Economy

TOKYO (Reuters) -Japan is aiming to earn 5 trillion yen ($34 billion) or more from tourists over the next financial year, a draft economic package seen by Reuters showed on Tuesday, as policymakers hope to use the weak yen to attract foreign visitors.Japan has eased COVID-19 border control requirements this month, a key step in fostering a recovery in the country’s tourism sector, which is eager to take advantage of the yen’s slide to a 32-year low.Japanese policymakers have remained coy about the likely size of the planned stimulus package, although some lawmakers have floated ball-park figures of 30 trillion yen or more.Japan must strike a delicate balance between spending its way out of the COVID-induced doldrums in the near term while reining in the industrial world’s heaviest public debt at more than twice the size of the economy in the long run.Investors will scrutinise the size of the package and government debt to finance it, particularly after Britain was plunged into financial crisis by the market reaction to plans for huge tax cuts funded by borrowing.The package will be compiled by the end of this month. The government will also devise a new plan by the end of the current fiscal year in March to promote Japan as a tourist destination, according to the draft.Japan spent 2.8 trillion yen in dollar-selling, yen-buying intervention last month when authorities acted in the markets to prop up the yen for the first time since 1998 and ease the pain of rising import costs.The economic package is made up of four pillars: Response to price hikes and accelerating wage rises; enhancing purchasing power; promoting Prime Minister Fumio Kishida’s new capitalism; and securing relief and safety of the people.It marks a second round of economic measures following the first package backed by a 2.7 trillion yen extra budget. Kishida’s government is expected to compile a second extra budget, with the aim of winning parliament’s approval by December.The first measures, which took effect in May, were comprised of steps to help households and small firms deal with surging fuel prices.Any heavy spending could make it even harder to bring Japan’s primary budget balance, excluding new bond sales and debt-servicing, into the black in the fiscal year ending March 2026.($1 = 149.0000 yen) More

U.S. GDP is now expected to grow by just 0.5% next year, down from 1.5% in the firm’s June forecast, CNN reported, citing a Fitch report obtained by them.Economists at Fitch expect recession in the country to be quite mild and the rise in unemployment rate from 3.5% currently to 5.2% in 2024, which implies loss of millions of jobs, but lesser than those lost during the prior two recessions, the report said.Fitch believes that high inflation will “prove too much of a drain” on household income next year, shrinking consumer spending which will lead to a downturn during the second quarter of 2023, the report added.U.S consumer prices increased more than expected in September and underlying inflation pressures continued to build, reinforcing expectations that the Federal Reserve will deliver a fourth 75-basis points interest rate hike next month.Despite the continued moderation as supply chains ease and oil prices retreat from the highs seen in the spring, inflation is running way above the Fed’s 2% target. More

Investing.com — Netflix (NASDAQ:NFLX), Johnson & Johnson (NYSE:JNJ) and Goldman Sachs (NYSE:GS) report earnings, looking to build on the good vibes created so far by the rest of the banking sector and Pepsico (NASDAQ:PEP). Industrial production data are due, as is the National Association of Homebuilders’ monthly survey. The pound and Gilts take a breather amid uncertainty over whether or not the Bank of England will go ahead with its “quantitative tightening”, while European gas prices slump as the EU hits its storage targets early. Here’s what you need to know in financial markets on Tuesday, 18th October.1. Netflix aims to snap losing streakNetflix is looking to snap a two-quarter losing streak when it posts earnings for the three months through September after the close.The streaming giant, whose fall from grace this year has epitomized the abrupt change in market sentiment toward long-duration growth stocks, had predicted a net gain of 1 million subscribers, helped by a better quarter for new content.The numbers will cast some light on how loyal its customer base has been after a succession of price increases. Most market research has suggested that it remains the last streaming service to be cut by those who need to cut back on their monthly outlays.2. Calm after the storm for U.K. markets; confusion over BoE QTCalm is returning to the U.K.’s financial markets after the new Chancellor of the Exchequer, Jeremy Hunt, ripped up the economic strategy of Prime Minister Liz Truss, reversing almost all of her proposed tax cuts.The rout in U.K. government bonds caused by Truss’s plans had spread ripples through global financial markets, especially after the Bank of England had warned of a “material risk to the U.K.’s financial stability.”  Gilts had rallied strongly on Monday, but ran out of steam on Tuesday after the Financial Times reported that the Bank is set to delay the start of its ‘quantitative tightening’ due to fears about the market’s resilience.Newswires later quoted a Bank spokesman as calling the FT’s report “inaccurate”.3. Stocks set to open higher, extending bounceU.S. stocks are set to build on their gains of Monday at the open, reassured by developments in the U.K. and by the generally strong third-quarter earnings to have come out of the key financial sector so far.By 06:20 ET (10:20 GMT), Dow Jones futures were up 394 points, or 1.3%, while S&P 500 futures were up 1.5% and Nasdaq 100 futures were up 1.7%. The Nasdaq had outperformed on Monday with a stellar 3.4% gain, while the Dow had gained around 1.5% and the S&P 1.8%.Bank of America (NYSE:BAC), Bank of New York Mellon (NYSE:BK) and Charles Schwab (NYSE:SCHW) all comfortably beat expectations with their updates on Monday, encouraging hopes that Goldman Sachs will be able to repeat the trick before the open today, although the news is likely to be dominated by its apparent restructuring plans.Also reporting early are Johnson & Johnson, Truist, State Street (NYSE:STT), Hasbro (NASDAQ:HAS) and Omnicom. Industrial production numbers for September at 09:15 AM ET head the data calendar, along with the monthly tale of woe from the NAHB survey.Others in focus include Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) after reports of a cut in Intel’s ambitions for the Mobileye spin-off and job cuts at the software giant. 4. Russia continues to pound Ukraine’s power stationsRussia continued to attack Ukraine’s power sector with missiles and Iranian-made kamikaze drones, knocking out around 30% of the country’s energy supply, according to President Volodymyr Zelensky.The Kremlin has abandoned any pretense of targeting military infrastructure this week, as Russia’s new military commander, Sergey Surovikin, has adopted the same kind of tactics against anti-government forces in Syria’s Idlib province.Iran denies that it has been sending weapons to Russia, despite photo evidence of shrapnel fragments that appear to leave no doubt about their origin.  The development has prompted speculation that Israel may loosen its ban on supplying weapons to Ukraine in response.  Elsewhere in Russia, the Kremlin stripped Exxon Mobil (NYSE:XOM) of its stake in the Sakhalin-1 offshore oilfield, a project that had come to symbolize the rejuvenation of Russia’s oil industry after the fall of the Soviet Union.5. Oil steady near two-week low as Europe’s gas prices ease sharplyCrude oil prices fell to their lowest in two weeks on continued jitters about the outlook for world demand after fresh signs that key economies are slowing.By 06:30 ET, U.S. crude futures were down 0.1% at $84.42 a barrel, while Brent futures were down fractionally at $91.61.Earlier, a closely-watched sentiment indicator for the German economy had suggested that the outlook had darkened further, although there had been better news on the energy supply front in the last 24 hours. German Chancellor Olaf Scholz said he would allow all three of the nuclear reactors currently scheduled to end operations in December to run at least through April. In addition, industry data showed that the EU – and Germany in particular – have met their targets for filling gas storage ahead of schedule. Benchmark gas prices slumped nearly 10% to a four-month low. More

Away from the main stage of China’s 20th party congress, a press conference on Monday addressed the sensitive question of economic growth. “The economy rebounded significantly in the third quarter,” said Zhao Chenxin, a senior official at the National Development and Reform Commission (NDRC), just a day before new GDP data were due to be published. The country’s performance, he added, was “outstanding”.But hours later, the government’s statistics department quietly updated its website to clarify that the data would be delayed, without providing further explanation or comment. Economists had forecast growth of just 3.3 per cent — far below the country’s long-term average and its 5.5 per cent target for the year.Viewed in some quarters as an attempt to avoid distracting from China’s biggest political event in years, the delay nonetheless came at a time when growth has become an uncomfortable topic in Beijing.The Chinese economy — underpinning the Communist party’s governance model for decades and recently on course to become the world’s biggest — is beset by a property crisis and strict zero-Covid controls that have damped consumer spending through frequent and intense lockdowns. “That slightly above 3 per cent sub-par growth is probably the best they can get with strict Covid management and the drag from the housing sector,” said Robin Xing, chief China economist at Morgan Stanley. “The only meaningful policy lever they have for next year is the change in Covid management, aimed towards reopening.”

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But the government, both at the congress and in the build-up to the event, has reinforced its zero-Covid approach and declined to provide any timeline for reopening. A Goldman Sachs tracker of China’s Covid policies notes that cities with high and medium-risk districts now account for 40 per cent of national gross domestic product, which they said implied “continued pressure on consumption and services in October”.Aidan Yao, senior emerging Asia economist at Axa Investment Managers, said the discussion on zero-Covid was “backward looking” and that the policy was likely to remain in place under the same name, even if there was scope for adjusting its implementation.Other releases, including those for house prices in China’s 70 biggest cities, and customs data, due on Friday, have also been delayed.Given the tightly controlled language of the congress, which typically focuses on China’s longer term and overarching ambitions, analysts are quick to spot omissions that signal a change in priorities. Research platform CreditSights said that President Xi Jinping’s opening remarks on Sunday did not cover market reforms, financial institutions and the data economy, which were stressed as important areas at previous congresses. However, he did state the country would “better leverage the fundamental role of consumption in stimulating economic growth” and address “imbalanced development”. Xing at Morgan Stanley suggested the event so far had countered fears of a move away from economic development and towards security of energy, food and supply chains.“I would say the concern before the party congress in the market was maybe China would be shifting policy agenda away from the economy,” he said. “But I think the party congress narrative here is allaying those concerns.”Xi reiterated the need to build a “moderately prosperous” society by 2035, which entails a GDP per capita level equivalent to a median developed economy. Xing suggested this implied GDP per capita of $20,000-$24,000 a year, compared with slightly above $12,000 in 2021. That would imply a growth rate of about 4.5 per cent through to 2035.

This week’s unpublished GDP figures were set to be significantly below that and could set a path for growth at a weaker level than the 6 per cent or above maintained in the decades leading up to the pandemic.Yao at Axa also pointed to the emphasis on economic development in Xi’s comments, including his “unwavering support” for the private economy, which Yao said would come “as a relief to many”. He suggested the tone signified the end of a series of regulatory and private-sector crackdowns in 2021 that included the education and tech sectors.While GDP may pose a challenge to Chinese authorities, other metrics are more promising relative to other important economies. At Monday’s NDRC press conference, Chenxin pointed to China’s “moderate” increases in consumer prices, which contrast sharply with an environment of rising prices and rates elsewhere. Consumer price inflation was just 0.6 per cent in September.Policymakers have pursued incremental easing measures over the past year, following restrictions on real estate leverage in 2020 that coincided with the emergence of what subsequently became a crisis for property developers. But weak price increases are also intertwined with China’s Covid restrictions and their depressive impact on spending. For now, the lifting of strict Covid policies remains the main hope for a big uplift in growth — even if it is unlikely to materialise for several more quarterly GDP releases. More

ROME (Reuters) -Ryanair boss Michael O’Leary on Tuesday described the economic situation in Britain as a “car crash” caused by the country’s vote to leave the European Union in 2016.”The mini budget was a kind of spectacular failure of the whole concept of Brexit,” he said at a news conference in Rome, adding that the first thing Britain needs is what he called a sensible trading agreement with the EU. Britain’s new finance minister, Jeremy Hunt, on Monday scrapped Prime Minister Liz Truss’s economic plan and scaled back her vast energy support scheme in a historic policy U-turn to try to stem a dramatic loss of investor confidence.Irishman O’Leary said he expects Truss, who became prime minister last month, to be out of a job within a week or two.”The mini budget has been reversed. So she’s in office but not in power,” he said.O’Leary said that Truss, who had wanted Britain to remain in the EU at the time of the 2016 referendum, is paying a price for promises she made to Conservative party members who selected her to lead the country after Boris Johnson resigned.”She got elected by appealing to all the Brexiteers for the last three months and it is the ultimate, I think, failure of Brexit and the Brexiteers,” he said.Truss struck a eurosceptic tone during her leadership campaign over the summer, tapping in to the concerns of Conservative Party members and promising to scrap all remaining EU laws that still apply in Britain by 2023.O’Leary welcomed the appointment of Hunt, who took over as finance minister last Friday and has since rewritten government plans presented only last month.”The Remainers are coming back, the adults are taking charge again … we will return to some sensible economic policies,” O’Leary added. More

Edward Price is principal at Ergo Consulting. A former British trade official, he also teaches at New York University’s Center for Global Affairs.As the Great Accommodation gives way to the Great Uh-Oh, here’s the problem central bankers face: whither the policy rate?Right now, the answer is easy. Up. Jay Powell is warning of “pain” and “unfortunate costs” for households and companies. Andrew Bailey says the Bank of England “will not hesitate to raise interest rates”. Christine Lagarde said the ECB “will do what we have to do, which is to continue hiking interest rates”. Higher rates, however, will eventually spell recession, illiquidity and insolvency. That may challenge financial stability. If so — if crisis ensues — only a lower policy rate will do. Alas, lower rates exacerbate upward price pressures. After the “transitory inflation” snafu, swinging back to accommodation would cost central banks their remaining street cred. Under these circumstances their only option would be . . . a higher policy rate.Whatever central banks do, is financial instability the ultimate threat?  Well yes, but don’t ask me. Ask the people in charge. Four economists from the New York Fed have recently released a revised version of a 2020 paper entitled The Financial (In)Stability Real Interest Rate, R**. And what, pray tell, is r-star-star? Again, easy. If r-star is the natural real rate of interest associated with macroeconomic stability (caveat emptor), then r-star-star is the rate associated with financial stability. Cool. You can watch the paper being presented at a recent Fed event here. It’s engrossing. Spoiler alert though. There’s a major catch.Both conceptually and observationally r** differs from the “natural real interest rate” and from the observed real interest rate reflecting a tension in terms of macroeconomic stabilization versus financial stability objectives.Great. Financial stability ≠ macroeconomic stability. R-star ≠ r-star-star. Moreover, the two part ways just when it matters most — a financial crisis (basically, whenever banking hits the wall). Behold these graphs:

This is a crisis model we’re talking about, so meanwhile GDP and investment fall while credit spreads rise. That’s any crunch.But here’s the thing: prices. You can’t reconcile these graphs with a lower policy rate. US inflation came in at 8.2 per cent in September. Oof.We’re already seeing this tension play out. To choke inflation, American business leaders expect the Fed to spank labour. Bank of America expects a 5.5 per cent unemployment rate. Frankly, as Larry Summers has suggested, over 6 per cent wouldn’t be weird. Consensus has now moved to the view a recession is likely next yr. The avg recession involves a 3% point increase in unemployment. The most benign involved an extra 1.5 % unemployment. Fed forecast of 4.5 peak is looking implausible. 6 seems a better guess https://t.co/mt5rOQfjn7— Lawrence H. Summers (@LHSummers) October 17, 2022
So, the price mechanism and households (occasionally) need different interest rates. Full employment and price stability are (occasionally) at odds. Financial instability, meanwhile, will happily challenge both.Basically, there are conditions under which the dual mandate (alias: internal equilibrium) must take a back seat to capital markets (alias: global equilibrium). As per the paper:. . . “Greenspan’s put” . . . has been a feature of all financial stress episodes in the US [since the 1970s], with the only exception being the later part of the Great Financial Crisis . . . [in] general we note that financial stress episodes are associated with periods in which the real interest rate is above our measure of r**.Translation: financial markets want their policy cut. Otherwise, they’re gonna pay you a little visit.

And when they do, you can forget whatever fed funds rate you think is appropriate for full employment and/or price stability. Bravo to the NY Fed. This paper has, in all fairness, explained exactly what it is that financial instability does. More

If the UK hadn’t been an inadvertent ‘dead cat’ hogging the market’s attention lately, we think more people would be freaking out about China. Luckily, BlackRock has us covered.With the 20th Chinese Communist party conference now in progress, the authorities have delayed the release of third-quarter GDP data — economists think annual growth to slow to a new three-decade low of 3.3 per cent — and have clearly drawn 7.2 as the line in the sand for the renminbi-dollar exchange rate.

That may become tougher to defend, as China’s era of hypergrowth is coming to an end, according to a blog post released by Larry Fink’s vanity project BlackRock’s quasi think-tank, the BlackRock Investment Institute. The Chinese economy grew apace in the ten years prior to the pandemic, by 7.7% on average each year. But it now faces a set of acute challenges that, in our view, mean it’s entering a stage of significantly slower growth.. . . The big focus on Covid-related ups and downs in activity ignores another underlying issue that, we think, will significantly challenge Chinese growth next year — and beyond.For now, Alex Brazier and Serena Jiang — a former top Bank of England staffer and a BlackRock economist respectively — expects China’s economy to grow by about 3 per cent this year, because of the country’s zero-Covid policy and fading demand for goods that it produces. After exports rocketed 10 per cent both in 2020 and 2021 as people splurged out on new TVs, washing machines and other goods largely manufactured in China, BlackRock thinks exports will actually shrink by 6 per cent a year over 2022 and 2023. The implications for the renminbi are serious. Coupled with higher US interest rates, this “would ultimately warrant a depreciation of twice that seen this year”, BlackRock said in the report. However, this could ramp up the pain for Chinese companies that have borrowed in dollars and stir financial stability concerns. However, a 3 per cent growth rate might be the new normal. Brazier and Jiang argue that longer-term picture is that China’s potential pace of economic growth has fallen significantly, mostly because of an ageing work force. Our emphasis below. Covid controls are reducing potential output today. While they might be eased, we still think the potential growth rate of the Chinese economy might have fallen below 5% and could fall further to around 3% by the turn of the decade. Why? Most importantly, the working age population, having grown rapidly, is now shrinking . . . Fewer workers mean the economy cannot produce as much without generating inflation, unless productivity growth accelerates. But we think international trade and tech restrictions, as well as tighter regulations on companies operating in China, will dampen productivity growth.Here’s a chart showing the contracting work force.

Given how essential China’s rampant growth has been to the global economy — remember when Jim O’Neil was telling everyone that would listen that China was adding the equivalent of a Greece every 11 weeks? — the wider implications are . . . not great. In the past, when countries faced a slowdown, they could still rely on Chinese consumers and companies to buy up their cars, chemicals, machinery, fuel — even as consumers at home tightened their belts. And they could rely on China to continue supplying an abundance of cheap products as China’s rapidly growing working population enabled it to keep production costs low.Not so anymore. Recession is looming now for the US, UK and Europe. But this time, China won’t be coming to its own, or anyone else’s, rescue. More

After months of struggling to make ends meet, last month’s budget came as a relief to Dutch postal worker Richard Huijsing.The government pledged to enforce a minimum wage rise of 10 per cent from January to tackle a huge increase in the cost of living after Russia’s full-scale invasion of Ukraine led to soaring costs for power and other commodities. But Huijsing, who earns just over the current minimum, fears even this will not be enough to cover his bills. “Food prices are getting higher, energy also,” he said. With no dependants, he says he can manage it right now but is “fearful for the future”. Since the war in Ukraine began in late February, costs for cooking staples have soared. A three-litre bottle of sunflower oil for Huijsing’s deep fryer — an essential in most Dutch households for making chips and bitterballen meatballs — has doubled to €10 in a few months. His battered bike, his only means of transport, will soon need replacing.Richard Huijsing fears the minimum wage increase will not be enough to cover his bills © Bram Belloni/FTThe cost of living crisis in the Netherlands, where inflation hit 17 per cent in the year to September on the back of a surge in energy prices, is mirrored across Europe. Annually, prices rose by 10 per cent in the eurozone. In the three Baltic states inflation is more than double that amount. Wages have been raised for the poorest workers in the 21 EU countries that have minimum wage laws in place. This round of pay rises is not pleasing everyone, however, triggering clashes between workers’ groups and businesses. ETUC, the EU-wide confederation of trade unions, said the real value of minimum wages had fallen by about 5 per cent on average — and by almost 20 per cent in some member states. “The current crisis is having an even bigger impact than the financial crisis on low wage earners,” said Esther Lynch, ETUC’s deputy general secretary. “No matter how good you are at household budgets you are not going to be able to make ends meet.”Tuur Elzinga, chair of Huijsing’s union, FNV, dismissed the budget as a sticking plaster. “Nothing structural is being done to address the fundamental causes of the imbalance in society. We have only gotten richer as a country, but the money remains in limited pockets.” FNV wants the minimum wage — now between €10.14 and €11.46 depending on how many hours are worked — to hit €14 an hour.Tuur Elzinga: ‘We have only gotten richer as a country, but the money remains in limited pockets’ © Rob NelisseBusinesses believe that the Dutch government is already going too far, too fast. The VNO, the Dutch employers’ body, said the government should raise in-work benefits rather than force hard-pressed companies to pay more.Geert-jan Castelijn, who owns a family-run fashion store near the southern city of Maastricht, said he would struggle to provide the increase. Although only a handful of his 25 staff earn the minimum wage, he said he had to raise all salaries to maintain differences between pay grades. Fortunately, last year he fixed his energy costs until 2026, but still wants to reduce consumption. “I want to invest in energy efficiency and in staff development,” said Castelijn. “We cannot raise our prices by 10 per cent. Customers are already putting off purchases.”The swift wage rise makes it hard to budget, he said. He has to repay a €224,000 coronavirus emergency loan from the state over the next five years. “We could have a vicious circle, with inflation and wages going up [together] like we saw in the seventies,” he said.Economists, including interest rate setters at the European Central Bank, have warned that workers must expect a cut in real pay to avoid a “wage-price spiral”, where inflation remains high for years on end and erodes standards of living. Philip Lane, the ECB’s chief economist, said last month: “In order to get back to lower inflation, we need to realise that corporate profitability will decrease for a while and that wages will not fully keep up with inflation for a while either.”But officials elsewhere say the labour market’s most poorly paid workers must be fairly compensated.An EU directive approved recently requests that they hit a level of 60 per cent of the gross median wage. The Dutch rise falls slightly short of these figures.About 25mn workers would have a 20 per cent increase if member states followed this, according to Green MEPs.Stefano Scarpetta, director for employment, labour and social affairs at the OECD, said in September that automatic uprating mechanisms in place in countries such as France and Belgium were “an effective way to preserve the purchasing power of the low-paid”. Scarpetta added that automatic or not, it would be “important to adjust statutory minimum wages regularly in the current context of relatively high inflation”.With the labour market tight, the minimum wage rise is not expected to lead to businesses sacking many workers. The UK’s experience since 2015 suggests higher pay does not have to come at the expense of jobs: its minimum wage rose rapidly over five years to reach 60 per cent of median earnings, making it one of the highest in the OECD, without any significant increase in joblessness.Back in the Netherlands, employment is so plentiful that Huijsing has decided not to wait for the government to provide support. He starts a new job this month at a DIY store that pays €13 an hour. “Politicians always walk behind the problem. They just wait and provide help too late,” he said.This article has been amended to correct the spelling of Richard Huijsing’s name. Additional reporting by Delphine Strauss in London More