Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is leading a review of international development for the UK government and is a member of the House of LordsTrade policy is probably the area in which the views of the public and those of economists diverge most substantially. Polls in the US regularly show that the majority of people think that protectionism is a good thing, whereas only a minority of professional economists would agree. But when asked if they would be willing to pay more for goods and services in order to have more domestic production, people tend to change their minds.Public opinion is one reason why politicians sometimes reach so quickly and easily for tariffs and other trade restrictions as a solution to many problems. But so is the fact that even though there are many better alternatives to tariffs for achieving growth in jobs, industrial development, fairer outcomes and national security goals, these are often harder to sell to voters. So it is easy to opt for the politically expedient but often ultimately ineffective imposition of tariffs, provision of subsidies and state aid, and localisation of public procurement.Some current supporters of trade restrictions have a zero-sum view of the world and reject the classical arguments for the gains from trade that originate in the work of David Ricardo and Adam Smith. They ignore the fact that a rules-based trading system has contributed hugely to prosperity and poverty reduction, especially for developing countries. Since 1990, global trade has contributed to a 24 per cent increase in global incomes, including a massive 50 per cent gain for the poorest 40 per cent of the world’s population. Supporters of trade restrictions often also fetishise trade deficits and manufacturing exports. But trade deficits are not a problem if they can be financed sustainably and are often a consequence of other macroeconomic imbalances. And there is nothing better about dollars earned from manufacturing exports than dollars earned from services exports.More interesting are those who believe in economic openness but want to use trade policy to achieve other objectives such as competitiveness, redistribution of incomes, climate change mitigation or national security. In most cases, however, there are better ways to achieve those worthy goals than through trade policy.Consider the case of industrial policy, where a variety of trade restrictions have been imposed in the US and elsewhere in the hope of achieving competitive advantage in industries such as electric vehicles or chips and artificial intelligence. The history of such industrial policies is long and the successes have arguably been fewer than the failures. But the main point is that there are much better and more successful policies to build competitiveness, such as financing research and development, building a skilled labour force and providing incentives for investment. Using trade policy as the answer to regional inequality and income inequality is far less effective than building a proper social safety net and investing in declining regions and in people. Countries that have adequate safety nets and policies that help workers reskill and adjust to economic change experience far less protectionism than those that allow global shocks to be felt across the population. It is possible to build safety nets that act like trampolines — enabling workers to bounce back with support that kicks in early and comprehensively to support incomes and also gets people into new jobs.As for accelerating progress to address climate change, it bears repeating that the most efficient way to do this is through a carbon tax with a rebate to protect the poor. Trade restrictions, such as local content requirements or tariffs, make it more expensive to transition to a green economy. Some argue that new green technologies will emerge behind protectionist barriers. But targeted subsidies to research and development would do a better job of making that happen. If we want to address the urgent challenge of climate change, we should focus on policies that make it cheaper and faster to deliver emissions reductions. Similarly, national security is better served by diversifying supply chains. In other words, we need more trade not less. Trade policy is first and foremost about fostering competition to create growth and jobs and to serve consumers efficiently. In most cases, there are better alternatives for achieving competitive industries, fairer income distribution, mitigation of global warming and national security objectives. As the old saying goes, “use the right tool for the job”. Not every nail needs to be hammered with trade policy. A bigger and more varied toolkit would get the job done better and preserve the global trading system that has done so much to improve lives in recent decades.  More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyIt is in the nature of electioneering that, whatever their starting point, politicians will tip more populist, promise big things and be economical with the policy details. This US presidential election has been no different. But whoever is declared the winner only stands a chance of delivering on their promises if they formulate specifics to address five areas that influence the future wellbeing of the economy.This year’s presidential candidates made many ambitious policy statements. They even agreed on some: job creation, ending inflation, protecting domestic companies, eliminating the taxation of tips and improving housing affordability. Donald Trump also opted for additional tax cuts, ambitious deregulation, high tariffs, lower federal spending, expanding fossil fuel production and curtailing environmental initiatives. Kamala Harris has focused on reducing the cost of healthcare and improving access to it, fighting corporate price gouging, expanding tax credits and creating an innovation fund.Yet both Harris and Trump lack the specifics to meet their promises. It’s not something that should be left unaddressed, even in an economy that has outperformed other advanced countries. Measures are needed to be taken in five areas to stand a good chance of delivering on promises.First, the incoming president must find a way to maintain growth while repositioning the economy to take advantage of the drivers of tomorrow’s prosperity. This involves removing the brakes on existing economic engines, such as manufacturing and services, and promoting future sources of growth by supporting the smart dissemination of innovations in artificial intelligence, life sciences, green energy, defence, healthcare and food security. Both the Inflation Reduction Act and the Chips Act should be evaluated for course corrections to fulfil their restructuring aims. This needs to be accompanied by more dynamic regulatory approaches to foster innovation and a better understanding of the risk of the balance between job losses and the upside of skills enhancement.The second challenge is to come to grips with high budget deficits and rapidly rising debt. It was once unthinkable that the US would have almost three years with an unemployment rate around or well below 4 per cent and yet run budget deficits of 6-8 per cent of GDP. To paraphrase John F Kennedy, this is the time of “sunshine” when governments should be “fixing the roof” and not creating additional holes. Yet, whether it is the current deficit at over 6 per cent of GDP or government debt at 120 per cent of GDP, both are on an ultimately unsustainable path.It’s not just about the size of the imbalances. The incoming administration needs to build much greater operational flexibility for public finances that lack sufficient resilience and agility. This requires reforms to the tax system, including removing distortive exemptions and anti-growth biases; rationalising spending; and liberating more resources for investment and precautionary buffers.Third, both candidates need to resist the excessive use of the economic tools they favour. For Harris, this means avoiding overregulation and blunt industrial policy. For Trump, it means containing the use of tariffs and tax cuts.Fourth, the new administration needs to restore credible American leadership at the centre of the global economic and financial order. This is not about a globalist ideology. It is about countering fragmentation which undermines growth and national security. Active US involvement is also needed to develop common responses to shared threats. The alternative is greater vulnerability to more frequent and more violent shocks.The final issue is proper communication. You need only look at the UK to see how an ambitious economic initiative can fall victim to obfuscation. The Biden-Harris administration learnt this lesson the hard way when it followed the 2021 lead of the Federal Reserve in wrongly characterising inflation as “transitory” only to see it surge to more than 9 per cent. Trump managed it better in the immediate aftermath of his 2016 election victory when his conciliatory tone on the economy flipped equity market losses into gains and set an economic narrative that has served him well since.Overpromising in electioneering is neither new nor unexpected. The issue now is for the winning candidate to pivot from promises to economic governing lest the US lose its economic exceptionalism and the world lose its one major growth locomotive. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.If Europe wants to see how Chinese manufacturers could affect its all-important car industry, it could do worse than look to Norway. Fully 94 per cent of cars sold in the Nordic country in October were electric, putting it on course to hit a target of no new fossil-fuel passenger vehicles next year.Chinese carmakers sold no cars in Norway in 2019; this year so far, they have managed to take 11 per cent market share. Brands such as MG, BYD and Xpeng are common sights on Norwegian streets. Perhaps most telling is that Oslo’s main shopping strip Karl Johans Gate has only one car dealership on it: Nio, a relatively new Chinese brand. Just around the corner, under the Financial Times’ Nordic bureau, an upmarket estate agent has been replaced by a flashy showroom for Voyah, replete with modern art.It is hard to exaggerate the importance of Europe’s car industry either in economic terms or in symbolic value. It employs more than 13mn on the continent directly or indirectly, and accounts for one in 10 manufacturing jobs. It is equally hard to underplay the gloom in the sector right now. Amid the profit warnings being handed out by European carmakers, taboos are being threatened everywhere from Volkswagen planning its first closure of a factory in its homeland of Germany in 87 years to Europe’s oldest car plant in Turin being shut for large parts of the year.But just as European manufacturers are being laid low by the move to electric vehicles, Chinese carmakers (and Tesla) are prospering. “I looked at VW, Toyota, Volvo, but I just think the Chinese have better technology, look cooler,” said Ivar, standing outside Nio’s dealership in Oslo. He added that the touchscreens so crucial to electric cars were far slicker in Chinese models than, say, VW’s.Nio’s main storefront looks like a coffee shop, perhaps because it is one, selling everything from a matcha latte to pistachio cookies. “I had no idea it was a Chinese car store,” said one American tourist last month. Further on in the Nio store, it looks more like a lifestyle brand with jackets, suitcases and other bags for sale. It is only around the corner that cars such as ET5 saloon — with a starting price of NKr426,000 ($39,000) — make an appearance.Manufacturers such as VW, Audi and Mercedes had become heavily dependent for their global sales on China, where they had to strike collaborations with local carmakers. Many Chinese companies are now beating the European marques where it hurts: by making arguably better cars in some cases. The German carmakers’ sales in China are falling hard as local manufacturers increasingly dominate. “Look at how the Chinese are now building better cars than the Europeans after starting cooperations with the Europeans decades ago. It’s amazing,” said one Nordic automotive executive.The picture is less dramatic in Norway, even though the direction of travel is still clear and challenging for the Europeans. Tesla, the US industry upstart, is the biggest-selling brand in Norway this year, and is not far off selling as many as the next two — VW and Japan’s Toyota — combined, according to statistics from the Norwegian Road Association. Volvo, based in Sweden but owned by China’s Geely, is not far behind that duo in fourth place. The pace of the Chinese advance in Norway has been uneven. It has been led by MG, the former UK brand that is now owned by SAIC Motor, one of VW’s partners in China. Chinese makers had reached 5 per cent market share already in their first year of sales in 2020, and 10 per cent by 2022. In 2023, their share declined before rebounding to a fresh record level this year.Established brands are far from finished: both Toyota and Volvo have increased their market share in the past five years, but VW and BMW have seen their share drop by more than a fifth. As to where it could lead, a simulation published this year by the European Central Bank provides for alarming reading. If China’s car industry receives subsidies similar to those applied to its solar panel sector, an ECB simulation forecast Chinese carmakers’ global market share would increase by 60 percentage points and the Europeans’ would decrease by 30 percentage points. EU domestic production would fall 70 per cent.The US and EU have sought to stem the rise of Chinese electric cars with tariffs, but Norway has pointedly refused to follow suit. How much tariffs will check the rise of Chinese manufacturers remains to be seen. For now, Norway serves as a local warning for European carmakers of what could happen if they do not move quicker.richard.milne@ft.com More

SAO PAULO (Reuters) -Brazil’s Itau Unibanco, Latin America’s largest private lender, on Monday bumped up its estimated portfolio growth for the year after logging an 18% increase in its third-quarter net recurring profit.Itau reported a 10.68 billion real ($1.84 billion) net recurring profit for the quarter ended in September, beating an estimate of 10.4 billion reais from analysts polled by LSEG.Itau said it now expects its total credit portfolio to grow between 9.5% and 12.5%, up from a previous estimate 6.5% to 9.5% growth.Itau management has previously said the bank was close to wrapping up an overhaul of its personal credit segment by cutting back on loans likely to go unpaid.That has raised analysts’ expectations for coming quarters, as Itau could start to deliver higher portfolio growth once the process is wrapped up. “It is important to mention the resumption of the growth of the credit card portfolio,” Itau said in the earnings report, noting it grew 1.7% sequentially as the bank cut back on risky clients. The bank’s over 90-day delinquency rate inched down to 2.6% from 2.7% the previous quarter, and was also under the 3% a year earlier. Analysts at Citi called the results “solid,” nodding toward the bumped-up loan growth guidance.The new outlook “shows the benefits of (Itau’s) ample capital position and an opportunistic approach to gain share and be selective with clients,” they wrote in a note to clients.Itau’s return on equity, a gauge of profitability, stood at 22.7%, up from 21.1% a year earlier, and 22.4% in the second quarter.The lender posted an 8.5% year-on-year increase in its net interest income, its main source of revenue, while its cost of credit fell 11% on lower provisions. Itau logged a 500 million real gain from a large client, it said, without naming them.Analysts had expected a potential gain for Itau as Brazilian retailer Americanas started to pay creditors to the bankrupt department store giant.($1 = 5.7916 reais) More

Third-quarter net earnings fell about 87% to $120 million, as its engineered materials segment was impacted by rapid slowdowns in commercial activity in both automotive and industrial segments. The company said the temporary dividend reduction, beginning in the first quarter of 2025, was a prudent and cost-effective path forward to support deleveraging, and its plans to cut additional costs would help it save more than $75 million by the end of 2025.CEO Lori Ryerkerk said the teams executed value enhancing initiatives and made improvements but “these actions have been increasingly offset in the current environment and the earnings generated fell short of our expectations.”Last month, peer Dow, which is set to be replaced by Sherwin-Williams (NYSE:SHW) in the Dow Jones Industrial Average, forecast fourth-quarter revenue below market expectations and started review of some of its European assets as the company grapples with sagging demand.Celanese also said it was “reducing manufacturing costs through the end of 2024 by temporarily idling production facilities in every region and driving cash generation through an expected $200 million inventory release in the fourth quarter.”The company forecast fourth-quarter adjusted profit of $1.25 per share, below average analysts’ expectations of $2.93 per share, according to data complied by LSEG, as the company expects demand conditions to worsen.Celanese makes chemical products that are used in coatings, paints and pharmaceutical products and polymers.The chemicals industry, which had previously been dealing with high inventory that led to destocking, is now facing weaker demand in key markets such as China and Europe.  More

Shares of the company rose about 8% in extended trading. The data analytics company has benefited from a boom in GenAI technology, as more companies turn to its AI platform, which is used to test, debug code and evaluate AI-related scenarios.The company now expects 2024 revenue in a range of $2.805 billion to $2.809 billion, up from its prior expectation of $2.742 billion to $2.750 billion.The company is among the largest beneficiaries of a rally in AI-linked stocks, with its shares up more than 140% so far this year. It was added to the S&P 500 in September and has outperformed the index’s 20% year-to-date gain.It also raised its annual forecast range for adjusted income from operations to between about $1.05 billion and $1.06 billion. It earlier forecast $966 million to $974 million. “Top line growth, which is driven by the demand for AI, (is) flowing through to the bottom line,” CFO David Glazer told Reuters. While businesses are increasingly using Palantir (NYSE:PLTR)’s services, a large chunk of its revenue comes from government spending. Palantir, whose services include providing software to governments that visualizes army positions, posted a 40% rise in U.S. government revenue in the third quarter, which made up more than 44% of total sales of $725.5 million.Analysts on average had expected revenue of $701.1 million, according to data compiled by LSEG. Palantir also recorded its largest-ever profit, with net income of $144 million in the third quarter, CEO Alex Karp said in a letter to shareholders. One of the Nordic region’s largest investors, Storebrand Asset Management, said last month it sold its Palantir holdings due to concerns that the company’s work for Israel might put it at risk of violating international humanitarian law and human rights.The company also forecast fourth-quarter revenue above estimates. More

“Instead, we believe he will leave options open for either slowing or accelerating rate cuts at 2PM Thursday – a dovish message relative to the market focus,” Citi analysts Andrew Hollenhorst and Veronica Clark said.The Fed is expected to deliver a 25 basis rate cut at the conclusion of its two-day meeting on Thursday.Recent market bets have swayed toward expectations that the U.S. economy may not cool sufficiently for the Fed to continue its plan to reduce policy rates to neutral. Citi analysts, however, argue that the latest data points strongly in the opposite direction.The softer-than-expected jobs report for October, after accounting for hurricane and strike effects, along with core PCE inflation running close to target and the employment cost index slowing to 3.2% annualized, are likely to keep Powell from endorsing a hawkish view, the analysts said.”Fed officials had prepositioned to dismiss any weakness in the October jobs report, which will moderate the dovishness of the response,” they added, referring to comments made by Governor Waller on October 14th.Citi expects little debate about cutting rates by 25 basis points at the November meeting. The December rate cut decision will depend on labor market data, with Citi expecting another 50 basis point cut.The analysts also pointed out that the FOMC meeting will be held just after the U.S. presidential and congressional elections. They expect Powell to emphasize that monetary policy will react to macroeconomic developments, not proposed new policies, if asked about the election’s impact on Fed policy.Regarding the balance sheet reduction, Citi analysts believe Fed officials are unconcerned by the modest pickup in funding rate volatility and could be comfortable running reduction well into 2025. More

BRUSSELS (Reuters) – Europe’s investment needs for the green and digital transition, along with defence and research, should use public funds primarily to attract and boost private investment, EU finance ministers said on Monday.Their statement, which confirms details from a draft seen last week by Reuters, will form part of EU discussions on competing with China and the United States in advanced technologies while cutting CO2 emissions.Last month, former European Central Bank president Mario Draghi estimated the EU needs up to 800 billion euros ($870.80 billion) in annual investments – up to 5% of its GDP – to keep pace with global rivals. EU finance ministers said they cannot meet this sum alone, highlighting the need for strong capital markets to draw private funds as public finances have been depleted by multiple crises.The limited public funds were “best used as a catalyst for leveraging private capital in areas with positive spillovers,” the statement said.Leveraging in this case means using a relatively small amount of EU funds to cover the riskiest parts of a project, thereby drawing private investors to the safer, more profitable segments.The ministers met on Monday ahead of an EU summit on competitiveness on Nov. 7-8 in Budapest. They also expressed willingness to spend EU taxpayer money on services and infrastructure that benefit all 450 million citizens across borders, labelling these as EU public goods.”While private investment is vital, public financing also has an important role to play. European financing should focus on areas where public goods can be more effectively delivered jointly,” the statement said.Germany and other EU nations have rejected further joint borrowing due to debt from the COVID-19 pandemic, but ministers have said cross-border electricity grids are essential in securing lower, stable energy prices for businesses.($1 = 0.9187 euros) More