Economy

Stay informed with free updatesSimply sign up to the More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The auto industry supports 6 per cent of the EU’s jobs, and Volkswagen is its biggest carmaker. So when the German group warns it must close three plants at home and axe thousands of workers, that is a sign of the stress Europe’s carmakers are under. European sales have yet to regain pre-pandemic levels, just when the industry is engaged in an epochal shift from internal combustion engines to electric vehicles — and has allowed Chinese rivals to leapfrog ahead in the new technology. Slow off the starting line, Europe’s carmakers face a restructuring as wrenching as the US auto industry after the 2008 financial crisis. But policy needs to play a more constructive role, too.Despite two profit warnings in three months, Volkswagen is not in such desperate straits as the biggest US carmakers 15 years ago. It says it needs to raise operating margins in the core VW brand from 2 per cent in recent quarters to 6.5 per cent by 2026 to fund investments in its future. Targeting three plant closures may be its opening gambit in talks with Lower Saxony, which has 20 per cent of voting rights, and the unions. But VW and Germany are not alone in having to slash overcapacity and costs. Italian politicians are pushing Stellantis, which owns Fiat, Peugeot and Opel, to keep open its Fiat plant in Turin despite falling sales. Some French assembly lines are already being shifted offshore.Germany’s big carmakers, in particular, were too complacent in assuming that the lucrative Chinese market could tide them over the tricky EV transition. Chinese manufacturers have stolen a march technologically and are supplanting foreign rivals in a market where, in July, half of all vehicles sold were EVs or plug-in hybrids. China’s upstarts benefited from huge state subsidies and lower labour costs, and started from a cleaner slate. They grasped more quickly, though, that EVs’ value lies more in snazzy software and electronics than in mechanics. In Europe, the cheapest new EV last year cost almost double the cheapest ICE car; in China, it cost 8 per cent less. China’s EVs are not only more affordable than foreign ones, they are often better.Fearing a flood of subsidised imports, the EU this week imposed higher tariffs on Chinese-made EVs. But protectionism is not the answer. Europe’s auto industry has to face up to the need to cut costs by reducing capacity and jobs. With fewer moving parts, EVs were always going to need fewer people to build them. Though there will be social costs that must be mitigated, governments need to accept that keeping surplus or lossmaking plants open will only delay or derail a successful transition to new technology. As well as making EVs more cheaply, Europe’s carmakers have to speed up model development, and find partners or outsource areas where they lack expertise. Tie-ups with Chinese counterparts they can learn from make some sense — though China’s newcomers might also use these to plug gaps in their own prowess, and gain access to ready-made distribution networks.Smarter policy must also play a role. The EU has banned the sale of new ICE cars from 2035, and its tightening emissions standards will force automakers to sell fewer of them over time. But as Mario Draghi’s report on competitiveness noted last month, the EU decreed targets without a proper industrial strategy to achieve them. It needs a comprehensive approach to developing the entire supply chain, including raw materials and the battery technology that lies at the heart of EVs, and of China’s EV success. Investment in charging networks and financial incentives are needed to encourage consumers to switch, so higher volumes start to cut production costs. It is not yet too late for Europe’s auto industry to narrow the EV gap. But China has opened a substantial lead. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.For an hour on Wednesday, the financial market reaction to Rachel Reeves’ Budget was ugly — Truss-like, even. Between 2pm when the chancellor finished her speech and 3pm, UK government borrowing costs rose 0.2 percentage points, whether it was seeking to borrow short or long term. This was a much higher increase in yields than in equivalent government bond markets on both sides of the Atlantic and nerves must be jangling in the Treasury. Things were not much better on Thursday. If financial markets blow a loud raspberry to a Budget for a second time in just over two years, that would be a significant blow both to households and the Treasury. There are, however, important differences with Liz Truss’s “mini” Budget debacle. First, the UK market has been calm. Second, rising borrowing costs were not initially combined with falling sterling. In comparison to 2022, foreigners have not been dumping UK assets.Market reaction appeared to follow the Office for Budget Responsibility’s new forecasts which show that higher public spending would add to demand and inflation, while increased taxes would hit supply. This all sounds pretty inflationary and the fiscal watchdog said that while it still thought the Bank of England’s policy rate would fall, the Budget measures would leave interest rates 0.25 percentage points higher than it had assumed when initially producing the forecast. More spending, more borrowing and higher taxes equals higher interest rates than otherwise. This was reasonable analysis from the OBR, which was making a comparison based solely on the outlook now compared with that in March. But it makes little sense for the BoE to follow suit. The central bank has had ample time to adjust its thinking to Reeves’ announcement on July 29 that public spending would be much higher than the OBR assumed in March. Alongside public finance data that has also pointed to a large spending overshoot, the Budget cannot be much of a surprise. The key question for the BoE’s Monetary Policy Committee is what was genuine news. This is pretty limited. The increase in public borrowing for 2024-25 caused directly by policy decisions was £23.7bn, just a little higher than the chancellor’s announcement of a £22bn black hole in July. Whatever you think of the veracity of Reeves’ number, in their meetings in August and September MPC members had known this fiscal stimulus was coming. They did not then think it significant for interest rates. If the BoE says next week that their November meeting was the first time they have considered the effects of Labour’s fiscal plans and these are more inflationary, it would reflect very poorly on its ability to respond to events. For that reason, I think it highly unlikely. It is also worth noting that the BoE is traditionally loathe to suggest it is responding to loose fiscal policy with higher interest rates. When the former chancellor Jeremy Hunt cut national insurance in late 2023 and early 2024, its reaction was a large shrug. Based on information we have had for some time, UK fiscal policy is loosening a little this year, but is on a medium-term tightening path, inflation threats have declined significantly and wage pressures have been moderating. These remain the conditions for the BoE to lower official interest rates with the pace determined by many larger uncertainties than UK fiscal policy. Having suffered a longer-lasting inflationary shock than other European countries, especially in services, the central bank needs to maintain restrictive monetary policy. But it can do so while cutting rates gradually.The Budget is unlikely to change this reality much. The tax rises were big. The spending increases were bigger. But the broad macroeconomic balance did not alter much on Wednesday. chris.giles@ft.comVideo: Sketchy Politics: Labour pains More

PHILADELPHIA (Reuters) -Elon Musk, a billionaire supporting Republican Donald Trump, has been ordered to attend a Thursday hearing in a prosecutor’s lawsuit to block his $1 million-a-day giveaway to registered swing state voters ahead of the U.S. election on Nov. 5. The hearing before Judge Angelo Foglietta concerns Philadelphia District Attorney Larry Krasner’s bid to halt the giveaway less than a week before the tightly contested U.S. presidential election between former President Trump and Democratic Vice President Kamala Harris. According to published reports, Krasner asked the court for added security for the hearing, saying social media users posted an “avalanche” of inflammatory posts, including antisemitic attacks toward him, and posted his home address.Musk, meanwhile, is seeking to move the case to the federal court in Philadelphia.In a filing there, Musk said Krasner’s interference with core political speech and claim that he was “somehow unlawfully interfering with a federal election” raised significant questions of federal law that belonged in federal court.Krasner, who championed progressive causes when running for district attorney, accuses Tesla (NASDAQ:TSLA) CEO Musk and his political action committee America PAC of hatching an “illegal lottery scheme to influence voters.” Musk promised to give $1 million a day to randomly selected people who signed a petition pledging support for free speech and gun rights.Signatories were required to be registered voters in one of seven states that will likely decide the outcome of the Nov. 5 election – Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin. Musk gave away the first $1 million to an attendee of an Oct. 19 rally hosted by America PAC in Harrisburg, Pennsylvania. Krasner’s Oct. 28 lawsuit alleges the giveaway amounts to an illegal lottery unsanctioned by the state, which has sole authority to run and regulate them.The lawsuit also says it violates consumer protection laws by “deploying deceptive, vague or misleading statements” about its rules. “Running an illegal lottery and violating consumer protections is ample basis for an injunction and concluding that America PAC and Musk must be stopped, immediately, before the upcoming Presidential Election on November 5,” the lawsuit said.Krasner’s office said Musk and America PAC have not published clear rules for the giveaway nor said how they are protecting voters’ personal information.He also said people who receive Musk’s money are “not actually chosen at random,” citing two winners who happened to live near, and attended, two pro-Trump rallies.  Musk and America PAC’s lawyers did not immediately respond to requests for comment. Some legal experts have said Musk’s giveaway could also potentially violate federal laws against paying people to vote or register to vote. Others say he is in the clear because people are only required to sign a petition to enter. Krasner’s lawsuit was brought in a Pennsylvania state court and does not allege the giveaway violates federal law. The U.S. Department of Justice warned America PAC the giveaway could violate federal law, multiple news outlets reported last week, although federal prosecutors have not taken any action publicly. Musk, ranked by Forbes as the world’s richest person, has so far given nearly $120 million to America PAC, according to federal disclosures, making the group a crucial part of Trump’s bid to regain the White House. The entrepreneur has increasingly supported Republican causes and this year became an outspoken Trump supporter. Trump in turn has said that if elected, he would appoint Musk to head a government efficiency commission. More

(Reuters) – Traders of short-term interest-rate futures on Thursday stuck to bets the Federal Reserve will cut short-term U.S. borrowing costs by a quarter-of-a-percentage point next week, and likely again by that amount in December, after economic data suggested upward price pressures continue to ease. Inflation by the Fed’s targeted measure, the year-over-year increase in the personal consumption expenditures index, was 2.1% in September, down from an upwardly revised 2.3% in August, a Commerce Department report showed. The Fed aims at 2% inflation. More

The personal consumption expenditures price index showed a seasonally adjusted 0.2% increase for the month, with the 12-month inflation rate at 2.1%, both in line with Dow Jones estimates.
However, the core inflation rate was at 2.7% after the measure increased 0.3% on a monthly basis.
Initial filings for unemployment benefits totaled 216,000 for the week ending Oct. 26, a decrease of 12,000 and below the forecast for 230,000.

Inflation increased slightly in September and moved closer to the Federal Reserve’s target, according to a Commerce Department report Thursday.
The personal consumption expenditures price index showed a seasonally adjusted 0.2% increase for the month, with the 12-month inflation rate at 2.1%, both in line with Dow Jones estimates. The Fed uses the PCE reading as its primary inflation gauge, though policymakers also follow a variety of other indicators.

Fed officials target inflation at a 2% annual rate, a level it has not achieved since February 2021. The September headline rate was down 0.2 percentage point from August.
Though the headline number showed the central bank nearing its goal, the inflation rate was at 2.7% excluding food and energy, after the so-called core measure increased 0.3% on a monthly basis. The annual rate was 0.1 percentage point higher than forecast but the same as in August.
The move in inflation was tilted towards services prices, which increased 0.3%, while goods prices decreased 0.1%, the fourth outright deflation figure in the past five months for the category. Housing prices eased off their pace, rising 0.3%. Energy goods and services fell 2%.
The report comes with markets betting heavily that the Fed will cut its benchmark short-term borrowing rate when it meets next week. In September, the Fed slashed the rate by a half percentage point, a move virtually unprecedented during an economic expansion.
Policymakers have expressed confidence that inflation is heading back to target while at the same time showing concern over the state of the labor market despite most indicators showing that hiring is continuing and layoffs are low.

A separate report Thursday morning reinforced the notion that companies are mostly hanging onto their workers.
Initial filings for unemployment benefits totaled 216,000 for the week ending Oct. 26, a decrease of 12,000 from the previous period’s upwardly revised level, according to the Labor Department. The total was also below the 230,000 forecast.
Despite worries over inflation, the Commerce Department report showed income and spending held up during the month.
Personal income increased 0.3%, slightly higher than the August number and in line with expectations. Consumer spending rose 0.5%, topping the outlook by 0.1 percentage point. The personal saving rate moved down to 4.6%, its lowest of the year.
In yet another data point Thursday, the Bureau of Labor Statistics reported that the employment cost index increased 0.8% in the third quarter, 0.1 percentage below forecast. On a 12-month basis, the index, which measures wages, salaries and benefits, increased 3.9%, compared to a 2.4% increase in the consumer price index. More