 99.Katie Miller had served in the first Trump adminstration as deputy press secretary for the Department of Homeland Security and as press secretary for former Vice President Mike Pence.She is currently a spokesperson for the transition team for Trump’s designated Health and Human Services secretary, Robert Kennedy Jr. More

By Arathy SomasekharHOUSTON (Reuters) – Oil prices settled little changed on Friday as markets weighed Chinese demand and interest rate-cut expectations after data showed cooling U.S. inflation. Brent crude futures closed up 6 cents, or 0.08%, at $72.94 a barrel. U.S. West Texas Intermediate crude futures rose 8 cents, or 0.12%, at $69.46 per barrel. Both benchmarks ended the week down about 2.5%. The U.S. dollar retreated from a two-year high, but was heading for a third consecutive week of gains, after data showed cooling U.S. inflation two days after the Federal Reserve cut interest rates but trimmed its outlook for rate cuts next year.A weaker dollar makes oil cheaper for holders of other currencies, while rate cuts could boost oil demand.Inflation slowed in November, pushing Wall Street’s main indexes higher in volatile trading. “The fears over the Fed abandoning support for the market with its interest rate schemes have gone out the window,” said John Kilduff, partner at Again Capital in New York.”There were concerns around the market about the demand outlook, especially as it relates to China, and then if we were going to lose the monetary support from the Fed, it was sort of a one-two punch,” Kilduff added. Chinese state-owned refiner Sinopec (OTC:SHIIY) said in its annual energy outlook on Thursday that China’s oil consumption would peak by 2027, as demand for diesel and gasoline weakens. OPEC+ needed supply discipline to perk up prices and soothe jittery market nerves over continuous revisions of its demand outlook, said Emril Jamil, senior research specialist at LSEG. OPEC+, the Organization of the Petroleum Exporting Countries and allied producers, recently cut its growth forecast for 2024 global oil demand for a fifth straight month. JPMorgan sees the oil market moving from balance in 2024 to a surplus of 1.2 million barrels per day in 2025, as the bank forecasts non-OPEC+ supply increasing by 1.8 million barrels per day in 2025 and OPEC output remaining at current levels. U.S. President-elect Donald Trump said the European Union may face tariffs if the bloc does not cut its growing deficit with the U.S. by making large oil and gas trades with the world’s largest economy.In a move that could pare supply, G7 countries are considering ways to tighten the price cap on Russian oil, such as with an outright ban or by lowering the price threshold, Bloomberg reported on Thursday. Russia has circumvented the $60 per barrel cap imposed in 2022 following the invasion of Ukraine through the use of its “shadow fleet” of ships, which the EU and Britain have targeted with further sanctions in recent days.Money managers raised their net long U.S. crude futures and options positions in the week to Dec. 17, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday. More

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