Economy

The Employment Cost Index, which Federal Reserve officials watch closely as a gauge of pay trends, is picking up more slowly.A measure of pay and benefits that the Federal Reserve has been watching closely amid a strong labor market rose less than expected at the end of 2022, fresh data showed Tuesday.The Employment Cost Index climbed 1 percent in the final quarter of 2022 versus the prior three months, more slowly than the 1.1 percent that economists expected and a slowdown from the previous 1.2 percent reading.The data will probably reaffirm to central bankers that the economy and labor market are cooling, which could help inflation return to normal over time. While wage gains are still faster than normal, the moderation could help central bankers feel comfortable as they adjust interest rates less aggressively than they did throughout 2022.The employment cost measure picked up by 5.1 percent on a yearly basis, close to the 5 percent reading in the previous quarter’s report. In the decade leading up to the pandemic, the index averaged 2.2 percent yearly gains, underscoring the continued rapidness of today’s pace. But a measure of private-sector wages not including benefits, which economists see as a particularly good indicator of labor market tightness, slowed slightly.Fed officials are closely watching the labor market — and wages in particular — as they try to gauge how much further they have to go in their campaign against stubbornly high inflation. While goods price increases that are tied to supply chain snarls are beginning to fade, central bankers are worried that rapid pay gains could keep services costs rising rapidly. Labor is a big expense for service companies, like hotels and restaurants, and firms might pass higher wage costs on to customers in the form of higher prices. Bigger paychecks could also help sustain consumer demand, keeping pressure on prices.The Fed’s next interest-rate decision will be announced on Wednesday. Central bankers are widely expected to raise rates by a quarter of a percentage point, after raising them by three-quarters of a point per meeting for much of 2022 and by half a point at their last gathering, in December.The new adjustment would push rates up to a range of 4.5 to 4.75 percent. The question now is how many more moves the Fed will make — and how long policymakers will hold interest rates at a high level.Steeper borrowing costs deter consumers from making big purchases and businesses from expanding, which can slow the economy and weaken the labor market. Fed officials are hoping that they can cool the economy by just enough to allow supply and demand to come back into balance — causing inflation to moderate — without causing a punishing recession. But they have been clear that they are willing to accept some pain to bring price increases back under control.And they have underlined that they think the labor market needs to slow down to put inflation on a more sustainable path.“We want strong wage increases,” Jerome H. Powell, the Fed chair, said at his last news conference in December. “We just want them to be at a level that’s consistent with 2 percent inflation,” he said, referring to the Fed’s target inflation rate.For now, America’s rate of price increases remains much faster, at 5 percent.Mr. Powell will give another news conference on Wednesday, after the release of the Fed’s rate decision at 2 p.m. Eastern time. More

Demand for housing loans in the eurozone fell at the fastest pace on record, according to European Central Bank data that showed how rising interest rates and declining consumer confidence are taking a toll on the property market.Banks reported that demand for housing loans decreased at its largest rate on record — a net percentage of minus 74 per cent, according to the January eurozone bank lending survey. The figure was the lowest since records began in 2003 and a decline from minus 42 from the previous quarter.The net decrease in demand “was mainly driven by the general level of interest rates, lower consumer confidence and deteriorating housing market prospects”, stated the survey. A significant tightening in lending criteria for mortgages was also reported. The figures “painted a pretty dire picture for” the housing sector, said Fabio Balboni, economist at HSBC, adding that the recent tightening of monetary policy by the ECB “is starting to feed quickly through to the credit channel and, in turn, take its toll on the economy”.The ECB increased its deposit rate to 2 per cent in December from -0.5 per cent last June, representing the largest and fastest increase in rates in the monetary union’s history. Markets are expecting another 50 basis point increase at the meeting of the bank’s governing council on Thursday.Eurozone house prices and transactions boomed during the pandemic, boosted by record low rates and strong demand from people looking for more space. However, with the sharp rise in rates, house prices and transactions are expected to fall sharply, economists said. The drop in mortgage demand pointed to a 12 per cent year-on-year fall in residential investment, Capital Economics forecast. A drop on that scale would knock 0.7 percentage points off annual economic growth, it added.The latest official figures from Eurostat showed that third-quarter house prices fell in six eurozone countries — including Germany, Denmark, Italy and Sweden — compared with the previous three months. Oxford Economics forecast that house prices would fall by more than 5 per cent in 2023 in many countries, including Germany and the Netherlands. Across the eurozone, house prices were expected to contract by 2.4 per cent, the consultancy added. The ECB report also showed that the banks’ criteria for approving loans to businesses tightened substantially at the start of the year, marking the most significant tightening since the eurozone’s sovereign debt crisis in 2011. Credit standards also tightened sharply for mortgages. The report explained that banks’ perceptions of bigger risks to the bloc’s economic outlook, a decline in risk tolerance and increased funding costs continued to tighten their lending guidelines. “Banks are tightening their lending standards and loan demand is falling,” said Jack Allen-Reynolds, senior European economist at Capital Economics. He added that this points to “significant declines in consumption and investment”. More

More UK companies went bust last year than at any point since the financial crisis as soaring inflation, rising interest rates and the stalling economy hit businesses.The total number of company insolvencies registered in 2022 was 22,109 — the highest since 2009 and 57 per cent higher than 2021 — according to data issued on Tuesday by the Insolvency Service, a government agency that deals with bankruptcies and companies in liquidation.Christina Fitzgerald, president of R3, an insolvency and restructuring trade body, added that “2022 was the year the insolvency dam burst”, as pandemic-era government support for companies was wound down.The construction, retail and hospitality sectors have been hit particularly hard, according to Insolvency Service data, given their exposure to the faltering economy and falling consumer confidence. Paperchase, the high street retailer, became the latest to fall into administration on Tuesday, with its brand, but not its stores, being acquired by Tesco. Catherine Atkinson, director in PwC’s restructuring and forensics practice, warned that “creditors appear nervous”, adding that last year there was a fourfold increase in “winding up petitions”. These formal applications by creditors to shut down companies are widely seen as a key bellwether of confidence among banks and other creditors as to whether debtors are going concerns. Business groups representing companies in hospitality and manufacturing also told a parliamentary committee on Tuesday that more British businesses would fail when the government’s energy support package was scaled back in April“Supply-chain pressures, rising inflation and high energy prices have created a ‘trilemma’ of headwinds which many management teams will be experiencing simultaneously for the first time,” said Samantha Keen, UK turnround and restructuring strategy partner at EY-Parthenon and president of the Insolvency Practitioners Association (IPA). “This stress is now deepening and spreading to all sectors of the economy as falling confidence affects investment decisions, contract renewals and access to credit.”Personal insolvencies also reached the highest numbers for three years in 2022, as the cost of living crisis and falling real wages hit personal finances.In a further sign of the faltering UK economy, lenders approved 35,600 mortgages for house purchases last month, down from 46,200 in November, according to Bank of England data. This was well below the 45,000 approvals forecast by a Reuters poll of economists. The BoE said that, excluding the onset of the Covid-19 lockdowns in May 2020, which brought the UK housing market to a standstill, mortgage approvals had fallen to their lowest levels since January 2009. The December figure marks the fourth consecutive monthly decrease in mortgage approvals. The number had almost halved since it hit 74,300 in August, and was well below the 107,095 registered in November 2020. Mortgage lending decreased to £3.2bn in December, down from £4.3bn in the previous month. The BoE said the effective interest rate — the actual interest rate paid on new mortgages — rose 32-basis points to 3.67 per cent in December 2022, the largest monthly increase since the bank started to raise rates in December 2021.

The rise in mortgage costs follows a string of interest rate increases by the central bank as it tries to tame inflation. The BoE is expected to raise rates to 4 per cent on Thursday, after its last decision in December brought them to 3.5 per cent, the highest level in 14 years.According to today’s data, individuals borrowed an additional £500mn in consumer credit, on net, in December, following the £1.5bn borrowed in the previous month, and below the previous six-month average of £1.2bn. The decline in borrowing “suggests that after a period of resilience, consumer spending may have weakened at the end of the year”, said Thomas Pugh, economist at consulting company RSM UK. “This raises the chances that the economy contracted in the fourth quarter and fell into recession,” he added. More

Has the time come to slow the monetary tightening or even reverse it? That the answer to these questions is “yes” is becoming an increasingly common view. Markets are certainly behaving as if the days of tightening were numbered. They might even be right. But, crucially, they will only be right on the future of monetary policy if economies turn out to be weak. The stronger economies are, the greater the worry of central banks that inflation will not return to a stable 2 per cent and so the longer policy is likely to stay tight. In essence, then, one can hope that economies will be strong, policy will ease and inflation will vanish, all at the same time. But this best of all possible worlds is far from the most likely one.The World Economic Outlook Update from the IMF does confirm a somewhat more optimistic view of the economic future. Notably, global economic growth is forecast at 3.2 per cent between the fourth quarters of 2022 and 2023, up from 1.9 per cent between the corresponding quarters in 2021 and 2022. This would be below the 2000-19 average of 3.8 per cent. Yet, given the huge shocks and surges in inflation, this would be a good outcome.

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True, growth is forecast at only 1.1 per cent in the high-income countries over the same period, with 1 per cent in the US and just 0.5 per cent in the eurozone. But the UK’s economy is the only one in the G7 forecast to shrink over this period, by 0.5 per cent. The UK forecast for 2023 has also been downgraded by 0.9 percentage points. Consider this one of those “Brexit dividends”. Brexit is the gift that keeps on giving.The striking feature of the forecasts, however, is the strength of emerging and developing countries. Their economies are forecast to grow by 5 per cent between the fourth quarters of 2022 and 2023 (up from 2.5 per cent in the preceding period), with emerging and developing Asia growing by 6.2 per cent (up from 3.4 per cent), China growing by 5.9 per cent (up from 2.9 per cent) and India growing by 7 per cent (up from 4.3 per cent). China and India are even forecast to generate half of global economic growth this year. If the IMF proves right, Asia is back, big time.

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The reopening of China and falling energy prices in Europe are considered the most important reasons for the improving prospects. Global inflation is also forecast to fall from 8.8 per cent in 2022 to 6.6 per cent in 2023 and 4.3 per cent in 2024. The IMF’s chief economist, Pierre-Olivier Gourinchas, even said that 2023 “could well represent a turning point”, with conditions improving in subsequent years. Above all, there is no sign at all of a global recession.The risks remain weighted to the downside, says the IMF. But the adverse risks have moderated since October 2022. On the upside, there might be stronger demand or lower inflation than expected. On the downside, there are risks of worse health outcomes in China, a sharp aggravation of the war in Ukraine or financial turmoil. To this might be added other hotspots, not just Taiwan, but the risk of an assault on Iran’s nuclear weapons programme that would trigger bombing of Gulf oilfields.Some might argue that the downside risks to growth in high-income countries are being underestimated: consumers might retrench, as the funds they received during Covid run dry. The opposite risk, however, is that the strength of economies will prevent inflation from falling to the target fast enough. Headline inflation might have passed its peak. But, the IMF notes, “underlying (core) inflation has not yet peaked in most economies and remains well above pre-pandemic levels”.Central banks confront a dilemma: have they already done enough to deliver their target and anchor inflation expectations? If the Federal Reserve looked at the optimism in markets, it might conclude it has not. But, if it looked at fund forecasts for US growth, it might conclude the opposite. These may not be disastrous, but they are weak. The same applies to the European Central Bank and, even more so, to the Bank of England when they look at their own economies. These central banks might quite reasonably wait, in order to see how weak their economies become, before their next moves. Indeed, Harvard’s hitherto hawkish Larry Summers recommends just such a pause.

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That the world economy looks a bit stronger than expected not so long ago is surely a good thing. Yet, for central banks (and investors), this also creates difficulties. The strategic goal of the former must after all remain that of returning the annual inflation rate to 2 per cent and, in the process, firmly anchoring expectations at that level.The dilemma for central banks then is whether today’s greater optimism is consistent with achieving that strategic goal, while that for investors is whether the markets’ implicit view of how central banks will view this question is correct. The analytical difficulty is trying to work out, in a world in which there is an interactive “game” between central banks and economic actors, whether the former have done just enough to deliver the economy needed to put core inflation on target, too much or too little.Given the uncertainty, there is now a good case for adopting a wait and see position. But a crucial point is that in an inflationary world, good news on economic activity today is not necessarily good news for policy and so activity later on, unless it reveals that the short-term trade-off between output and inflation is also favourable. If it is, central banks can relax policies earlier than previously expected. If it is not, they will have to tighten more than now hoped. At the moment, one can hope for the former outcome. But it is still far from [email protected] Martin Wolf with myFT and on Twitter More

The employment cost index increased 1% in the fourth quarter, less than the 1.1% expectation and slower than the third quarter, the Labor Department reported Tuesday.
Fed officials consider the ECI an important inflation gauge as it adjusts for various labor market conditions.

Employment costs increased at a slower than expected pace in the fourth quarter, indicating that inflation pressures on business owners are at least leveling off.
The employment cost index, a barometer the Federal Reserve watches closely for inflation signs, increased 1% in the October-to-December period, the Labor Department reported Tuesday. That was a bit below the 1.1% Dow Jones estimate and less the 1.2% reading in the third quarter. It also was the lowest quarterly gain in a year.

Wages and salaries for the period also rose 1%, down 0.3 percentage point, while the cost of benefits increased just 0.8%, down from 1% in the previous period.
Compensation for government workers grew at a much slower pace comparatively in the quarter, slowing to a 1% gain from 1.9% in Q3.
Fed officials consider the ECI an important inflation gauge because it adjusts for occupations that are in higher demand and for outsized wage gains in particular industries, such as those that were most affected by the pandemic.
The Q4 reading comes the same day the interest rate-setting Federal Open Market Committee begins its two-day policy meeting. Markets have assigned a near-certainty to the FOMC approving a 0.25 percentage point rate hike before it adjourns Wednesday.
But the greater focus will be on what officials signal about the future of monetary policy.

Markets are anticipating one more quarter-point hike in March, followed by a pause and then one or two cuts before the end of the year. Fed officials have pushed back on the notion of any policy easing in 2023, though they could change their minds if inflation readings continue to abate.
“The Fed is still likely to keep raising interest rates at the next couple of meetings, but we expect a further slowdown in wage growth over the coming months to convince officials to pause the tightening cycle after the March meeting,” wrote Andrew Hunter, senior U.S. economist at Capital Economics.
The next big data point comes Friday, when the Labor Department releases its monthly nonfarm payrolls report.
Economists expect that payrolls increased by 187,000 in January, while average hourly earnings were projected to grow 0.3% monthly and 4.3% year over year, after increasing 4.6% at the end of 2022.

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The ministry confirmed an earlier report in Der Spiegel magazine that said the finance ministers of Estonia, Finland, Austria, Ireland, the Czech Republic, Denmark and Slovakia had written to Dombrovskis saying that too far-reaching financial support for companies “not justified by clear market failures” could lead to a dangerous “subsidy race”.Czech Finance Minister Zbynek Stanjura also said it would be wrong to “escalate a trade war with the United States”.”Introducing retaliatory protectionist measures will threaten the fiscal stability of EU countries and will lead to disruption of the internal market,” Stanjura said on Twitter.”We have to find with the U.S. side a compromise solution that will maintain a fair competitive environment.”The EU said in December it would adapt its state aid rules to prevent an exodus of investment triggered by the U.S. Inflation Reduction Act, which it feared might lure away EU businesses and disadvantage European companies. More

CHTAURA, Lebanon (Reuters) – The money exchange shop in Lebanon’s Bekaa Valley was buzzing with business. Cellphones pinged endlessly and employees shouted out various rates as customers flocked in carrying plastic bags of the crashing local currency to buy U.S. dollars. “Welcome to the Wall Street of Lebanon,” grinned the storefront’s owner, a machine gun leaning on a rack behind him in case of a robbery. Cash is now king in Lebanon, where a three-year economic meltdown has led the country’s once-lauded financial sector to atrophy.Zombie banks have frozen depositors out of tens of billions of dollars in their accounts, halting basic services and even prompting some customers to hold up tellers at gunpoint to access their money.People and businesses now operate almost exclusively in cash. The local currency in circulation ballooned 12-fold between Sept. 2019 and Nov. 2022, according to banking documents seen by Reuters.Most restaurants and coffeeshops have hung apologetic signs stating that credit cards are not accepted but that dollars are, at the fluctuating parallel market rate. COLLAPSING POUNDLebanese use mobile apps to check on the collapsing pound, which has lost some 97% of its value since 2019.Fleets of mobile money exchangers zip to offices or homes to carry out transactions. Highways are dotted with billboards advertising money-counting machines.With credit cards redundant, people document big transactions by taking pictures of the dollar bills used, fanning them out to show the serial numbers. Even the largely paralysed Lebanese state is moving towards the cash economy: the finance ministry has considered requiring traders to pay newly-increased customs tariffs partly in cash. With more bank notes in circulation, crime has risen. Elie Anatian, CEO of security firm Salvado, said yearly sales of safes had grown steadily, with a 15% increase in 2022. Other businesses are faltering. Omar Chehimi imports smaller shipments for his home appliance shop with cash he has on-hand, since banks stopped granting letters of credit for large ones.”Even the companies we source from – Samsung (KS:005930), LG – are only dealing with us in cash,” he said, examining a crumpled $20 bill a customer had used to buy an electric heater. WESTERN CONCERNSAny recovery hinges on government action to address some $72 billion of losses in the financial system and revive the banking sector. But politicians and bankers with vested interests have resisted reforms sought by the International Monetary Fund to fix the situation and access international aid.Paul Abi Nasr, CEO of a textile company, said the cash economy made it “practically impossible” to enforce taxes “because everything can simply stay outside of the banks”.    “The government’s ability to be financially sound down the line hinges on this,” he said, adding that the cash economy also risked Lebanon being listed as a country falling short in the struggle against money laundering and terrorist financing.Western governments, which oppose the role of the heavily armed, Iran-backed Hezbollah group, share those concerns. A Western diplomat said foreign governments were worried illicit transactions would rise as cash was harder to track.The U.S. Treasury last week sanctioned Lebanese money exchanger Hassan Moukalled and his business for alleged financial ties to Hezbollah, saying he helped “transfer cash” on its behalf and recruited money exchangers loyal to the group.Moukalled denied the charges.Nassib Ghobril, chief economist at Lebanon’s Byblos Bank, said the pound’s continuing decline meant the cash economy was now also dollarised, “with dollars accounting for approximately 70-80% of operations”. “The transformation to a cash economy means the collapse of the economy,” said Mohammad Chamseddine, an economic expert at Lebanese research group Information International. More

The EU Commission plans to present a package to promote European industry on Wednesday in response to the U.S. government’s 370-billion-dollar subsidy package to promote climate-friendly technologies.The EU said in December it would adapt its state aid rules to prevent an exodus of investment triggered by the Inflation Reduction Act, fearing it might lure away EU businesses and disadvantage European companies. “This is a challenge for our competitiveness on top on already existing challenges,” Gentiloni said. A draft of the Commission’s plan to support industries facing U.S. and Chinese competition, seen by Reuters on Monday, said it would produce a simpler regulatory framework for manufacturers of technologies deemed key to meeting the EU’s climate change goals, including faster permitting procedures.”We will not start this discussion from the end, meaning the funding,” Gentiloni said.The European Commission will not propose any new joint EU borrowing, a draft of its “Green Deal Industrial Plan” showed on Monday. More