Economy

FRANKFURT (Reuters) – European Central Bank policymakers are increasingly at odds on the outlook for growth, a rift that could shape the rate cut debate for months with some fearing a recession and others focusing on lingering inflation pressures, sources close to the debate said.The ECB cut interest rates in June and is almost certain to ease again in September in a nod to slowing price growth. However, policy decisions further down the road are likely to be more complicated as the euro zone economy enters a more precarious state, conversations with close to a dozen sources suggest. The core of the debate is over how weakness in economic growth and a potential recession will impact inflation – the bank’s ultimate focus – as it tries to cut inflation to 2% by the end of 2025. Although much of the discussion is private, conversations with sources with direct knowledge of it reveal diverging views.An ECB spokesperson declined to comment. Policy doves, who remain in the minority, argue the economy is weaker than thought, recession risks are on the rise and firms that have hoarded labour are starting to cut vacancies, leaving the jobs market softer. Once employment declines, so does disposable income, quickly eroding consumption and leaving a self-reinforcing downturn.”This would weaken price pressures quicker than we now forecast, so I think the risk of returning to below-target inflation is real,” one of the sources, who asked not to be named, said.This would suggest the central bank is behind the curve in cutting interest rates and buffering the economy, supporting the case for quicker interest rate cuts, they say. Inflation, down to 2.2% in August, is now forecast to rise again towards the end of the year and coming back to 2% only in late 2025.RECESSION?Conservatives, or hawks in central banking parlance, who have dominated the policy debate since the start of rapid rate hikes in 2022, argue that actual growth figures persistently outperform weak survey results and the economy is holding up.Consumption is robust, the bloc just enjoyed a superb tourism season and construction is finally rebounding, so growth remains respectable.Moreover, wage growth remains far above levels consistent with a 2% inflation target, so real incomes are rebounding quickly and should continue to insulate the economy. While industry is in a deep downturn and could drag Germany into a recession, this is more a structural issue that could take years to resolve, so monetary policy has little role, many of the sources said. All this builds the case for slow rate cuts, perhaps one every quarter, until the ECB is certain inflation is heading back to 2%. Hawks are also likely to fight any policy easing that would push into 2026 the date the inflation target is met, since that could jeopardize the ECB’s credibility, the sources said. ECB board member Isabel Schnabel, a prominent policy conservative, argues that inflation concerns should trump growth. “Monetary policy should remain focused on bringing inflation back to our target in a timely manner,” she said in a speech on Friday. “While risks to growth have increased, a soft landing still looks more likely than a recession.” OCTOBERThe rift is unlikely to impact September’s policy decision since there is already widespread consensus to cut rates, the sources said.But it could affect how ECB President Christine Lagarde communicates the decision, shifting expectations for the October meeting. The bank is unlikely to discard its “meeting by meeting” approach to setting policy so there will be no commitment about October, but doves want Lagarde to highlight growth risks and signal that back-to-back cuts are not excluded.Hawks fear such a message would heighten market expectations too much, putting the ECB in a bind. Investors already see a 40% to 50% chance of an October cut and such a dovish message would only firm up those bets.”I think quarterly cuts serve us well and the data just don’t support picking up this pace,” a third source said. While governors will agree on the text of the policy statement, Lagarde enjoys some freedom in delivering the message and can choose to emphasize certain points. Economists also appear to take a mixed view on the outlook, even if most agree that it is far from bright. “Even if the U.S. is to avoid recession, Europe might not,” Macquarie strategist Thierry Wizman said. Wizman argued that weak Chinese demand for European goods exacerbates the downturn, while the potential impact on political stability from the rise of the far right in France and Germany could also weigh on consumer sentiment.ABN Amro, meanwhile, expects continued, if meagre, growth. “The euro zone economic recovery is struggling to gain momentum,” ABN said. “High savings rate suggests consumers are less willing to spend real income gains, especially in France, the Netherlands and Germany.” More

BUENOS AIRES (Reuters) – Brazil’s economy kept growing at a solid pace last quarter compared to the first three months of the year, supported by household expenditure, a Reuters poll predicted.But higher imports of goods and services likely weighed on the country’s growth after surpassing less-dynamic exports at the start of 2024 due to a strong foreign exchange rate, which has depreciated recently.Second-quarter gross domestic product figures, scheduled for Tuesday, are forecast to show a 0.9% expansion versus the January-March period, when the economy advanced 0.8%, according to the median forecast of 18 analysts polled Aug. 28-Sept. 2. “We estimate the Brazilian economy grew 0.9% on the quarter, 2.7% yearly… likely supported by resilient private consumption benefiting in part from strong labor markets and rising real wages,” Barclays economists wrote in a report.While public spending contributed with an increase in social benefit payments, as well as aid related to floods in April and May, “on the downside, the external sector was likely a drag for growth due to higher imports,” they added.In a report, Santander (BME:SAN) analysts saw a 7.8% quarterly rise in imports versus a much lower 1.3% gain in exports. In the first quarter, imports and exports grew 6.5% and 0.2% respectively, as Brazilians piled into foreign goods and services.Meanwhile, from the point of view of supply, total industrial production, including mining, should have expanded by 1.2%, an advance partly offset by a 2.4% contraction in the smaller farm sector, according to Santander.On an annual basis, economic growth was seen in the survey at 2.7% in the second quarter, the highest since 3.5% in the same period of 2023, following the inauguration of President Luiz Inacio Lula da Silva at the beginning of last year.”Brazil’s growth is particularly surprising as this economy could grow close to 3% for the second consecutive year, an average rate that outperforms the other countries of the region in 2023 and 2024,” J.P. Morgan economists wrote in a report.”We think this strength will be extended through the third quarter but foresee some deceleration going forward as, for the first time in a while, both monetary and fiscal policies will be restrictive for growth.”Last week, Lula signalled he would accept a potential rate hike from his central bank chief nominee for 2025-2028. At the same time, the finance ministry vowed to fulfill its promise of fiscal restraint by year-end. (Reporting and polling by Gabriel Burin; Editing by Ross Finley and Christina Fincher) More

The consensus forecast of 15 analysts polled by Reuters in late August and early September suggested annual inflation would end 2024 at 7%, down from the current rate of 9.1% but slightly up from the previous poll’s forecast of 6.9%. The central bank anticipates inflation in the range of 6.5-7.0% in 2024 as the supply of goods and services catches up with demand.At its last meeting in July, the central bank raised its benchmark interest rate by 200 basis points to 18%, the highest level since April 2022, and indicated that tight monetary policy would remain for some time to achieve a sustainable slowdown in inflation.Analysts predicted that the double-digit benchmark interest rate in Russia would remain until 2027, when it is expected to fall to 9.0%. The central bank forecasts an average benchmark rate of 7.5%-9.5% in 2027.Analysts projected gross domestic product growth this year at 3.6%, below the updated official forecast of 3.9% announced by Finance Minister Anton Siluanov, following the release of strong data for the first half of the year.Growth in capital investment, one of the factors behind strong economic growth, is forecast at 7% in 2024, down from 9.8% last year.The rouble is expected to weaken by over 5% to 96.0 against the U.S. dollar in a year, compared to the current official exchange rate of 91.19.”Negative factors for the rouble include geopolitical and sanction risks, capital outflows, demand for foreign currency to buy back shares of Russian companies from foreign owners, and increased budgetary expenditures,” said Mikhail Vasilyev, chief analyst at Sovcombank. (Reporting and polling by Gleb Bryanski and Alexander Marrow; Editing by Christina Fincher) More

The nonfarm payrolls number has regained its crown as the most important data release for stocks, analysts at BOA Securities, said in a note dated Sept. 2, with S&P futures now less sensitive to CPI data than at any other point post-Covid, and the payrolls report now the bigger source of volatility.The second print of second quarter U.S. GDP growth surprised to the upside at a robust 3.0% q/q seasonally adjusted, led by strong consumption growth of 2.9%, while most other major categories were marked down. Nevertheless, the consumer is nearly 70% of the economy. Concerns about the labor market can be eased when the economy sees 2.9% spending growth, as strong spending indicates the labor market probably held up fine in the second quarter and solid demand should still generate some job growth going forward.“The economy continues to disprove skeptics,” BoA said. “Growth has certainly cooled relative to last year, but it has done so at a gradual pace. July personal spending data further confirmed this view, picking up a solid 0.5% m/m in nominal terms.”“Overall, recent data indicate another step in the right direction, and all eyes will be on the August payrolls report.”Into the print, Fed funds futures are pricing in a “recession-sized” 100bps of cuts for the rest of 2024. Equities seem more excited about the cuts than concerned about a potential recession, gauging by their return to near highs and the outperformance of small caps & equal-weighted S&P. “If that’s true, the main risk for equities this week is a hot NFP that reprices short-term rates higher,” BoA added. “The most direct way to hedge this risk is through equity-rates hybrids.” More

The CBE kept rates steady at its last two meetings, on July 18 and May 23, saying economic growth remained slow but that inflation had been decreasing.On March 6, the bank raised rates by 600 basis points (bps) as part of an $8 billion agreement with the International Monetary Fund, bringing total increases since the beginning of the year to 800 bps. The median forecast in a poll of 15 analysts was for the central bank to hold its deposit rate steady at 27.25% and lending rate at 28.25% when the committee meets. Only one analyst expected the bank to lower rates by 100 bps.”We anticipate interest rates being left on hold by the CBE given inflation remains well above target,” said James Swanston of Capital Economics. “However, momentum is in the right direction and with a sharper fall anticipated in the headline rate in early 2025, attention will turn to when that first rate cut will be – for our part, we have pencilled it in for Q1 2025.”Inflation dropped to 25.7% in July, the first time the real interest rate has been positive since January 2022. Inflation had fallen from a record 38% in September to 27.5% in June. The monetary policy committee said it was targeting inflation of below 9% by the end of 2024. Egypt allowed its currency to plunge to under 50 to the dollar as part of its agreement with the IMF in March after having fixed it at 30.85 for a year. The Egyptian pound has since strengthened to about 48.6 to the dollar. More

ECB officials have generally argued that the incoming data broadly confirms the baseline scenario and that policy rates can be lowered further if the disinflation process remains on track, analyst at the bank said, in a note dated Aug. 30.A number of members, moreover, cited the recent cooling in wage growth as good news and some argued that rising downside risks to the growth outlook have reinforced the case for easing policy restrictiveness. “Taken together, we think the recent commentary points to a modest shift in signalling from 1-2 additional cuts this year before the summer break to 2 more cuts now, with little appetite for cutting policy rates at a faster pace at this stage,” Goldman Sachs said.Forward-looking indicators and comments from some ECB officials suggest a small downgrade to near-term growth, which would take 2024 and 2025 growth down -0.1pp each to 0.8% and 1.3%, respectively. “We look for core inflation to be revised up +0.1pp to 2.9% in 2024 and +01pp to 2.3% in 2025 given a stronger recent run-rate, but remain unchanged 2026,” Goldman added. “Lower oil prices and a stronger euro are likely to be offset by lower rates and higher gas prices, which would leave the projections for headline inflation unchanged in 2024, 2025, and 2026.”With all this in mind, “we continue to expect the Governing Council to deliver the widely anticipated second 25bp cut on September 12 but look for limited changes to its communication,” Goldman said. “In particular, we expect the Council to maintain its data-dependent and meeting-by-meeting approach without explicit guidance about the future policy path. We maintain our forecast for quarterly cuts to a terminal rate of 2.25% but see risks skewed towards a sequential pace, especially in 2025H1.” More

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$75 per monthComplete digital access to quality FT journalism with expert analysis from industry leaders. Pay a year upfront and save 20%.What’s included Global news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print edition More