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U.S. GDP Rose 2.9% in the Fourth Quarter After a Year of High Inflation

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The U.S. economy grew at a solid 2.9% annual rate last quarter but entered this year with less momentum as rising interest rates and still-high inflation weighed on demand.

U.S. growth in the fourth quarter was down slightly from a 3.2% annual rate in the third quarter, the Commerce Department said Thursday. Consumer spending helped drive the fourth-quarter gain, while the housing market weakened and businesses cut back their spending on equipment.

The October-to-December period capped a year of economic slowdown with growth of 1% in the fourth quarter of 2022 compared with a year earlier, down sharply from 5.7% growth in 2021. The slowdown in part reflected a return to a more normal pace of growth after output surged amid business reopenings, fiscal stimulus and a waning pandemic in 2021.

Markets were mixed following Thursday’s release. Investors have been closely scrutinizing economic data for signs that U.S. growth is coming under pressure from the Federal Reserve’s campaign of interest-rate increases aimed at cooling the economy and bringing down high inflation.

So far in 2023, many traders and portfolio managers appear satisfied that economic activity remains strong enough that a recession this year is far from certain. That conclusion, together with cooling inflation readings, has helped fuel a modest rebound in U.S. stock indexes following last year’s washout.

The Fed is on track to slow interest-rate increases when it meets next week and debate how much higher to raise them this year as it tracks inflation’s trajectory and other economic developments.

The labor market has cooled some but continues to run strong. Jobless claims—a proxy for layoffs—fell last week and held near historic lows, despite the spread of layoff announcements beyond tech companies.

Workers received large wage gains through the end of last year. That helped consumer spending, the economy’s main engine, grow at a solid annual pace of 2.1% last quarter.

Despite some signs of resilience, recent data suggest consumers and businesses are starting to falter. Retail sales fell last month at the sharpest pace of 2022. Surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in January in the manufacturing and service sectors. Companies cut temporary workers in December for the fifth consecutive month, a sign that broader job losses could be on the horizon.

Many economists are concerned about the possibility of a U.S. recession this year. They worry that the Fed’s efforts to curb inflation could trigger broad spending cutbacks and job losses.

“Headwinds from the big jump in interest rates, consumers cutting back on discretionary spending and weak economies overseas were big problems for the U.S. in late 2022,” said

Bill Adams,

chief economist for Comerica Bank. “I expect real GDP growth will likely turn negative in the first half of this year.”

A buildup in inventories helped drive economic growth at the end of last year. That category is volatile, though.

Final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, cooled to a 0.2% annual pace in the fourth quarter from 1.1% in the third, the Commerce Department said, a sign of economic cooling in line with the Fed’s goals.

One of the most interest-rate-sensitive sectors—housing—is stumbling amid high mortgage rates. Residential investment declined throughout last year, while existing-home sales fell almost 18% in 2022 from the previous year.

Some economists say the worst of the housing downturn is over as mortgage rates are down from their peak last fall. But few expect a return to the boom times of 2021 any time soon.

The Fed had initially hoped it could bring down inflation with only a slowing in economic growth rather than an outright contraction, an outcome dubbed a “soft landing.”

“If we continue to get strong job growth and if we continue to get consumer spending on services, and companies don’t cut back on [capital expenditures], I think that adds fuel to the soft-landing story,” said Luke Tilley, chief economist at Wilmington Trust.

Consumer spending rose by 1.9% in the fourth quarter of 2022 compared with a year earlier, a slowdown from 7.2% growth in 2021 but close to 2019’s gain.

StoryBright Films, which provides photography and planning services for elopements in the Blue Ridge Mountains, photographed 16 couples’ elopements last year, down from 20 in 2021, said Mark Collett, the company’s co-owner.

Mr. Collett said his small business received many inquiries and engaged in conversations with a lot of potential clients last year. But more couples expressed concern about their financial situations and ability to pay for a big event than a year earlier.

“We would even get as far as sending them a contract to book, but then they got cold feet,” Mr. Collett said.

For 2022 marriages, clients tended to book at the bottom and top ends of the price range, rather than the middle, he added.

Purchasing power from paychecks fell for middle-income households last year, while it rose for lower-income and higher-income households. Many lower-income households benefited from wage increases and pandemic savings, while higher-income households had a large-enough savings buffer to spend aggressively.


Spending

on services

remained a

contributor.

Goods spending

(pct. pts.)

A shrinking trade

deficit continued

to drive growth,

but less so than in

the third quarter.

Residential

investment

was a drag

on growth.

Spending

on services

remained a

contributor.

Goods spending

(pct. pts.)

A shrinking trade

deficit continued

to drive growth,

but less so than in

the third quarter.

Residential

investment

was a drag

on growth.

Spending

on services

remained a

contributor.

Goods spending

(pct. pts.)

The trade deficit

continued to

drive growth, but

less so than in

the third quarter.

Residential

investment

was a drag

on growth.

Goods

spending

(pct. pts.)

Goods

spending

(pct. pts.)

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

China’s Shrinking Population Is Deeper Problem Than Slow Growth for Its Economy

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Economists said China’s shrinking population poses a major future challenge for the world’s second-largest economy, while President Xi Jinping’s top economic adviser sought Tuesday to restore investor confidence after one of the most disappointing growth rates in decades.

China has already rolled back the zero-Covid policies that restrained growth for much of 2022, setting the stage for a recovery this year. The U-turn, in the wake of public protests, was part of a broad policy reset aimed at boosting the economy, including an easing of regulations on the property sector and signals that the clampdown on the tech sector has ended.

Beijing is now betting on a robust rebound in economic activities as officials increasingly signal that the recent wave of infections is reaching its peak. Some government advisers say the central leadership likely will announce a growth target of between 5% and 5.5% for 2023 at the coming legislative sessions in March. China on Tuesday posted 3% growth for 2022, its second-worst growth rate since 1976.

Speaking to the World Economic Forum in Davos, Mr. Xi’s top economic adviser, Vice Premier Liu He, sought to send a message to investors and executives that China’s growth would return to prepandemic levels this year as the country reopens.

On a Davos panel titled “China’s Next Chapter,” speakers also projected optimism. China’s reopening and exit from its zero-Covid policy is the “most positive catalyst” for global markets this year, said

Hong Kong Exchanges and Clearing Ltd.

’s Chief Executive

Nicolas Aguzin.

Vice Premier Liu He sought to restore investor confidence in China at the World Economic Forum in Davos, Switzerland.



Photo:

Markus Schreiber/Associated Press

“If China produces a solid growth number for 2023, 5% or 5% plus, that will actually underpin much global growth for the year to come,” said

Kevin Rudd,

president and CEO of Asia Society.

China’s recent measures, however, won’t address a host of challenges, some of which were exacerbated by the pandemic. A rapidly aging population, slowing growth in productivity, high debt levels and rising social inequality will weigh on the country’s economic ascent for decades to come, economists said.

On Tuesday, the same day that China posted 3% growth, the second-worst growth rate since 1976, it also said that for the first time since 1961, its population shrank.

China’s population dropped by 850,000 to 1.412 billion. The shift toward a shrinking population, which came faster than Beijing had projected, marks a watershed moment in China’s history with profound implications for its economy and its status as the world’s factory floor.

The demographic milestone comes when, despite its enormous size, China’s economy is still that of a middle-income, developing country, as measured by average worker incomes when compared with the U.S. and other rich-country peers. China’s leaders have long held the ambition of leapfrogging the U.S. to become the world’s biggest economy, a task made harder by this strengthening demographic headwind, economists say.

The global economy has grown to rely on China’s vast pool of workers for manufactured goods.



Photo:

Kyodonews/Zuma Press

“The likelihood of China someday overtaking the U.S. as No. 1 economy has just gone down a notch,” said Roland Rajah, lead economist at the Lowy Institute, a Sydney think tank.

The global economy has grown to rely on China’s vast pool of factory workers for manufactured goods, and its consumers represent a growing market for Western-made cars and luxury goods. A dwindling population means fewer consumers when China is under pressure to power growth through greater consumption instead of investment and exports.

Any rebound in consumption will also likely be constrained by a weak labor market and a housing downturn that has eroded the wealth of Chinese families. The jobless rate among people age 16 to 24 remained elevated at 16.7% in December, versus the peak of near 20% last summer. Growth in disposable income per capita could slow to around 4% each year in the next five years, downshifting from around 8% before the pandemic, according to David Wang, chief China economist at

Credit Suisse.

A smaller workforce will likely restrain economic growth. An economy can only grow by adding workers or producing more with the workers it has. China’s working-age population, which peaked around 2014, is expected to fall by 0.2% a year until 2030, according to S&P Global Ratings.

Productivity growth has been slowing. It slid to 1.3% on average in the 10 years through 2019, from 2.7% in the preceding decade, according to estimates from the Conference Board, a nonprofit research organization.

“It seems like it’s going to get old before it gets rich,” said Andrew Harris, deputy chief economist at Fathom Consulting in London.

Countries around the world are welcoming back Chinese tourists, once the largest source of tourism revenue globally. But even as China reopens its borders, the travel industry isn’t expecting things to bounce back to what they were just yet. Here’s why. Photo illustration: Adam Adada

There are some grounds for optimism, economists say. China could make better, more productive use of underemployed urban workers in state-owned enterprises as well as those still laboring in the countryside.

It is also adding automation and related technology to its factories rapidly, replacing or augmenting its shrinking pool of workers. Advances in robotics, artificial intelligence and other high-tech sectors that could turbocharge worker productivity “is the potential out for China,” Mr. Harris said, though he added whether it will succeed or not is unclear.

Meanwhile, China remains tied to its old playbook of fueling growth by encouraging governments and companies to borrow more to fund investments, a model that economists warn will be unsustainable in the long run.

The country’s overall debt as a share of its economy reached a high during the pandemic, as local governments borrowed to finance infrastructure projects and boost the economy. As of June 2022, credit to the nonfinancial sector reached $51.8 trillion, or 295% of gross domestic product, according to data from the Bank for International Settlements.

China’s policies throughout the pandemic have focused heavily on the supply-side rather than the demand-side of the economy. Unlike many countries in the West, the Chinese government refrained from handing out cash to households, directing most of its efforts toward supporting manufacturers.

“The systemic problems that China had in its economy before Covid are still there,” said

George Magnus,

an economist and research associate at Oxford University, “In some aspects, the pandemic made them worse.”

A dwindling population means fewer consumers as China is under pressure to power growth through consumption.



Photo:

Qilai Shen/Bloomberg News

Despite the optimism expressed by some speakers in Davos, investors and corporate executives both inside and outside China remain wary of Beijing’s willingness to sufficiently roll back its restrictions on businesses of the past few years to re-embrace private capital.

Mr. Liu sought to allay those concerns during his Tuesday speech. He told the Davos crowd that a return to a planned economy, where the party-state dictates economic activities, is impossible.

But economists say Mr. Xi’s drive for self-sufficiency across a range of industries and his penchant for dictating how private business should be run will continue to sap vitality from the economy.

To achieve self-reliance in key sectors, Beijing has focused on channeling low-cost loans to favored sectors, such as semiconductors, renewable energy and pharmaceuticals. But the spending, which often involves less-productive state-owned enterprises, has also been plagued by waste and corruption, economists say, with limited evidence of real innovation.

“Xi’s desire to make sure that the Party’s control extends across society runs far deeper than his commitment to growing a market economy,” said Mark Williams, chief Asia economist at Capital Economics.

—Rebecca Feng contributed to this article.

Write to Stella Yifan Xie at stella.xie@wsj.com and Jason Douglas at jason.douglas@wsj.com

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Business

From the unwinding of zero-Covid to economic recovery: What to watch in China in 2023

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Editor’s Note: A version of this story appeared in CNN’s Meanwhile in China newsletter, a three-times-a-week update exploring what you need to know about the country’s rise and how it impacts the world. Sign up here.


Hong Kong
CNN
 — 

After a tumultuous end to a momentous and challenging year, China heads into 2023 with a great deal of uncertainty – and potentially a glimpse of light at the end of the pandemic tunnel.

The chaos unleashed by leader Xi Jinping’s abrupt and ill-prepared exit from zero-Covid is spilling over into the new year, as large swathes of the country face an unprecedented Covid wave.

But the haphazard reopening also offers a glimmer of hope for many: after three years of stifling Covid restrictions and self-imposed global isolation, life in China may finally return to normal as the nation joins the rest of the world in learning to live with the virus.

“We have now entered a new phase of Covid response where tough challenges remain,” Xi said in a nationally televised New Year’s Eve speech. “Everyone is holding on with great fortitude, and the light of hope is right in front of us. Let’s make an extra effort to pull through, as perseverance and solidarity mean victory.”

Xi had previously staked his political legitimacy on zero-Covid. Now, as his costly strategy gets dismantled in an abrupt U-turn following nationwide protests against it, many are left questioning his wisdom. The protests, which in some places saw rare demands for Xi and the Communist Party to “step down,” may have ended, but the overriding sense of frustration has yet to dissipate.

His New Year speech comes as China’s lockdown-battered economy faces more immediate strain from a spiraling outbreak that has hit factories and businesses, ahead of what is likely to be a long and complicated road to economic recovery.

Its tightly-sealed borders are gradually opening up, and Chinese tourists are eager to explore the world again, but some countries appear cautious to receive them, imposing new requirements for a negative Covid test before travel. And just how quickly – or keenly – global visitors will return to China is another question.

Xi, who recently reemerged on the world stage after securing a third term in power, has signaled he hopes to mend frayed relations with the West, but his nationalist agenda and “no-limits friendship” with Russia is likely to complicate matters.

As 2023 begins, CNN takes a look at what to watch in China in the year ahead.

The most urgent and daunting task facing China in the new year is how to handle the fallout from its botched exit from zero-Covid, amid an outbreak that threatens to claim hundreds of thousands of lives and undermine the credibility of Xi and his Communist Party.

The sudden lifting of restrictions last month led to an explosion of cases, with little preparation in place to deal with the surging numbers of patients and deaths.

The country’s fragile heath system is scrambling to cope: fever and cold medicines are hard to find, hospitals are overwhelmed, doctors and nurses are stretched to the limit, while crematoriums are struggling to keep up with an influx of bodies.

And experts warn the worst is yet to come. While some major metropolises like Beijing may have seen the peak of the outbreak, less-developed cities and the vast rural hinterland are still bracing for more infections.

As the travel rush for the Lunar New Year – the most important festival for family reunion in China – begins this week, hundreds of millions of people are expected to return to their hometowns from big cities, bringing the virus to the vulnerable countryside where vaccination rates are lower and medical resources even scarcer.

The outlook is grim. Some studies estimate the death toll could be in excess of a million, if China fails to roll out booster shots and antiviral drugs fast enough.

The government has launched a booster campaign for the elderly, but many remain reluctant to take it due to concerns about side effects. Fighting vaccine hesitancy will require significant time and effort, when the country’s medical workers are already stretched thin.

Beijing’s Covid restrictions have put China out of sync with the rest of the world. Three years of lockdowns and border curbs have disrupted supply chains, damaged international businesses, and hurt flows of trade and investment between China and other countries.

As China joins the rest of the world in living with Covid, the implications for the global economy are potentially huge.

Any uptick in China’s growth will provide a vital boost to economies that rely on Chinese demand. There will be more international travel and production. But rising demand will also drive up prices of energy and raw materials, putting upward pressure on global inflation.

“In the short run, I believe China’s economy is likely to experience chaos rather than progress for a simple reason: China is poorly prepared to deal with Covid,” said Bo Zhuang, senior sovereign analyst at Loomis, Sayles & Company, an investment firm based in Boston.

Analysts from Capital Economics expect China’s economy to contract by 0.8% in the first quarter of 2023, before rebounding in the second quarter.

Other experts also expect the economy to recover after March. In a recent research report, HSBC economists projected a 0.5% contraction in the first quarter, but 5% growth for 2023.

Despite all this uncertainty, Chinese citizens are celebrating the partial reopening of the border after the end of quarantine for international arrivals and the resumption of outbound travel.

Though some residents voiced concern online about the rapid loosening of restrictions during the outbreak, many more are eagerly planning trips abroad – travel websites recorded massive spikes in traffic within minutes of the announcement on December 26.

Several Chinese nationals overseas told CNN they had been unable or unwilling to return home for the last few years while the lengthy quarantine was still in place. That stretch meant major life moments missed and spent apart: graduations, weddings, childbirths, deaths.

Some countries have offered a warm welcome back, with foreign embassies and tourism departments posting invitations to Chinese travelers on Chinese social media sites. But others are more cautious, with many countries imposing new testing requirements for travelers coming from China and its territories.

Officials from these countries have pointed to the risk of new variants emerging from China’s outbreak – though numerous health experts have criticized the targeted travel restrictions as scientifically ineffective and alarmist, with the risk of inciting further racism and xenophobia.

As China emerges from its self-imposed isolation, all eyes are on whether it will be able to repair its reputation and relations that soured during the pandemic.

China’s ties with the West and many of its neighbors plummeted significantly over the origins of the coronavirus, trade, territorial claims, Beijing’s human rights record and its close partnership with Russia despite the devastating war in Ukraine.

The lack of top-level face-to-face diplomacy certainly didn’t help, neither did the freeze on in-person exchanges among policy advisers, business groups and the wider public.

At the G20 and APEC summits, Xi signaled his willingness to repair relations with the United States and its allies in a flurry of bilateral meetings.

Communication lines are back open and more high-level exchanges are in the pipeline – with US Secretary of State Antony Blinken, French President Emmanuel Macron, Dutch Prime Minister Mark Rutte and Italy’s newly elected Prime Minister Giorgia Meloni all expected to visit Beijing this year.

But Xi also made clear his ambition to push back at American influence in the region, and there is no illusion that the world’s two superpowers will be able to work out their fundamental differences and cast aside their intensifying rivalry.

In the new year, tensions may again flare over Taiwan, technological containment, as well as China’s support for Russia – which Xi underlined during a virtual meeting with Russian President Vladimir Putin on December 30.

Both leaders expressed a message of unity, with Xi saying the two countries should “strengthen strategic coordination” and “inject more stability into the world,” according to Chinese state media Xinhua.

China is “ready to work” with Russia to “stand against hegemonism and power politics,” and to oppose unilateralism, protectionism and “bullying,” said Xi. Putin, meanwhile, invited Xi to visit Moscow in the spring of 2023.

Beijing has long refused to condemn Russia’s invasion of Ukraine, or even refer to it as such. It has instead decried Western sanctions and amplified Kremlin talking points blaming the US and NATO for the conflict.

As Russia suffered humiliating military setbacks in Ukraine in recent months, Chinese state media appeared to have somewhat dialed back its pro-Russia rhetoric, while Xi has agreed to oppose the use of nuclear weapons in Ukraine in meetings with Western leaders.

But few experts believe China will distance itself from Russia, with several telling CNN the two countries’ mutual reliance and geopolitical alignment remains strong – including their shared vision for a “new world order.”

“(The war) has been a nuisance for China this past year and has affected China’s interest in Europe,” said Yun Sun, director of the China Program at the Washington-based think tank Stimson Center. “But the damage is not significant enough that China will abandon Russia.”

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Business

The stock market is sliding because investors fear recession more than inflation

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A stock-market paradox, in which bad news about the economy is seen as good news for equities, may have run its course. If so, investors should expect bad news to be bad news for stocks heading into the new year — and there may be plenty of it.

But first, why would good news be bad news? Investors have spent 2022 largely focused on the Federal Reserve and its rapid series of large rate hikes aimed at bringing inflation to heel. Economic news pointing to slower growth and less fuel for inflation could serve to lift stocks on the idea that the Fed could begin to slow the pace or even begin entertaining future rate cuts.

Conversely, good news on the economy could be bad news for stocks.

So what’s changed? The past week saw a softer-than-expected November consumer-price index reading. While still running mighty hot, with prices rising more than 7% year over year, investors are increasingly confident that inflation likely peaked at a roughly four-decade high above 9% in June.

See: Why November’s CPI data are seen as a ‘game-changer’ for financial markets

But the Federal Reserve and other major central banks indicated they intend to keep lifting rates, albeit at a slower pace, into 2023 and likely keep them elevated longer than investors had anticipated. That’s stoking fears that a recession is becoming more likely.

Meanwhile, markets are behaving as if the worst of the inflation scare is in the rearview mirror, with recession fears now looming on the horizon, said Jim Baird, chief investment officer of Plante Moran Financial Advisors.

That sentiment was reinforced by manufacturing data Wednesday and a weaker-than-expected retail sales reading on Thursday, Baird said, in a phone interview.

Markets are “probably headed back to a period where bad news is bad news not because rates will be driving concerns for investors, but because earnings growth will falter,” Baird said.

A ‘reverse Tepper trade’

Keith Lerner, co-chief investment officer at Truist, argued that a mirror image of the backdrop that produced what became known as the “Tepper trade,” inspired by hedge-fund titan David Tepper in September 2010, may be forming.

Unfortunately, while Tepper’s prescient call was for a “win/win scenario.” the “reverse Tepper trade” is shaping up as a lose/lose proposition, Lerner said, in a Friday note.

Tepper’s argument was that the economy was either going to get better, which would be positive for stocks and asset prices. Or, the economy would weaken, with the Fed stepping in to support the market, which would also be positive for asset prices.

The current setup is one in which the economy is going to weaken, taming inflation but also denting corporate profits and challenging asset prices, Lerner said. Or, instead, the economy remains strong, along with inflation, with the Fed and other central banks continuing to tighten policy, and challenging asset prices.

“In either case, there’s a potential headwind for investors. To be fair, there is a third path, where inflation comes down, and the economy avoids recession, the so-called soft landing. It’s possible,” Lerner wrote, but noted the path to a soft landing looks increasingly narrow.

Recession jitters were on display Thursday, when November retail sales showed a 0.6% fall, exceeding forecasts for a 0.3% decline and the biggest drop in almost a year. Also, the Philadelphia Fed’s manufacturing index rose, but remained in negative territory, disappointing expectations, while the New York Fed’s Empire State index fell.

Read: Still a bear market: S&P 500 slump signals stocks never reached ‘escape velocity’

Stocks, which had posted moderate losses after the Fed a day earlier lifted interest rates by half a percentage point, tumbled sharply. Equities extended their decline Friday, with the S&P 500
SPX,
-1.11%
logging a 2.1% weekly loss, while the Dow Jones Industrial Average
DJIA,
-0.85%
shed 1.7% and the Nasdaq Composite
COMP,
-0.97%
dropped 2.7%.

“As we move into 2023, economic data will become more of an influence over stocks because the data will tell us the answer to a very important question: How bad will the economic slowdown get? That’s the key question as we begin the new year, because with the Fed on relative policy ‘auto pilot’ (more hikes to start 2023) the key now is growth, and the potential damage from slowing growth,” said Tom Essaye, founder of Sevens Report Research, in a Friday note.

Recession watch

No one can say with complete certainty that a recession will occur in 2023, but it seems there’s no question corporate earnings will come under pressure, and that will be a key driver for markets, said Plante Moran’s Baird. And that means earnings have the potential to be a significant source of volatility in the year ahead.

“If in 2022 the story was inflation and rates, for 2023 it’s going to be earnings and recession risk,” he said.

It’s no longer an environment that favors high-growth, high risk equities, while cyclical factors could be setting up nicely for value-oriented stocks and small caps, he said.

Truist’s Lerner said that until the weight of the evidence shifts, “we maintain our overweight in fixed income, where we are focused on high quality bonds, and a relative underweight in equities.”

Within equities, Truist favors the U.S., a value tilt, and sees “better opportunities below the market’s surface,” such as the equal-weighted S&P 500, a proxy for the average stock.

Highlights of the economic calendar for the week ahead include a revised look at third-quarter gross domestic product on Thursday, along with the November index of leading economic indicators. On Friday, November personal consumption and spending data, including the Fed’s preferred inflation gauge are set for release.

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Business

Euro zone inflation hits 10.7% in October

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Inflation in the euro zone remains extremely high. Protestors in Italy used empty shopping trolleys to demonstrate the cost-of-living crisis.

Stefano Montesi – Corbis | Corbis News | Getty Images

Euro zone inflation rose above the 10% level in the month of October, highlighting the severity of the cost-of-living crisis in the region and adding more pressure on the European Central Bank.

Preliminary data on Monday from Europe’s statistics office showed headline inflation came in at an annual 10.7% last month. This represents the highest ever monthly reading since the euro zone’s formation. The 19-member bloc has faced higher prices, particularly on energy and food, for the past 12 months. But the increases have been accentuated by Russia’s invasion of Ukraine in late February.

This proved to be the case once again, with energy costs expected to have had the highest annual rise in October, at 41.9% from 40.7% in September. Food, alcohol and tobacco prices also rose in the same period, jumping 13.1% from 11.8% in the previous month.

“Inflation surged again in October and are a proper Halloween nightmare for the ECB,” analysts at Pantheon Macroeconomics, said in an email.

Salomon Fiedler, an economist at Berenberg, said the “continuing surge in consumer prices and still-resilient domestic demand in the summer indicate a risk that the European Central Bank may hike rates by 75 basis points in December, rather than the 50 basis points we currently expect.”

Italy’s inflation above 12%

Monday’s data comes after individual countries reported flash estimates last week. In Italy, headline inflation came in above analysts’ expectations at 12.8% year-on-year. Germany also said inflation jumped to 11.6% and in France the number reached 7.1%. The different values reflect measures taken by national governments, as well as the level of dependency that there nations have, or had, on Russian hydrocarbons.

There are, however, euro nations where inflation rose by more than 20%. This includes Estonia, Latvia and Lithuania.

The European Central Bank — whose primary target is to control inflation — on Thursday confirmed further rate hikes in the coming months in an attempt to bring prices down. It said in a statement that it had made “substantial progress” in normalizing rates in the region, but it “expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.”

The ECB decided to raise rates by 75 basis points for a second consecutive time last week.

Speaking at a subsequent press conference, ECB President Christine Lagarde said the likelihood of a recession in the euro zone had intensified.

Growth figures released Monday showed a GDP (gross domestic product) figure of 0.2% for the euro area in October. This is after the region grew at a rate of 0.8% in the second quarter. Only Belgium, Latvia and Austria registered GDP rates below zero.

So far, the 19-member bloc has dodged a recession but an economic slowdown is evident. Several economists predict there will be a contraction in GDP during the current quarter.

Andrew Kenningham, chief Europe economist at Capital Economics, said “the increase in euro zone GDP in the third quarter does not alter our view that the euro zone is on the cusp of a recession.”

“But with inflation having jumped to well over 10%, the ECB will prioritise price stability and press on with rate hikes regardless,” he added.

The euro traded below parity against the U.S. dollar in early European trading hours Monday and ahead of the new data releases, and barely moved after the new figures. The euro has been weaker against the greenback and that’s also something the ECB has been concerned about with concerns that this will push up inflation in the euro zone even further.

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Business

Janet Yellen: Treasury secretary says she’s not seeing signs of a recession in the US economy

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CNN
 — 

Treasury Secretary Janet Yellen said Thursday in an exclusive interview with CNN that she did not see signs of a recession in the near term as the US economy rebounded from six months of contraction.

During a one-on-one interview in Ohio that aired on CNN’s “Erin Burnett OutFront,” Yellen said the third quarter GDP data released Thursday underscored the strength of the US economy as policy makers urgently move to cool off pervasive and soaring inflation that has had a sharp effect on American views of the economy – and endangered the Democratic majorities on Capitol Hill less than two weeks from the midterm elections.

“Look, what we’re seeing right now is solid growth this quarter. Growth has obviously slowed following a very rapid recovery from high unemployment,” Yellen said when asked about whether the latest GDP data assuaged any recession concerns. “We’re at a full employment economy. It’s very natural that growth would slow. And it has over the first three quarters of this year, but it continues to be OK. We have a very strong labor market. I don’t see signs of a recession in this economy at this point.”

Yellen’s optimism comes amid growing concern from economists and finance officials that a recession is likely at some point in the next year, but was based in part on elements of the latest data that showed signs a necessary slowdown in key areas of the economy leaves open a pathway to a “soft landing” as the Federal Reserve prepares to continue its rapid pace of rate increases.

Gross domestic product — the broadest measure of economic activity — rose by an annualized rate of 2.6% during the third quarter, according to initial estimates released Thursday by the Bureau of Economic Analysis. That’s a turnaround from a decline of 1.6% in the first quarter of the year and negative 0.6% in the second.

But Yellen’s view also underscored the complex balancing act President Joe Biden and his top economic officials have attempted over the course of this year, as they seek to highlight a rapid economic recovery and major legislative victories while also pledging to tackle soaring prices.

“Inflation is very high – it’s unacceptably high and Americans feel that every day,” Yellen said when asked how the administration squared its view of the US economy with soaring discontent among voters. Yellen acknowledged that the prices would take time to recede, saying the efforts to bring it back down to levels “that people are more accustomed to” will likely cover “the next couple of years.”

It’s a reality that has undercut efforts by the administrationto take advantage of what officials view as a robust record. Biden, asked about the economy last week, told reporters it’s “strong as hell,” drawing criticism from Republicans.

But Yellen agreed with the President’s assessment that the economy remains strong, standing out in comparison to how other economies around the world are fairing.

“If you look around the world, there are a lot of economies that are really suffering not only from high inflation but very weak economic performance, and the United States stands out. We have unemployment at a 50-year low. … We saw in this morning’s report – consumer spending and investment spending continued to grow. We have solid household finances, business finances, banks that are well capitalized,” she said.

She added, “This is not an economy that’s in recession and we continue to do well.”

Yellen also acknowledged frustration inside the administration that the efforts to pull the US economy out of crisis haven’t received the credit officials believe is merited.

“There were several problems that we could have had, and difficulties many families American families could have faced,” Yellen said. “These are problems we don’t have, because of what the Biden administration has done. So, often one doesn’t get credit for problems that don’t exist.”

Yellen traveled to Cleveland as part of an administration push to highlight the major legislative wins – and the tens of billions of dollars in private sector investment those policies have driven toward manufacturing around the country.

It’s a critical piece of an economic strategy designed to address many of the vulnerabilities and failings laid bare as Covid-19 ravaged the world, with significant federal investments in infrastructure and shoring up – or creating from scratch – key pieces of critical supply chains.

Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.

Yellen pledged that those efforts would be felt as they course through the economy in the months and years ahead. Asked if the administration’s general message to Americans was one of patience, Yellen said: “Yes.”

“But you’re beginning to see repaired bridges come online – not in every community, but pretty soon. Many communities are going to see roads improved, bridges repaired that have been falling apart. We’re seeing money flow into research and development, which is really an important source of long term strength to the American economy. And America’s strength is going to increase and we’re going to become a more competitive economy,” she said.

Yellen also addressed the battle lines that have been drawn this week over raising the debt ceiling, a now-perpetual Washington crisis of its own making that House Republicans have once again pledged to utilize for leverage should they take the majority.

“The President and I agree that America should not be held hostage by members of Congress who think it’s alright to compromise the credit rating of the United States and to threaten default on US Treasuries, which are the bedrock of global financial markets,” Yellen said.

But Yellen, who has long highlighted the “destructive” nature of the showdowns, has also backed doing away with the debt limit altogether through legislation. A group of House Democrats wrote to Democratic leaders to request that action in the lame duck session of Congress, but Biden rejected the idea this week.

Asked about the split, Yellen said only that she and Biden agreed that it’s “really up to Congress to raise the debt ceiling.”

“It’s utterly essential that it be done, and I’d like to see it occur in the way that it can occur,” Yellen added.

As the administration moves toward a time period that traditionally leads top officials to leave an administration, she made clear she did not plan to be one of them. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”

“I feel very excited by the program that we talked about,” Yellen said. “And I see in it great strengthening of economic growth and addressing climate change and strengthening American households. And I want to be part of that.”

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Business

U.S. Economy Grew 2.6% in Third Quarter, GDP Report Shows

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The U.S. economy grew in the third quarter but showed signs of a broad slowdown as consumer and business spending faltered under high inflation and rising interest rates.

Gross domestic product—a measure of goods and services produced across the nation—grew at a 2.6% annual rate in the third quarter after declining in the first half of the year, the Commerce Department said Thursday.

Trade contributed the most to the third quarter’s turnaround as the U.S. exported more oil and natural gas with the Ukraine war disrupting supplies in Europe. Consumer spending, the economy’s main engine, grew but at a slower pace than in the prior quarter.

Businesses slashed spending on buildings, however, and residential investment fell at a 26.4% annual rate, the department said.

Stocks were mixed after the GDP release and earnings announcements. Treasury yields fell.

Economic uncertainty is growing and many economists are worried about the possibility of a recession in the coming 12 months. They expect the Federal Reserve’s efforts to combat high inflation by raising interest rates will further weigh on the economy.

“The overall state of the economy is deteriorating and a lot of it is just the weight of elevated inflation and higher interest rates,” said Richard F. Moody, chief economist at

Regions Financial Corp.

“I don’t think that we’ve seen the full effects of higher rates work their way through the economy, so that’s why we have pretty low expectations for the next several quarters.”



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The U.S. isn’t the only part of the world facing economic challenges. The European Central Bank on Thursday raised its key interest rate to 1.5% from 0.75% as it too attempts to tame inflation in a region teetering close to recession.

One of the sectors most sensitive to interest rates—housing—is showing signs of pain. Home sales posted their longest streak of declines in 15 years and the average rate on a 30-year fixed-rate mortgage eclipsed 7% Thursday for the first time in more than 20 years.

Economists don’t expect the third-quarter rise in exports to endure, given a stronger dollar and weakening global economy. Many point to final sales to private domestic purchasers, a measure of consumer and business spending that gauges underlying demand in the economy, as a sign of a broader economic slowdown. That inched up at a 0.1% annual rate in the third quarter after it rose 0.5% in the second quarter and increased 2.1% in the first quarter.

Some of the economic slowdown this year reflects a return to a more normal rate of growth after the economy last year expanded at an unusually fast pace of 5.7% as it rebounded from earlier pandemic disruptions.

The trajectory of the economy largely depends on how consumers fare in the coming months.

High inflation and rising interest rates haven’t done much to weaken the health of the American consumer, Bank of America Corp. Chief Executive

Brian Moynihan

said in an October earnings call. The company’s data show consumers continue to spend more. They also have more money in the bank than before the pandemic.

Consumers are benefiting from a tight labor market. Employers are holding on to the workers they have, with jobless claims remaining low last week. Many businesses are also ramping up pay as they struggle with staffing shortages.

“Wage growth is up, which is good for consumers, and that helps their balance sheet,” said

Mark Begor,

CEO of the credit-reporting company

Equifax Inc.

on an earnings call this month. “Obviously, inflation is a bad guy, and it is hurting lots of consumers. But even with inflation, consumers are still out there spending and traveling and doing all the things that they do in their lives.”

Still, consumers might be starting to crack. Many are tapping into pandemic savings and turning more to credit cards to finance spending, said

Kathy Bostjancic,

chief U.S. economist at Oxford Economics.

The consumer-sentiment index and the consumer-confidence index both try to measure the same thing: consumers’ feelings. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

But with higher interest rates, “there’s really a limit to how much consumers can rely on their credit cards,” she said.

Some companies—particularly in sectors that benefited from a consumer-goods binge earlier in the pandemic—are seeing a consumer pullback. Sales are down about 25% so far this year from the same period in 2021 at Altus Brands LLC, said Gary Lemanski, owner of the Grawn, Mich.-based company that manufactures and sells accessories for hunting, shooting and outdoor recreation.

Many of the factors that spurred a sales surge in 2020 and 2021—such as consumers’ extra cash from government stimulus, their time at home to go out in the woods and their lack of ability to spend money on services including travel—have since faded, he said.

Inflation is causing many consumers to cut back on discretionary purchases, which include products Altus sells, such as electronic ear muffs for hearing protection that can go for $200 to $250, Mr. Lemanski said.

“I talk with a lot of folks, and you just hear it over and over again: It’s tougher to make ends meet,” he said.

Many technology companies are feeling the effects of a slowing economy.

Facebook

parent Meta Platforms Inc. posted its second revenue decline in a row, as the social-media company wrestles with tough macroeconomic conditions that are weighing on advertiser spending.

Microsoft Corp.

said it expects a sharp decline in personal-computer sales and the dollar’s strength to continue to weigh on growth.

A series of interest-rate rises have rippled through the U.S. economy, and more are projected to be on the way. WSJ breaks down the numbers hitting Americans’ wallets this year and beyond. Photo: Elise Amendola/Associated Press

Inflation is denting some consumers’ appetite for big-ticket purchases. Most Americans say it is a bad time to buy a car or large household goods such as furniture, refrigerators or stoves, with a large share attributing their viewpoint to high prices, University of Michigan survey data show.

CarMax,

a used-car retailer, reported a profit drop of more than 50% in its most recent quarter as tough economic conditions weighed on consumers.

“This quarter reflects widespread pressure the used-car industry is facing,” said

William Nash,

the company’s chief executive, on an earnings call. Higher prices, climbing interest rates and low consumer confidence “all led to a marketwide decline in used-auto sales,” he said.

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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Business

China GDP: Hong Kong stocks plunge 6% as fears about Xi’s third term trump data

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Hong Kong
CNN Business
 — 

Hong Kong stocks had their worst day since the 2008 global financial crisis, just a day after Chinese leader Xi Jinping secured his iron grip on power at a major political gathering.

Foreign investors spooked by the outcome of the Communist Party’s leadership reshuffle dumped Chinese equities and the yuan despite the release of stronger-than-expected GDP data. They’re worried that Xi’s tightening grip on power will lead to the continuation of Beijing’s existing policies and further dent the economy.

Hong Kong’s benchmark Hang Seng

(HSI) Index plunged 6.4% on Monday, marking its biggest daily drop since November 2008. The index closed at its lowest level since April 2009.

The Chinese yuan weakened sharply, hitting a fresh 14-year low against the US dollar on the onshore market. On the offshore market, where it can trade more freely, the currency tumbled 0.8%, hovering near its weakest level on record, even as the Chinese economy grew 3.9% in the third quarter from a year ago, according to the National Bureau of Statistics. Economists polled by Reuters had expected growth of 3.4%.

The sharp sell-off came one day after the ruling Communist Party unveiled its new leadership for the next five years. In addition to securing an unprecedented third term as party chief, Xi packed his new leadership team with staunch loyalists.

A number of senior officials who have backed market reforms and opening up the economy were missing from the new top team, stirring concerns about the future direction of the country and its relations with the United States. Those pushed aside included Premier Li Keqiang, Vice Premier Liu He, and central bank governor Yi Gang.

“It appears that the leadership reshuffle spooked foreign investors to offload their Chinese investment, sparking heavy sell-offs in Hong Kong-listed Chinese equities,” said Ken Cheung, chief Asian forex strategist at Mizuho bank.

The GDP data marked a pick-up from the 0.4% increase in the second quarter, when China’s economy was battered by widespread Covid lockdowns. Shanghai, the nation’s financial center and a key global trade hub, was shut down for two months in April and May. But the growth rate was still below the annual official target that the government set earlier this year.

“The outlook remains gloomy,” said Julian Evans-Pritchard, senior China economist for Capital Economics, in a research report on Monday.

“There is no prospect of China lifting its zero-Covid policy in the near future, and we don’t expect any meaningful relaxation before 2024,” he added.

Coupled with a further weakening in the global economy and a persistent slump in China’s real estate, all the headwinds will continue to pressure the Chinese economy, he said.

Evans-Pritchard expected China’s official GDP to grow by only 2.5% this year and by 3.5% in 2023.

Monday’s GDP data were initially scheduled for release on October 18 during the Chinese Communist Party’s congress, but were postponed without explanation.

The possibility that policies such as zero-Covid, which has resulted in sweeping lockdowns to contain the virus, and “Common Prosperity” — Xi’s bid to redistribute wealth — could be escalated was causing concern, Cheung said.

“With the Politburo Standing Committee composed of President Xi’s close allies, market participants read the implications as President Xi’s power consolidation and the policy continuation,” he added.

Mitul Kotecha, head of emerging markets strategy at TD Securities, also pointed out that the disappearance of pro-reform officials from the new leadership bodes ill for the future of China’s private sector.

“The departure of perceived pro-stimulus officials and reformers from the Politburo Standing Committee and replacement with allies of Xi, suggests that ‘Common Prosperity’ will be the overriding push of officials,” Kotecha said.

Under the banner of the “Common Prosperity” campaign, Beijing launched a sweeping crackdown on the country’s private enterprise, which shook almost every industry to its core.

“The [market] reaction in our view is consistent with the reduced prospects of significant stimulus or changes to zero-Covid policy. Overall, prospects of a re-acceleration of growth are limited,” Kotecha said.

On the tightly controlled domestic market in China, the benchmark Shanghai Composite Index dropped 2%. The tech-heavy Shenzhen Component Index lost 2.1%.

The Hang Seng Tech Index, which tracks the 30 largest technology firms listed in Hong Kong, plunged 9.7%.

Shares of Alibaba

(BABA) and Tencent

(TCEHY) — the crown jewels of China’s technology sector — both plummeted more than 11%, wiping a combined $54 billion off their stock market value.

The sell-off spilled over into the United States as well. Shares of Alibaba and several other leading Chinese stocks trading in New York, such as EV companies Nio

(NIO) and Xpeng, Alibaba rivals JD.com

(JD) and Pinduoduo

(PDD) and search engine Baidu

(BIDU), were all down sharply.

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Business

Moody’s lowers UK’s outlook to negative

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London
CNN Business
 — 

Moody’s Investor Service on Friday changed the United Kingdom government’s ratings outlook to “negative” from “stable.”

Moody’s attributed the change in the outlook to “heightened unpredictability in policymaking amid weaker growth prospects and high inflation; and risks to the UK’s debt affordability from likely higher borrowing and risk of a sustained weakening in policy credibility.”

However, the ratings agency affirmed the country’s credit rating. The affirmation of the Aa3 rating is a reflection of the UK’s economic resilience, Moody’s said in a statement.

Credit ratings are essentially credit scores for governments and companies. They express an opinion about the capacity and willingness of large borrowers to repay their debts. Germany, Canada, Switzerland, Australia and the United States have some of the best credit ratings in the world, while Argentina, Nigeria, Pakistan and India have some of the lowest ratings.

The UK is in the midst of suffering from a string of blows to its economy, which the Bank of England has said may already be in recession. Soaring food costs drove the annual rate of inflation to 10.1% in September, returning it to July’s 40-year high.

That may prompt the central bank to hike interest rates more aggressively when it meets on November 3 in order to tame rising prices.

On Thursday, Liz Truss resigned as Prime Minister after six disastrous weeks in office. Truss and former Finance Minister Kwasi Kwarteng’s “mini” budget upended UK financial markets. Investors immediately rejected their plans for unfunded tax cuts, spiking government bond yields, sinking the pound and forcing the Bank of England to make three successive interventions to rescue overstretched pension funds.

While most of those measures have since been rescinded by Britain’s new Finance Minister Jeremy Hunt — calming markets and restoring a sense of stability — the government’s credibility has been damaged and volatility could persist.

As well as driving up borrowing costs for the government and adding pressure to public spending, any credit ratings downgrade would only weaken investor appetite for UK assets.

The last time Moody’s downgraded the United Kingdom’s credit rating was in October 2020, citing lower than expected growth following Brexit, rising government debt and a weakening of the UK’s institutions that it said had led to a “fractious policy environment.”

— Julia Horowitz and Alicia Wallace contributed to this report.

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World

China’s economy is ‘in deep trouble’ as Xi heads to Communist Party congress

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Hong Kong
CNN Business
 — 

When Xi Jinping came to power a decade ago, China had just overtaken Japan to become the world’s second largest economy.

It has grown at a phenomenal pace since then. With an average annual growth rate of 6.7% since 2012, China has seen one of the fastest sustained expansions for a major economy in history. In 2021, its GDP hit nearly $18 trillion, constituting 18.4% of the global economy, according to the World Bank.

China’s rapid technological advances have also made it a strategic threat to the United States and its allies. It’s steadily pushing American rivals out of long-held leadership positions in sectors ranging from 5G technology to artificial intelligence.

Until recently, some economists were predicting that China would become the world’s biggest economy by 2030, unseating the United States. Now, the situation looks much less promising.

As Xi prepares for his second decade in power, he faces mounting economic challenges, including an unhappy middle-class. If he is not able to bring the economy back on track, China faces slowing innovation and productivity, along with rising social discontent.

“For 30 years, China was on a path that gave people great hope,” said Doug Guthrie, the director of China Initiatives at Arizona State University’s Thunderbird School of Global Management, adding that the country is “in deep trouble right now.”

While Xi is one of the most powerful leaders China and its ruling Communist Party have seen, some experts say that he can’t claim credit for the country’s astonishing progress.

“Xi’s leadership is not causal for China’s economic rise,” said Sonja Opper, a professor at Bocconi University in Italy who studies China’s economy. “Xi was able to capitalize on an ongoing entrepreneurial movement and rapid development of a private [sector] economy prior leaders had unleashed,” she added.

Rather, in recent years, Xi’s policies have caused some massive headaches in China.

A sweeping crackdown by Beijing on the country’s private sector, that began in late 2020, and its unwavering commitment to a zero-Covid policy, have hit the economy and job market hard.

“If anything, Xi’s leadership may have dampened some of the country’s growth dynamic,” Opper said.

More than $1 trillion has been wiped off the market value of Alibaba and Tencent — the crown jewels of China’s tech industry — over the last two years. Sales growth in the sector has slowed, and

tens of thousands of employees have been laid off, leading to record youth unemployment.

The property sector has also been bludgeoned, hitting some of the country’s biggest home developers. The collapse in real estate — which accounts for as much as 30% of GDP — has triggered widespread and rare dissent among the middle class.

Thousands of angry homebuyers refused to pay their mortgages on stalled projects, fueling fears of systemic financial risks and forcing authorities to pressure banks and developers to defuse the unrest. That wasn’t the only demonstration of discontent this year.

In July, Chinese authorities violently dispersed a peaceful protest by hundreds of depositors, who were demanding their life savings back from rural banks that had frozen millions of dollars worth of deposits. The banking scandal not only threatened the livelihoods of hundreds of thousands of customers but also highlighted the deteriorating financial health of China’s smaller banks.

“Many middle-class people are disappointed in the recent economic performance and disillusioned with Xi’s rule,” said David Dollar, a senior fellow in the John L. Thornton China Center at the Brookings Institution.

According to analysts, the vulnerabilities in the financial system are a result of the country’s unfettered debt-fuelled expansion in the previous decade, and the model needs to change.

“China’s growth during Xi’s decade in power is attributable mainly to the general economic approach adopted by his predecessors, which focused on rapid expansion through investment, manufacturing, and trade,” said Neil Thomas, a senior analyst for China and Northeast Asia at Eurasia Group.

“But this model had reached a point of significantly diminishing returns and was increasing economic inequality, financial debt, and environmental damage,” he said.

While Xi is trying to change that model, he is not going about it the right way, experts said, and is risking the future of China’s businesses with tighter state controls.

The 69-year old leader launched his crackdown to rein in the “disorderly” private businesses that were growing too powerful. He also wants to redistribute wealth in the society, under his “common prosperity” goal.

Xi hopes for a “new normal,” where consumption and services become more important drivers of expansion than investments and exports.

But, so far, these measures have pushed the Chinese economy into one of its worst economic crises in four decades.

The International Monetary Fund recently cut its forecast for China’s growth to 3.2% this year, representing a sharp slowdown from 8.1% in 2021. That would be the country’s second lowest growth rate in 46 years, better only than 2020 when the initial coronavirus outbreak pummeled the economy.

Under Xi, China has not only become more insular, but has also seen the fraying of US-China relations. His refusal to condemn Moscow’s invasion of Ukraine, and China’s recent aggression towards Taiwan, could alienate the country even further from Washington and its allies.

Analysts say the current problems don’t yet pose a major threat to Xi’s rule. He is expected to secure an unprecedented third term in power at the Communist Party Congress that begins on Sunday. Priorities presented at the congress will also set China’s trajectory for the next five years or even longer.

“It would likely take an economic catastrophe on the scale of the Great Depression to create levels of social discontent and popular protest that might pose a threat to Communist Party rule,” said Thomas from Eurasia Group.

“Moreover, growth is not the only source of legitimacy and support for the Communist Party, and Xi has increasingly burnished the Communist Party’s nationalist credentials to appeal to patriotism as well as pocketbooks,” he added.

But to get China back to high growth and innovation, Xi may have to bring back market-oriented reforms.

“If he was smart, he would liberalize things quickly in his third term,” said Guthrie.

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