US interest rate rises may be on the way, China seeks ‘stability’, and other economy stories you need to read this week

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Ian Shine, Senior Writer, Forum Agenda

• This weekly round-up brings you the latest stories from the world of economics and finance.
• Top economy stories: US signals larger interest rate rises; China sets low economic growth target as it seeks ‘stability’; Japan narrowly avoids recession.

1. Larger interest rate rises may be on the way, US Fed indicates

The US Federal Reserve will likely need to raise interest rates more than expected in response to recent strong economic data, Chair Jerome Powell says. He also told the Senate Banking Committee that the Fed is prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control inflation.

The number of Americans filing new claims for unemployment benefits has been falling, pointing to sustained labour market strength. At the same time, retail sales are rising faster than expected and the services sector is performing strongly.

Some of this unexpected strength may have been due to warm weather and other seasonal effects, but Powell says it may also be a sign the Fed needs to do more to temper inflation, perhaps even returning to larger rate increases than the 0.25 percentage point steps officials had been intending to use.

The Fed’s policy rate is currently in the 4.50-4.75% range. In December, officials saw that rising to a peak of around 5.1%, but investors now expect this may move at least 0.5 percentage points higher.

US inflation has fallen from an annual rate of 9.1% in June to 6.4% in January, but Powell says this remains too high. “The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” he told the Senate Banking Committee, adding that “the social costs of failure are very, very high”.

Changes to US interest rates have a knock-on effect around the world, as many countries that peg their currency to the dollar alter their rates in line with the Fed.

2. China prioritizes ‘economic stability’ amid low growth expectations

China has set a 5% growth target this year as it looks to “prioritize economic stability” following a bumpy 2022, reports the Financial Times. The goal is its lowest in decades and is below most economists’ expectations – and it could have implications for global growth.

It comes as President Xi Jinping secured a precedent-breaking third term in office.

The country’s GDP grew by just 3% last year – falling short of a target of 5.5%, and proving to be one of its worst showings in decades. The slowdown was a result of three years of COVID-19 restrictions, a crisis in the country’s vast property sector, a crackdown on private enterprise and weakening demand for Chinese exports.

China annual GDP growth, %

Premier Li Keqiang has stressed the need for economic stability and to expand consumption following last year’s dip in GDP. China’s annual consumer price inflation slowed to 1% in February – its lowest rate in a year – showing that consumers are behaving cautiously.

“We should give priority to the recovery,” Li said. “The incomes of urban and rural residents should be boosted through multiple channels. We should stabilize spending on big-ticket items and promote recovery in consumption of consumer services.” He has set a goal to create around 12 million urban jobs this year, up from last year’s target of at least 11 million.

The Economist says the “undemanding growth target removes any pressure to stimulate the economy further” and will prevent the further build-up of debt. China’s local governments are facing a debt crisis, according to Reuters. It points out that Li has set a fiscal deficit target of 3% of GDP this year – a marginal uptick from 2022 – and says there are no plans for direct transfers to boost consumer spending.

The International Monetary Fund (IMF) predicts 5.2% growth for China’s economy this year. It also points out how lower growth in China could pull down global growth. “When China’s growth rate rises by 1 percentage point, growth in other countries increases by around 0.3 percentage points.”

3. News in brief: Stories on the economy from around the world

Japan narrowly avoided a recession in the fourth quarter of 2022, with GDP growth of just 0.1% following a contraction in the third quarter. Real wages fell by 4.1% in January compared with a year earlier – their fastest drop in nearly nine years, as four-decade-high inflation squeezed consumer purchasing power in the world’s third-biggest economy. Wage trends are under close market scrutiny because Bank of Japan officials say pay hikes are essential to it scaling back its loose monetary policy.

Eurozone retail sales rebounded much less than expected in January compared with December and were still lower than 12 months earlier, underlining the weakness of consumer demand and the broader economic slowdown. Sales rose by 0.3% on the month and were down 2.3% on the year.

Sri Lanka has moved closer to receiving a $2.9 billion bailout from the International Monetary Fund (IMF), after securing financing assurances from China, India and all its major bilateral creditors.

US President Joe Biden has unveiled plans to raise taxes on the wealthy and boost federal spending. His proposed budget would increase taxes on anyone earning over $400,000 per year in order to cut $3 trillion from the US deficit over the next 10 years.

The Bank of Canada has left its key overnight interest rate on hold at 4.50%, becoming the first major central bank to suspend its monetary tightening campaign in the face of an anticipated easing of high inflation.

Australia’s central bank could pause its aggressive cycle of interest rate increases as soon as April. It has made 10 hikes that have lifted rates to an 11-year-high of 3.6%.

The UK economy grew by 0.3% on the month in January, following a 0.5% dip in December. And the British Chambers of Commerce says the UK economy is on track to shrink less than expected this year, avoiding the two quarters of negative growth that mark a technical recession.

South Africa’s economy contracted by 1.3% in the fourth quarter of 2022 compared with the previous three months, as an escalation in rolling power cuts hit sectors from agriculture to mining. Ratings agency S&P Global has downgraded its outlook for South Africa to “stable” from “positive”, citing infrastructure constraints and the severe power crisis.

France’s food retailers will offer “the lowest possible prices” on a selection of items for a three-month period, following an agreement with French Finance Minister Bruno Le Maire. The discounts, designed to help shoppers cope with food price inflation, are expected to cost retailers “hundreds of millions of euros”, Le Maire says.

4. More on finance and the economy on Agenda

The global financial system needs wide-scale reform, according to UN Secretary-General António Guterres. He says the system was created by wealthy countries to serve their own interests and is extremely unfair to the world’s least developed countries. As a result, he wants a “revolution of support” to aid these poorer nations.

The Indonesian government’s food aid program used to provide bags of rice to villages, but it led to people only receiving their full allocation 24% of the time. Since swapping this for a debit card system that allows people to buy the equivalent amount of food at local shops, millions of Indonesians now receive the full amount of food intended for them 81% of the time, according to new research.

The outlook for Asia’s economies this year has brightened, according to the International Monetary Fund. However, subtle policy trade-offs between controlling inflation and ensuring financial stability are needed, it says.