Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a senior fellow at the Brookings Institution and a former chief economist at the Institute of International FinanceThe US election may be the start of a massive dollar rally, but markets have yet to realise this. In fact, without much clarity on what is coming, markets are currently doing a retread of price action after Donald Trump’s 2016 win. Expectations of looser fiscal policy are lifting growth expectations, boosting the stock market, while rising US interest rates vis-à-vis the rest of the world buoy the dollar.But, if the president-elect follows through on tariffs, bigger changes are coming. In 2018, after the US put a tariff on half of everything it imported from China at a 25 per cent rate, the renminbi fell 10 per cent versus the dollar, in what was almost a one-for-one offset. As a result, dollar-denominated import prices into the US were little changed and tariffs did little to disrupt the low-inflation equilibrium before the Covid-19 pandemic. The lesson from that episode is that markets trade tariffs like an adverse terms-of-trade shock: the currency of the country subject to tariffs falls to offset the hit to competitiveness.If the US imposes further and perhaps much larger tariffs, the case for renminbi depreciation is urgent. This is because China has historically struggled with capital flight when depreciation expectations take hold in its populace. When this happened in 2015 and 2016, it sparked big outflows that cost China $1tn in official foreign exchange reserves. Maybe restrictions on capital flows have been tightened since then, but the main lesson from that episode is to allow a front-loaded, large fall in the renminbi, so that households cannot front-run depreciation. The larger US tariffs are, the more important this rationale becomes. Take the case of a 60 per cent tariff on all imports from China, a number the president-elect floated during the campaign. Factoring in tariffs already in place from 2018, this could require a 50 per cent fall in the renminbi versus the dollar to keep US import prices stable. Even if China imposes retaliatory tariffs, which will reduce this number, the scale of needed renminbi depreciation is probably unprecedented.For other emerging markets, such a large depreciation will be seismic. Currencies across Asia will fall in tandem with the renminbi. That in turn will drag down emerging markets currencies everywhere else. Commodity prices also will tumble for two reasons. First, markets will see a tariff war and all the instability that comes with it as a negative for global growth. Second, global trade is dollar-denominated, which means emerging markets lose purchasing power when the dollar rises. Financial conditions will — in effect — tighten, which will also weigh on commodities. That will only add to depreciation pressure on the currencies of commodity exporters.In such an environment, the large number of dollar pegs in emerging markets are especially vulnerable. Depreciation pressure will become intense and many pegs will be at risk of explosive devaluations. Notable pegs include Argentina, Egypt and Turkey.For all these cases, the lesson is the same: this is a uniquely bad time to peg to the dollar. The US has more fiscal space than any other country and seems determined to use it. That is dollar positive. Tariffs are just one manifestation of deglobalisation, a process that shifts growth from emerging markets back to the US. That is also dollar positive. Finally, elevated geopolitical risk is making commodity prices more volatile, increasing the incidence of economic shocks. That makes fully flexible exchange rates now more valuable than in the past.The good news is that the policy prescription for emerging markets is clear: allow your exchange rate to float freely and act as an offset to what could be a very large external shock. The pushback to this idea is that large depreciations can boost inflation, but central banks in emerging markets have become better at tackling this. They mostly navigated the Covid inflation shock better than their G10 counterparts, raising interest rates earlier and faster. The bad news is that another major surge in the dollar could do lasting damage to local currency debt markets across emerging markets.These economies have already suffered because the huge rise in the dollar over the past decade wiped out returns for foreign investors when converting back into their home currencies. Another big rise in the dollar will further damage this asset class and push up interest rates in emerging markets. This makes it all the more imperative for these economies to budget wisely and pre-emptively. More

The agreement was announced after an IMF mission to Zambia from Oct. 2-15, followed by subsequent discussions at IMF and World Bank annual meetings in Washington, the Fund said in a statement.The IMF said Zambia’s economy has been hit hard by drought, with reduced agricultural output and electricity shortages impacting economic activity widely. It forecast Zambia’s 2024 real GDP growth at 1.2%, down from a 2.3% forecast in June. Inflation accelerated to 15.7% in October, driven by food prices and currency depreciation, well above a target band of 6-8%. More

Edison Research has not yet projected House control. It has projected that Republicans will hold at least 214 seats, including two currently held by Democrats, with Democrats holding at least 205, with 16 uncalled. The smallest House majority is 218.Republicans had already secured a U.S. Senate majority of at least 52-46, Edison Research projected. During his first presidential term in 2017-2021, Trump’s biggest achievement was sweeping tax cuts that are due to expire next year. That legislation and Democratic President Joe Biden’s signature $1 trillion infrastructure law both came during periods when their parties controlled both chambers of Congress.By contrast, during the past two years of divided government, Biden has had little success in passing legislation and Congress has struggled to perform its most basic function of providing the money needed to keep the government open. More

The Brazilian real currency has weakened to multi-year lows against the U.S. dollar in recent weeks amid government hesitation to announce a fiscal package to stem a rapid rise in mandatory spending.Speaking to journalists in Brasilia, Finance Minister Fernando Haddad gave no time frame for when the package might be publicly announced. He added that outstanding issues that had held up discussions last week were resolved. Still, he said Lula has now asked to include a new ministry in the spending-cut package, adding that the talks with the unnamed ministry might be concluded by Wednesday.Lula and his chief of staff held meetings in the last few days with leaders of more than 10 ministries, including those from Health, Education and Pension, according to the government.The government has said it would present the fiscal package after municipal elections held in late October, but has offered no concrete timeline for the announcement since then.Asked if the package has stalled during the recent talks, Haddad said no, but that the government made adjustments to make the measures “more understandable and palatable.” Haddad said he would speak with Lula on Tuesday about presenting the package to the Lower House and Senate chiefs, adding he believed the measures could be approved by Congress this year. More

The survey from National Australia Bank (OTC:NABZY) (NAB) showed its index of business conditions held at +7 in October. The more volatile confidence index climbed 7 points to +5, the highest reading since early 2023.Sales showed a 1 point rise to a strong +13 in the month, while profitability was steady at +5 and employment intentions dipped 2 points to +3.”Confidence spiked in the month after an extended period of below average reads,” said Gareth Spence, NAB’s head of Australian economics. “While it’s just one month this is an encouraging sign alongside a tentative improvement in forward orders.”The improvement came as a separate survey of consumer confidence from Westpac showed a second month of strong gains in November, partly on hopes for lower borrowing costs.The Reserve Bank of Australia has held interest rates steady at 4.35% for a full year and financial markets are confident the next move will be down, albeit not for a few months yet.Measures of cost pressures in the NAB survey suggested inflation was slowly easing with growth in input costs slowing to a quarterly pace of 0.9%, from 1.3% in September. Growth in labour costs eased to 1.4%, from 1.9%, and product prices to 0.5%, from 0.6%.”The survey, like other price indicators, continues to suggest an ongoing gradual easing in inflation pressure, but also that there is still some way to go in the moderation,” Spence said. The official measure of consumer price inflation slowed sharply to 2.8% in the September quarter, though much of that was due to temporary government rebates on electricity bills. More

The Institute for Fiscal Studies said growth in hospital activity had far outstripped increases in staffing over the last year, suggesting new workers were being put to good use – even if this had not yet made a big dent in treatment waiting lists.Restoring the National Health Service is one of the five missions of Prime Minister Keir Starmer’s Labour government, elected in a landslide in July.Last month finance minister Rachel Reeves announced sharp increases in tax, spending and borrowing to repair public services, which a vast majority of Britons say are in a poor state.”While undoubtedly positive news, we should remember that NHS productivity is still below where it was pre-pandemic and will require a further period of improvement before the post-pandemic productivity hit is fully unwound,” Olly Harvey-Rich, research economist at the IFS.”Nonetheless, this is a welcome development, particularly as the NHS heads into winter.”The IFS said the number of consultants in NHS England had grown by 3.6% in January to July 2024 compared with a year previously, and there were 6.4% more nurses and health visitors too. But growth in services was much stronger, with elective admissions up by 10.3% and outpatient appointments rising 9.2%.Overall public sector productivity, dominated by healthcare and education, last year stood around 3% below its level of 1997, according to official data.Earlier this year, NHS England cited several factors for the drop in productivity, including: strikes, temporary staffing costs, changing needs of patients and past real-terms cuts to healthcare investment that had harmed the resilience of the NHS. More

The Westpac-Melbourne Institute index of consumer sentiment rose 5.3% in November from October, when it jumped 6.2%. The index reading of 94.6 showed pessimists still outnumbered optimists, but by a narrowing margin.Indeed, readings for future finances and the economic outlook broke above the 100 mark for the first time since the pandemic. “Consumers are seeing some further easing in the pressure on family finances, are no longer concerned about the risk of further interest rate rises and are becoming more confident about the economic outlook,” said Westpac Senior Economist Matthew Hassan.The Reserve Bank of Australia (RBA) again left its interest rates unchanged at 4.35% this month and financial markets are confident the next move will be down, albeit not until next year.Hassan did caution that survey responses took a turn for the worse after Republican Donald Trump’s won the U.S. presidential election. It was unclear whether this would last.Otherwise, the survey was broadly firmer as the share of consumers expecting mortgage rates to drop in the future climbed to the highest since 2016.That was reflected in the survey’s measure of family finances compared to a year ago which surged 6.8%, while finances for the next 12 months rose 4.4%.The index measuring the economic outlook for the next 12 months jumped 8.7%. The outlook for the next five years rose 6.5% as fears of rate hikes eased.The “time to buy a major household item” added 3.2% in November, boding well for retailers ahead of the Christmas shopping period.The time to buy a dwelling index jumped 11.3%, while respondents were also less worried about losing their jobs. More

The Beverly Hills, California-based company is benefiting from high prices of concert tickets, even as some customers are spending cautiously amid high interest rates.”We wrapped up our most active summer concert season ever, our show pipeline has never been bigger, and brand sponsorships are accelerating,” CEO Michael Rapino said.The U.S. Department of Justice and more than two dozen states in May sued to break up Live Nation, arguing that the big concert promoter and its Ticketmaster unit illegally inflated concert ticket prices and hurt artists.Live Nation reported profit per share of $1.66, beating analysts’ average estimate of $1.59, according to data compiled by LSEG. Revenue declined about 6% to $7.65 billion for the quarter ended Sept. 30, missing estimates of $7.75 billion. The company reported its first decline in revenue since 2021.Operating expenses for the quarter fell to $5.78 billion from $6.30 billion a year earlier.The company’s concert business comprising merchandise sales and the production of live music events generated $6.58 billion, making up the bulk of its overall revenue, followed by $693.7 million from ticketing. More