Economy

NEW YORK/LONDON (Reuters) – The downturn in U.S. business activity eased slightly in January even as it contracted for the seventh straight month while euro zone business activity made a surprise return to modest growth, as two of the world’s major economies hope to avert recession this year, surveys showed on Tuesday.S&P Global (NYSE:SPGI) said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to 46.6 this month from a final reading of 45.0 in December, the first moderation since September but still well below a key reading of 50 used to separate contraction and growth in the private sector.The Federal Reserve’s fastest interest rate hiking cycle since the early 1980s has weighed on demand in the world’s largest economy as central bankers around the world try to rein in high inflation.But in a worrisome sign, the survey’s measures of input prices for both U.S. services firms and goods producers rose month-over-month for the first time since last May, suggesting the U.S. central bank may need to keep up the pressure through higher interest rates to bring inflation back to its 2% target.”The worry is that… the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.The Fed is primed for a 25 basis increase at its policy meeting next week but has been eyeing a stopping point in its current hiking cycle this spring, to better balance the risk of bringing down inflation without tipping the economy into recession.EURO ZONE BOUNCES BACKThe Euro zone is showing more resilience. Business activity there made a surprise return to modest growth in January, adding to signs the downturn in the bloc may not be as deep as feared and that the currency union may escape recession.S&P Global’s flash Composite PMI Index, seen as a good gauge of overall economic health, climbed to 50.2 this month from 49.3 in December.January was the first time the index has been above the 50 mark since June and the reading was better than expected.”The rise in the purchasing managers’ indices is likely to fuel hopes among many that the economy in the euro area might just escape a recession after all,” said Christoph Weil at Commerzbank (ETR:CBKG). However, Weil added that a clear deterioration in the economic environment continued to point to at least a mild recession.A moderate winter so far, falling gas prices and recent positive economic data meant some quarterly growth forecasts in a Reuters poll published on Monday were upgraded although a technical recession was still predicted.Pressure on Germany’s economy, Europe’s largest, eased further in January as inflation slowed and businesses looked to the new year with optimism, a sister survey showed, although sentiment was still shy of predicting a return to growth.In France, the bloc’s second-biggest economy, output fell slightly overall again in January, its PMI showed, but manufacturing activity improved for the first time since August.British private-sector economic activity, however, fell at its fastest rate in two years in January, another PMI showed, as businesses blamed higher Bank of England interest rates, strikes and weak consumer demand for the slowdown.The dollar languished near a nine-month low against the euro on Tuesday as markets continued this year’s buoyant mood after the PMI data and a slew of corporate earnings. [MKTS/GLOB] In the Euro zone, there was mixed news on inflation pressures, according to the PMI survey. The input prices index fell but firms raised their charges at a faster rate. The output prices reading also nudged up but was still far lower than it has averaged over much of the last three years.”The PMIs suggest that price pressures remain strong. So there is no prospect of the ECB taking its foot off the brake any time soon,” said Andrew Kenningham at Capital Economics.The European Central Bank will deliver 50 basis point interest rate rises at each of its next two meetings, according to a Reuters poll, with its fastest hiking campaign on record having so far failed to bring inflation anywhere near its 2% target. (This story has been refiled to correct day of the week in the first paragraph) More

The Chinese Embassy in Zambia said on its website Tuesday “the biggest contribution that the U.S. can make to the debt issues outside the country is to act on responsible monetary policies, cope with its own debt problem, and stop sabotaging other sovereign countries’ active efforts to solve their debt issues.” Republicans in the House of Representatives are using a risky, unusual threat to refuse to vote in a new debt ceiling, a figure that reflects money already spent and now owed by the government, to pressure the Biden administration and Democrats to cut spending programs. So far, the Biden White House is refusing to negotiate, counting on hardline Republicans to step back under pressure from businesses, investors and moderates. U.S. national debt is about $31 trillion, a figure that has skyrocketed since 2000’s $5.6 trillion thanks in part to increased spending for an aging population, outlays for Iraq and Afghanistan wars, COVID-19 programs and tax cuts that trimmed revenues. Yellen and International Monetary Fund Managing Director Kristalina Georgieva arrived separately in Zambia Sunday to highlight the need for debt reform in Africa. Zambia defaulted on its debt in 2020 and has made little progress to restructure it with Chinese and private creditors to date, a situation that has helped pushed citizens into poverty. The world’s poorest countries faced $35 billion in debt-service payments to official and private-sector creditors in 2022, more than 40% of which was due to China, the World Bank said. The U.S. Federal Reserve’s rate increases, designed to tame inflation at home, and the appreciating U.S. dollar have added to African countries’ debt service burden, the African Development Bank said last week. More

MEXICO CITY (Reuters) -Mexico’s headline inflation accelerated and exceeded expectations in early January, data from the national statistics agency showed on Tuesday, marking the first monthly pickup since September as markets brace for fresh interest rate hikes ahead.Annual headline inflation in the first half of the month reached 7.94%, beating both the 7.77% recorded in the month of December and economists’ forecasts of 7.86%, though still below the two-decade high of 8.70% registered in August and September.Meanwhile the core index, which strips out some volatile food and energy prices, hit 8.45% on an annual basis, back on the rise after showing some relief in December. It also exceeded forecasts of 8.34%.That means annual inflation remains far above the target rate of 3%, plus or minus one percentage point set by Banxico, as the Bank of Mexico is known.Banxico bank board member Jonathan Heath said on Twitter the consumer price data pointed to “domestic pressure, possibly from increases in labor costs.” Heath underscored that Mexico still has “a lot to worry about” in terms of inflation.In an effort to tame rising prices, Banxico has increased its key lending rate by 650 basis points to 10.50% during the current hiking cycle, which began in June 2021.Banxico is considering another interest rate hike at its next monetary policy meeting on Feb. 9, according to the minutes of its last board meeting – a move markets already anticipate, including a potential higher-than-expected hike.The latest headline inflation figure, Capital Economics economist Jason Tuvey said, “means that there is a growing risk that Banxico delivers a bit more tightening beyond the 25bp increase to 10.75% that we expect at February’s meeting.”It is unlikely Banxico will make any cuts to the interest rate in the next six months, Heath said in an interview last week.In the first half of January, according to statistics agency INEGI, consumer prices rose 0.46% compared to the previous two-week period, while the core index rose 0.44%, both also exceeding market estimates.”We still believe that deteriorating domestic fundamentals, lower raw material prices and improving global supply conditions will push inflation down over the coming months,” Pantheon Macroeconomics economist Andres Abadia said.”But today’s numbers suggest that Banxico will remain particularly hawkish in the near term.”Mexico’s Latin American peer Brazil, where monetary tightening is on pause, also released mid-month inflation data on Tuesday, with prices slightly beating market forecasts. More

WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen activated another extraordinary cash management measure on Tuesday to avoid breaching the federal debt limit, suspending daily reinvestments in a large government retirement fund that holds Treasury debt, the department said.In a letter notifying Congress of the move to access the Government Securities Investment Fund (G Fund), Yellen did not alter a projected early June deadline for when the Treasury may no longer be able to pay the nation’s bills without an increase in the $31.4 trillion statutory borrowing limit.”The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit,” Yellen wrote in the letter to House of Representatives Speaker Kevin McCarthy, a Republican, and other congressional leaders. “My predecessors have taken this suspension action in similar circumstances.”Yellen last week suspended reinvestments in two other retirement and health benefit funds as the government nominally reached the debt ceiling. Republicans who now control the House have threatened to oppose a debt ceiling increase without spending reductions from the Biden administration.The G-Fund maneuver is one of the largest tools that Treasury can employ to reclaim borrowing capacity under the debt ceiling. The fund, part of the Thrift Savings Plan for federal employees, had net assets of $210.9 billion at the end of 2021, according to its most recent annual report.Normally the money market-like retirement fund reinvests its entire balance daily into special-issue Treasury securities that count against the debt limit. Halting the reinvestments allows more normal Treasury bills, notes and bonds to be issued.But the Treasury is required by law to replenish the fund, along with any lost earnings, once a debt limit impasse ends. Federal retirees and employees would be unaffected by this action.”I respectfully urge Congress to act promptly to protect the full faith and credit of the United States,” Yellen wrote, repeating a regular line in her letters to lawmakers. More

One always learns something from the World Economic Forum. At the very least, one learns what rich and powerful people think is happening. They may be wrong: indeed, they often are. The world is, as we have recently been reminded, full of surprises. But here are my reactions.The business people are feeling more cheerful. Yes, they are still suffering from the legacies of Covid, the inflationary post-pandemic reopening and Russia’s assault on Ukraine. They are still threatened by the hostility between the US and China. But the news has been more positive: Ukraine has been doing better in its fight for survival; the lunatics fared worse than expected in the US midterm elections; gas prices have tumbled; headline inflation may have peaked; recession worries have lifted; and China has reopened. With that background, let us consider some of the more important topics, starting with the economic outlook.The general mood on the economy in the high-income countries is one of greater optimism about the near-term future. Yet these optimists may be getting ahead of themselves. The growth of US nominal GDP has been far too fast to be consistent with inflation at 2 per cent. US wages have also grown at close to 5 per cent, over the past year, while unemployment remains low. None of this is consistent with hitting the inflation target on a sustained basis. If one takes the Fed seriously (I do), this implies tighter monetary policy and a weaker economy than many expect. Alternatively, the Fed may give up too soon, only to be forced to tighten again a year or two later. As for the ECB, it is a good bet that it will seek to get inflation back to 2 per cent as soon as possible.The mood in many developing countries is anxious, however. The legacy of Covid, high food and energy prices, high interest rates and a strong dollar have put many low and lower middle income countries into serious difficulties. The worries of some policymakers, especially those from Africa, were palpable.The stories coming out of China and India, the world’s giant emerging economies, were rather different. Liu He, the outgoing vice-premier, came to tell participants that China is not just open again, at home and abroad, but is also embracing its private sector. A western businessman I know well, long resident in China, confirmed the shift. A plausible explanation is that Xi Jinping has decided that growth matters. This year, it will clearly be strong. Whether the new approach will be sustained in the longer term is uncertain. That is inevitable when power is so concentrated. The urge for tight control will surely return.The Indians were the largest delegation in Davos. Their business community is clearly feeling optimistic about the prospects of what may now be the world’s most populous country. Indeed, unless things go wrong (always possible), this should be the fastest growing large economy in the world over the next couple of decades. Opportunities should abound.Another huge story concerns trade and industrial policy. The misnamed US Inflation Reduction Act is mesmerising European businesses, many of which are considering shifting operations there, partly to exploit its opportunities, but also to take advantage of lower US energy prices. This is the beginning of a subsidy war, one in which the US, with its vast federal budget, has the upper hand, though Ursula von der Leyen, head of the European Commission, proposed possible responses. I have little doubt that these policies will be wasteful. But they should accelerate the introduction of new climate technologies. Economic nationalism may now be the only way to do so. It is also splitting the west at a crucial moment.Almost as striking was how Katherine Tai, US trade representative, framed US trade policy in terms of worker interests and worker rights. Yet what was most significant was not this, but rather the apparent absence of any US view of how the global trading system should operate. The erstwhile hegemon has not just developed deep suspicions of China, this being the one truly bipartisan policy; it has abandoned interest in the system.A final area of focus was technology. Temporarily, I fear (and permanently, I hope) the hype over cryptocurrencies has abated. This leaves the field open for the dramatic improvements in global payments systems that central bank digital currencies could deliver. On the environment, the most excitement this time seemed to be on the shift towards hydrogen. That does indeed look like a crucial element in a more environmentally sustainable economy.The greatest hype, however, was over artificial intelligence. ChatGPT has for the moment stolen the show. The ability of people engaged in AI to feel unabashedly enthusiastic about their creations is as understandable as it is terrifying. The more I watch the creations of the tech industry, the more I fear that I am watching the sorcerer’s apprentice in real life. The difference is that nobody has the ability to turn this spell off.Finally, very present throughout was the assault on Ukraine. In a breakfast meeting, Boris Johnson was reborn, informing the audience that there was no chance that Vladimir Putin would use nuclear weapons. I hope he is right. But the issue the discussion raised was clear: Putin’s attempt to recreate the Russian empire cannot be allowed to stand. It would make Europe radically and permanently insecure. It would embolden neo-imperialists everywhere. It must be defeated.In all, the news has indeed been better in recent months. The absence of another huge shock is good news in itself. But many unresolved challenges remain, not least finding a swift and successful end to the war and getting to grips with climate change. Things may be a bit better. They are far from [email protected] Martin Wolf with myFT and on Twitter More

LONDON (Reuters) – The Bank of England will lift the Bank Rate by 50 basis points on Feb. 2 to 4.00% and then add another 25 basis points in March before pausing, according to a Reuters poll of economists who said the greater risk was that it would do even more. Britain’s central bank was one of the first among global peers to begin raising borrowing costs and has added 340 basis points since it began the current cycle in December 2021 to tame inflation now running at more than five times its 2% target.Prices jumped 10.5% in December from a year earlier, official data showed last week, as food and drink prices increased at their fastest pace since 1977.A firm majority, 29 of 42 respondents to the Jan. 18-24 poll, said the Bank would add 50 basis points next Thursday. Thirteen opted for a more modest 25-basis-point rate rise.Median forecasts in the poll showed the Bank would then add 25 basis points in March, giving a peak rate of 4.25%. It was last over 4.00% in late 2008.Both the United States Federal Reserve and the European Central Bank are also nearing the end of their policy tightening campaigns, separate Reuters polls found.Markets are pricing in a peak of 4.50% for Bank Rate. Governor Andrew Bailey said last week there was now more optimism about the prospects for inflation falling this year, noting the BoE had not pushed back against market expectations.Inflation has proved sticky, however. When asked about the risks around their peak rate forecasts, 20 of 24 respondents to an additional question said the greater risk was that Bank Rate ends higher than they expect rather than lower.”More resilient growth versus our forecasts should mean core inflation is likely to be stickier and give some space or force the BoE to hike a bit more than we forecast,” said Raphael Olszyna-Marzys at J. Safra Sarasin.Inflation has likely already peaked, but according to the poll it won’t fall to the Bank’s target until the end of next year. It will average 7.0% this year and 2.5% in 2024, the poll found, but will drop to 1.9% across 2025.RECESSIONBritain’s economy is almost certainly heading for a recession, with the poll giving that scenario a strong 75% chance within a year, albeit lower than the 85% probability given last month.Gross domestic product contracted 0.3% in the third quarter but the poll said it flatlined last quarter, thus just dodging the technical definition of a recession.However, the poll showed GDP falling 0.3% this quarter and next and 0.1% in the third quarter.Still, when questioned, 20 of 24 respondents said the downturn was more likely to be shallower than they currently expect rather than deeper.Across this year, the economy was predicted to contract 0.9% before growing 0.8% in 2024.”The consumer will struggle in 2023, with the UK likely in a mild recession for much of this year as the lagged impact of higher interest rates quells growth prospects, adding to the effects of the cost-of-living crisis,” said Ellie Henderson at Investec.Workers, from rail staff and healthcare workers to teachers, have been taking industrial action to demand better pay as they face soaring costs. (For other stories from the Reuters global economic poll:) More

Germany’s taste for Russian gas over recent decades was a double tragedy. It gave the Kremlin leverage over Europe. But it also gave protectionists throughout the western world a spurious credibility. Look what happens, they say, when strategic industries are open to trade. The first of these tragedies is fixable: there are substitutes for Russian fossil fuels. The second is here to stay. Within a year of the attack on Ukraine, the US Congress has passed a king’s ransom of domestic industrial aid and a piqued Europe is shaping its own version. The goal has widened: from punishing Russian violence to slowing China’s ascent. So has the key industry: from gas to chips and green tech. Over time, lots of sectors will turn out to be “strategic”. Why not agriculture? Why not the professional services that China will need to master to go from middle to high income? The west will rue this protectionist turn. Its hard-won cohesion over the past year is already yielding to mistrust, not just between the US and EU, but within the EU, where trading nations with small domestic markets (Sweden) dread the protectionism of big states (France). Perhaps Europe can make America’s Inflation Reduction Act less discriminatory to its own companies. Such is the lobbying power of a 450mn-strong entity. But what of Ireland versus Brussels? What of Australia versus Capitol Hill? Joe Biden “never intended” to beggar “folks who were co-operating with us”. But it is the nature of protectionism that intentions only count at the very start. What takes over is the logic of escalation.It is said often enough that America is in ideological, not just material, conflict with China. Protectionism is a tacit ideological concession from west to east. What does it concede? That international relations are a zero-sum game. That the state is paramount in the life of a country. That prosperity (which is objectively measurable) is subservient to security (which officials get to define at will). That the institutions formed at Bretton Woods a human lifetime ago are relics, and nations must make their own arrangements.Biden’s embrace of protectionism is hailed as “muscular”, which is code for “aggressive” when a Democrat is in office. And it has to be, given China’s industrial ruthlessness. If taken too far, though, it is also intellectual self-disarmament. It is possible to win the techno-economic struggle with the autocrats and lose in a larger sense: by granting their view of the world, by playing on their turf. The US won the cold war, in part, by building an empire of trade that wavering third nations could join to their profit. In a protectionist world, what is the equivalent carrot?Wariness of China is rational. But it is bound up with something else: a belief that the liberal decades either side of the millennium were a betrayal of the western poor. This slander, recognised as such when it was Donald Trump peddling it, needs countering at every point. It is possible — no, common — for an open trading nation to be egalitarian at home. (Trade is a high share of national output in the northern European social democracies.) As Reagan, Thatcher and their heirs loosened world trade, none succeeded in gutting the welfare state. In 1980, US government spending on social protection, which includes cash benefits and services in kind, was 13 per cent of national output. It was fractionally higher in 1990. It is 19 per cent now. Nothing about liberal external trade implies domestic laissez-faire.A problem with the word “neoliberal”, besides the ring of undergraduate leftist about it, is that it allows for none of this nuance. To be pro-trade is to be anti-worker, if not unpatriotic. You wouldn’t know from the rhetoric of the day that the neoliberal age included the New Labour spending rounds and the expansion of Medicare under George W Bush.I sense the elites (in whom the guilt reflex is strong) never psychologically recovered from the populist electoral breakthroughs of the last decade. They feel remorseful about the globalism they authored. They have tired of the old Ricardian verities: that workers are also consumers and taxpayers, that protectionism can hurt them in unseen ways. You hear sensible people attribute to “neoliberalism” the 2008 crash but not the long economic expansion that preceded it. No, that just fell off a tree. This is a profound intellectual conquest by populists. And its saddest outcome is the turn against trade. A British premier was once said to be “in office but not in power”. Look around. Trump has performed the reverse feat. [email protected] More

TOKYO (Reuters) -Japan raised its estimates for long-term interest rates over the coming few years in government’s twice-yearly fiscal projections issued on Tuesday, following the central bank’s decision last month to allow 10-year bond yields to move more widely.Higher rates will test the government’s ability to service the industrial world’s heaviest debt burden at more than double the size of Japan’s annual economic output.While a decade of aggressive monetary stimulus under Bank of Japan Governor Haruhiko Kuroda did little to economic growth, which averaged around 1% over that time, it has kept the government’s borrowing costs at rock-bottom.Now the government sees Japan’s primary budget surplus in fiscal 2026, although that surplus would “come into sight” in the next fiscal year if it strives to streamline government budget spending.”It’s not easy to realise it at a time when uncertainty heightens,” Prime Minister Fumio Kishida told a meeting of his 11-member top economic advisory panel – Council on Economic and Fiscal Policy – which includes Kuroda.”We will strive to achieve both economic revival and fiscal reform so as not to lose markets’ and global community’s confidence in our medium- to long-term fiscal sustainability.”ECONOMIC GROWTH, FISCAL REFORMUnder its latest projections, Kishida’s government looks to achieve a primary budget surplus – excluding new bond sales and debt-servicing costs – in the fiscal year to March 2026.The government, which has missed budget-balancing targets for a decade, would miss it again due to increased defence budget, leaving a shortfall of 1.5 trillion yen ($11.56 billion) in fiscal 2025, up from 500 billion yen seen previously.The debt-to-GDP ratio will peak at 217% in fiscal 2022, before steadily declining over the forecast period through fiscal 2032, based on rosy assumptions that the economy will grow by 2% per year.Assuming the baseline scenario of zero growth, the debt-to-GDP ratio is expected to turn upward in the latter half of the forecast period.Long-term rates are expected to rise from 0.3% seen this fiscal year to 0.4% in 2023-2025 before climbing eventually to 3.1% in fiscal 2032, the projections showed. The projections show that a 0.5 percentage-point rise in long-term rates would add 3.3 percentage points to the debt-to-GDP ratio.In comparison, the previous estimates issued in July showed long-term rates steady at 0.1% in fiscal 2022-2025.”We see underlying interest rates to be somewhat higher, which will cause outstanding government debt to deviate upward due to the BOJ’s move last month,” a Cabinet Office official said. ($1 = 129.8000 yen) More