Economy

The IBC-BR economic activity index, a key gauge of gross domestic product (GDP), declined by a seasonally adjusted 2.0% compared to April, disappointing analysts who had expected zero growth according to a Reuters poll.This marked the largest monthly drop since March 2021. The observed data series recorded a 2.15% increase on a year-on-year basis, resulting in an accumulated growth rate of 3.43% over the past 12 months.Gabriel Couto, economist at Santander (BME:SAN) Brazil, stated that the frustrating outcome could be attributed to the end of contribution from the record grain production witnessed during the 2022-23 summer crops.Speaking to reporters, Finance Minister Fernando Haddad said the numbers came in “as expected” amid an environment marked by persistently high borrowing costs. “The economic slowdown intended by the central bank has arrived strongly, and we need to be cautious about what may happen,” he said, emphasizing that current real interest rate levels are imposing a heavy burden on the economy.The central bank has held its benchmark interest rate steady at a cycle-high of 13.75% since September to tackle inflationary pressures. Still, it has recently indicated the possibility of a rate cut in August if the inflation scenario continues to improve.Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note to clients that the performance underscores the need for interest rate cuts.”Several key economic sectors are under pressure, on the back of tighter financial conditions, but low inflation, a resilient labor market, and still-supportive external conditions for Brazil’s key exports, suggest that economic growth will not grind to a halt,” he said. Economists have continuously revised their expectations for the performance of Latin America’s largest economy this year, particularly following a stronger-than-anticipated first quarter, buoyed by a thriving agricultural sector. However, due to seasonal factors, the farm sector is expected to decelerate in the year’s second half.According to a weekly survey conducted by the central bank among private economists, GDP growth for 2023 is now estimated at 2.24%, a decrease from 2.9% in 2022 but still significantly higher than the approximately 0.8% initially forecast when the year started. Nevertheless, expectations going forward point to a slowdown amid financial constraints and high borrowing costs. More

This was the year that the Chinese economy was meant to roar back to life. Its reopening, after draconian Covid-19 restrictions, was touted by financial markets as 2023’s biggest economic story. In some sense it still is — but for different reasons. The world’s second-largest economy grew just 0.8 per cent in the second quarter, compared with 2.2 per cent in the first three months. A slew of data, from industrial activity to business investment, also paints a downbeat picture for the months ahead. Investors are trying to work out if China’s recovery may have already ended.There are three core drivers behind the sluggishness. First, China’s export-reliant economy is suffering from weak demand for its goods as high interest rates crush advanced economies. Demand has also shifted away from goods like consumer electronics and Pelotons, which propped up its output during the pandemic; in the west, consumers are spending more on restaurants and holidays instead. This has strained China’s economy, which accounts for almost a third of the world’s manufacturing output.Second, consumer confidence within China is weak. Although savings built up during the pandemic, retail sales have since disappointed. A drop in China’s housing values has made homeowners feel poorer, while prospective buyers are holding off. New home prices are poised for the longest period of falls since records began in 2011. Unemployment among China’s graduates is also weighing down enthusiasm in the economy — youth unemployment has surpassed 20 per cent.Lastly, business investment is depressed. President Xi Jinping’s regulatory crackdown on tech firms in recent years and broader geopolitical tensions with the US have exacerbated uncertainty. Private fixed-asset investment shrank 0.2 per cent in the first six months of the year, compared with the 8.1 per cent growth in investment by state entities. Real estate investment, which has driven China’s economy for about two decades, has slumped too.Despite the gloom, most analysts expect the economy to grow above 5 per cent this year, which means China will still drive the global economy as the US and eurozone economies slow. Investors are hoping that the Communist party will nonetheless act to stimulate the economy. There is, though, little fiscal space. Local government debt amounts to about $9tn, or almost half of total gross domestic product. As the country flirts with deflation amid weak domestic demand, the real costs of servicing huge debt repayments could rise. China’s headline annual inflation rate in June was 0 per cent.Government policy is largely to blame for the slowdown. Decades of relying on an investment-driven growth model has slowed China’s transition to a consumer-based economy. Poor oversight of the housing market led to an unsustainable lending boom, while political impediments have hamstrung private enterprises. Heavy-handed Covid restrictions have also left deep scars.To avoid a debilitating deflationary cycle from becoming embedded, the government will need to act fast. For starters, entrepreneurs and established businesses need stability and regulatory clarity from the government. Further monetary policy loosening by China’s central bank could help. Beijing will also need to restructure its local government debt; one option might be a fire sale of state assets to private companies. The proceeds would help local authorities to avoid a debt crisis. There is hope that China’s ruling politburo will outline further support measures at a meeting this month. It got the economy into this fix, now it needs to find a way out. More

A Reuters poll on Monday suggested the Bank of Russia would hike rates to 8% at its meeting on Friday, increasing the cost of borrowing for the first time in over a year as the rouble’s sharp slide adds to inflationary pressures.The central bank targets inflation at 4%, which it aims to achieve by next year. It has forecast inflation will fall to 4.5%-6.5% this year. More

ISTANBUL (Reuters) – Turkey’s central bank is expected to raise its policy rate by 500 basis points to 20% this week, a Reuters poll showed on Monday, making good on its pledge of further tightening with another sharp hike to curb inflation which is set to rise again.The central bank raised its policy rate by 650 basis points in June to 15%, while promising to continue tightening until a significant improvement in the inflation outlook is achieved.The rate hike and the hawkish tone were the strongest signals of a reversal after years of loose policy under President Tayyip Erdogan, who was prioritising growth and investments.The tightening still remained below expectations, with economists saying that Erdogan’s influence over the central bank limits how far they can go in tightening policy. Real rates are also still deeply negative.Economists see a further hike this week to 20%, according to the median estimate of 23 economists in a Reuters poll, with forecasts ranging between 17% and 21.50%.”Anything less than a move to hike the policy rate to 20% will be seen as disappointing and a signal that Erdogan is constraining what (Finance Minister Mehmet) Simsek and (Central Bank Governor Hafize Gaye) Erkan can do,” said Tim Ash of BlueBay Asset Management.Turkey’s annual inflation surged to a 24-year high of 85.51% last October, mainly due to the constant depreciation of Turkey’s lira due to Erdogan’s policy of low rates.Inflation eased to 38.21% by June but is expected to rise again. The year-end forecast stood at 51.50% in the latest Reuters poll, but economists now say it will likely be around 60% after Ankara hiked several tax rates to support its deteriorating budget and as the lira continues to decline.The central bank was expected to keep hiking rates in coming months, with the median estimate of 13 economists in the Reuters poll for the policy rate at year-end standing at 25%.The forecasts ranged between 24% and 35%.The central bank’s one-week repo rate had been slashed to 8.5% from 19% since 2021 under Erdogan’s economic programme. The bank had also used foreign exchange reserves to prop up the lira, which nonetheless plunged to a series of record lows.As a result of the recent policy reversals, the central bank’s net international reserves rose to $13.17 billion in the week to July 7, continuing to rebound from a record low of $-5.7 billion it touched in June.The central bank will announce its rate decision at 1100 GMT on Thursday. More

WASHINGTON (Reuters) -U.S. Treasury Secretary Janet Yellen said on Monday the United States was making good progress in bringing inflation down and she did not expect the U.S. economy to enter into a recession.Yellen, speaking to Bloomberg TV from India during a meeting of Group of 20 finance officials, said slower growth in China could spill over to other economies, but the U.S. economy was on “a good path” to reducing inflation while the labor market remained strong.”For the United States, growth has slowed, but our labor market continues to be quite strong. I don’t expect a recession,” Yellen said. “The most recent inflation data were quite encouraging.”Yellen said Chinese officials raised serious concerns, especially about U.S. tariffs, during her visit earlier this month, but the underlying reasons that Washington implemented them in the first place, including unfair trade practices, had not been addressed.”We have to see what comes out of the four-year review” of tariffs, Yellen said, adding, “But I would emphasize that really the underlying concerns have not yet been addressed. And we need to work on that going forward.”Yellen said the United States was likely to proceed with a new executive order restricting outbound investment in China, but stressed that these would focus narrowly on three sectors – semiconductors, quantum computing and artificial intelligence.”They would contain a combination of notification requirements, and in a very narrowly scoped portion of these sectors, prohibitions, but these would not be broad controls that would affect U.S. investment broadly in China,” she said. More

(Reuters) – There is no doubt that higher interest rates are hard on a many people – especially if you are taking out a loan on a home or a car, or are struggling to catch up with credit-card debt.But for some, steep interest rates are not actually bad news.That is because they can finally put their savings to work. In fact, 38% of people say they have benefited from higher interest rates during the past year, according to a new survey from Allianz (ETR:ALVG) Life Insurance.“That’s the dichotomy: Higher interest rates are both crushing some people and benefiting others at the same time,” says Kelly LaVigne, vice president of Consumer Insights for Allianz Life.“If you are a saver, suddenly you are seeing higher rates on anything from Certificates of Deposit to annuities for the first time in a while.”It all stems from the U.S. Federal Reserve, which has set its target Fed funds rate at 5-5.25%, in an ongoing effort to tamp down inflation. That key rate then affects other areas of the economy, such as what mortgage lenders or credit-card companies are charging.While the inflation rate has been cooling of late, the Fed has indicated more rate hikes could still be on the way, potentially another half-point to 5.5-5.75% in 2023.That means if you have some savings set aside, it is time to think about how to flip this negative of higher interest rates into a positive. A few segments of the population who can benefit from this “new normal”:BOND INVESTORS For years, the fixed income portion of investor portfolios was yielding hardly anything. Not so now.To be sure, you should still be wary of longer-term bond funds, which could expose you to more risk.“For the majority of investors, especially given the very high yields on the short end of the yield curve, they would be better off with short-term or intermediate maturities,” says Amy Arnott, a portfolio strategist for fund research firm Morningstar.The good news is that investors could be looking at “5% or even a little above” in this arena, Arnott says. A few such funds which are highly rated by Morningstar include the Vanguard Short-Term Bond Index (VBIRX) and T. Rowe Price Short Duration Income (TSDLX), as well as Vanguard Ultra-Short-Term Bond (VUSFX) and Baird Ultra Short Bond (BUBSX).SAVERS You don’t even have to reach for exotic products to get decent returns these days. Plain vanilla banking options like high-yield savings, money market accounts and Certificates of Deposit are all offering yields in the region of 4-5%. They are FDIC-insured up to the usual limits of $250,000 per depositor, per bank.“It’s amazing how many people are sitting still in low-interest savings accounts,” says Jeremy Keil, a financial planner in New Berlin, Wisconsin. Keil says he recently moved more than $7 million of client money into high-yield Treasury Bills and money markets, and he estimates the change will add roughly $300,000 more in interest to client accounts in this year.A few current examples of high-yield savings accounts from financial information site NerdWallet: 4.95% from CIT Bank, 4.75% from BMO Alto, and 4.5% from Citizens.ANNUITY PURCHASERSIf you are in the demographic that is nearing retirement and pondering how to create an income stream, annuities could be worth new consideration. In recent years they have typically been overlooked, thanks to paltry offers and high fees.But now, witness the healthy payouts of some annuities, which essentially transform initial lump sums into monthly checks (either immediate, or deferred until a later date). A survey of immediate income annuities on the market (as of July 7) shows products offering payout rates on average of 7.92% for a 70-year-old male and 7.52% for a 70-year-old female, according to CANNEX Financial Exchanges, a Toronto-based data firm. With a five-year deferral of payments, these payout rates increase to 11.03% and 10.45%, respectively.At those rates it could make sense to devote a portion of your retirement savings to such a purchase, to essentially create your own pension and ensure you don’t outlive your cash.Says George Gagliardi, a financial planner in Lexington, Massachusetts: “If you are looking for lifetime income to augment your Social Security check, now is a great time to consider purchasing an annuity.” More

MOSCOW (Reuters) – Russia’s central bank is expected to hike rates to 8% on Friday, increasing the cost of borrowing for the first time in over a year as the rouble’s sharp slide adds to inflation pressure, a Reuters poll showed.The bank has held rates at 7.5% since September, but has steadily become more hawkish in its rhetoric. A series of rate cuts followed an emergency hike to 20% shortly after Russia despatched troops to Ukraine in February 2022. Sixteen of 21 analysts and economists polled by Reuters on Monday predicted that Russia would increase its benchmark rate to 8% on Friday. Three forecast a 25-basis-point hike, while two predicted an increase to 8.5%. The Bank of Russia is no longer discussing whether or not to raise rates, but by how much, said Mikhail Vasilyev, chief analyst at Sovcombank.Vasilyev forecast a 50-basis-point increase, arguing that the rouble’s slump since the bank’s previous meeting meant a 25-basis-point hike was no longer sufficient. The Russian currency has been gradually weakening for most of this year as exports fall and imports recover, but pressure intensified sharply after an abortive armed mutiny in late June, sending the rouble to a more than 15-month low. A rate hike seems inevitable, said Olga Belenkaya of Finam brokerage.”The rate could be raised by 50 basis points to 8%, although a larger increase cannot be ruled out,” said Belenkaya, who also pointed to the importance of the central bank’s updated macro forecasts, which will be released on Friday. Annual inflation has dipped below the bank’s 4% target in recent months, due to a favourable base effect after last year’s double-digit jump in prices. Inflation accelerated in June and is set to continue climbing due to other factors in addition to the rouble, including a labour shortage and strong consumer demand. “A significant pro-inflationary factor in June-July was the rouble’s weakening against major currencies by 11-15% on average,” said Rosselkhozbank analysts. “We expect that the transfer of the rouble’s weakening to prices for goods and services will strengthen the upward dynamic of prices in July-September.” More

Gross domestic product is expected to regain momentum gradually in 2024 and 2025, as the lagged effects of monetary tightening gradually dissipate and the economy adjusts to the energy shock, the IMF said in its country report for Germany.Over the medium term, average GDP growth is expected to fall back below 1% due to accelerating headwinds from population aging and a lack of significant increases in productivity.Inflation is expected to keep falling amid softening energy prices and tightening fiscal policy, but core inflation may decline more slowly than headline inflation due to rising nominal wage pressures and the time it takes for lower global commodity prices to seep through to core inflation, the IMF said.Uncertainty is unusually high, with substantial risks in both directions, which on balance are tilted downward for growth, the IMF warned in its report.”Uncertainty around the persistency of core inflation is especially high, as a rapid rise in core inflation to its current levels has not been observed in Germany or most other advanced economies for decades,” the IMF said. More