Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Interest payments are swallowing the biggest portion of rich nations’ economic output since at least 2007, outstripping their spending on defence and housing, according to figures from the OECD. Debt service costs as a percentage of GDP for the 38 OECD countries climbed to 3.3 per cent in 2024, a sharp rise from 2.4 per cent in 2021, according to the group’s Global Debt Report on Thursday. In contrast, the World Bank estimates that the same group spent 2.4 per cent of GDP on their militaries in 2023. Interest costs were 4.7 per cent of GDP in the US, 2.9 per cent in the UK and 1 per cent in Germany.Borrowing costs have risen in recent months as bond investors brace for persistent inflation in large economies and rising issuance as many governments expand spending on defence and other fiscal stimulus policies. The OECD warned that the double hit of rising yields and growing indebtedness risked “restricting capacity for future borrowing at a time when investment needs are greater than ever”. It highlighted a “difficult outlook” for global debt markets. Sovereign borrowing among the high-income group of countries is expected to reach a fresh record of $17tn in 2025, compared with $16tn in 2024 and $14tn in 2023, according to the OECD report. This wave of debt issuance has fuelled concerns over sustainability in countries such as the UK, France and even the US. The large debt burden itself was “not negative”, said Carmine Di Noia, the OECD’s director for financial and enterprise affairs. But a lot of the borrowing over the past 20 years had been spent on recovering from the 2008 financial crisis and the Covid-19 pandemic, he added, arguing that “now there are needs to shift from recovery to investment”, such as spending on infrastructure and climate projects. “Borrowing must increase growth” so that governments can eventually be “stabilising and actually reducing the debt-to-GDP ratio”, said Di Noia. But the picture is complicated by higher bond yields, which make it more expensive to refinance existing debt.The report noted that almost 45 per cent of OECD sovereign debt would mature by 2027. “There has been a lot of issuance in favourable conditions,” said Di Noia, adding that those conditions have altered for the worse.Adding to the expensive debt-servicing conditions was a changing profile of holders of sovereign bonds, the OECD said. As policymakers unwind emergency bond-buying programmes, central bank holdings of government bonds have fallen by $3tn from their 2021 peak and are expected to fall by another $1tn this year. This means that private investors — whom Di Noia said were “more price sensitive” — will be making up the difference. The sensitivity left issuers open to more volatility and made them more exposed to “heightened geopolitical and macroeconomic uncertainty”, he added. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. The new European defence fund says it will only buy weapons from EU sources, or from countries with defence agreements with the bloc. This strikes us as sensible from the European point of view but, as believers in global capitalism, it makes us despair a bit. Email us and tell us how we ought to feel: robert.armstrong@ft.com and aiden.reiter@ft.com.The Fed’s outlook and the market’s responseThe market liked what it heard from Jay Powell and the Federal Open Market Committee yesterday. No one was doing cartwheels, but stocks, which had been enjoying a solid day before the statement and the press conference, rose further afterward, though enthusiasm waned a bit at the end of the day. Treasury yields fell — the two year by three basis points, then the 10-year by one. A dovish meeting, then?Not really. It’s easy to imagine a world in which investors listened to what the bank had to say yesterday and didn’t like it one bit. The committee reduced its outlook for growth meaningfully, increased its outlook for unemployment by a hair, and bumped up its inflation outlook, too. Here are the median numbers as presented in the Fed’s summary, with arrows added by Unhedged:There is a word for this sort of thing, and it is a bad word: stagflation. Not that the Fed is forecasting a bad case of the big S, but still, expectations are trending the wrong way on both sides of the central bank’s mandate. And the Fed was clear about the reason for this: the sharp decline in investor, business and consumer sentiment precipitated largely by worries about the Trump administration’s policies, particularly tariffs.Yes, the projection for interest rate policy stayed the same. But that projection is an average, and it conceals a move towards tighter policy. Trim the three highest and lowest individual estimates and the “central tendency” expectation for policy went from a range of 3.6-4.1 per cent to 3.9-4.4 per cent. That’s not nothing. In the press conference Powell drew attention to committee members’ rising uncertainty about their projections — uncertainty that is not just higher, but asymmetrical and almost entirely on the side of slower growth and higher inflation. Below is the Fed’s chart of committee members’ uncertainty about the unemployment rate (relative to historical levels) and which side they place it on:This is all a bit spooky. So why the unruffled market response? There are a few possibilities:The Fed delivered a message the market had already received. The market knew the policy worries have increased the risks to growth and inflation.There was relief that the Fed didn’t really show its teeth on the inflation risk posed by tariffs. Powell took a measured tone, emphasising that it might be appropriate to look through tariff-induced price increases so long as long-term inflation expectations stay under control. This is not a central bank looking to pick a fight with the executive branch.The market, desperate for good news after a bruising month, has decided to anchor its attention on the unchanged interest projections, to the exclusion of all else.We leave it to readers to decide their own weighting among those three. The end of QTThe Fed surprised the market yesterday by announcing a dramatic slowdown to the pace of quantitative tightening: a change from allowing $25bn of securities to roll off the balance sheet each month to just $5bn. It is not surprising that QT is coming to an end; by most measures, we are close to the Fed’s goal of “ample”, but not abundant, bank reserves.Most forecasts from the end of last year suggested that QT would end sometime in the first half of the year, likely in June. The picture has changed since then — the minutes from the January FOMC meeting showed that the Fed governors were considering ending QT earlier than planned if there were “swings in reserves over coming months related to debt ceiling dynamics”. Even so, analysts we spoke with before the meeting suggested sunsetting QT would start in May, not March. Yesterday, chair Powell said the slowdown was just part of the normal course of QT and did not reflect concern over the debt ceiling. That’s a different message from the notes of the January meeting. And such concern would be justified: the debt ceiling, or the limit to what the US can borrow to fund ongoing deficits, was reinstated at the start of this year, after a two-year suspension. Until the debt limit is raised or suspended again, the Treasury cannot issue net new debt. Instead, it is spending down its $414bn account at the Fed.The clock is ticking. Even with new tax revenue, the Treasury is set to run out of money “sometime this summer, potentially August”, according to Brij Khurana at Wellington Management. After that, the Treasury will need to take “extraordinary measures” to keep the US government from defaulting.Congress will most likely raise the debt ceiling before that happens — though there will almost certainly be political theatrics around doing so. After that the Treasury will need to issue new debt to rebuild its coffers. If that were to coincide with QT, there would be a double strain on financial system liquidity that the Fed would want to avoid, says Guneet Dhingra, chief US rates strategist at BNP Paribas:When the Treasury is running down its cash balance, that adds liquidity to the [banking] system. But when the Treasury rebuilds its cash balance [by issuing more Treasuries], that money goes from the banking system back to the Treasury’s Fed account. That draws liquidity from the banking system. QT is also taking liquidity from the system.The Treasury did issue new debt in 2022 when QT was in full swing. But at that time there was more liquidity and more sources of liquidity (such as funds in the reverse repurchase programme). If QT and a burst of new Treasury issuance had occurred simultaneously, a liquidity crunch may have threatened.The slowdown of QT is welcome news for the market. Equities appreciate the added liquidity. And, though the effect of QT and QE on Treasury yields is likely small, all else equal the end of QT should slightly reduce Treasury yields too.We are happy to take Powell at his word. But it just so happens that slowing QT will take some pressure off during what might be a tense summer on Capitol Hill and in the financial system. Some Republicans are focused on the national debt, while most Democrats are looking for ways to push back against Trump. That raises the risk of fiscal brinkmanship as Congress decides what to do about the debt ceiling. Best to take risks off the table where you can.(Reiter)One good readBros.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is chief market strategist for Europe, Middle East and Africa at JPMorgan Asset ManagementIs this the beginning of a period of European exceptionalism in markets? Six months ago, most investors would have thought the idea absurd, even more so once Donald Trump was re-elected to the White House and on a mission to Make America Great Again. But in euro terms, the MSCI Europe index is up 9 per cent in the year to date compared with the S&P 500’s decline of 9 per cent. Investors are questioning whether the tide is turning. It may well be. Europe’s decade of equity market underperformance was caused by relative macroeconomic weakness, and the “wrong” sectoral composition. Let’s take these in turn. Naysayers will argue Europe’s economic problems are structural. Demographics aren’t conducive to strong growth and Mario Draghi, in his paper on Europe’s competitiveness, did a super job of highlighting the problems that come from the continent’s fragmentation.However, there is another part of the region’s underperformance that is often overlooked. That is, for the past decade, Europe has been kept on a very tight rein in all aspects of policy — fiscal, monetary and regulatory.Here are some statistics to demonstrate this point. In the past decade, the US government has been showering its economy with cash: subsidies and tax cuts for companies and, quite literally, cheques in the post for households. As a result, government debt as a per cent of GDP has risen by 17 percentage points. By contrast, in the Eurozone, government debt as a per cent of GDP has fallen by 5 points.Monetary policy also played a critical part in the relatively weak period post-pandemic. Though the Federal Reserve also raised interest rates to combat inflation, the impact on US households and businesses was limited by the fact that the vast majority of mortgage borrowers were protected by long-term contracts, locked in at low interest rates. By contrast, Europe’s borrowers still largely rely on floating rate interest rate loans provided by their local bank. Statistical measures that capture these financial conditions show barely any restrictiveness in the US, but in the Eurozone and UK, financial conditions have been tighter in the past two years than at any point in the past 15 years.Some content could not load. Check your internet connection or browser settings.Finally, one also has to consider regulatory policy. Regulations to combat climate change have soared in recent years to drive companies towards broader net zero targets. Adding to these macroeconomic woes, Europe’s stock markets were short of the tech stocks that were much in favour, as artificial intelligence excitement grew, and overweight in the financial stocks.Viewed through this lens, one can see how the tide is turning. The adversarial stance of Trump has galvanised the region into action. Fiscal policy is being loosened, and not only in the area of defence. Germany’s €500bn infrastructure package alone is a boost of 1 per cent of the country’s GDP annually over the next decade. Monetary policy is also easing. It looks likely that real interest rates will soon be back close to zero in the Eurozone and the UK. This is already spurring loan growth. And, finally, regulatory stipulations are easing in areas such as climate change policy.Some content could not load. Check your internet connection or browser settings.While all this should boost confidence and fuel the recovery, it could be offset by a wave of US tariffs and a worsening situation in Ukraine. But one also has to overlay this macro view with an assessment of the outlook for key equity sectors, particularly US technology. The last significant period of European equity outperformance, relative to the US, was 2000-09, coinciding with the long and painful bursting of the US tech bubble in the 2000s.It is not obvious that US tech stocks are destined for the same fate this time around. The companies that have driven US returns in recent years have been producing fantastic earnings, and most have considerable cash on their balance sheets. But these companies are at that tricky stage of having to live up to the AI hype and deliver a high return on the massive amounts of investment they have been deploying.Despite recent relative performance, most European stocks still trade at a heavy discount to their US counterparts. The points I’ve made above therefore do not, to me, appear to be in the price yet. Investors that have focused on passive investing should be particularly wary, given the weight of the US in the global MSCI ACWI benchmark has increased from 42 per cent in 2009 to 66 per cent today. This recent European outperformance might not be over, and investors should continue to think about whether such a large overweight to US equities is the right set-up for the decade ahead. More

Stay informed with free updatesSimply sign up to the More

Stay informed with free updatesSimply sign up to the More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The UK government needs to be “more ambitious” in its negotiations with the EU in order to boost the country’s flagging goods exports, the head of the UK’s largest business organisation has warned.Shevaun Haviland, director-general of the British Chambers of Commerce, said she would keep pushing the government to build on the warm words of recent diplomatic exchanges on resetting UK-EU relations to deliver material improvements for exporters. “We feel like the mood music is moving in the right direction. That’s good, but it’s not even nearly enough,” she told the Financial Times ahead of the BCC’s international trade conference in London on Thursday.Haviland said the BCC would be looking to “apply pressure” on the government by hosting a meeting of UK and EU business and political leaders ahead of the EU-UK summit on May 19 that will formally kick off the reset process.“We absolutely want them to be ambitious . . . they need to set the ambition high and move quickly with a clear timeline.” Her intervention comes as Prime Minister Sir Keir Starmer’s government is in the midst of a delicate negotiation with Washington to try to avoid the “reciprocal tariffs” due to be imposed by President Donald Trump from the start of April.UK foreign secretary David Lammy will address the BCC’s conference and warn that Britain must grapple with broader economic flux. The “multilateral rules and institutions which were built to manage the global economy are not just facing challenges, they are under threat”, he will say, citing international climate finance and trade dispute resolution as crucial areas of dysfunction.Declaring the “laissez-faire approach to globalisation, which ruled from 1989 to 2008” to be “dead and buried”, he will say he has instructed the Foreign Office to “turbocharge” economically beneficial relationships, including with the EU, US and China — which account for two-thirds of Britain’s external trade — but also deepen partnerships with markets such as Japan. The move dovetails with wider reforms under way at the Foreign Office, including the creation of a departmental delivery board that will set hard targets for ambassadors and senior managers on trade and investment, migration and national security. Lammy is also planning to restructure the department, significantly boosting the UK’s diplomatic headcount overseas while reducing it in London. Haviland said that the government must keep a “cool head” with Washington while doing more to back British exports around the world that have underperformed both EU and other G7 economies since the Covid-19 pandemic. “The government needs to put more money into export support,” she said. “The government looks at it as a cost, but we’re telling them that it’s a return on investment because businesses that trade are more resilient, last longer, pay better and they pay more tax.” A 2024 study by Aston Business School estimated that UK exports to the EU were 17 per cent lower than if Brexit had not occurred, a hit acknowledged by Cabinet Office minister Nick-Thomas Symonds in a speech in Cambridge last week on the EU-UK reset.However, the government has said it will stick to its manifesto “red lines” on not rejoining the EU single market, entering a customs union with the EU or agreeing a youth mobility deal that would allow 18- 30-year olds on both sides to live and work in each others’ countries for two to three years.Haviland said the BCC continued to press the government to take deeper measures to improve trade, including joining the Pan-Euro-Mediterranean customs area, removing safety and security declarations for goods and seeking a deal to improve professional mobility.“We were with a chocolate business the other day. It exports to 50 different markets. It takes two days to get product to the US and sometimes it takes two weeks to get to France and Spain — still,” she added. More

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome back to FirstFT Asia. In today’s newsletter: Trump’s policies weigh on the Fed’s outlookWhy China delayed BYD’s Mexico plantGoldman’s succession plans The Federal Reserve has slashed its US growth forecast and lifted its inflation outlook, underscoring concerns that Donald Trump’s tariffs will knock the world’s biggest economy.The Fed’s latest set of projections showed officials now expect GDP to expand by 1.7 per cent this year, with prices forecast to rise by 2.7 per cent. Policymakers kept the central bank’s main interest rate on hold yesterday.Fed chair Jay Powell acknowledged to reporters after the meeting that the US president’s plan to hit trading partners with sweeping tariffs had affected the central bank’s outlook for inflation and the economy.“Clearly some of it, a good part of it,” was related to the impact of Trump’s tariffs, Powell said, adding that they “tend to bring growth down and push inflation up”. He also said progress on inflation was “probably delayed for the time being”.The Fed’s new forecasts “signalled essentially that we are in a stagflation economy, with lower growth and higher inflation”, said Torsten Slok, chief economist at investment firm Apollo. Here’s what that means for US rate-setters. Read more news from a busy day in central banking:Japan: The Bank of Japan held interest rates as the rising risk of a global trade war and potential downturn in the US weighed on Japan’s hope for a sustained economic revival.Indonesia: The south-east Asian nation’s central bank intervened “boldly” in the foreign exchange market as the rupiah hovers close to five-year lows amid concerns over a sluggish economy.For more insight into what rate-setters are thinking, sign up for our Central Banks newsletter by Chris Giles if you’re a premium subscriber, or upgrade your subscription here.Here’s what else we’re keeping tabs on today:Economic data: Hong Kong reports February CPI inflation data and Australia publishes labour force figures for the month.Monetary policy: The People’s Bank of China announces its loan prime rate decision. Olympics: The International Olympic Committee will vote on a new president — the most powerful position in global sport.Results: CK Hutchison Holdings and China Mobile report 2024 full-year results.Five more top stories1. Turkish police have detained Istanbul’s mayor Ekrem İmamoğlu, the main political challenger to President Recep Tayyip Erdoğan, as the government’s sweeping crackdown on the opposition intensified. The Republican People’s party was set to name İmamoğlu, one of the country’s most popular political figures, as its presidential candidate on Sunday.2. China is delaying approval for carmaker BYD to build a plant in Mexico, after plans were first announced in 2023. People familiar with the matter said Beijing was worried that the smart car technology developed by China’s biggest electric-vehicle maker could leak across the border to the US. 3. President Donald Trump proposed that the US take over Ukraine’s nuclear power plants in a phone call with Ukrainian President Volodymyr Zelenskyy yesterday. Zelenskyy also agreed to back an American proposal to halt strikes on Russian energy infrastructure. Read more about their call.Israel-Hamas war: Israel has started a new ground operation in Gaza, reclaiming territory it ceded as part of a now-shattered ceasefire.Go deeper: How Trump’s peacemaking ambitions in Ukraine and the Middle East unravelled.4. China’s Hesai has denied short-seller allegations that the company misled investors over financial reporting and alleged ties to the People’s Liberation Army. Shares in the world’s biggest maker of laser sensors for EVs slid on Tuesday after Texas-based Blue Orca Capital released a report alleging the tech group was “dishonest” in insisting it was not involved with the Chinese military.5. Semiconductor materials group JX Advanced Metals surged on its first day of trading after raising $3bn in Japan’s biggest IPO in almost seven years. The listing served as a test of investor appetite for chip-related stocks amid a tech sell-off in recent weeks.The Big ReadGoldman chief executive David Solomon and his lieutenant John Waldron More