Finance

The Monetary Policy Committee voted 7-2 in favor of the quarter-point hike to take the main bank rate from 4.25% to 4.5%, as the Bank reiterated its commitment to taming stubbornly high inflation.
The MPC no longer expects the U.K. economy to enter recession this year, according to the updated growth forecasts in its accompanying Monetary Policy Report.

A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.
Hollie Adams | Bloomberg | Getty Images

LONDON — The Bank of England on Thursday hiked interest rates by 25 basis points and revised its economic projections to now exclude the possibility of a U.K. recession this year.
The Monetary Policy Committee voted 7-2 in favor of the quarter-point increase to take the main bank rate from 4.25% to 4.5%, as the bank reiterated its commitment to taming stubbornly high inflation.

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The headline consumer price index rose by an annual 10.1% in March, driven by persistently high food and energy bills. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, increased by 5.7% over the 12 months to March, unchanged from February’s annual climb and reiterating the risk of entrenchment that the bank is concerned about.
The MPC no longer expects the U.K. economy to enter recession this year, according to the updated growth forecasts in its accompanying Monetary Policy Report. U.K. GDP is now expected to be flat over the first half of this year, growing 0.9% by the middle of 2024 and 0.7% by mid-2025. The country’s newest GDP print will be published Friday.
The economy has thus far shown surprising resilience in fending off a widely anticipated recession, with falling energy costs and a fiscal boost announced in the government’s Spring Budget improving the outlook.
The MPC now assesses that “the path of demand is likely to be materially stronger than expected in the February Report, albeit still subdued by historical standards.”
“There has been upside news to the near-term outlook for global activity, with U.K.-weighted world GDP now expected to grow at a moderate pace throughout the forecast period,” the MPC said in its May Monetary Policy Report.

“Risks remain but, absent a further shock, there is likely to be only a small impact on GDP from the tightening of credit conditions related to recent global banking sector developments.”
Inflation slower to fall
Inflation is expected to decline sharply from April, as the large price hikes following Russia’s full-scale invasion of Ukraine drop out of the annual comparison. The extension of the government’s Energy Price Guarantee and further falls in wholesale energy prices also remove some inflationary pressure.
However, the MPC projects that inflation will decline at a slower rate than previously projected in the February report, falling to 5.1% by the end of this year, compared with a previous estimate of 3.9%. It is still expected to drop “materially below the 2% target” to just above 1% at the two- and three-year time horizons.
“The Committee continues to judge that the risks around the inflation forecast are skewed significantly to the upside, reflecting the possibility that the second-round effects of external cost shocks on inflation in wages and domestic prices may take longer to unwind than they did to emerge,” the MPC said.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”
Focus on what comes next
Compared with the U.S. Federal Reserve’s hint at a pause in rate hikes last week, the Bank of England struck a notably more hawkish tone Thursday, with stickier inflation meaning policymakers face a tricky call on when enough is enough on raising rates.
Vivek Paul, U.K. chief investment strategist at BlackRock Investment Institute, said that investor focus in light of Thursday’s decision would not be on the 25 basis point hike, but on what happens next.
“We are in a new regime where central banks are faced with sharper trade-offs between maintaining growth and controlling inflation; in the Bank of England’s case, this is especially acute,” Paul said in an email Thursday.
Inflation since February’s forecasts has proven stickier than expected, and the Bank still forecasts a bleak growth picture for years to come, which will likely be exacerbated by higher-for-longer interest rates. There is also growing concern over labor market tightness and the risk of a wage-price spiral.
“Recent comparative resilience in the growth picture could have two interpretations; the benign one, which suggests the economy is proving resilient to the effects of higher interest rates, or the pessimistic one suggesting that the full extent of the lagged damage is yet to occur,” Paul said.
“This has implications for how the Bank manages the trade-off from here: continued resilience may ultimately mean for more work for the BoE in terms of rate hikes; yet-to-be-seen lagged damage may mean it’s closer to stopping.”
Paul suggested that the Bank may be forced to keep rates higher for longer, a view echoed by Hussain Mehdi, macro and investment strategist at HSBC Asset Management.
“In the context of resilient economic activity, we think there is a good chance of the Bank Rate peaking at 5% by the August meeting. Rate cuts are unlikely until well into 2024, whereas the Fed could be in cutting mode later this year,” Mehdi said.
“As rates moves deeper into restrictive territory and credit conditions tighten, a policy-induced recession becomes almost inevitable.” More

An inflatable Disney+ logo is pictured at a press event ahead of launching a streaming service in the Middle East and North Africa, at Dubai Opera in Dubai, United Arab Emirates, June 7, 2022.
Yousef Saba | Reuter

Check out the companies making headlines before the bell.
PacWest — Shares plunged 20% after the regional bank stock said deposits fell 9.5% for the week ended May 5. If necessary, PacWest said it has access to $15 billion of available liquidity. Other regional banks stocks moved lower on the news, with Western Alliance and First Horizon down 7.3% and 3.2%, respectively.

Disney — The media stock slumped more than 5%. Disney posted a decline in streaming subscribers even as losses for the business improved. The company also reported revenue and profit that was roughly in line with Wall Street’s expectations.
Robinhood — Shares climbed more than 4% after the retail brokerage reported a revenue beat, with $441 million in the first quarter against analyst estimates of $425 million, according to Refinitiv. Robinhood also showed growth in monthly users, which hit 11.8 million.
Unity Software — Shares popped more than 9% after the video game software developer topped revenue expectations for the recent quarter and raised its full-year revenue outlook.
Sonos — Shares shed nearly 24% after the home sound systems maker reporter a wider-than-expected loss for the recent quarter and cut its outlook for the second half of the 2023 fiscal year amid a softening demand environment.
Tapestry — Tapestry soared 10% after exceeding analysts’ third-quarter expectations. The American luxury fashion company behind Coach and Kate Spade reported adjusted earnings of 78 cents per share, topping consensus estimates of 60 cents per share, according to FactSet. It posted revenue of $1.51 billion, which was higher than calls for $1.44 billion. In addition, Tapestry raised its full-year guidance, which was also better than what analysts expected.

AppLovin — Shares soared more than 16% in premarket trading following the company’s first-quarter revenue and-second quarter guidance beat after the bell Wednesday. Revenue came in at $715.4 million, versus the $694.8 million expected from analysts polled by StreetAccount. AppLovin guided for $710 million-$730 million for the second quarter, topping the $695.7 million expected.
Beyond Meat — Shares of the alternative meat manufacturer fell more than 2% even after the company’s better-than-expected quarterly report. Beyond Meat reported a loss of 92 cents per share and $92.2 million in revenue. Analysts had anticipated a loss of $1.01 per share on revenue of $90.8 million, according to Refinitiv.
JD.com – Shares of the Chinese e-commerce giant advanced more than 3% after the company reported stronger-than-expected earnings and revenue for the first quarter of the year, according to FactSet. JD also announced some leadership changes: CEO Lei Xu is stepping down and will be replaced by chief financial officer Sandy Ran Xu.
Alcoa — Alcoa shares added 1.4% before the bell as Credit Suisse upgraded the aluminum producer to outperform. Analysts cited a recovery in aluminum prices and a move beyond Alcoa’s operational problems as reason for the upgrade.
Norfolk Southern — The transportation stock rose nearly 2% in premarket trading as JPMorgan upgraded shares to overweight. The Wall Street firm noted that Norfolk Southern shares trade at a discount to some peers, and that operations should improve as the company moves past its recent derailment issues.
— CNBC’s Yun Li, Tanaya Macheel, Brian Evans, Sarah Min and Michelle Fox contributed reporting More

More people are paying attention to America’s regional banks than ever before. But it is difficult to work out the state of their balance-sheets. Recent data from the Federal Financial Institutions Examination Council, a regulator, offer a glimpse. Our analysis suggests several regional banks are struggling with flighty deposits, interest-rate mismatches and pricey borrowing. Even if none are about to collapse, the outlook is grim. Start with deposits. Before the panic in March, savers were moving money to high-yielding money-market funds. The fall of Silicon Valley Bank (svb) sped up the trend. Accounts with balances over the $250,000 federal-insurance limit fell by nearly 5% across the banking system—and by more than 11% at midsized lenders. At PacWest, an institution in California, total deposits dropped by 17% and uninsured ones by more than half. Many banks are still sitting on billions in unrealised losses. The data show that America’s banks in aggregate have more than $500bn in such losses on their securities portfolios. Charles Schwab, a broker that has seen its share price fall by two-fifths this year, holds more than $21bn in paper losses through its banking subsidiaries. When svb collapsed, unrealised losses on its securities amounted to 100% of core equity capital (see chart).Outstanding borrowing at American banks reached $1.3trn in the most recent quarter, up more than 40% on the previous one. At large institutions, borrowing rose by 26%; at midsized ones, it more than doubled. Schwab reported $39bn of short-term advances from the Federal Home Loan Banks (fhlb), up from $12bn in the previous three months. KeyBank, an Ohio-based lender, borrowed $19bn in short-term fhlb loans, up from $11bn. Such loans come at today’s high interest rates. Banks that rely on them might survive the crisis. But they will probably see their profits suffer.For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

People looking for tips on how to run a bank do not often head to Mumbai, and for good reason. On May 2nd India’s Supreme Court ruled that the fraud-investigation office could prosecute auditors for their role in the collapse in 2018 of an infrastructure-finance firm backed by state banks. Last year four bosses at Indian Bank, a state lender, were jailed for fraud. Prosecutions of those at three other banks are grinding through the country’s courts.Yet Indian banks’ recent annual earnings have been spectacular. State lenders have led the way: Canara Bank’s net earnings jumped 87% against last year, Union Bank of India’s 61% and idbi’s 49%. Private banks are hardly laggards: icici’s earnings rose by 37%, Kotak Mahindra’s 28% and hdfc’s 19%. JPMorgan Chase, global banking’s benchmark for excellence, offers a return on equity of 14%. India’s state-owned banks generate, on average, over 11% and private banks almost 15%. In a development few, if any, predicted, Indian banks are among the world’s most profitable.During the first half of the 2010s, Indian banks reported numbers that were strong—but unbelievably so. The practice of rolling over bad loans to avoid recognising losses was rampant, particularly with those made by state banks to borrowers with political connections. Reality would have intruded eventually; an accelerant came in the form of scandals over the allocation of government licences in industries including coal, which concluded with the Supreme Court cancelling hundreds of mining permits in 2014, and telecoms, with the surprising exoneration of defendants in 2017. Approvals for projects froze, undermining their financial viability.Outside expertise helped the process along. In 2015 Raghuram Rajan, a professor at the University of Chicago who was then the head of India’s central bank, initiated an “asset-quality review”. Write-downs and failures followed, notably in energy, steel and telecoms. Political and business leaders faulted Mr Rajan for pushing reforms, which they saw as throwing a wrench into the economy. His tenure did not extend to a second term.In time, however, even critics have reconsidered Mr Rajan’s stint at the Reserve Bank of India. It took more than five years for the benefits of his review to emerge, but they did so at an extremely helpful time: just as covid-19 hit. Rather than collapse under lockdowns, India’s banks built on early signs of improvement. Non-performing loans peaked at 16% of corporate lending in 2018. They have since fallen sharply. By early 2024, predicts Crisil, a ratings agency, they should drop below 2%.Narendra Modi’s government also deserves credit. Bankruptcy reforms in 2016 have sped up the liquidation of failing firms, and prodded delinquent businesses to pay up. In 2019, as part of the seemingly endless mop-up of Indira Gandhi’s banking nationalisation half a century ago, the government announced that 27 state-owned banks would become 12, with many branches closing. According to Boston Consulting Group, state banks have also written off $91bn in bad loans in the past five years—just a little less than their combined worth. Many survived thanks to an infusion of 2.6trn rupees ($31bn) from the state, in return for shares, over the past three years. Such infusions have more recently been curtailed, as banks have learned how to stand on their own feet.The process has both accelerated and benefited from India’s economic growth. The imf expects the country to be the fastest-growing major economy this year. As the system has become healthier, banks have lent more. Annual credit growth slowed to 3% in 2017. It is now up to 18%. Interest rates have risen less sharply than in America, helping limit stress.Nonetheless, investors are not entirely convinced by the clean-up at state banks. hdfc, Kotak Mahindra and icici, three private-sector banks, trade at triple their book value. Many state-owned institutions still trade at just a fraction of theirs, meaning they are worth more dead than alive. One reason for this lack of confidence is that India has made similar steps before, notably in 1993, when other bankruptcy reforms passed, and in 2002, when a law made it easier for banks to go after deadbeats. Both instances, ultimately, proved to be blips in longer-term decline. The state still retains enormous influence over the country’s state banks. Senior appointments must go through the government. Bosses often serve two- to three-year terms, undermining long-term planning. Fear had its uses: when the banks were in trouble, ministers were forced to aim for solvency rather than use them for political ends. But as it ebbs, will a laxer era now begin? Only continued success for the state banks will show that Indian finance has truly changed. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Over the past few decades, the small, industrial city of Zibo has been best-known for its petrochemical output. In recent months, however, it has become the centre of a national barbecue craze and social-media phenomenon unlike anything China has seen before. Tourists have flooded the city in the central province of Shandong in the hope of munching its mythical kebabs, posting videos on Douyin, the local version of TikTok, and then departing. Arenas have been converted into makeshift dining halls in order to cope with the massed crowds. To ease constraints on the supplies of meat and grills, local banks have started handing out low-interest loans designed specifically for merchants in barbecue-related industries. During the recent May Day holiday, one of the most important weeks of the year for domestic shopping and entertainment spending, the chemicals hub was listed as a top tourist destination alongside other popular places such as the Great Wall and the Terracotta Warriors. A widely shared internet meme jokes that the last time this many people showed up in the city was during the Siege of Qi, a famous battle that took place in the area in 284bc.This frenzied activity in Zibo should be helping China recover from its disastrous zero-covid era. Analysts have highlighted consumption as a bright spot in the Chinese economy this year amid a gloomier outlook for construction and manufacturing. Indeed, at first glance activity during the recent holiday appears to be strong. The resumption in tourism has been stunning. A record 274m people travelled, up 19% from before the pandemic. Just months ago, a short jaunt could land you in a quarantine camp for weeks.Yet other data reveal a more modest recovery—only to levels last seen in 2019, before covid-19, and not beyond them. Although more people travelled this year, spending per head was down by more than 10% against 2019, according to hsbc, a bank. As a consequence, domestic tourism revenues were up by a mere 0.7% on four years ago. “Chinese consumers are not back to normal,” warns the boss of an asset-management firm. They are focused on food and fun, not big-ticket items like cars, he says. Auto sales were down 1.4% year on year in the first four months of 2023.Young folk are going out of their way to spend less. Since the end of zero-covid, many tourists have described themselves as “special-ops” travellers. This alludes to dropping into a location, spending as little time and money as possible, and then moving on to the next spot—much as an elite military outfit might pass through a location unnoticed. The activity has become something of a sport, where young people visit a list of popular places and check them off by posting pictures on social media. Zibo’s kebabs have been one of the top items to tick off from the list.It is not, though, just youthful frugality behind weak consumption figures. Urban disposable incomes barely grew, at least by Chinese standards, in the first three months of the year, up just 2.7% in real terms compared to the same period a year ago, notes Raymond Yeung of anz, a bank. A fifth of youngsters are now out of work, double the rate in April 2019, he adds.Zibo kebabs are the perfect treat for a budget traveller. They are consumed at low tables with a small stove, heated by coal. When the fat starts to drip, the meat is scraped into a thin pancake and dipped first into a garlic and chilli paste and then into a salty mixture of sesame and peanut. A bottle of the city’s local beer, called Lulansha, comes to less than three yuan ($0.40). Four people can eat and drink for hours on less than 350 yuan. The craze is about more than the simple food. One barbecue purveyor who has operated a shop for several years in the city’s Linzi district points out that anyone can sell chuan’r, as the dish is called locally. It is Shandong’s big-hearted hospitality that people across the country are seeking out in Zibo. Yet the cheap eats have stirred controversy among social commentators. Wu Xiaobo, a popular author, wrote recently that viral internet trends playing out on the streets of cities such as Zibo are evidence of a robust free-market economy at work in China. His article, however, generated such a backlash that it has been censored.Others are less sanguine. One widely circulated article, by Liu Yadong, a professor, asserts that the trend is evidence of social decay in China, with young people fixated on online fads that hold little cultural value. Another article, by Wang Mingyuan, a think-tank researcher, suggests that the barbecue hype is a sign of the end of a decades-long economic cycle. The small cities where most of China’s population dwell have run out of more standard drivers of growth; the demographic dividend is running low, as the country’s population ages. Thus local officials must leap on whatever passing internet craze comes their way. How much longer, Mr Wang asks, can the barbecue party continue? ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

After the cold war, America and Europe established an economic order based upon open markets, global trade and limited state meddling in the economy. Climate change was a distant threat. Allowing countries like China or Russia into the global economy was widely seen to be beneficial for both them and their Western trading partners. As the two countries grew they would surely adopt market economics and, ultimately, democracy. Other things mattered. But economic considerations took precedence. Not anymore. Policymakers on both sides of the Atlantic have come to the conclusion that national security and climate change must now come first. In Brussels talk is of “economic security” and “strategic autonomy”—policymakers want the bloc to be able to chart its own course. Ursula von der Leyen, president of the European Commission, recently said that she wants to “derisk” relations with China. Officials in Washington have similar ambitions. They believe that the old world order allowed America’s industrial base to wither, created economic dependencies that could be exploited for geopolitical gain, left the climate crisis unaddressed and increased inequality in a manner that undermined democracy. Yet pursuing greater security, tackling climate change and seeking to counter the threat of China involves all manner of trade-offs. Even if economic considerations are no longer dominant, the discipline of economics still has much to offer.In order to make sensible use of an economic weapon such as sanctions, for instance, national-security types must accurately gauge their costs. Russia’s invasion of Ukraine last year provided a test case. At the time, debates raged in the eu about whether to ban imports of Russian gas. The fear—forcefully voiced by businesses and industrial unions—was that an embargo would be a brutal economic hit not to Russia, but to Europe instead. When a group of economists, including Ben Moll at the London School of Economics and Moritz Schularick at the University of Bonn, analysed the likely impact of such measures at the time, they forecast a hard, if less severe, hit, as they expected the economy to adjust swiftly to the shock. And the eu did avoid a recession, even though gas consumption in the 12 months to February was 15% lower than a year earlier. In a new paper, three economists from the group that provided the initial forecast argue that Europe could even have withstood an immediate gas embargo in April 2022, instead of the later cut-off over the summer. A forthcoming paper by Lionel Fontagne of the Paris School of Economics and others, which studies energy-price shocks in France over the past couple of decades, comes to a similar conclusion: firms adapt quickly, and only in part by cutting employment and production.What about an economic clash between the West and a bigger, more powerful rival, such as China? Using the same model as the group above—and looking solely at intermediate inputs, such as semiconductors or engine parts, rather than finished products—researchers at the European Central Bank divide the world into two blocs: “East” and “West”. If the blocs were to return to the limited trade of the mid-1990s, the analysis finds that the short-term hit, before the world economy has adjusted, would be large, at about 5% of global gdp. But over time the loss would fall to about 1%. The hit to America and China would be relatively small, compared with more globally integrated economies like the euro zone. Small open economies, like South Korea, would bear the brunt. An intriguing aspect of an East-West clash is technological diffusion, a crucial ingredient in economic growth. Less trade means fewer learning opportunities, especially for poorer countries. Carlos Goes of the University of California, San Diego, and Eddy Bekkers of the wto look at the impact a breakdown in relations may have on such diffusion. They find that the consequences for the American economy, as the technological leader, are again manageable. The impact on China or India is considerable, since both countries would miss out on opportunities to advance. Trade-offs may be more painful when it comes to climate change. President Joe Biden has set aside more than $1trn over the next decade for green stimulus and manufacturing. Already there have been high-profile investments by large firms. But these could very well be plans that have been brought forward to secure subsidies. Meanwhile, evidence on intervention to boost industrial employment is decidedly mixed. Chiara Criscuolo of the oecd and others have analysed the eu’s previous efforts. They find that the bloc’s schemes do support employment, but only at small firms. Large firms tend to take the payment without adding jobs. Other countries are responding with their own green subsidies, and are likely to add more—which may be unwise. The world needs every bit of economic efficiency to maintain a stable climate, as resources are limited and government budgets increasingly strained. In a new working paper Katheline Schubert of the Paris School of Economics and others look at different combinations of carbon taxes and green subsidies. They find, in line with earlier research, that relying on subsidies to green an economy entails large costs compared with a carbon price.The danger of consensusDani Rodrik of Harvard University, a critic of the old “Washington” consensus, welcomes much of the new era. But in a recent essay on industrial policy, he describes just how difficult such intervention is to get right, and warns that trying to achieve multiple goals (say, to tackle climate change, boost industry and enhance security) with a single lever raises the chance of failure. What’s more, any paradigm that becomes conventional wisdom is in danger of promoting one-size-fits-all solutions, writes Mr Rodrik. In the eyes of its critics, the old Washington consensus fell short when it came to fairness and growth. Now it is easy for economists of all stripes to see the dangers of the new consensus. Policymakers would be wise to listen. ■Read more from Free exchange, our column on economics:How Japanese policymakers ended up in a very deep hole (May 4th)Economists and investors should pay less attention to consumers (Apr 27th)Is China better at monetary policy than America? (Apr 20th)Also: How the Free exchange column got its name More

Central banks around the world have been tightening monetary policy aggressively for over a year in a bid to rein in sky-high inflation.
But labor markets have remained stubbornly tight.
In mid-2022, supply chain shortages in the wake of the pandemic transitioned to gluts of goods and materials for retailers and manufacturers.
Jeffrey Kleintop, chief global investment strategist at Charles Schwab, expects a similar reversal in the labor market later in 2023.
Moody’s strategists suggested it could resurface without meaningful policy action to grow the size and productivity of the labor force.

Now Hiring signs are displayed in front of restaurants in Rehoboth Beach, Delaware, on March 19, 2022.
Stefani Reynolds | Afp | Getty Images

Since the onset of Covid-19, labor shortages have plagued major economies and intensified inflationary pressures, but economists expect this trend to finally abate this year.
Central banks around the world have been tightening monetary policy aggressively for over a year in a bid to rein in sky-high inflation, but labor markets have by and large remained stubbornly tight.

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Last week’s U.S. jobs report showed that this remained the case in April, despite recent turmoil in the banking sector and a slowing economy. Nonfarm payrolls increased by 253,000 for the month while the unemployment rate was at its joint-lowest level since 1969.
This tightness is reflected across many advanced economies, and with core inflation also remaining sticky, economists are divided as to when the likes of the Federal Reserve, the European Central Bank and the Bank of England will be able to pause, and eventually cut, interest rates.
In the U.S., the Federal Reserve last week signaled that it may hit pause on rate hikes, but markets remain uncertain as to whether the central bank will have to nudge rates higher still in light of incoming data. Job openings in March fell to their lowest level in nearly two years
However, Moody’s projected last week that the gap between labor supply and demand is expected to narrow across G-20 (Group of Twenty) advanced economies this year, easing the labor market tightness as growth slows with the lagged impact of tightening financial conditions and cyclical demand for workers recedes.
In mid-2022, supply chain shortages that arose in the wake of the pandemic transitioned to gluts of goods and materials for retailers and manufacturers, as bottlenecks and a resurgence of demand moderated.

Jeffrey Kleintop, chief global investment strategist at Charles Schwab, expects a similar reversal in the labor market later in 2023, once the lagged effect of monetary policy tightening takes hold.
“Company communications on earnings calls and shareholder presentations reveal a rising trend of mentions of job cuts (including phrases like ‘reduction in force,’ ‘layoffs,’ ‘headcount reduction,’ ’employees furloughed,’ ‘downsizing,’ and ‘personnel reductions’) along with a falling trend in mentions of labor shortages (including phrases like ‘labor shortages,’ ‘inability to hire,’ ‘difficulty in hiring,’ ‘struggling to fill positions,’ and ‘driver shortages’),” Kleintop highlighted in a report Friday.
Data aggregated by Charles Schwab showed that in U.S. corporate earnings since the start of this year, phrases relating to workforce reductions began to exceed those relating to labor shortages for the first time since mid-2021.
‘From shortages to gluts’
Kleintop also cited tighter lending conditions as contributing to a weaker jobs outlook, pointing to a “clear and intuitive leading relationship between banks’ lending standards and job growth.”
“The magnitude of the recent tightening in lending standards from banks in the U.S. and Europe points to a shift from job growth to job contraction in the coming quarters,” he said.
Falling demand for labor will be the main driver of further reversals over the next three to four quarters, Moody’s suggested on Friday, while rising borrowing costs for firms and households will reduce hiring intensity, consumer spending and economic activity over the course of the year.
“Modest growth in labor supply will also ease shortages, driven by higher participation rates from younger worker cohorts and fading pandemic-related frictions,” Moody’s strategists said.
“Labor force participation rates for age cohorts under the age of 65 have returned to (or in some cases surpassed) their pre-pandemic levels in most G20 AEs (advanced economies), indicating that the last two years of strong wage growth have been largely successful in enticing workers back into the labor force.”

Services job growth has been a key factor behind labor market resilience in the face of global economic weakness over the past year, as a result of a post-pandemic surge in demand.
Charles Schwab’s Kleintop highlighted that the gap between the services and manufacturing PMI (purchasing managers’ index), which is in recession, is at its widest on record.
“The record-wide gap between growth in services and weakness in manufacturing suggests an imbalance that may need to readjust,” he said.
“It may be the strength in the services economy—and therefore jobs—if the lagged impact of bank tightening begins to have more of an impact.”
This weakening of the job market picture may help central banks that have long voiced concern about the potential for tight labor markets and stronger wage growth to entrench inflation in their respective economies.
It may allow policymakers to adopt a more dovish stance, Kleintop suggested, which would boost stocks.
“However, the shift from shortages to gluts in the labor market may not be fast enough to bring down core inflation materially by year-end to allow central banks the freedom to declare victory over the drivers of inflation and begin to cut rates aggressively,” he added.
Risk of resurfacing
Although they agreed that labor shortages in advanced economies will subside this year, Moody’s strategists suggested it could resurface without meaningful policy action to grow the size and productivity of the labor force, as population aging continues to shrink workforces.
The ratings agency said aging will lead to a strong decline in available labor supply for most advanced economies, with South Korea, Germany and the U.S. particularly affected.
Based on estimates of labor supply lost to aging since the Covid pandemic, Moody’s believes the coming drag will be “significant.”

In the U.S., Moody’s estimates that aging is responsible for nearly 70% of the 0.8 percentage point decline in the labor force participation rate from the final quarter of 2019 to now, representing a loss of around 1.4 million workers due to aging.
“This ‘demographic drag’ on participation rates has been most significant in the euro area, Germany and Canada. However, idiosyncratic factors and policy action in France, Australia, Korea, the euro area and Japan have been able to offset their recent demographic drag,” Moody’s strategists said.
Offsetting factors they identified through data since the turn of the century included gains in female labor participation, migration, and progress in technology and training.
“As a result, policies that encourage immigration, female labor participation or the uptake of new, productivity-enhancing technologies will determine the extent and persistence of labor supply challenges. Without them, we would expect hiring challenges to re-emerge in the next business cycle,” Moody’s strategists argued. More

Robyn Beck | Afp | Getty Images

Check out the companies making headlines in extended trading.
Disney — Shares fell 4.7% after the company reported mixed fiscal second quarter results. Earnings came in line with estimates, while revenue slightly beat analysts’ estimates, according to Refinitiv data. While the company said its losses from its streaming segment narrowed, it shed 4 million Disney+ subscribers.

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Beyond Meat — The alternative meat manufacturer’s shares rose 8.5% after Beyond Meat posted better-than-expected results for the first quarter. Beyond Meat reported a loss of 92 cents per share and $92.2 million in revenue. Analysts had anticipated a loss of $1.01 per share on revenue of $90.8 million, according to Refinitiv.
Robinhood — Shares of the retail brokerage rose 4% in extended trading after Robinhood reported $441 million in revenue for the first quarter, above the $425 million predicted by analysts, according to Refinitiv. Transaction revenues for equities and options were both up from the fourth quarter, and monthly active users rose slightly to 11.8 million.
Unity Software – Unity Software shares popped 12% after the company beat revenue estimates for the recent quarter, according to Refinitiv. Unity also shared stronger-than-expected guidance for the current quarter, saying it expects revenue to range between $510 million and $520 million.
Groupon — Shares dropped 4% after the coupon company posted first-quarter revenue that came in below expectations, according to Refinitiv. Groupon reported revenue of $121.6 million, while the Street called for $134.9 million.
Sonos — The home sound system’s shares fell 18%. Sonos posted a loss of 24 cents per share, while analysts polled by Refinitiv called for a loss of 18 cents per share. Sonos CEO Patrick Spence announced the company is reducing its guidance for the second half of the 2023 fiscal year amid “softening consumer demand and channel partner inventory tightening.”
— CNBC’s Jesse Pound and Samantha Subin contributed reporting. More