Economy

Which shortage came first: the chicks or the eggs?Spooked by a huge spike in egg prices, some consumers are taking steps to secure their own future supply. Demand for chicks that will grow into egg-laying chickens — which jumped at the onset of the global pandemic in 2020 — is rapid again as the 2023 selling season starts, leaving hatcheries scrambling to keep up.“Everybody wants the heavy layers,” said Ginger Stevenson, director of marketing at Murray McMurray Hatchery in Iowa. Her company has been running short on some breeds of especially prolific egg producers, partly as families try to hedge their bets against skyrocketing prices and constrained egg availability.“When we sell out, it’s not like: Well, we can make another chicken,” she said.McMurray’s experience is not unique. Hatcheries from around the country are reporting that demand is surprisingly robust this year. Many attribute the spike to high grocery prices, and particularly to rapid inflation for eggs, which in December cost 59.9 percent more than a year earlier.“We’re already sold out on a lot of breeds — most breeds — until the summer,” said Meghan Howard, who runs sales and marketing for Meyer Hatchery in northeast Ohio. “It’s those egg prices. People are really concerned about food security.”Google search interest in “raising chickens” has jumped markedly from a year ago. The shift is part of a broader phenomenon: A small but rapidly growing slice of the American population has become interested in growing and raising food at home, a trend that was nascent before the pandemic and that has been invigorated by the shortages it spurred.“As there are more and more shortages, it’s driving more people to want to raise their own food,” Ms. Stevenson observed on a January afternoon, as 242 callers to the hatchery sat on hold, presumably waiting to stock up on their own chicks and chick-adjacent accessories.The Cackle Hatchery received eggs from local farms in Missouri. Hatcheries could theoretically hatch more chicks to meet the surge in demand, but is difficult in today’s economy.Neeta Satam for The New York TimesRaising chickens for eggs takes time and upfront investment. Brown-egg-layer chicks at McMurray’s cost roughly $4 a piece, and coops can cost hundreds or thousands of dollars to construct.Mandy Croft, a 39-year-old from Macon, Ga., serves as administrator on a Facebook group for new chicken farmers and is such an enthusiastic hobbyist that family members call her the “poultry princess.” Even she warned that raising chickens may not save dabblers money, but she said her group was seeing huge traffic nonetheless.“We get hundreds of requests a day for new members, and that’s due to the rising egg cost,” she said.Inflation F.A.Q.Card 1 of 5What is inflation? More

Good morning. It looks like the US is in a manufacturing recession. Yesterday’s ISM manufacturing report showed the sector shrinking for the third straight month, and the ISM index has dipped below where it bottomed in recent non-recessionary downturns, such as 2015-16. The contrast with the consumer side of the economy is striking. Email us your thoughts: [email protected] and [email protected] plug: Armstrong is the guest on this week’s Behind the Money podcast. Listen in and subscribe!The Fed vs marketsNeither Federal Reserve chair Jay Powell’s press conference yesterday, nor the official statement that preceded it, held many surprises. Both acknowledged that disinflation has begun in earnest, that growth is slowing, but that “ongoing increases” in interest rates are nonetheless likely. In the presser, Powell sounded measured. He cheered on disinflation while cautioning that the process was at an early stage. The Fed, he added, is still holding out for “substantially more evidence” that inflation is coming down for good. Asked if it was time to halt rate increases, Powell pushed back:Why do we think [a couple more rate hikes are] probably necessary? Because inflation is still running very hot . . . We don’t see [higher rates] affecting the services sector ex-housing yet. Our assessment is that we’re not very far from that [appropriately restrictive] level. We don’t know that, though . . . I think policy is restrictive. We’re trying to make a fine judgment about how much is restrictive enough. Markets looked indecisive after the statement came out, but took the press conference as dovish. The policy-sensitive two-year yield dropped some 13 basis points in the half-hour Powell was speaking. The Nasdaq closed up 2 per cent.What struck us most was Powell’s calm, almost blasé attitude towards the wide gap between markets’ rate expectations and Fed’s policy guidance. Futures markets are pricing in roughly 50 bps of rate cuts by the end of 2023, leaving the policy rate at 4.4 per cent, an outlook which did not budge after the meeting. The Fed, in December, said it expected rates to end the year at 5.1 per cent. Questioned about the mismatch, Powell said:I’m not particularly concerned about the divergence, no, because it is largely due to the market’s expectation that inflation will move down more quickly. Our forecasts, generally, are for continued subdued growth, some softening in the labour market, but not a recession. We have inflation moving down to somewhere in the mid-3s . . . Markets are past that. They show inflation coming down much quicker than that. So we’ll just have to see. We have a different view, a different forecast, really. And given our outlook, I don’t see us cutting rates this year, if our outlook turns true. If we do see inflation coming down much more quickly, that’ll play into our policy-setting, of course.In other words, Powell sees inflation moderating without plummeting, meaning rates will stay high. Markets see inflation dropping like a rock, pushing the Fed to cut.Is Powell right to be unbothered? His remarks yesterday emphasised how much tighter financial conditions are today than, say, a year ago, while playing down the importance of “short-term moves” in the markets. The chart below, of the Chicago Fed’s financial conditions indicator, shows both the marked tightening since mid-2021 and the extent of recent loosening:The most persuasive argument for Powell’s nonchalance is that, by all indications, monetary policy is working as intended, if slowly. Demand, wage growth and inflation are all cooling off. Mortgage rates have fallen 100bp from their peak, but that still leaves them 350bp higher than in 2021. This is having the hoped-for effect on the real economy; existing-home sales fell 38 per cent in 2022, for example. That broad story — off a peak but plausibly restrictive — holds for bond yields and credit spreads, too. The recent loosening isn’t ideal but if policy is working, why worry about what the market expects?The case against Powell’s nonchalance about the gap hinges on credibility. This is a vague concept, but Unhedged defines it simply: it is the ability of a central bank to jawbone the market. It is important that the central bank can change financial conditions just by talking about policy, as opposed by actually enacting policy, especially for keeping inflation expectations anchored. The idea that Powell is putting his credibility at risk by looking past the Fed-market gap comes down to the idea that market conditions are undercutting central bank policy. High stock prices and tight bond spreads are inflationary; they make more capital available to companies, make households feel richer, and so on. Powell, therefore, should further tighten policy, bringing markets to heel (Richard Bernstein recently made this sort of argument in the FT; Mohamed El-Erian presented a different version on Bloomberg.)Credibility, though, cannot be established by posturing or signalling. It is the product of consistently having the correct policy. It would be absurd to suggest that the Fed should build its credibility by pursuing a policy that is wrong for employment or price stability. So Powell has to choose a rate level that he thinks will get financial conditions to the right place at the right pace. An optimistic market is a consideration determining the right policy rate, because it loosens financial conditions. But the market’s failure to mirror the Fed’s inflation outlook is not a reason, over and above financial conditions, to tighten policy in the name of credibility. That said, we are worried about the Fed-market gap, not because of credibility but because of market risk. Suppose the Fed is right and the market is wrong, and the path to lower inflation does not run smooth. Say in a few months we get some bad news on inflation, forcing the market to move its estimate for the peak policy rate up and extend its expectations for how long high rates will last. That could lead to a very large, very fast repricing in markets. Remember that the S&P 500 is 15 per cent off its lows of October, while junk bond spreads have tightened by a full percentage point. If that were to reverse all at once, as the economy was already shrinking, that could easily turn what might otherwise have been a mild recession into a severe one. This does not strike us as a particularly unlikely scenario, simply because inflation tends to be volatile and markets are very jumpy about rates right now.Is it Powell’s job to control market risk? Should he target lower stock and bond prices directly? We’re not sure, and are very interested to hear readers’ thoughts. (Armstrong & Wu)Mark Zuckerberg gets the messageMeta reported earnings after the close yesterday. Revenue was a little better than expected, but the big news was meaty cuts to the outlook for operating expenses in 2023 (from $97bn at the midpoint to $92bn) and capital expenditure (from $35.5 to $31.5bn).In the conference call, Zuckerberg said 2023 would be “the year of efficiency” at Meta and said his goal was to make the company not just stronger but more profitable. The stock, already up 3 per cent on the day, rose another 19 per cent in after-hours trading, The shares have now doubled (doubled!) from its November lows, when it looked like expenses were rising fast while revenue set to fall. Back then I wrote:If Zuck can cool it [on expenses] my guess is that Meta shares have a lot of upside — so long as the company’s digital ad sales slowdown doesn’t get much worse. I have no idea about this. Of course this is all very crude (“Just spend less money and talk like a grown-up and the stock will go up!”) but some problems have crude solutions. Have my dreams come true? Maybe. The cost cuts are good news, but put them in perspective. Operating expenses in 2023 are still set to be 30 per cent higher than they were two years before; capital expenditure, 30 per cent higher. No one is going to start calling him ‘Mark the knife’.On the earnings call yesterday, one analyst asked exactly the right question: in years to come, is the plan for expenses to rise in line with revenues, or is the company still in margin-compression mode? Slightly alarmingly, the CFO gave a vague answer, pointing to expectations of “compounding earnings growth” over time. Meta, at its lows, traded at 11 times forward earnings estimates, a huge discount to the market. Now, at 22, it is at a small premium, despite cloudy prospects for earnings growth. Readers can come to their own conclusions.One good readI missed it when it came out last spring, but this detailed account of how social media feeds political polarisation, from the social psychologist Jonathan Haidt, is a must-read for Facebook investors (and probably the rest of us too). More

When Jay Powell took to the lectern to give his first press conference of 2023, the Federal Reserve chair stuck to pretty much the same script he has been using since the US central bank started ratcheting up rates last year. He spoke of the Fed’s unwavering commitment to rooting out high inflation and pledged to keep squeezing the economy until it is vanquished, insisting the central bank was not yet done with its campaign of interest rate rises. “We are going to be cautious about declaring victory and sending signals that we think the game is won, because we’ve got a long way to go,” he told reporters on Wednesday after the Fed raised its benchmark rate by a quarter point. That marked a downshift from the larger increases the central bank has relied on in recent months and a return to a more conventional pace of tightening. But even as Powell jettisoned the idea that the Fed would ease off any time soon — keeping open the possibility of another two 25-basis-point increases to come — he was decisively more upbeat not only about the economic outlook but also the central bank’s grip on inflation. That helped fuel a rally in US government bonds and stocks, with the S&P 500 closing at its highest level since last summer. “People came into this thinking he might have that same scolding tone as he had in December,” said Julia Coronado, a former Fed economist who now runs MacroPolicy Perspectives. “He sounded more positive and more optimistic.”Powell’s optimism might have been subtle, but it was in evidence throughout the question and answer session. While he maintained price pressures were still unacceptably high, he repeatedly said the “disinflationary process” was under way. What is more, he said he saw a “path” to bringing inflation down to the Fed’s 2 per cent target without a “really significant economic decline or a significant increase in unemployment”. Powell also seemed more relaxed about a recent easing of financial conditions and the fact that traders in fed funds futures do not seem to believe the central bank will have to raise rates to levels implied by officials’ projections given their expectation that inflation will moderate more quickly. He even went so far as to suggest officials could consider reversing course earlier if forthcoming data suggests.That marked a significant de-escalation in a months-long tussle with traders who have refused to back off their wagers that the Fed will not raise the benchmark rate to at least 5 per cent and hold it there throughout the year. The increase on Wednesday took the federal funds rate to between 4.50 per cent and 4.75 per cent. Most officials have signalled the Fed must increase it to 5.1 per cent before considering cuts in 2024 at the earliest. Yet traders’ bets suggest it will start loosening monetary policy before the end of the year. “Perhaps Powell was in no mood to fight the market because he wasn’t convinced the market’s inflation outlook is wrong,” suggested Michael Feroli, a former Fed economist now at JPMorgan.Powell’s comments were sufficiently dovish to cause consternation among those economists who had thought the Fed would raise rates in March and again in May before taking a breather. For instance, Aneta Markowska at Jefferies said she was now slightly less confident in her base case that the Fed would follow though with a final quarter-point increase in May. “Whether they pause in March or May, that really is just a function of how you think the data will play out,” she said. Not all economists are so sanguine, especially given concerns that progress on inflation could stall. Peter Hooper, global head of research at Deutsche Bank, said: “Folks who were inclined to look for things to be optimistic about picked those parts out and maybe didn’t put enough weight on the thrust of the overall message.”Hooper, who worked for the Fed for almost 30 years, said the central bank was trying to communicate that it expected to raise rates “a couple more times . . . to get to a noticeably more restrictive level”. Şebnem Kalemli-Özcan, an economist at the University of Maryland and a member of the New York Fed’s economic advisory panel, also warned that booming markets and even looser financial conditions could harden the central bank’s resolve. “If equity markets keep going through the roof, then that says there is growth in the future and everything is rosy,” she said. “People start spending more, and that is what the Fed doesn’t want.”“They don’t want people to buy stuff and they don’t want people to borrow to buy stuff,” Kalemli-Özcan added. “They want to slow down sentiment.” More

De-risk, don’t decouple, from the Chinese economy — this was the economic philosophy for the EU articulated by European Commission president Ursula von der Leyen at Davos last month. As organising principles go, it’s not a bad one, certainly better than Brussels’ nebulous “strategic autonomy” or the US’s disingenuous “worker-centred trade policy”.The EU has for years been attempting to attain and hold a middle ground. On the one side is the official US predilection for using its federal powers to decouple its economy from China’s. (It should be noted that it’s unclear how far this will work: overall US-China goods trade probably hit an all-time record last year.) On the other is the EU’s history of mainly letting commerce with China flow. But despite EU member states increasingly turning against Beijing, Brussels is struggling to construct tools to reduce a perceived dangerous reliance on Chinese trade.Europe’s ability to use policy is particularly weak in sensitive technologies with military and security applications. The EU has its own collective mechanisms for designing export controls. When there’s an obvious threat, the EU can act swiftly, with unity and in co-ordination with Washington: the two trading powers rapidly imposed a broad range of export controls on Russia after the invasion of Ukraine, from semiconductors to submarine engines.But when a policy is more contentious and particularly affects one member state, EU processes are generally pushed aside in favour of national competence. The details of the reported US-Netherlands-Japan agreement further restricting the sales of chips and chipmaking kit to China remain to be seen. But it was the Dutch, with their comparative lack of economic and diplomatic heft, in the negotiating room with the US, not the EU collectively. The process was confidential and ad hoc, exactly the kind of environment in which Washington is particularly able to throw its weight about.Sensitive technologies are an obvious weakness for collective EU action, but so is the lack of a strategy on de-risking China trade more generally. Europe would like security of supply, and where feasible a domestic industry, in sectors it considers of strategic importance, particularly green goods. That may be a wise idea or not, but in any case the EU is a long way from achieving it.One obvious example is that Europe, not helped by complacent sluggishness in its own car industry, is lagging well behind China (and increasingly the US) in electric vehicles. The EU is currently poring over its underpowered and scattered subsidy toolkit to see if it can hope to match American spending in this area, let alone China’s — a subject to which I will return next week. In the meantime, in line with the EU’s habit of relying on rules (of which it has plenty) rather than cash (of which it has relatively little), the bloc’s most enthusiastic China de-riskers (France in particular) have high hopes of the EU’s new foreign subsidies regulation. After years of debate, the new instrument comes into force in July. It enables the Commission to prevent state-subsidised companies from China or elsewhere producing in Europe or bidding for public procurement contracts there, essentially extending the EU’s tough state aid constraints to foreign governments.The question, though, is how much and how well it gets used. After all, the EU has long had the ability to use trade defence instruments (TDI) to impose anti-subsidy and antidumping duties on imports it deems unfairly cheap. But it has not employed those instruments to their full extent, certainly not enough to constitute a determined industrial policy in green or other high-tech goods. A decade ago, in the face of opposition from member states, the Commission was forced to back down from its plan to impose hefty across-the-board antidumping and anti-subsidy duties on imports of solar cells from China, in effect ceding control of the EU solar market to Chinese companies.Peering through the opacity of the hugely complex Chinese subsidy regime to come up with an estimate of competition-distorting handouts that might survive challenge at the World Trade Organization, which the EU quaintly seems still to care about, is not an easy task. The anti-foreign subsidy tool, along with traditional TDI, is unlikely to achieve a carefully calibrated degree of distance between the EU and Chinese economies. It also risks being used too broadly, reflecting domestic lobbying rather than a well-judged strategy of competitiveness.De-risking rather than an all-or-nothing approach to decoupling from China is a good way of framing the issue. But the EU isn’t currently very well set up to do it. Brussels and the member states need to work hard to acquire and use precision-focused tools if they are to turn the slogan into more than elegant rhetoric. [email protected] More

(Reuters) -Meta Platforms Inc’s stricter cost controls this year and a new $40 billion share buyback sent shares soaring on Wednesday, as CEO Mark Zuckerberg called 2023 the “Year of Efficiency.”The parent of Instagram and Facebook (NASDAQ:META), which has fallen on hard times amid a broad post-pandemic slump in digital ads, is focused on improving its content recommendations powered by artificial intelligence and its ad targeting systems to keep users clicking.Meanwhile, it will cut costs in 2023 by $5 billion to a range of $89 billion to $95 billion, a steep drop from the $94 billion to $100 billion it previously forecast, and it projected first-quarter sales that could beat Wall Street estimates.Meta stock surged nearly 19% in after-hours trade. If gains hold on Thursday, it would set up the shares for their biggest intraday surge in a decade and added more than $75.5 billion to its existing $401 billion market capitalization.Zuckerberg described the focus on efficiency as part of the natural evolution of the company, calling it a “phase change” for an organization that once lived by the motto “move fast and break things.””We just grew so quickly for like the first 18 years,” Zuckerberg said in a conference call. “It’s very hard to really crank on efficiency while you’re growing that quickly. I just think we’re in a different environment now.”The cost cuts reflect Meta’s updated plans for lower data-center construction expenses this year as part of a shift to a structure that can support both AI and non-AI work, it said in a statement.The digital ad giant faced a brutal 2022 as companies cut back on marketing spending due to economic worries, while rivals like TikTok captured younger users and Apple Inc (NASDAQ:AAPL)’s privacy updates continued to challenge the business of placing targeted ads.Meta in November cut more than 11,000 jobs in response, a precursor to the tens of thousands of layoffs in the tech industry that followed.”Our management theme for 2023 is the ‘Year of Efficiency’ and we’re focused on becoming a stronger and more nimble organization,” Zuckerberg said in a statement. Monetization efficiency for Reels on Facebook, a short-form video format, had doubled in the past six months and the business was on track to roughly break even by the end of 2023 or early 2024 and grow profitably after that, he said on the conference call.INVESTMENTS STARTING TO PAY OFF”Meta’s better-than-feared results should refute concerns over the state of the digital advertising industry following Snap’s horrible guidance earlier this week,” said Jesse Cohen, senior analyst at Investing.com.”Despite all the challenges Meta must deal with, there are signs the business is still doing well,” Cohen said.Shares of peer Alphabet (NASDAQ:GOOGL) Inc were up 3.3% while Snap Inc (NYSE:SNAP) stock rose 1% in after-hours trade on Wednesday.On the conference call, executives said Meta’s investments in AI-surfaced content and TikTok competitor Reels were starting to pay off. The company also has been using AI to increase automation for advertisers and target ads using less personal data, resulting in higher return on ad spend.Meta forecast first-quarter revenue between $26 billion and $28.5 billion. That was in with analysts’ average estimates of $27.14 billion, according to Refinitiv.Zuckerberg said generative AI – technology for producing original prose, imagery or computer code on command – would be the company’s other big theme for this year, alongside efficiency.Meta was planning to launch several new products that would “empower creators to be way more productive and creative,” he said, while cautioning about the cost associated with supporting the technology for a large user base.However, net income for the fourth quarter ended Dec. 31 fell to $4.65 billion, or $1.76 per share, compared with $10.29 billion, or $3.67 per share, a year earlier. Analysts had expected a profit of $2.22 per share.The decline was largely due to a $4.2 billion charge related to cost-cutting moves such as layoffs, office closures and the data center strategy overhaul.The company previously said it was planning to account for much of that cost in 2023. More

LONDON (Reuters) – The Bank of England is poised to raise interest rates for the 10th time in a row on Thursday to keep up its fight against rampant inflation, but it might also drop a hint about when the steep climb in borrowing costs will end.With Britain’s economy already forecast to go into recession and fare worse than its peers in 2023, Governor Andrew Bailey and his colleagues must judge how much of a delayed impact their run of rate hikes so far, starting in December 2021, will have.Unemployment is close to its lowest since 1974 but the housing market is cooling fast and confidence among consumers and employers is weak. Strikes by public service workers have added to the sense of gloom in an economy still struggling to adjust to Brexit and the coronavirus pandemic.Bailey has said there are hopes that the surge in prices was turning a corner after consumer price inflation dipped from a 41-year high of 11.1% in October to 10.5% in December.But underlying inflation has not fallen and wages are growing at the fastest pace on record apart from during the pandemic when state support distorted the data.BoE Chief Economist Huw Pill has warned of the risk that price growth will get stuck above the BoE’s 2% target.”I am more worried that underlying inflationary pressures are far from played out,” John Gieve, a former BoE deputy governor, told The Times. “Earnings in particular are growing strongly especially in the private sector and firms still expect to be able to raise prices.”Investors are largely pricing another half percentage-point rate hike at 1200 GMT on Thursday, taking Bank Rate to 4.0%, its highest since 2008, though some see a slim chance of a quarter-point move.On Wednesday, the U.S. Federal Reserve slowed the pace of its rate hikes with a quarter-point move but said it expected further increases would be needed.The European Central Bank looks set to raise rates by a half a percentage point on Thursday to 2.5% and the main question for investors is how much more tightening it will signal.LOWER RATES PEAKAs of Wednesday, investors were pricing a roughly two-in-three chance that BoE rates will peak at 4.5% by June, with the possibility of an earlier halt at 4.25%.In the run-up to the BoE’s November meeting, investors were expecting rates to peak at around 5.25%.The fall in those market expectations will feed into the BoE’s new projections on Thursday.It is expected to say the economy will contract by less in 2023 than its November forecast of a 1.5% hit. Earlier this week the International Monetary Fund said Britain’s economy would shrink by 0.6% this year.The BoE’s inflation forecasts are also likely to change with recent sharp falls in international gas prices and a rise in the value of sterling lowering inflation later this year. But the less dismal – albeit still weak – growth outlook could push up the BoE’s forecasts for inflation in two and three years’ time. Paul Dales, an economist with Capital Economics, said the central bank was approaching the moment when it would have to give new guidance about its rate plans, having promised up to now to act “forcefully” to combat inflation.”We think lingering inflation pressures will mean rates stay at their peak for around a year before being reduced in 2024,” Dales said.Bailey and other top officials are due to hold a news conference at 1230 GMT.The BoE is also due to update its estimate of the rate of unemployment that does not push up inflation. A rise in the non-accelerating inflation rate of unemployment would represent a lower speed limit on Britain’s already slow economy. More

FRANKFURT (Reuters) – The European Central Bank is set to raise interest rates again on Thursday and pencil in more hikes for the next few months, with the only open question being how big these will be. The ECB has been increasing rates at a record pace to fight a sudden bout of high inflation in the euro zone – the byproduct of factors including the aftermath of the COVID-19 pandemic and an energy crisis that followed Russia’s invasion of Ukraine.The central bank for the 20 countries that share the euro is seen raising its deposit rate by another half a percentage point to 2.5% on Thursday, in line with what it said in December.This would take the rate the ECB pays on bank deposits to the highest level since November 2008, after a steady climb from a record low of -0.5% in July.But ECB President Christine Lagarde is certain to face questions about smaller rises from next month after the U.S. Federal Reserve slowed the pace of its own hikes on Wednesday and some data pointed to a bleaker outlook for the euro zone. So far Lagarde has pushed back on any suggestion that the ECB is relenting in its fight against inflation and investors generally expect her and her policymaking colleagues to reaffirm that line on Thursday.”We suspect the ECB will reiterate its hawkish message in February as there are still uncertainties regarding underlying inflationary pressures and a change of tone would undermine the ECB’s credibility,” Annalisa Piazza, a fixed-income research analyst at MFS Investment Management, said. GRAPHIC: The race to raise rates – https://www.reuters.com/graphics/CANADA-CENBANK/dwvkdeaqopm/chart.png The ECB said in December that rates would be increased “at a steady pace” until it is happy inflation is heading back down to its 2% target. But that guidance is now proving a source of contention within the Governing Council.Policy hawks who favour higher rates, such as the Netherlands’ Klaas Knot, Slovakia’s Peter Kazimir and Slovenia’s Bostjan Vasle, have explicitly called for further 50-basis-point hikes in both February and March. But doves like Greece’s Yannis Stournaras and Italian board member Fabio Panetta have argued for smaller moves, or at least for the ECB to refrain from making commitments for March. This tension may result in a compromise on the language, as happened in December, whereby the ECB makes the size of its next rate hike dependent on incoming data, analysts said.”This week the doves will ensure Lagarde’s signal of another 50 bp in March is conditional,” Jim Reid, head of global fundamental credit strategy at Deutsche Bank (ETR:DBKGn), said. BNP Paribas (OTC:BNPQY) also thought the ECB might take out the reference to a “steady pace” of rate hikes or offset it so that a 50-basis-point increase would be “not predetermined (but) still a possible outcome”.MURKY OUTLOOKRecent economic data has painted a mixed picture.Headline inflation has been in rapid decline since peaking at a record 10.6% in October but core prices, which exclude volatile items such as food and fuel, have been rising at a steady or accelerating pace. The euro zone unexpectedly eked out growth in the final three months of 2022 but this was largely due to an exceptionally mild winter and a stellar performance by Ireland.And an ECB survey showed banks were tightening access to credit by the most since the 2011 debt crisis – usually the harbinger of lower growth and slowing inflation. To some observers, this meant the ECB would be wise not to commit to any future policy move. “In an environment with so many exogenous influences, forward guidance would be a recipe for disappointments that could ultimately weigh on the credibility of the ECB,” Karsten Junius, chief economist at J.Safra Sarasin, said.Financial markets expect the ECB’s deposit rate to peak at 3.5% by the summer, which would be the highest level since the turn of the century.The ECB is also set to reveal how exactly it plans to reduce the multi-trillion euro stock of bonds on its balance sheet, unwinding some of the asset purchases it made to boost inflation during almost a decade when it was too low. Barclays (LON:BARC) analysts estimate that 60 billion euros worth of maturing bonds the ECB will not replace between March and June will be split roughly evenly between government bonds and other debt, comprising corporate and covered bonds as well as asset-backed securities. More

Suad Durakovic, the owner of a truck driving school on the outskirts of the western German city of Duisburg, made it into Chinese newspapers in 2019 by testifying that Beijing’s Belt and Road Initiative had triggered a local logistics industry boom.Today, his business benefits from a shortage of qualified truckers, but not because of China’s global infrastructure development strategy.“The Silk Road has not developed for us,” Durakovic told Nikkei Asia. “First it was Covid, then it was the Ukraine war, so the boom is no longer about Silk Road logistics.”Duisburg, a city of half a million people, is located in Germany’s industrial heartland at the junction of the Rhine and Ruhr rivers. A downturn in the country’s steel and coal industries in the 1990s and early 2000s battered its economy.But the city found a saviour in Chinese president Xi Jinping, who visited Duisburg in 2014 to officially make its inland port Europe’s main Belt and Road hub. While this fuelled anticipation of a new heyday, recent events suggest the prospects are dimming.

Much of this stems from the Ukraine war and Germany’s awkward relationship with China.Chancellor Olaf Scholz was the first European leader to visit Beijing after Xi secured a third term as party leader at the Communist party congress in October. But German attitudes have soured recently over China’s cozy relationship with Russia, Taiwan and human rights, as well as Germany’s growing trade deficit with the world’s second-biggest economy.Germany is currently reviewing its relationship with Beijing, with the unveiling of Berlin’s new basic guidelines for its China policy expected in the next few weeks.Draft excerpts show lawmakers urging a significantly toughened stance and a reduction of economic reliance on China. The more drastic prescriptions include limiting investment in China and stricter monitoring of companies overdependent on China for business.

Chancellor Olaf Scholz met President Xi Jinping last November but German attitudes towards China have soured © Kay Nietfeld/Reuters

Plans were buried in 2021 for a sprawling China business centre on the banks of the Rhine, from where hundreds of Chinese companies were meant to grow their European distribution networks.In November, Duisburg cited China’s ties with Russia as a reason for letting expire a memorandum of understanding for a sweeping “smart city” project with Chinese tech giant Huawei.Russia’s sudden reduction of natural gas exports to Germany fuelled a notion among German policymakers that it was not a good idea to let critical infrastructure fall into the wrong hands.Around the same time, it became known that Chinese state-owned Cosco Shipping Holdings had in June quietly returned a 30 per cent stake in a €100mn ($108mn) Duisburg port terminal project.“As state-owned Cosco pulls out, other privately owned Chinese logistics players stay engaged, which suggests that Cosco pulled out of the port terminal project over political headwinds,” said Markus Taube, the University Duisburg-Essen’s professor for East Asia economics and China. “That event and the expired Huawei deal nurture doubts among Duisburg’s Chinese business community whether Duisburg still is a good place for them to do business.”

The mood has certainly changed since 2011, when the first train on the China Railway Express — an alternative to container shipping — arrived in Duisburg and opened a new chapter in China-Europe land transportation.The line constituted a key part of China’s efforts to entice electronics-makers to move their manufacturing away from China’s coastal provinces to the Chinese inland, where cities are served by the new train services.Data by Duisport, the port’s owner and operator, show that pandemic-related disruptions to maritime trade boosted the Silk Road freight rail business, with the geopolitical upheaval stemming from the Ukraine war causing the opposite.While the annual number of trains rose by 12 per cent to 2,800 in 2021, bookings dropped by about 30 per cent in the spring of 2022, as businesses that adopted rail freight faced reputational, insurance, sanction and confiscation risks along the Russian route.In late 2022, a port spokesman told Nikkei Asia that although momentum has since improved, figures remain below pre-pandemic days — the share of the China-Europe freight rail business in the port’s overall turnover is now 3-4 per cent.

Duisburg has Europe’s largest inland port but plans for a sprawling Chinese business centre on the banks of the Rhine have not materialised © Jens Kastner

Nanjing High Accurate Drive Equipment Manufacturing Group (NGC) in 2015 opened its European headquarters in the city for design, testing, maintenance and refurbishment of gearboxes for wind turbines and industrial equipment. The company cited direct train services between Duisburg and its headquarters in Nanjing as one of the main factors for choosing the city.But one complaint among opposition Duisburg council members is that Chinese companies are not contributing to the local economy.Nikkei Asia’s research of local trade registers suggests that nearly all of the 100 or so Chinese companies that opened bricks-and-mortar presences in Duisburg are engaged in either logistics or cross-border ecommerce. For example, a company with the Germanic-sounding name Hermann Commerce distributes Chinese instant food, soy sauce and food seasonings to more than 20 European countries.Chinese-owned Lisstec markets a cosmetics brand with the similarly Germanic-sounding name Hermuna, which is pitched as “Made in Germany”. But the brand only appears to be available for consumers in China despite the company’s Chinese-language Weibo social media account suggesting its products are made in a German factory for sale in German cosmetics stores and pharmacy chain stores.“The Chinese ecommerce companies that have set up here are not known to be big local job creators or tax contributors,” said Sven Benentreu, the deputy chair of the local chapter of the pro-business Free Democratic Party (FDP), an opposition party in Duisburg.“We as the FDP appreciate the presence of Chinese companies here, but the strong China focus of the city government is obviously not paying off as expected,” he added.NGC and the other Chinese-owned companies approached by Nikkei Asia for this article either declined to be interviewed or did not return calls.Kai Yu, director of the China Business Network Duisburg, also declined to be interviewed, just saying in November that “the Chinese managers I know are unavailable, because they have already travelled back to China for the Chinese new year holiday”.China is currently celebrating the lunar new year, two months after Nikkei Asia approached Yu.

Chinese students in Duisburg are also not integrating into the city, local academics say.About 2,000 Chinese nationals are enrolled at University Duisburg-Essen, the largest intake among German universities, due mainly to a city partnership signed between Duisburg and Wuhan in 1982 that encouraged academic exchanges.Duisburg’s Chinese student population is concentrated in the streets near the university, where there are a handful of Chinese restaurants and shops. Several part-time student restaurant workers said they mainly came from Shandong province under academic exchange arrangements.“It has always struck me how isolated Duisburg’s Chinese student population is compared to those of other Asian countries, with Chinese community groups effectively shielding new arrivals by assisting in all the initial tasks such as arrangement of accommodation,” said Antonia Hmaidi, an analyst at the China think-tank Merics in Berlin, who previously taught at University Duisburg-Essen.“China’s deteriorating image as an autocratic rival also made China-centred career planning unpopular among German students,” she added. “The relationship with China has become more politicised than a few years ago.”“After the German government releases its new China strategy, the overall climate will probably further worsen, which will probably further cool Duisburg’s business relationship with China.”A version of this article was first published by Nikkei Asia on January 24, 2023. ©2023 Nikkei Inc. All rights reserved.Related storiesGermany eyes ‘China lite’ future that is less dependentGermany struggles to get China parts to replenish ammo stockpileRoad to nowhere: China’s Belt and Road Initiative at tipping pointGermany blocks Chinese stake in 2 chipmakers on security fears More