Economy

SYDNEY (Reuters) – Australia’s improved fiscal outcomes from a strong economy and high commodity prices underpin its AAA sovereign rating, S&P Global (NYSE:SPGI) said on Tuesday, after the new labour government unveiled its first budget.”We believe the budget won’t greatly add to inflationary pressures. The budget reprioritizes previously allocated funding to the new government’s policy agenda and limits new spending in the immediate future,” Anthony Walker, a Director at S&P Global Ratings, said. More

WASHINGTON (Reuters) – Charles Evans and James Bullard are the U.S. Federal Reserve’s longest-serving monetary policymakers, a pair of PhD economists who’ve been at the center of central bank debates through two acute crises and often approached the job from markedly different perspectives. Where Evans, president of the Chicago Fed, calls himself a “hopeless romantic” about the longstanding economic concept known as the Phillips Curve as a useful guide to policymaking, with its tradeoff between inflation and unemployment, Bullard, head of the St. Louis Fed, dislikes the idea, puts more weight on psychology and expectations, and has toyed with different notions about what’s really behind changes in the price level.But they’ve come up with roughly the same spot for at least an initial stopping point if the economy performs as expected of around 4.6% that they – at least for now – feel will lower inflation, and where they’d be willing to hold policy steady barring any further inflation surprises.Much of the Fed is in roughly the same place. As of September, 18 of 19 policymakers saw the policy rate at the end of 2023 ranging just a quarter percentage point above or below the full group’s median of 4.6%, roughly the midpoint of a range of 4.5% to 4.75%. The Fed’s current policy rate is 1.5 points below that at 3.00% to 3.25% after a frantic half year of rate increases from near zero back in March in an attempt to quell the highest inflation in four decades.In a window on the mechanics of Fed policymaking, Evans and Bullard in separate interviews recently laid out how they were thinking conceptually about that landing spot. Graphic: Fed rate projections – https://graphics.reuters.com/USA-FED/RATES/lbpggrgwbpq/chart.png EVANS: “REAL” RATE OF 2%, WITH SOME HELPEvans recently said his figure came from estimating a level of the “real” – or inflation-adjusted – federal funds rate, that could lower inflation without a dramatic rise in unemployment. He said a real rate of around 2% seemed “in line with” restrictive Fed policies of the past and held out the chance for a “soft” landing.Though a gap between the fed funds rate and inflation of two percentage points would be narrower than in previous tightening cycles – it stayed around three percentage points for example in the years before the 2007 to 2009 recession – the aim is to lower inflation without the large rise in joblessness seen in the past. In the spirit of hitting a moving target, Evans said he looks at how inflation is expected to evolve under appropriate policy. Stripped of volatile food and energy components to give a better sense of underlying trends, the “core” personal consumption expenditures price index should end 2023 at around 3.1%, he feels. But in addition to the fed funds rate, Evans said he also accounts for the tightening of financial conditions from the drawdown of the Fed’s balance sheet and adds “a little bit more for financial volatility just in general around the world” – accommodations Fed officials nod to in theory but which Evans recently put a number on.Combining both “quantitative tightening” and the impact of global volatility, he said, is the equivalent of about half a percentage point on the federal funds rate.Bottom line: 3.1% inflation next year plus a 2% target for the “real” rate would ostensibly mean the Fed needs to hike rates to 5.1%. Accounting for the effect of those other forces lowers the figure to 4.6%. Graphic: Federal Funds rate and inflatio – https://graphics.reuters.com/USA-FED/RATES/gkplwmwdevb/chart.png BULLARD: A “GENEROUS” TAYLOR RULEIn the early 1990s Stanford University economics professor John Taylor derived what has become a touchstone guide for central bankers, the Taylor Rule. It requires some difficult estimation of such things as the underlying “neutral” rate of interest – the rate that is neither restrictive nor accommodative to growth – and the gap between actual and potential economic output. But the basic formula essentially relies on the distance of inflation from a central bank’s price target to recommend a policy rate.There are many variations, of varying complexity. Bullard has one he has referred to recently as both “generous” because it requires a less harsh adjustment of interest rates than a more traditional Taylor rule would recommend – some versions suggest a federal funds rate already near 8% – and “minimalist” in paring back the number and complexity of any adjustments.For example he uses an inflation calculation from the Dallas Fed that relies on a “trimmed mean,” tossing out the fastest and slowing moving prices rather than automatically stripping out food and energy as the most volatile. That price index as of August was rising at a 4.7% annual rate, a bit less than the 4.9% rate of the “core” personal consumption expenditures index. Bullard said recently he has updated his calculations, which he presented earlier in the year when inflation was lower, and “you make the most generous assumptions, you get to four-and-a-half or 4.75” on the federal funds rate.If the target rate needs to move higher, he said, “it will be because inflation doesn’t come down the way we’re hoping.” More

The performance of the world’s second-largest economy exceeded market forecasts when GDP numbers were finally released on Monday, but the third-quarter data did not come close to allaying concerns about China’s direction after decades of underpinning global growth.Delayed by almost a week without explanation — although a clash with China’s Communist party congress is suspected — the announcement of 3.9 per cent GDP growth came with little fanfare. It was better than the forecast of 3.3 per cent from analysts polled by Bloomberg but still short of China’s full-year target of 5.5 per cent, already set at its lowest in three decades.Other data, also delayed, painted a more nuanced picture of the predicament facing Chinese policymakers. House prices in the secondary market fell by the highest month-on-month rate since 2014, reflecting a property crisis. Growth in retail sales, just 2.5 per cent, missed forecasts as strict Covid lockdowns continued to hold back consumption. “The actual economic recovery momentum is not strong,” said Ting Lu, chief China economist at Nomura. Despite the latest outperformance, he expects growth of just 2.8 per cent in the fourth quarter. Within China, the data were interpreted as evidence that the economy has stabilised and a recovery is gathering momentum after fiscal support measures in August.

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Sheng Songcheng, a former central bank official, said in the state-run Securities Times that the property sector would no longer make the same contribution to growth as it once did. But he suggested its weakness was “bottoming out” and noted that both infrastructure and manufacturing investment rose by double digits in September.A rebound supported by investment and industrial activity, often state-backed, is a familiar feature of China’s past recoveries, especially in the aftermath of the 2008 financial crisis. This also happened in 2020 after the coronavirus emerged within its borders, but economists point to one major change in conditions that may affect recovery.“The difference with 2020 is there is no tailwind on the export front,” said Carlos Casanova, senior economist for Asia at UBP.Export data, while beating analyst expectations, nonetheless indicate a mounting challenge for the country’s recent economic model. They grew 5.7 per cent, compared with 7 per cent in August, and a further slowdown would reduce the effect of this key booster of GDP.In much of 2020 and 2021, exports rose by double digits as the world shifted towards consumption of goods and western economies unleashed stimulus in response to the pandemic. Now, western policymakers are tightening policy and the effects of Covid-19 play a far smaller role in consumption behaviour outside of China.Although exports only amount to 13 per cent of GDP, they have been a significant support to growth. Lu points to the example of last year, when China’s GDP grew 8 per cent but exports rose 30 per cent, implying that they contributed around half of growth.Sheng also noted in the Securities Times that net export of goods and services contributed 1 percentage point of GDP growth in the first three quarters.Some analysts, such as those at CCB Investment, part of state-owned China Construction Bank, suggest that trade growth, along with investment, will remain a “pillar of growth” this year. But they say consumption will continue to be hampered by Covid controls.Louis Kuijs, chief Asia economist at S&P Global, said the latest data showed the current zero-Covid policy was weighing on “organic” economic activity, which includes consumption and corporate and real estate investment. “Government-led investment is basically the only driver of growth that is functioning,” he said.Markets, which responded to GDP data on Monday with a dramatic sell-off of Chinese stocks, are closely watching for any signs of further reopening post-Covid. They were lacking at the party congress and 28 cities are experiencing lockdown measures, based on a Nomura estimate. While no timeline has been given for a relaxation of the rules, there are signs of adjustments to avoid an impact on investment. This week, the State Council, China’s cabinet, instructed provinces and cities to make it easier for staff of foreign businesses to enter and leave China, as part of policies to boost investment in manufacturing.However, the elevation of Xi Jinping’s closest allies to the seven-member Politburo Standing Committee, the Communist party’s most powerful body, also hinted that growth is, for now, less significant than pandemic management. Xi’s loyal former secretary Li Qiang presided over a prolonged lockdown in Shanghai that contributed to anaemic growth of just 0.2 per cent in the second quarter.On Sunday, he was promoted to the second-most powerful role in the country.

For major economies outside of China, the implications of a continuing slowdown in the world’s growth engine are unclear but stand to be profound. Within China itself, even as it shifts towards a more isolated ideological and geopolitical model, any slowdown elsewhere could have equally significant effects.“Hopefully we can see some reopening and some retail sales picking up,” Casanova said. “That will definitely help with the economic narrative.” But “with risks of recessions crystallising in key markets in Europe and America, we don’t expect external demand will remain supportive”, he added. More

Joe Biden put a brave face on his economic record last week as he stood before a recently rebuilt bridge in Pittsburgh, Pennsylvania, and pleaded for voters to stick with his party in next month’s midterm elections.“For a lot of families, it’s still kind of tough,” the US president acknowledged. “But there are bright spots where America is reasserting itself, like here.”Based on most measures of the labour market, Biden should not have any trouble making the case for his economic agenda, which has involved sweeping increases in public spending along with higher tax burdens and stricter enforcement for the wealthy and large companies.Under the Democrats’ watch since January 2021, the recovery generated 10mn jobs and the unemployment rate shot down to 3.5 per cent.But months of unrelentingly high inflation — with consumer prices still rising at an annual rate of 8.2 per cent in September — have made “Bidenomics” an almost impossible sell on the campaign trail.According to a RealClearPolitics polling average, 57.9 per cent of Americans disapprove of Biden’s handling of the economy, while just 38.9 per cent approve, a critical weakness that has left Democrats with a strong chance of losing control of the House of Representatives and possibly the Senate.

Summary of the Inflation Reduction Act mathsMeasuresRevenue raised $bnCorporate minimum tax rate 15%313*Prescription drug price reform288**IRS tax enforcement124**Total725 Spending $bnEnergy security and climate change369Affordable Care Act subsidies extension64**Medicare, low-income drug subsidies, vaccines34Total467* Joint Committee on Taxation estimate ** Congressional Budget Office estimateSource: Democrat Senate

“I think the broad policies are very positive for the economy, both near and long-term. So I think he deserves credit. He’s not getting any, though,” said Mark Zandi, an economist at Moody’s Analytics who has advised Republican and Democratic politicians.“People are having to pay a lot more at the pump, at the grocery store, for rent, and the high inflation is an acid on people’s perception of how well they’re doing and how well the president’s doing on the economy. I think it just colours everything.”Biden’s economic policies have been executed as a 21st century cross between Franklin Delano Roosevelt’s New Deal and Lyndon Johnson’s safety net expansion, under the assumption that Americans were ready to embrace a stronger government hand in the economy in the wake of the coronavirus pandemic.Over months of negotiations with Congress, Biden’s plans were somewhat watered down and split between at least four big pieces of legislation. But what he signed into law included trillions of dollars in federal money for direct stimulus payments to households; funding for infrastructure projects; subsidies and incentives for clean energy investments and chip manufacturing; and measures to bring down the costs of prescription drugs.All of these were top priorities for Democrats that were seen as broadly popular, but they are not being rewarded in the polls.“[Producing] a boom with these really tight supply chains and complicated international economic relationships is really hard to do,” said Felicia Wong, the president of Roosevelt Forward, the progressive think-tank, who served on Biden’s transition team. “It’s even harder when voters don’t understand it, and for reasons that are understandable, but perhaps unfortunate, politicians don’t talk about it and explain it.”Heading into the final stretch of their election campaigns, some Democratic strategists and pollsters say the party is struggling to figure out when and how to speak clearly about the economy — compared with other matters, such as former president Donald Trump’s extremism and the gutting of abortion rights by the Supreme Court.“Democrats need to understand that we have a winning message on the economy and inflation, but rising costs will beat us if we avoid the issue,” wrote Patrick Gaspard, Stan Greenberg, Celinda Lake and Mike Lux in The American Prospect last week. “Inflation and the cost of living is [people’s] number one concern right now, and they are thinking and talking about it all the time in part because they believe it is getting worse with no end in sight,” they added.The attacks from the Republican side have been relentless — and politically effective. In campaign ads, on social media and at public events, they have pounded the cash infusions and large-scale spending for sparking and then fuelling inflation — even though the war in Ukraine and supply chain disruptions due to Covid-19 were also big factors.In recent months, Biden and his economic team have rushed to showcase their economic achievements. Treasury secretary Janet Yellen, who framed the administration’s economic philosophy as “modern supply-side economics”, has been travelling across the country to talk about everything from electric vehicles to tax incentives for clean energy.Brian Deese, the director of the National Economic Council, visited downtown Cleveland to talk about the administration’s efforts to protect domestic supply chains and revitalise American manufacturing. These efforts have led to a flurry of plans by top companies such as Intel and General Motors to build plants in Ohio, the Midwestern state that has drifted towards the Republicans in recent years.“It’s an economic strategy . . . that quite explicitly prioritises those places that have been too often overlooked,” Deese said in an interview in the West Wing of the White House last week. “If that continues, and that succeeds, then people will see that and it will make a difference.”He has also insisted that the economy can avert recession even as the Federal Reserve hikes interest rates — pointing to the health of household balance sheets and the labour market. “If you look at core metrics of economic stability, credit card delinquencies, mortgage delinquencies and personal bankruptcies — they’re all down between 10 and 30 per cent, lower levels than before the pandemic.”

The Biden administration has scrambled to take action to bring down prices in the near term, including through oil releases from the Strategic Petroleum Reserve and threats to do more if needed to bring down the cost of petrol, which is the most politically sensitive good in America.Even though prices have dropped over the past three weeks, a trend celebrated by White House chief of staff Ron Klain in a tweet on Sunday, they are still above their levels a month ago and a year ago.Biden, trying to draw a sharper contrast with the opposition, has warned that if Republicans take control of Congress, the US would risk new clashes on taxes and spending that could lead to a debt ceiling crisis and potential default.Tim Kaine, the Democratic senator from Virginia, said he believed there is a chance that voters will give their party the benefit of the doubt. “They know that none of us have a magic wand. They have different ideas about what the causes are, and I think they get some of the global issues. But what they want to see is a Congress that’s trying to respond.”Yet some political analysts warn that any recalibration of the economic message may be too late. “It is really kind of clunky: they are trying to sell their policy playbook from 2020 or 2021 for a different environment in 2022, and it does not quite work,” said Ben Koltun of Beacon Policy Advisors. More

Turkey’s finance minister has defended Ankara’s economic ties with Russia as “good neighbourly relations” even as western governments raise concerns that the country is serving as a backdoor for Moscow to evade sanctions. Nureddin Nebati said “opposition elements” inside and outside Turkey were “deliberately raising question marks” about the country’s financial links with Russia, while conceding there had been a rush of cash into its financial system. US and EU officials fret that Turkey, a Nato member that shares a Black Sea border with Russia and Ukraine, is relieving financial pressures on Moscow by not participating in western sanctions. Nebati insisted the economic ties between the two countries were “legal”.“Turkey is a country that acts very carefully within the international financial system. It’s not a country that behaves in ways that will cause breaches of the international financial system. We’re very clear on this,” Nebati said in a rare interview. “Everything is coming to us through legal routes.”Turkey’s economy, which relies on inflows of foreign capital, is under heavy strain from high commodity prices, a soaring US dollar and unorthodox monetary and fiscal policies that have sent traditional investors fleeing one of the world’s biggest emerging markets. Nebati, who was appointed in December, also shed light on the mystery funds that have played a key role in financing a large current account deficit — caused by an import bill that exceeds the value of the country’s exports.Net inflows categorised by the Turkish central bank as “net errors and omissions” — money whose origin is unclear — reached a record $28bn in the first eight months of 2022. Those inflows have financed about 70 per cent of the $40bn current account deficit during the same period and have vexed economists and western governments. Nebati said he believed that unaccounted-for tourism revenues were a key component. Some came from Russians, many of whom used cash because they were unable to use the financial system owing to western sanctions on Moscow, he said. Russians were Turkey’s second-largest group of foreign visitors this year.The finance minister cited the fact that Turkey was “surrounded by war” in Russia, Ukraine, Syria and Iraq as another source of inflows. He added that Turkish companies and individuals had repatriated money that was kept offshore back to the country — a phenomenon he said was also sometimes cash-based.All the money was legitimate, despite concerns in western capitals that using cash makes it impossible to track the true origins of funds, he said.Nebati predicted that the streak of inflows would continue and voiced confidence that Turkey would “very comfortably” avoid a balance of payments crisis over the next year despite the $100bn energy import bill it is facing. The finance minister said Turkey was pushing hard for a discount on the vast quantity of gas it buys from Russia — which would ease the pressure on the Turkish lira and bolster President Recep Tayyip Erdoğan ahead of critical elections scheduled for next summer. Turkey is also asking Russia’s Gazprom for an option to delay payment. Nebati said he expected “good news” on both fronts. The minister also confirmed that money had been transferred by Russia’s state nuclear agency to Turkey for the building of an atomic power plant on the country’s south coast — a move that analysts say has boosted the Turkish central bank’s foreign currency reserves by an estimated $5bn to $10bn. He declined to provide the amount.

Nebati, who is Turkey’s third finance minister in three years, launched a robust defence of Erdoğan’s unorthodox economic policy, insisting that the country was going through a “transformation”.Erdoğan, who rejects the established economic principle that raising interest rates curbs inflation, has presided over a succession of currency crises and bouts of ultra-high inflation as he has insisted on reducing borrowing costs to promote growth. The central bank last week cut rates for the third month running even as inflation exceeded 83 per cent in September. The Turkish president argues that he is pursuing a new economic model that will capitalise on the weak lira — which has lost about half of its value against the US dollar in 12 months — to boost domestic production, create jobs and boost exports.But the turbulence has caused a sharp fall in prosperity, with gross domestic product per capita falling from a peak of about $12,500 in 2013 to roughly $9,500 last year. Nebati said the apparent affluence of a decade ago was a “virtual wealth” because the country had an overly-strong lira, high foreign debt, large amounts of imports, low domestic production and “wealth was being transferred out of the country”.He admitted, however, that many Turks were going through a “painful period” — and that he himself had been forced to limit his purchases when travelling abroad. But he added that the government was seeking to limit the pain through social transfers, including two minimum wage rises this year. More

Suzuki also said he saw no contradiction between the government’s yen-buying currency intervention and the Bank of Japan’s ultra-loose monetary policy.”The BOJ is responsible for deciding monetary policy,” Suzuki told a regular news conference, adding that the central bank’s policy is aimed at achieving price stability.The BOJ is set to maintain ultra-low interest rates at its two-day policy meeting ending on Friday.Japan has been conducting yen-buying interventions to address the currency’s unwelcome sharp declines, driven in part by the divergence between the BOJ’s ultra-loose monetary policy and aggressive interest rate hikes by the U.S. Federal Reserve.Suzuki repeated that the government would not tolerate excessively volatile yen moves driven by speculative trading.”If we leave sharply volatile currency moves, driven by speculative trading, unattended, that would affect companies and households,” Suzuki said.He also said Japan’s yen-buying intervention is aimed at smoothing market volatility, signalling that Tokyo was not targeting a specific currency level in deciding when to step into the market to buy yen. More

The financing by the International Bank for Reconstruction and Development, the bank’s main lending arm, was supported by $500 million in loan guarantees from Britain that were announced on Sept. 30, the bank said.It comes on the eve of a recovery conference taking place in Berlin on Tuesday, where national leaders, development experts and CEOs will discuss how to rebuild Ukraine after Russia’s invasion, now entering its ninth month.“The Russian invasion continues to cause massive destruction of Ukraine’s infrastructure – including water, sanitation, and electricity networks – just as winter is approaching, further endangering Ukrainian people,” World Bank Group President David Malpass said in a statement.“The new portion of financing disbursed today will be used to maintain essential government services. We stand firmly to support the Ukrainian people as they face this unparalleled crisis.” The World Bank has mobilized a total of $13 billion in emergency financing for Ukraine, of which $11.4 billion has been fully disbursed. Russia’s invasion caused over $97 billion in direct damages to Ukraine through June 1, but it could cost nearly $350 billion to rebuild the country, the World Bank, Ukrainian government and the European Commission said in a report released in September.Moscow has called its actions a special military operation to rid its neighbor of extremists. More

BENGALURU (Reuters) – The U.S. Federal Reserve will go for its fourth consecutive 75 basis point interest rate hike on Nov. 2, according to economists polled by Reuters, who said the central bank should not pause until inflation falls to around half its current level.Its most aggressive tightening cycle in decades has brought with it ever bigger recession risks. The survey also showed a median 65% probability of one within a year, up from 45%.Still, a strong majority of economists, 86 of 90, predicted policymakers would hike the federal funds rate by three quarters of a percentage point to 3.75%-4.00% next week as inflation remains high and unemployment is near pre-pandemic lows.Results in the poll are in line with interest rate futures pricing. Only four respondents predicted a 50 basis point move.”The front-loading of policy rate tightening we have seen up to now has been aimed at getting to a positive real fed funds rate at the start of 2023,” said Jan Groen, chief U.S. macro strategist at TD Securities, referring to rates adjusted for inflation.”Instead of a pivot, in our view, the Fed is signaling that they foresee shifting from front-loading up to December, towards more of a more grinding pace of hikes from then onward.”A majority of economists in the Oct. 17-24 poll forecast another 50 basis point hike in December, taking the funds rate to 4.25%-4.50% by end-2022. That matches the Fed’s “dot plot” median projection.The funds rate was expected to peak at 4.50%-4.75% or higher in Q1 2023, according to 49 of 80 economists. But the risks to that terminal rate were skewed to the upside, according to all but one of the 40 who answered an additional question.Fed officials have begun contemplating when they should slow the pace of rate hikes as they take stock of their impact given it takes many months for any rate move to take effect.Asked around what level of sustained inflation the Fed should consider pausing – currently running above 8% according to the consumer price index (CPI) – the median from 22 respondents said 4.4%, according to that measure.The Fed targets the personal consumption expenditures (PCE) index, but the survey suggests roughly half the current rate of inflation ought to be a turning point. PCE inflation was forecast above target until 2025 at least.CPI inflation was not expected to halve until Q2 2023, according to the poll, averaging 8.1%, 3.9% and 2.5% in 2022, 2023 and 2024, respectively.”Fed officials have indicated that pausing is only possible after ‘clear and compelling’ evidence inflation has moderated,” said Brett Ryan, senior U.S. economist at Deutsche Bank (ETR:DBKGn).”With the Fed continuing its aggressive tightening to rein in persistent inflation, we expect a moderate recession likely to begin in Q3 next year as the real growth would dip negative and the unemployment rate will rise substantially.”Next year the economy was expected to expand just 0.4% – a forecast that has been downgraded in each consecutive monthly Reuters poll since the Fed first started hiking in March – after growing 1.7% on average this year.The unemployment rate was expected to average 3.7% this year before rising to 4.4% and 4.8% in 2023 and 2024, respectively, an upgrade from the previous poll but significantly lower than the highs seen in previous recessions.Still, the chances of a sharp rise in unemployment in the United States over the coming year were high, according to over half of respondents to an additional question, 23 of 41. Eighteen said the chances were low.(For other stories from the Reuters global economic poll:) More