Economy

European consumers have begun to cut back on discretionary spending as rising energy bills and interest rates push up the cost of living, in the latest evidence of the mounting strain on the region’s economy.Car sales, box office revenues and hotel bookings are all falling, according to high-frequency data indicators, while consumers have rapidly scaled back plans to make major purchases. Although the overall amount spent by consumers has continued to rise in recent months, the quantity of goods purchased is falling as inflation bites, sales data show.Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said: “Consumers are tightening their belts, preserving income for heating and other necessities.”Alternative data have become widely watched since the start of the coronavirus pandemic as they offer a more timely gauge of activity than official data, although they are less comprehensive and reliable.Consumer sentiment has dropped sharply as economists warn that many European countries face recession. Despite this, the European Central Bank is persisting in raising interest rates to tackle raging inflation. This week, it imposed a 0.75 percentage points rise, though its president Christine Lagarde insisted policymakers were not “oblivious” to the risk of a recession.European consumers are “absolutely feeling the purchasing power squeeze”, said Bert Colijn, an economist at ING. “Clearly, the consumer has to make choices about what to spend on.”Debono expects eurozone consumption to decline again in the final quarter of this year “as the squeeze on households’ real income forces them to save more and forego some spending to ensure enough funds for heating this winter”.This is despite incoming fiscal support in some countries, particularly in France, where real incomes will get a boost from rising social transfers and a higher minimum wage. The outlook is similar in the UK. Maxim Rybnikov, economist at rating agency S&P, expects “consumer spending to contract over the next few quarters, leading the broader UK economy into a moderate technical recession”.Nathan Sheets, global head of international economics at Citi, anticipates a series of “rolling recessions” with downturns in the euro area and the UK late this year and in the US in mid-2023.The economies of Germany, France, the US and Spain continued to expand in the third quarter, but France’s growth was driven by investment, while household consumption stagnated. Spain’s consumer spending was still more than 5 per cent below its pre-pandemic levels.The third quarter’s growth was “the last hurrah of the summer tailwinds”, said Tomas Dvorak, an economist at Oxford Economics. Timelier indicators show economic activity in the eurozone is slowing sharply and the “bloc will slide into a recession over the winter”, he warned.Major purchases on holdEuropean consumers’ intentions of spending on major goods, such as cars and houses, are at their lowest levels for two decades, excluding the early months of the pandemic.Cutting back on funDiscretionary spending is the most easily cut. In September and October, spending in cinemas in Germany, France, Italy, Spain and the UK dropped 59 per cent below the pre-pandemic norm, defined as the same period in 2019. Hotel bookings were lower in October than throughout the spring and the summer, relative to 2019 levels, according to travel industry company Sojern. Similarly, AirDNA, which tracks short-term lets via Vbro and Airbnb, found that momentum “paused” in September, with the number of nights falling back below pre-pandemic levels after topping that level in the summer. Nights booked for future travel also declined.Spending more for lessWith inflation high, consumers are getting less for their money. In August, overall EU consumer spending was 9 per cent higher than the same period last year but the quantity of goods purchased was 1 per cent lower. Similarly, in September UK shoppers spent 4 per cent more than the previous year for 7 per cent less in quantity.Off the roadIn the UK, automotive fuel sales volumes fell by 1.3 per cent in September. Car sales in western Europe were down nearly one-third in the 12 months to September, compared with the same period in 2019.Low energyThere is some evidence that consumers are responding to rising energy costs by cutting back on fuel use. In the week to October 22, gas consumption in Germany, France and Italy fell to 15 per cent below the 2017-2021 average, according to an analysis of ENTSO-E data by Barclays.Mark Cus Babic, European economist at Barclays, said the decline “likely reflects efforts by European governments to curb consumption, demand destruction due to higher prices and more recently higher temperatures”.

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In 2015, following several false alarms that prices would take off, former US Treasury secretary Lawrence Summers said the Federal Reserve should not raise interest rates until they had seen “the whites of inflation’s eyes”. Now, with inflation near 40-year highs across the developed world, central bankers are instead worried about easing off monetary tightening before there is firm evidence that price pressures are waning. They are right to be wary of high inflation becoming entrenched. But as interest rates climb, they face an increasingly challenging balancing act as the risks of deeper economic downturns and financial market ructions are also mounting. Despite central banks increasing interest rates this year with a synchronicity not seen in the past five decades, inflation in advanced economies has remained stubbornly high. Looser fiscal policy and, outside the US, weaker currencies have added to existing price pressures — including from labour shortages, high energy and food prices, and choked-up supply chains. The US and British central banks are both expected to deliver hefty rate rises in meetings in the coming week. The European Central Bank on Thursday raised its deposit rate to its highest since 2009. With inflation running at four to five times target rates, central banks will need to push up the cost of credit further yet. The longer inflation remains elevated, the greater the likelihood of high prices becoming hard-wired into expectations, driving wages and prices up further. Indeed, some measures of medium-term household and business inflation expectations in the UK, eurozone, and US are still above the 2 per cent target. Central bankers are also aware that attempting to row back from a high-inflation regime, once entrenched, would require a more aggressive and costlier tightening. And while energy and supply chain price pressures have eased recently, upside risks remain.Yet as monetary policy has become more restrictive, calls have grown for central banks to ease off amid rising recession risks. Higher rates are already curbing demand: corporate borrowing conditions have tightened, mortgage repayments costs are increasing and there are nascent signs that labour markets are cooling. There is a risk central banks go too far; turning a slowdown into a crash. That could mean a wave of business insolvencies, steep falls in house prices and higher joblessness.After a decade of low interest rates and ample liquidity, there are also warning signs that the rapid rise in rates — and planned shrinking of bloated central bank balance sheets — may upset financial stability. Recent upheavals in UK pension funds demonstrated just how volatile markets are. Meanwhile, strains have been building in the US Treasury market and, in the eurozone, rising rates are adding pressure to peripheral sovereign bond spreads. Setting monetary policy is far from an exact science, but right now the risks of both over- and under-tightening are amplified, particularly as economic uncertainty is also high. Central bankers need to judge how quickly higher rates are passing through to the real economy and the knock-on impacts of central bank actions elsewhere. Gauging policy is even harder as governments try to cushion economies against high energy costs — and as geopolitical tensions rise.Central banks need to stay focused on bringing inflation down. But they will have to tread with ever more care, keeping a firm eye on brewing economic and financial market risks. Above all, they need to be wary that by trying to mitigate the risk of high inflation becoming endemic, they do not unwittingly unleash a whole new set of threats. More

What will the Fed signal about the future path of rate rises? At its November policy meeting next week, the Federal Reserve is widely expected to announce a fourth consecutive 0.75 percentage point increase in interest rates. This would bring its key rate to 3.75 to 4 per cent, the highest since December 2007. The futures market has nearly fully priced in the likelihood of that 0.75 rise. What’s less certain is what Fed chair Jay Powell will signal about rate increases going forward. As the global economy has slowed and inflation appears to have peaked, some believe the Fed is more likely to moderate the pace of its tightening. Investors in the futures market are betting on higher odds that a 0.5 percentage point increase in rates will be announced at the final meeting of the year in December.The Fed has been clear about its commitment to stamping out inflation at all costs, indicating that it is unlikely to loosen monetary policy until inflation has reapproached its 2 per cent target. But a less aggressive approach may be imminent as the US central bank’s vision is being questioned by politicians and investors among others, who fear the possibility of a Fed overcorrection that will compress the US — and potentially even the global — economy. There have already been signs of a slowdown in housing in the US as well as big dips in earnings and forecasts this quarter. Third-quarter GDP released Thursday showed that the US economy had expanded in the latest three-month period, but the headline figure masked indications of weaker domestic consumer demand. Kate DuguidHow aggressively will the BoE raise rates?The Bank of England is expected to raise rates by the largest amount in 33 years next week as it fights the highest inflation in four decades.Economists polled by Reuters on average expect the bank to increase its key rate by 0.75 percentage points from its current level of 2.25 per cent. The last time it increased rates by more than 0.5 percentage points was in 1989.Imogen Bachra, head of UK rates strategy at NatWest expects a 0.75 percentage point increase and explained that “although the government has reversed three-quarters of its “mini” Budget tax cuts, about £15bn survived the cull and this will probably be sufficient to elicit another step-up in the pace of policy tightening.”She added that with trade-weighted sterling 3 per cent below August Monetary Policy Report levels, the Bank also has some additional imported inflation to counter.Some economists have revised down their rate increase expectations from one percentage point to 0.75 percentage points following the decision to postpone the Treasury’s Autumn Statement to November 17, which means the fiscal outlook will be based on lower borrowing costs.However, Dani Stoilova, economist at BNP Paribas noted that a large increase is justified by the labour market which remains “extremely tight” and a persistent inflation shock that increases the risk of more permanent high inflation.However, she said the case for a one percentage point increase has reduced as “monetary and fiscal policy are no longer pulling in opposite directions.”Markets expect the tightening cycle to continue beyond November with the policy rate rising to 4 per cent in February and exceeding 4.5 per cent by May next year. Valentina RomeiWill eurozone inflation data top estimates?Inflation in the eurozone has consistently outstripped expectations for much of this year and it looks likely to do so again on Monday when price growth data for the single currency zone are released.Germany, France and Italy all reported hotter than expected inflation data for October on Friday, prompting several analysts to raise their forecasts for overall price growth in the 19-country euro area. Monday’s data will be a crucial input into the debate about how soon inflation is likely to peak and allow the European Central Bank to take its foot off the pedal on interest rate rises. Economists polled by Reuters were on Friday expecting eurozone inflation to dip slightly in October to 9.8 per cent down from the record high of 9.9 per cent it hit a month earlier. But several economists lifted their forecasts after stronger than expected national pricing data on Friday. Marco Valli, global head of research at Italian bank UniCredit, predicted the eurozone figure would rise to 10.3 per cent, while Goldman Sachs forecast 10.9 per cent.“Signs that underlying inflationary pressures are continuing to build suggest the bank will ultimately have to push rates into restrictive territory,” said Franziska Palmas, an economist at Capital Economics.Eurostat will on Monday also deliver third-quarter gross domestic product figures, expected to show growth slowing to 0.2 per cent, versus 0.8 per cent in the previous quarter. Growth is another factor closely watched by ECB rate-setters that could also surprise on the upside after the German economy defied recession fears by growing 0.3 per cent in the period. Martin Arnold More

Goldman Sachs Chief Executive Officer David Solomon last week said the U.S. Federal Reserve could hike rates beyond 4.5-4.75% if it does not see “real changes in behaviour.”Federal Reserve’s next meeting could shed light on how long it will stick to the aggressive monetary policies.Goldman’s economists added that the journey to 5% hike includes increases of 75 basis points this week, 50 basis points in December and 25 basis points in February and March, the report added.The report said Goldman cited three reasons for expecting the Fed to hike beyond February -an “uncomfortably high” inflation, the need to cool the economy as fiscal tightening ends and price-adjusted incomes climb, and avoiding a premature easing of financial conditions.Goldman Sachs did not immediately respond to a Reuters’ request for comment.The central bank is expected to raise rates by 75 basis points for a fourth straight time at the conclusion of its next policy meeting on Nov. 1-2.Betting on a less hawkish Fed has been a dangerous undertaking this year. Stocks have repeatedly rebounded from lows on expectations of a so-called Fed pivot, only to be crushed anew by fresh evidence of persistent inflation or a central bank bent on maintaining its pace of rate increases. More

“We will keep liquidity reasonably ample, increase credit support to the real economy,” Yi was quoted by a central bank statement as saying during a parliament session on Friday.”Going forward, China has the conditions to maintain a normal monetary policy as long as possible and maintain the stability of the currency’s value.”China’s economy rebounded at a faster-than-anticipated clip in the third quarter but a more robust revival in the longer term will be challenged by persistent COVID 19-related curbs, a prolonged property slump and global recession risks.The central bank will keep the yuan basically stable while enhancing its flexibility, Yi said.The central bank will make 200 billion yuan ($27.6 billion)in special loans to ensure the delivery of stalled housing projects, Yi said. The scheme was announced by authorities in August but they did not give specifics.China will properly resolve financial risks in the real estate sector and guide financial institutions to meet property developers’ demand for financing, within reason, Yi said.Yi also reaffirmed that China will further enhance financial supervision and prudently curb financial risks. Between 2017 and 2021, China disposed of non-performing assets in the banking sector worth more than 12 trillion yuan, he said.($1 = 7.2499 Chinese yuan renminbi) More

BEIJING (Reuters) – He Lifeng, head of China’s state planning agency, is likely to succeed the country’s economic tsar Vice Premier Liu He in March, but may struggle to maintain his predecessor’s policy clout.He, 67, a confidant of President Xi Jinping, was elevated to the ruling Communist Party’s Politburo during its once-every-five-years congress this month. That paves the way for He’s expected promotion as the 70-year-old Liu is due to step down in March.The top priority for He will be to help Li Qiang – another Xi ally, tipped to become the new Premier in March – to pull the world’s second-largest economy out of its worst downturn in decades amid disruptive COVID-19 curbs and a prolonged property crisis.The departing Liu, Xi’s top economic adviser and a childhood friend, holds an unusually powerful portfolio: it covers economic policy, the financial sector and trade ties with Washington, overshadowing the role of outgoing Premier Li Keqiang.Xi, who secured a precedent-breaking third term as president at the party conclave, may want to restore some of the premiership’s previous power under the incoming Li Qiang. Some analysts say part of the expanded role that Liu built up during his time as economic tsar could be taken over by other top officials. “If He Lifeng does indeed get the job, his portfolio will overlap with that of the new Premier, Li Qiang,” Julian Evans-Pritchard at Capital Economics said in a note. “It remains to be seen who will have more influence in practice.”Liu, who has been vice premier since 2018, is seen by China watchers as the brains behind earlier reforms, including those to reduce excess factory capacity and financial risks. The Harvard-trained economist was also Xi’s point person on trade negotiations with Washington, thanks to his international experience and fluent English.He Lifeng, a home-groomed economist and bureaucrat with close Xi ties, had worked for 25 years in Fujian province before moving to the northern municipality of Tianjin in 2009. His track record suggests he is likely to favour a more statist approach to economic management, Evans-Pritchard said. Serving under Xi in Fujian in the 1980s, He attended Xi’s wedding ceremony when he married his second wife, the popular singer Peng Liyuan, sources have said. In 2014, He was named vice head at the National Development and Reform Commission – the state planning agency – before taking full control in 2017. Since then He has joined Xi on domestic tours, diplomatic meetings and other engagements. The expected departure of pro-reform officials, including Liu, top banking regulator Guo Shuqing and central bank chief Yi Gang, has raised concerns over the quality of policymaking as officials become increasingly focused on displays of loyalty to Xi and less on governance and economic performance.”The chance of making policy mistakes will be greater if officials only talk about politics and do not follow economic rules,” a policy source said, speaking on condition of anonymity. More

Decoupling global supply chains will be “very complicated, expensive and time-consuming”, one of the world’s leading chipmakers has warned, as rising US-China tensions threaten to worsen a sharp market downturn.Lorenzo Flores, vice-chair of Kioxia, said in an interview with the Financial Times that the Japanese company was analysing the impact of the latest US export controls. The challenge, he added, was the uncertainty of how Beijing would retaliate against Washington’s moves to hamper its efforts to manufacture advanced semiconductors. Washington’s controls have specifically targeted Kioxia’s Chinese rival Yangtze Memory Technologies. The company has had to ask American employees in core tech positions to leave the company as it rushes to comply with the export controls.“We’ve always viewed YMTC as a company that one needed to monitor or understand, and they were potentially an emerging competitor,” Flores said, noting that the Chinese company had “leapfrogged” in technology after lagging behind bigger global rivals.Analysts have suggested Nand flash memory makers that compete directly with YMTC, such as Kioxia and Micron in the US, might benefit from the US restrictions. However, China is also expected to accelerate the development of domestic capabilities, which could pose a threat to Kioxia in the long term. Kioxia, a spin-off of Toshiba’s chip unit, mainly manufactures its flash memory chips in Japan, but Flores said decoupling supply chains from China would be an expensive effort for the semiconductor industry and it would not “happen in six months or a year”.“Whether [decoupling] is an imperative or not, I don’t know. The prudent thing to do is to look for ways to de-risk your own supply chain and increase your competitiveness simultaneously. The logical alternative is [the] friendshoring approach,” he said, referring to the term for building supply chains with like-minded countries.The comments came as Kioxia said it would spend ¥1tn ($6.8bn) on its new No 7 chip fabrication plant at its main Nand production facility in Yokkaichi, western Japan, despite a sharp drop in demand for electronic devices, which has forced the company to cut wafer production by 30 per cent.“The market conditions are severe and we don’t know how deep and how long they will last,” Kioxia’s chief executive Nobuo Hayasaki said at the unveiling of the No 7 plant on Wednesday. “But we do not think demand will continue to fall so that’s why we need to prepare for the future.”

South Korea’s SK Hynix has also warned of “unprecedented” slowing demand for chips, but Flores said he still saw the slowdown as part of a cycle. He added that the falling demand was driven by worries about the global economic outlook, built-up inventories caused by the Covid-induced supply chain disruptions and uncertainty about the US export controls against China.The tough market conditions have also forced Kioxia to delay its share-listing plans.According to people close to the discussions, the company is in talks for a merger with its longtime manufacturing partner Western Digital as Washington and Tokyo have backed the creation of a US-Japanese chip champion in light of economic security concerns.“The IPO is not the end. It is a step,” Flores said, acknowledging the need for scale to compete in the investment-heavy semiconductor industry. More

Tunisia this month reached a preliminary agreement with the International Monetary Fund (IMF) for a $1.9 billion rescue package that could be finalised in December.Tunisia has been in need of international help for months as it grapples with a crisis in public finances that has raised fears it may default on debt and has contributed to shortages of food and fuel.The IMF agreement is also critical to unlock bilateral aid from country donors that want reassurance Tunisia will put its finances on a more sustainable footing.The reforms are expected to include reducing food and energy subsidies, in addition to reforming public companies and reducing public sector wages in real terms, according government officials.‮”‬In times of crisis, we find serious solutions. We did not take difficult reforms for years. During this period, we will,‮”‬ Marouan Abassi, the central bank governor, told reporters.He added that Tunisia aimed to keep the dinar stable and to give clarity to investors.Opposition politicians and Tunisia’s powerful UGTT labour union have warned of a “social explosion” if painful reforms are implemented. More