Finance

The size of unfinished, pre-sold homes in China is about 20 times the size of developer Country Garden as of the end of 2022, Nomura analysts said.
“We estimate that there are around 20 million units of unconstructed and delayed pre-sold homes,” the analysts said.
Country Garden has been the largest non-state-owned developer in China by sales.

HANGZHOU, CHINA – NOVEMBER 15, 2023 – An aerial photo shows a new property under construction in Hangzhou City, Zhejiang Province, China, Nov 15, 2023. On the same day, data released by the National Bureau of Statistics showed that from January to October 2023, the national real estate development investment was 9,592.2 billion yuan, down 9.3% year on year; Of this total, the investment in residential housing was 7,279.9 billion yuan, down 8.8 percent. (Photo credit should read CFOTO/Future Publishing via Getty Images)
Future Publishing | Future Publishing | Getty Images

BEIJING — The size of unfinished, pre-sold homes in China is about 20 times the size of property developer Country Garden as of the end of 2022, according to a Nomura report on Wednesday.
Country Garden has been the largest non-state-owned developer in China by sales. It ran into financing troubles this year, and defaulted on a U.S. dollar bond last month, according to Bloomberg News.

“We estimate that there are around 20 million units of unconstructed and delayed pre-sold homes,” said Nomura’s Chief China Economist Ting Lu and a team.
About 3.2 trillion yuan ($440 billion) is needed to complete those remaining units, according to the analysts’ estimates.
Apartments in China are typically sold ahead of completion. Ensuring construction of the homes has been a government priority since delays make people less willing to buy new apartments.

At some point next year, the issue of home delivery could turn into a social issue and endanger social stability, and Beijing may eventually need to significantly ramp up policy support.

“In our view, amid the collapsing property sector and widespread credit fallout among property developers, home buyers might get increasingly impatient while waiting for the delivery of their purchased new homes,” the Nomura report said.
“At some point next year, the issue of home delivery could turn into a social issue and endanger social stability, and Beijing may eventually need to significantly ramp up policy support,” the analysts said. “We see this as the key to truly restoring the confidence in the property sector and economy.”

Last year, many homebuyers in China decided not to pay their mortgages on property purchases due to long delays in construction. Developers have faced a financing crunch since Beijing’s crackdown in 2020 on their high reliance on debt. Covid-19 restrictions last year also made construction difficult.
“Assuming 20% volume growth in new home completions for the current year, developers will only manage to deliver 48% of the homes pre-sold between 2015 and 2020, leaving 52% still subject to delays,” the Nomura analysts said. More

The PGA Tour said it will begin to offer professional players direct equity ownership in the new company that will be formed after it reaches a deal with investors.
Talks with the Saudi Public Investment Fund are the tour’s “top priority,” Commissioner Jay Monahan wrote in a memo.

Tiger Woods of the United States and Rory McIlroy of Northern Ireland walk to the 11th fairway during a practice round prior to the 2023 Masters Tournament at Augusta National Golf Club on April 03, 2023 in Augusta, Georgia. 
Ross Kinnaird | Getty Images Sport | Getty Images

The PGA Tour said Tuesday it will begin to offer professional players direct equity ownership in the new company that will be formed after it reaches a deal with investors, according to an internal memo obtained by CNBC.
The tour is currently in negotiations working toward an investment agreement with Saudi Arabia’s Public Investment Fund, which owns LIV Golf, and the DP World Tour. The talks with PIF and the DP World Tour remain the tour’s “top priority,” PGA Tour Commissioner Jay Monahan said in Tuesday’s memo.

The sides reached a framework agreement earlier this year to combine the business interests of the golf leagues. The development triggered anger and criticism, including from players such as Rory McIlroy. The Senate held hearings to investigate claims that the deal was meant to increase Saudi Arabia’s influence in the U.S. through sports investments.
The new program outlined in Tuesday’s memo is the latest move to align the interests of PGA Tour players with the business itself.
“At the point we secure outside investment, this would be a unique offering in professional sports, as no other league grants its players/members direct equity ownership in the league’s business,” wrote. “We recognize – as do all of the prospective minority investors who are in dialogue with us – that the PGA TOUR will be stronger with our players more closely aligned with the commercial success of the business.”
Monahan also wrote that the Tour’s agreement with PIF and DP World Tour has generated interest from other investors. The board is currently reviewing private investors’ bids and will keep negotiating to select finalists, he added.
Last week, Fenway Sports Group Chairman Tom Werner acknowledged that the company has held talks with the PGA Tour, but declined to comment with any further details. There’s been speculation that Fenway could come up with an offer that tops the Saudis’ bid. More

“When I think climate, I think jobs—good-paying, union jobs,” proclaims Joe Biden, America’s president. Ursula von der Leyen, the head of the European Commission, says that her “Green Deal” offers a “healthy planet” for future generations, as well as “decent jobs and a solemn promise to leave no one behind”. Sir Keir Starmer, Britain’s probable next prime minister, promises to back “a new energy company that will harness clean British power for good British jobs”. The state will intervene. The planet will be saved. Jobs will come. And they will be good.Politicians across the rich world agree that industrial policy—wheezes which aim to alter the structure of the economy by boosting particular sectors—deserves to make a comeback. Just about all agree that it should focus on climate change. But is there actually any logic to combining the two? Industrial policy seeks prosperity in the form of economic growth and jobs; climate policy seeks lower emissions and the prevention of global warming. Marrying two aims often means neither is done well. As politicians pour trillions of dollars into green industrial policy, they will increasingly have to choose between the two objectives.The argument in favour of any climate-change measure starts with externalities (those costs or benefits not borne by producers). There is a missing market for pollution, since emitting greenhouse gas is free. It is thus oversupplied, despite the fact that it hurts others. One way to tackle this is by putting a price on carbon, as many countries are doing. Yet doing only this might encourage investment in making dirty technologies more efficient, and as a result allow fossil fuels to extend their lead over clean tech.Hence the need to combine carbon prices with subsidies for clean-tech research. In a paper published in 2016, Daron Acemoglu of the Massachusetts Institute of Technology and colleagues argue that, under such a regime, subsidies would do most of the work in redirecting technological progress towards clean energy. Only after alternatives to polluting tech had become better and cheaper would carbon pricing take over by encouraging their uptake.Would such a regime, prudent though it may be, satisfy the political desire for green jobs? Consider the lithium-ion battery, which powers electric vehicles. In 2019 the chemistry Nobel prize went to three scientists for developing it: John Goodenough, then at the University of Oxford, a British university; Stanley Whittingham of ExxonMobil, an American oil firm; and Yoshino Akira of Asahi Kasei, a Japanese chemical firm. Yet none of these countries dominates production of such batteries. China does. Research produces its own set of externalities (positive ones), since knowledge tends to be shared. As firms would rather not give competitors a leg-up, that makes it undersupplied.The most efficient climate-change policy—taxing carbon and subsidising research—is unselfish. As Dani Rodrik of Harvard University, an advocate of industrial policy, has noted, not only is the social return from investing in green research higher than the private one, so is the international return higher than the national one—meaning that both companies and governments tend to underinvest in it. The greenest policies may therefore not create many jobs. By contrast, greenish policies that create jobs may at least have the merit of making climate action acceptable to voters leery of spending on things that benefit other countries.But as the rich world proceeds along this path, difficulties will emerge. Economists have traditionally criticised industrial policy on the grounds that governments are bad at it. Their ineptitude comes in two forms. First, politicians struggle to “pick winners”. They lack the ability to identify which tech will win out. Although in the late 2000s the American government offered a loan guarantee to Tesla, which eventually emerged as a successful electric-vehicle maker, it also offered support to Solyndra, a solar-power firm that went bankrupt. This lack of knowledge among politicians contributes to the second problem: rent-seeking. Industrial policy offers a way for companies to capture public funds via lobbying. Governments fail to cut off failing businesses, since doing so means admitting that they wasted public money in the first place.The new economics of industrial policy, as put forward by Reka Juhasz of the University of British Columbia, Nathan Lane of the University of Oxford and Mr Rodrik in a paper this year, rests on the idea that such problems can either be solved or have been exaggerated. A disciplined government that cuts off bad investment can avoid waste. Clarity and transparency when it comes to goals will help politicians jettison weak companies.Striking a blowMaybe. But this is where climate and industrial policy become uncomfortable bedfellows. A firm could deliver good jobs while not being any greener than its competitors. Is that a failure or a success? Is an investment that cuts emissions while displacing workers a worthwhile one? Moreover, it is unclear whether, say, guaranteeing a loan to a loss-making clean-tech firm, such as a bail-out for Siemens Gamesa, a German wind-turbine maker, which was confirmed on November 14th, is throwing good money after bad or investing in the climate. Recent strikes by American carmakers were partly motivated by the idea that manufacturing cleaner electric vehicles will mean fewer jobs than assembling their petrol-powered counterparts—a difficult situation for a government committed to green industrial policy. Such policy seeks to improve international competitiveness, deliver high-paying work, make the economy grow, revitalise poorer regions and cut emissions at the same time. In reality, these goals are often opposed.The more ambitions industrial policy becomes, the harder it will be for politicians to exercise the control advocates say is needed. Many governments, including America’s, also want industrial policy to bolster national security, for instance. Taken together, such aims risk an almighty mess. ■ More

For financial markets the Holy Grail is a perfect leading indicator—a gauge that is both simple to monitor and consistently accurate in foretelling the future. In reality, such predictive perfection is unattainable. It is often hard enough to grasp what is happening in the present, let alone the future. A perfect real-time indicator would thus be a potent goblet of knowledge, if not quite the Holy Grail, for investors and analysts to drink from. Recently they have turned their attention towards one impressive candidate: the Sahm rule.Developed by Claudia Sahm, a former economist at the Federal Reserve, in 2019, the rule would have been capable of identifying every recession since 1960 in its early stages, with no false positives. This is no mean feat given that the body which officially declares whether the American economy is in recession sometimes needs a full year of data. The Sahm rule, by contrast, typically needs just a few months.image: The EconomistLike all good rules, it is parsimonious. If the unemployment rate increases by half a percentage point from its trough of the past 12 months, the economy is said to be in a recession. To smooth out the figures, which jump around, both the current unemployment rate and the trough are measured as three-month moving averages. At present the Sahm indicator stands at 0.33 percentage points. It would not take much for it to reach the half-point mark. If the unemployment rate, which hit 3.9% in October, rises to 4.0% this month and 4.1% next month, the economy would, according to the Sahm rule, be in a recession.What about in reality? As Ms Sahm herself is quick to point out, her rule describes an empirical regularity, not an immutable law. What is more, the post-pandemic economy may have fostered the exact kind of conditions that violate this regularity. During downturns companies fire workers, and the layoffs typically go well beyond the Sahm rule’s half-point line.This time, though, the increase in the jobless rate appears to have been driven less by a reduction in demand for workers and more by an increase in their supply. The American labour force, including both people in work and looking for jobs, has expanded by nearly 3m, or 1.7%, since the end of last year. During that same time the number of jobs has increased by about 2m, or 1.2%. “If workers come back and the jobs haven’t caught up with them, the unemployment rate can drift up,” says Ms Sahm. “But then as the jobs catch up, the unemployment rate doesn’t spiral upwards.”For Ms Sahm the sudden fame of her measure has brought with it an additional wrinkle. She has had to grapple with the world taking her rule in a different direction from her initial intent. Ms Sahm was not trying to get into the forecasting business, much less into timing financial markets. Rather, she wanted to come up with a benchmark for triggering automatic payments to individuals in order to insulate them from a recession. “Many people have asked me if we are going into a recession,” she says. “Almost no one has asked me what policymakers can do about it.”Considering the paralysis in Congress, it is a fair bet that policymakers will not do much of anything if unemployment continues to rise in the coming months. So Ms Sahm is now in the curious position of rooting against her own rule, and hoping that America skirts a recession. ■ More

The October consumer price index increased 3.2% on an annual basis, according to the Bureau of Labor Statistics’ monthly inflation report.
That’s down from 3.7% in September and a Covid pandemic-era peak of 9.1% in June 2022.
Gasoline prices were a big driver of the reduction in October, economists said. Housing inflation also continued to cool.

A customer holds a fuel nozzle at a Shell gas station in Hercules, California, U.S., on Wednesday, June 22, 2022. President Joe Biden called on Congress to suspend the federal gasoline tax, a largely symbolic move by an embattled president running out of options to ease pump prices weighing on his party’s political prospects. Photographer: David Paul Morris/Bloomberg via Getty Images
Bloomberg | Bloomberg | Getty Images

Inflation declined in October, continuing a broad slowdown as gasoline prices retreated during the month. However, price pressures remain under the surface and it may take a while for them to return to their pre-Covid pandemic baseline, economists said.
“The disinflationary trend is in place,” said Sarah House, senior economist at Wells Fargo Economics. “But we’re getting into a harder part of the cycle.”

In October, the consumer price index increased 3.2% from 12 months earlier, down from 3.7% in September, the U.S. Bureau of Labor Statistics said Tuesday.

The CPI is a key barometer of inflation, measuring how quickly the prices of anything from fruits and vegetables to haircuts and concert tickets are changing across the U.S. economy.
The October reading is a significant improvement on the pandemic-era peak of 9.1% in June 2022 — the highest rate since November 1981. Prices are therefore rising much more slowly than they had been.
“Inflation is slowly but steadily moderating, and all the trend lines look good,” said Mark Zandi, chief economist at Moody’s Analytics. “It feels like by this time next year inflation will be very close to the [Federal Reserve’s] target, and something the American consumer will feel comfortable with.”
The Fed aims for a 2% annual inflation rate over the long term.

Gasoline prices fell in October

Gasoline prices dropped 5% in October, according to Tuesday’s CPI report.
Prices for regular-grade gasoline declined by about 33 cents a gallon between Oct. 2 and Oct. 30, from $3.80 a gallon to $3.47, according to the U.S. Energy Information Administration.
They’ve fallen further since then. Average prices at the pump were $3.37 a gallon nationwide as of Nov. 13, according to AAA.
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The monthly pullback is an improvement from August and September, when gasoline was a major contributor to increases in overall inflation readings. In August, for example, prices at the pump spiked 10.6% largely due to dynamics in the market for crude oil, which is refined into gasoline.
“We had a big increase in gasoline prices back in August” and are now seeing an “unwinding of that,” House said.
“What gas prices give us one month, they can taketh away in another,” she added.

What’s happening under the surface

Energy prices can whipsaw inflation readings due to their volatility. Likewise with food.
That’s why economists like to look at a measure that strips out these prices when assessing underlying inflation trends.
This pared-down measure — known as the “core” CPI — fell to an annual rate of 4% in October from 4.1% in September. It’s the smallest 12-month change since September 2021, the BLS said.

Shelter — the average household’s biggest expense — has accounted for more than 70% of the total increase in the core CPI over the past year. Housing inflation declined in October, to 6.7% relative to a year earlier, and has fallen from a peak over 8% in March 2023, according to BLS data.
A continued moderation in housing costs was “the most encouraging aspect” of the October report and should continue to slow in coming months, Zandi said.
“It’s got a long way to go to get back to something I think we’d feel comfortable with,” he added. “But we’re heading in that direction.”

Food inflation was perhaps the one “small blemish” in October, Zandi said. Grocery prices rose 0.3% in October, on a monthly basis, up from 0.1% in September. However, on an annual basis “food at home” inflation increased 2.1% in October, down significantly from a pandemic-era peak over 13% in August 2022, according to BLS data.
Other categories with “notable” increases in the past year include motor vehicle insurance (which increased 19.2%), recreation (3.2%), personal care (6%), and household furnishings and operations (1.7%), according to the BLS.

Why inflation is returning to normal

At a high level, inflationary pressures — which have been felt globally — are due to an imbalance between supply and demand.
Energy prices spiked in early 2022 after Russia invaded Ukraine.
Supply chains were snarled when the U.S. economy restarted during the Covid-19 pandemic, driving up prices for goods. Consumers, flush with cash from government stimulus and staying home for a year, spent liberally. Wages grew at their fastest pace in decades, pushing up business’ labor costs.

Now, those pressures have largely eased, economists said. Supply chains have normalized and the labor market has cooled.
Plus, the Federal Reserve has raised interest rates to their highest level since the early 2000s to slow the economy. This policy tool makes it more expensive for consumers and businesses to borrow, and can therefore tame inflation.
Fed Chair Jerome Powell last week said the U.S. still “has a long way to go” before getting back to a sustainable 2% inflation target. Fed officials don’t expect that to happen until 2026.
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GoCardless CEO Hiroki Takeuchi said that his firm was “very open minded” about the prospect of mergers and acquisitions after acquiring the Latvian open banking startup Nordigen last year.
Takeuchi said he expects a barrage of consolidation to take place in the payments market as some companies struggle to survive challenging macroeconomic conditions.
“We’ve seen market conditions change over the last 18 to 24 months,” Takeuchi said, adding that fundraising is becoming more difficult for startups.

Hiroki Takeuchi, GoCardless chief executive, on the MoneyConf Stage, attends Web Summit 2021 in Lisbon, Portugal.
Harry Murphy | Sportsfile | Getty Images

GoCardless, the British fintech company backed by Alphabet’s venture capital fund GV, is considering more mergers and acquisitions as it looks to grow market share in the highly competitive online payments space.
“We’re constantly reviewing the market for opportunities that will accelerate our growth, add value to our core payment platform or strengthen our open banking proposition,” Hiroki Takeuchi, GoCardless’ CEO and co-founder, told CNBC in an exclusive interview.

Last year, GoCardless acquired the Latvian open banking startup Nordigen in its first major acquisition. Financial information was not disclosed. The deal was aimed at expanding access to bank account information for GoCardless’ 85,000 customers globally.
“Will we do more of that? We’re very open minded, not just for us but in general,” Takeuchi said.
“In this space I expect there’s going to be a lot of opportunities for consolidation and M&A [mergers and acquisitions], especially in the context that some companies in this space are going to be well positioned to survive these challenging conditions and grow stronger.”
GoCardless is one of the darlings of the British fintech industry. Co-founded by Takeuchi, Monzo co-founder Tom Blomfield, Jason Bates, Paul Rippon, Gary Dolman, and Jonas Huckestein, in 2011, the business processes more than $30 billion of payments across over 30 countries in a single year.
The U.K. fintech industry attracted $2.9 billion in the first six months of 2023. That was down 37% from last year, as investors turned their backs on loss-making, high-growth startups in response to the worsening macroeconomic situation.

Britain is, nevertheless, among the standout countries globally when it comes to the might of its fintech industry. According to CNBC analysis of data from Statista, the country is the second-largest market for so-called fintech “unicorns,” or firms that command a valuation of $1 billion or more.

Changing market conditions

Takeuchi pointed to Visa’s $2.2 billion acquisition of Swedish open banking fintech Tink in 2021 as an example of the kinds of deals to watch out for in the coming months.
In August, London-based fintech Rapyd acquired PayU GPO, a huge slice of the payments business PayU that focuses on emerging markets, from Dutch tech investment firm Prosus for $610 million.

“We’ve seen market conditions change over the last 18 to 24 months,” he said. “What we’ve been really focused on is making sure that core offering we’re bringing to merchants is as good as it can be and that we’re staying more focused on a few key set of things and getting them right to continue to drive the growth of the business. Open banking is one thing and definitely something we think is really important.”
GoCardless made revenues of £70.4 million ($85.9 million) in the 2022 fiscal year ended 2022, up 3.5% year-over-year. However, it recorded a loss of £62.7 million for the year, marking a 38% increase from its £46.8 million loss in 2021.
GoCardless’ technology allows firms to collect direct debit payments from consumers. These payments are typically for subscriptions — think of your gym memberships, news subscriptions, and monthly meal kit orders.
Without naming any acquisition targets of interest, Takeuchi suggested that the frailty of some players in the payments industry would leave them exposed to corporate takeovers.
“Some companies, they’re not going to be set up for the longer term. The ability to fundraise in this environment is much harder,” Takeuchi said. “One of the things that is important in this space to achieve is you have to get to significant scale. I know how much it costs to get to that scale because we’ve invested for 10 years.”
He added, “There will be opportunities for us. We’re open minded. The important thing is that we’re very disciplined on it being aligned to that strategy we have.”
Takeuchi said that the integration with Nordigen was “going very well” and that the company had invested a lot of time investing in the smooth combination of Nordigen’s teams with GoCardless.

What is open banking?

Open banking is a set of nascent technology standards that allows third-party technology companies to obtain access to account information from large incumbent banks and use that data to offer new services.

It has enabled fintech firms like Coinbase and Robinhood to seamlessly connect to customers’ bank accounts to allow them to top up their accounts and make payments.
That can include money management apps that give consumers more visibility over their spending, or lending products that determine a user’s creditworthiness based on their past spending decisions rather than going through the established credit reference agencies.
Takeuchi said that GoCardless has also received interest from payment service providers (PSPs) about plugging into its technology to add the option of direct debit capabilities. That’s as businesses are beginning to become more selective about which providers they use for their payment needs due to tighter macroeconomic conditions.
Half of businesses use three or more PSPs for their payment needs, according to GoCardless’ own data, while one in 10 firms use a minimum of five providers. Cost reduction is the top priority for businesses with two thirds of companies surveyed by GoCardless looking to reduce the number of PSPs they use and 34% planning to do so in the next 12 months.
Takeuchi declined to comment on which payment service providers the firm was in contact with, but cited Stripe and Adyen as examples of the kinds of companies that would fall under the umbrella of PSPs. More

Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the Fed funds rate from a target range of 0.25-0.5% to 5.25-5.5%, and inflation has since fallen substantially.
October’s consumer price index slated for release Tuesday is expected to show an increase of 0.1% month-on-month and 3.3% annually, according to a Dow Jones poll of economists.

James Bullard at Jackson Hole, Wyoming.
David A. Grogan | CNBC

Former St. Louis Fed President Jim Bullard says the Federal Reserve still has “a ways to go” in fighting inflation and that there is still a risk that prices pick up once again.
Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the Fed funds rate from a target range of 0.25-0.5% to 5.25-5.5%, and inflation has since fallen substantially.

Although markets now believe interest rates have peaked and have begun looking forward to cuts next year, Bullard — who stepped down as head of the St. Louis Fed in August — suggested the central bank’s work is far from over.
“It’s been so far so good for the FOMC. Inflation has come down, core PCE inflation on a 12-month basis down from 5.5% to 3.7% — pretty good but that’s still only halfway back to the 2% target so you’ve still got a ways to go,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference in London.
“I think you have to watch the data carefully and it’s very possible that inflation will turn around and go the wrong way.”
October’s consumer price index slated for release Tuesday is expected to show an increase of 0.1% month-on-month and 3.3% annually, according to a Dow Jones poll of economists.
“That’s just one month’s number, but still I think the risk for the FOMC is that the nice disinflation that we’ve seen over the last 12 months won’t persist going forward and then they’ll have to do more,” Bullard said. More

UBS sees slower growth, rising unemployment and disinflation to lead the Fed to cut its benchmark rate to a target range ending the year between 2.50% and 2.75%.
Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.

U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023.
Evelyn Hockstein | Reuters

UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.
In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”

UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”
Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the Fed funds rate from a target range of 0.25-0.5% to 5.25-5.5%.
The central bank has since paused at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.
However, Fed Chairman Jerome Powell said last week that he was “not confident” the FOMC had yet done enough to return inflation sustainably to its 2% target.

UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”

“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.
“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”
The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.
“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.

“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.”
UBS expects the economy to contract by half a percentage point in the middle of next year, with annual GDP growth dropping to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.
“With that added disinflationary impulse, we expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025. We forecast some slowing in 2026, in part due to projected fiscal consolidation,” the bank’s economists said.
Worst credit impulse since the financial crisis
Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.
“The credit impulse is now at its worst level since the global financial crisis — we think we’re seeing that in the data. You’ve got margin compression in the U.S. which is a good precursor to layoffs, so U.S. margins are under more pressure for the economy as a whole than in Europe, for instance, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference.

Meanwhile, private payrolls ex-health care are growing at close to zero and some of the 2023 fiscal stimulus is rolling off, Kapteyn noted, also reiterating the “massive gap” between real incomes and spending that means there is “much more scope for that spending to fall down towards those income levels.”
“The counter that people then have is they say ‘well why are income levels not going up, because inflation is falling, real disposable incomes should be improving?’ But in the U.S., debt service for households is now increasing faster than real income growth, so we basically think there is enough there to have a few negative quarters mid-next year,” Kapteyn argued.
A recession is characterized in many economies as two consecutive quarters of contraction in real GDP. In the U.S., the National Bureau of Economic Research (NBER) Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” This takes into account a holistic assessment of the labor market, consumer and business spending, industrial production and incomes.
Goldman ‘pretty confident’ in the U.S. growth outlook
The UBS outlook on both rates and growth is well below the market consensus. Goldman Sachs projects the U.S. economy will expand by 2.1% in 2024, outpacing other developed markets.
Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the U.S. growth outlook.
“Real income growth looks to be pretty firm and we think that will continue to be the case. The global industrial cycle which was going through a pretty soft patch this year, we think, is showing some signs of bottoming out, including in parts of Asia, so we feel pretty confident about that,” he told CNBC’s “Squawk Box Europe.”
Trivedi added that with inflation returning gradually to target, monetary policy may become a bit more accommodative, pointing to some recent dovish comments from Fed officials.
“I think that combination of things — the lessening drag from policy, stronger industrial cycle and real income growth — makes us pretty confident that the Fed can stay on hold at this plateau,” he concluded. More