Economy

Incoming centrist prime minister Francois Bayrou has struggled for almost 10 days to put together a government as he looks to stave off a vote of no-confidence in mid-January and ensure parliament agrees on a budget for 2025 in February.”Given the national day of mourning, the (government) announcement will not be before 1800 (1700 GMT),” the presidency said. There are fears that hundreds or even thousands may have been killed by Cyclone Chido in France’s Indian Ocean territory of Mayotte.Bayrou initially sought to broaden his incoming administration to appeal to both the left-wing Socialist party and the conservative Les Republicains, hoping not to suffer the fate of his predecessor Michel Barnier, whose government collapsed after just three months amid opposition to his budget measures.However, Bayrou, who has vowed to name his government before Christmas, has failed in particular to satisfy demands from the left in his quest to secure majority support in a deeply fractured parliament.In a letter seen by Reuters addressed to Les Republicains, which won just 5% of votes in the summer parliamentary election, Bayrou sets out security and budgetary measures in the hope of ensuring it joins the next government. Bayrou is trying to cut a wide budget deficit but is finding consensus as hard to achieve as Barnier. An opinion poll published on Dec. 19 found 64% were dissatisfied with his appointment as prime minister.After a European Parliament election last June in which the far-right Rassemblement National made significant gains, President Emmanuel Macron called a snap parliamentary election that he promised would bring more clarity.Instead, no party or bloc won a majority, leaving parliament divided into three main blocs, and Macron’s nominees for prime minister so far unable to muster the majority support that would enable them to survive an inevitable vote of no-confidence. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The UK economy failed to grow in the third quarter, in the latest blow to a government already under fire from businesses for its tax-raising Budget.GDP did not register any growth in the three months to September, the Office for National Statistics said on Monday, down from its first estimate of a 0.1 per cent expansion. The economy was held back by the dominant services sector, which stagnated over the quarter. Production output fell 0.4 per cent, offsetting a 0.7 per cent increase in the construction sector.The figures show the economy stalled in the immediate aftermath of Labour’s July election victory, even before chancellor Rachel Reeves’ Budget dented business confidence.Reeves on Monday admitted that the government faced a “huge” challenge but insisted that the Budget had laid the foundations for long-term growth.If growth undershoots forecasts made in the Budget, it raises the prospect that the chancellor may need to deliver spending cuts or higher taxes next year to ensure she continues to meet her borrowing rules.“The challenge we face to fix our economy and properly fund our public finances after 15 years of neglect is huge,” Reeves said. “But this is only fuelling our fire to deliver for working people.”The government has put boosting growth at the heart of its agenda, but now faces the threat that the economy could have contracted in the final quarter of the year.GDP shrank 0.1 per cent in October, the second straight monthly contraction.The ONS also revised its estimate for second-quarter growth down from 0.5 per cent to 0.4 per cent, indicating the economy began slowing earlier than previously thought. Recent figures have pointed to a softening in the jobs market, stubborn inflation and falling business confidence.The Bank of England last week predicted zero expansion in the fourth quarter, down from its previous forecast of 0.3 per cent growth.Economists said the details of Monday’s downwardly revised data contained some bright spots, with consumer spending growing at a healthy pace, business investment picking up and households no longer piling more money into savings. Paul Dales, at the consultancy Capital Economics, said the downward revision in the third quarter was “mainly due to external influences rather than the domestic economy”, including a bigger drag from net trade. But the overall picture was that growth had “ground to a halt”, he said, due to “the lingering drag from higher interest rates, weaker overseas demand and some concerns over the policies in the Budget”.Elliott Jordan-Doak, senior UK economist at the consultancy Pantheon Macroeconomics, said the revision would not change the BoE’s thinking on interest rates, as much of the weakness had been in government spending and would “fade away” next year. Last week Andrew Griffith, shadow business secretary, claimed the UK was heading for a “January of discontent” and the possibility of a recession. He said if there was a recession it would be “made in Downing Street”. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Ireland’s top central banker has said rate-setters are facing more uncertainty now than during the early stages of the coronavirus pandemic. Gabriel Makhlouf told the Financial Times that the outlook for next year was probably clouded by “more uncertainty than there was when we went into lockdown” as the agenda and actions of incoming US president Donald Trump were all but impossible to read. The president-elect has pledged to impose levies of up to 20 per cent on all US imports, with the tariffs rising to 60 per cent on China, once he returns to the White House on January 20. Most economists, including those at the European Central Bank, think a US-instigated global trade war would dent growth in the export-dependent Eurozone. Some analysts think the ECB should cut rates pre-emptively to guard against Trump’s second term in the White House as growth in the Eurozone has been weaker than expected, while inflation is falling quicker than anticipated towards the central bank’s 2 per cent goal. But, despite the risks, Makhlouf, who holds one of the 26 votes on the ECB’s governing council, said uncertainty was so rampant that “insurance cuts [to interest rates] really may not necessarily help [but] may actually create a different problem”.Makhlouf warned that it was unclear if Trump was really serious about tariffs, or if his threat was just a bargaining strategy to achieve other policy goals. While he acknowledged that additional barriers to trade would “not be good for the world”, he said the fallout for growth and inflation was all but impossible to quantify at this point in time. “There are so many caveats [and] so many variables that any scenario analysis risks giving people a wrong sense [that] we understand how all this is going to pan out.”Makhlouf said that the ECB needed to be “very vigilant”, but argued against calls for the central bank to start cutting rates by 50 basis points at a time at forthcoming meetings in early 2025. The ECB in December lowered borrowing costs for the fourth time this year by a quarter point. ECB president Christine Lagarde said that further cuts were likely next year and disclosed that some members of the governing council had argued in favour of a 50bp reduction in December.Makhlouf told the FT his preference was still “for gradual moves rather than big leaps”, unless “the facts and the evidence” suggest otherwise. “I have not seen, and I at the moment do not see, the need for a sudden big leap.”Makhlouf pointed to the risk that inflation may flare up again if the ECB eased too fast. “We haven’t declared victory [over inflation] yet” as “some elements” of services inflation were still “a bit” concerning. “We wouldn’t want to complicate our price stability objective by making these sort of insurance cuts,” he said. The ECB could respond when it had “more information” and understood more clearly was Trump’s policies meant for the outlook.Makhlouf said he expected borrowing costs in the Eurozone to fall to a level where they were neither restricting nor stimulating economic activity — a level often described by economists as the “neutral” rate. “I couldn’t tell you whether that will be at 2.75 [per cent], at 2.5 [per cent] or at 2.25 [per cent],” he said. Makhlouf indirectly suggested that the current market consensus that interest rates were to fall to 1.75 per cent by the second half of next year was off the mark. “People who are saying that [the neutral rate is] below 2 are probably ahead of themselves,” he said. More

(Reuters) – No sooner had the global economy started to put the aftermath of the COVID-19 pandemic behind it than a whole new set of challenges opened up for 2025. In 2024, the world’s central banks were finally able to start lowering interest rates after largely winning the battle against inflation without sparking a global recession.Stocks hit record highs in the United States and Europe and Forbes declared a “banner year for the mega-wealthy” as 141 new billionaires joined its list of the super-rich.But if this was supposed to be good news, someone forgot to tell voters. In a bumper election year, they punished incumbents from India to South Africa, Europe and the United States for the economic reality they were feeling: a merciless cost of living crisis brought on by cumulative post-pandemic price rises.For many, it might get tougher in 2025. If a Donald Trump presidency enacts U.S. import tariffs that spark a trade war, that could mean a fresh dose of inflation, a global slowdown or both. Unemployment, currently near historic lows, could rise. Conflicts in Ukraine and the Middle East, political logjams in Germany and France, and questions over the Chinese economy further cloud the picture. Meanwhile, rising up the rank of concerns for many countries is the cost of climate damage.WHY IT MATTERSAccording to the World Bank, the poorest countries are in their worst economic state for two decades, having missed out on the post-pandemic recovery. The last thing they need are new headwinds – for example, weaker trade or funding conditions.In richer economies, governments need to work out how to counter the conviction of many voters that their purchasing power, living standards and future prospects are in decline. Failure to do so could feed the rise of extremist parties already causing fragmented and hung parliaments.New spending priorities beckon for national budgets already stretched after COVID-19, from tackling climate change to boosting armies to caring for ageing populations. Only healthy economies can generate the revenues needed for that.If governments decide to do what they have been doing for years – simply piling on more debt – then sooner or later they run the risk of getting caught up in a financial crisis.WHAT IT MEANS FOR 2025As European Central Bank President Christine Lagarde said in her press conference after the ECB’s final meeting of the year, there will be uncertainty “in abundance” in 2025.It is still anyone’s guess whether Trump will push ahead with tariffs of 10-20% on all imports, rising to 60% for Chinese goods, or whether those threats were just the opening gambit in a negotiation. If he goes ahead with them, the impact will depend on what sectors bear the brunt, and who retaliates.China, the world’s second-largest economy, faces mounting pressure to begin a deep transition as its growth impetus of recent years runs out of steam. Economists say it needs to end an over-reliance on manufacturing and put more money in the pockets of low-income citizens.Will Europe, whose economy has fallen further behind that of the United States since the pandemic, tackle any of the root causes – from lack of investment to skills shortages? First it will need to resolve political deadlocks in the two biggest euro zone economies, Germany and France.For many other economies, the prospect of a stronger dollar – if Trump policies create inflation and so slow the pace of Federal Reserve rate cuts – is bad news. That would suck investment away from them and make their dollar-denominated debt dearer.Finally, add in the largely unknowable impact of conflicts in Ukraine and the Middle East – both of which may have a bearing on the cost of energy which fuels the world’s economy.For now, policymakers and financial markets are banking on the global economy being able to ride all this out and central bankers completing the return to normal interest rate levels.But as the International Monetary Fund signalled in its latest World Economic Outlook: “Brace for uncertain times”. More

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After the bonanza of recent central bank decisions, this week is much quieter with only the minutes of a few of those meetings due. There are no Federal Reserve speeches and U.S. data is of secondary importance.Otherwise the themes were largely the same, with the dollar underpinned by a relatively strong economy and higher bond yields, which in turn is a burden for commodities and gold.It is also a headache for emerging market countries, which are having to intervene to stop their currencies from falling too far and stoking domestic inflation.For now, the afterglow from the U.S. inflation report was enough to lift MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%.Japan’s Nikkei gained 0.7% and South Korea firmed 0.9%.S&P 500 futures added 0.3%, while Nasdaq futures firmed 0.4%. The S&P 500 fell almost 2% last week and the Nasdaq 1.8%, though the latter is still up 30% for the year.Analysts at BofA noted the S&P 500 was up 23% for the year, but if the 12 largest companies were excluded the gain was only 8%. They cautioned such extreme concentration was a vulnerability going into 2025.Wall Street had rallied on Friday when a key gauge of core U.S. inflation printed lower than expected at 0.11%, providing a partial antidote to the Fed’s hawkishness earlier in the week.Fed funds futures rallied to imply a 53% chance of a rate cut in March and 62% for May, though they only have two quarter-point easings to 3.75-4.0% priced in for all of 2025. A few months ago, the market had hoped rates would bottom around 3.0%.The prospect of fewer cuts has combined with expectations of more debt-funding government spending to pressure bond markets, with 10-year yields surging almost 42 basis points in just two weeks for the biggest such increase since April 2022.”The recent firming in core inflation has interacted with a rising threat of tariffs and immigration restrictions to temper the Fed’s inflation optimism,” noted JPMorgan economist Michael Feroli.”Given our inflation and unemployment rate forecasts, we continue to look for 75bp of cuts next year with a hold in January and a quarterly cadence thereafter.”In currency markets, the dollar index held near two-year highs at 107.970 having climbed 1.9% for the month so far. The euro looked vulnerable at $1.0432 having again tested support around $1.0331/43 last week. [USD/] The dollar was firm at 156.44, having gained 4.5% so far in December, but faces more threats of Japanese intervention should it challenge the 160.00 barrier.The strong dollar combined with high bond yields to weigh on gold, which stood at $2,624 an ounce after slipping 1% last week. [GOL/]The high dollar is also a burden for oil, already hampered by concerns over Chinese demand following dismal retail sales figures last week. [O/R]Brent was up 4 cents at $73.00 a barrel, while U.S. crude gained 12 cents to $69.58 per barrel. More