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Gold Outlook 2023: The global economy at a crossroads

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The global economy is at an inflection point after being hit by various shocks over the past year. The biggest was induced by central banks as they stepped up their aggressive fight against inflation.

Going forward, this interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold’s performance.

Economic consensus calls for weaker global growth akin to a short, possibly localised recession; falling – yet elevated – inflation; and the end of rate hikes in most developed markets. 1 In this environment which carries both headwinds and tailwinds for gold, our key take-aways are:

  • A mild recession and weaker earnings have historically been gold-positive
  • Further weakening of the dollar as inflation recedes could provide support for gold
  • Geopolitical flare-ups should continue to make gold a valuable tail risk hedge
  • Chinese economic growth should improve next year, boosting consumer demand
  • Geopolitical flare-ups should continue to make gold a valuable tail risk hedge
  • Chinese economic growth should improve next year, boosting consumer gold demand
  • Long-term bond yields are likely to remain high but a levels that have not hampered gold historically
  • Pressure on commodities due to a slowing economy is likely to provide headwinds to gold in H1

On balance, this mixed set of influences implies a stable but positive performance for gold (Figure 1). 2

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That said, there is an unusually high level of uncertainty surrounding consensus expectations for 2023. For example, central banks tightening more than is necessary could result in a more severe and widespread downturn. Equally, central banks abruptly reversing course – halting or reversing hikes before inflation is controlled –could leave the global economy teetering close to stagflation. Gold has historically responded positively to these environments.

On the flipside, a less likely ‘soft landing’ that avoids recession could be detrimental to gold and benefit risk assets.

Figure 1: Consensus scenario of a mild recession, with greater upside potential for gold than downside risk

Bumpy road ahead

Economic growth: short sharp pain

There are now many signs of weakening output due to the speed and aggressiveness of hiking moves by central banks. Global purchasing manager indices (PMI), now in contraction territory,3  indicate a deepening downturn across geographies, and economists are warning of a material recession risk (Chart 1).

Consensus forecasts now expect global GDP to rise by just 2.1% next year. 4 Excluding the global financial crisis and COVID, this would mark the slowest pace of global growth in four decades and meet the IMF’s previous definition of a global recession – i.e. growth below 2.5%.

Chart 1: Global contraction appears all but guaranteed

Global contraction appears all but guaranteed

Global manufacturing and services PMIs and year-ahead probability of recession*

Global contraction appears all but guaranteed

Global manufacturing and services PMIs and year-ahead probability of recession*

*Global PMIs below 50 are associated with an economic contraction. 4Q average recession probability. Data as of December 2022.
Source: Bloomberg, Survey of Professional Forecasters, World Gold Council

Sources:
Bloomberg,
Survey of Professional Forecasters,
World Gold Council; Disclaimer

*Global PMIs below 50 are associated with an economic contraction. 4Q average recession probability. Data as of December 2022.

Policy and inflation: higher for longer

It is almost inevitable that inflation will drop next year as further declines in commodity prices and base effects drag down energy and food inflation. Furthermore, leading indicators of inflation tell a consistent story of a moderation (Chart 2).

This brings us to the implications for monetary policy. The policy trade-off for nearly every central bank is now particularly challenging as the prospect of slower growth collides with elevated, albeit declining inflation.

No central bank will want to lose its grip on inflationary expectations resulting in a strong bias towards inflation fighting over growth preservation. As a result, we expect monetary policy to remain tight until at least mid-year.

In the US, markets expect the Fed to start cutting rates in the second half of 2023 (Chart 3). Elsewhere, markets expect policy rates to come down more slowly than in the US, but by 2024 most major central banks are expected to be in easing mode. 5

Chart 2: Inflation has peaked

Inflation has peaked

PCE inflation and Bloomberg median forecast, US producer and house prices*

Inflation has peaked

PCE inflation and Bloomberg median forecast, US producer and house prices*

*Consensus PCE inflation forecast provided by Bloomberg median economists’ forecasts. As of December 2022.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

*Consensus PCE inflation forecast provided by Bloomberg median economists’ forecasts. As of December 2022.

Chart 3: Market pricing in cuts during H2 2023

Market pricing in cuts during H2 2023

Fed Funds futures curve and Fed median projection 2023*

Market pricing in cuts during H2 2023

Fed Funds futures curve and Fed median projection 2023*

*Fed dot plot provided by the Federal Reserve. Fed data as of September 2022. Fed Funds Futures (data as of 2 December) reflect one market view of the future Fed Funds rate.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

*Fed dot plot provided by the Federal Reserve. Fed data as of September 2022. Fed Funds Futures (data as of 2 December) reflect one market view of the future Fed Funds rate.

Macroeconomic implications for gold

Gold is both a consumer good and an investible asset. As such, our analysis shows that its performance is driven by four key factors and their interactions:

  • Economic expansion – positive for consumption
  • Risk and uncertainty — positive for investment
  • Opportunity cost – negative for investment
  • Momentum – contingent on price and positioning.

These factors, in turn, are influenced by key economic variables such as GDP, inflation, interest rates, the US dollar, and the behaviour of competing financial assets.

Recession: portfolio ballast

A challenging combination of reduced but still elevated inflation and softening growth demands vigilance from investors. The likelihood of recession in major markets threatens to extend the poor performance of equities and corporate bonds seen in 2022.

Chart 4: Gold does well in recessions

Gold does well in recessions

Performance of gold before, during and after NBER-designated recessions*

Gold does well in recessions

Performance of gold before, during and after NBER-designated recessions*

*Based on the LBMA Gold Price PM. The vertical line at time T is the start of an NBER-designated recession. The thick portion of each respective line denotes the recession period.
Source: ICE Benchmark Administration, The National Bureau of Economic Research (NBER), Bloomberg, World Gold Council

Sources:
Bloomberg,
ICE Benchmark Administration,
NBER,
World Gold Council; Disclaimer

*Based on the LBMA Gold Price PM. The vertical line at time T is the start of an NBER-designated recession. The thick portion of each respective line denotes the recession period.

Gold, on the other hand, could provide protection as it typically fares well during recessions, delivering positive returns in five out of the last seven recessions (Chart 4). Furthermore But a recession is not a prerequisite for gold to perform. A sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising.

Inflation: disinflation ahead

While inflation may indeed come down next year, there are several important considerations that impact the gold market.

First, central bankers have inflation targets and while a lower inflation rate is necessary, it is insufficient for central bankers to withdraw their hawkish policies. Inflation needs to get to target or below for that to happen. This raises the risk of an overshoot, in our opinion.

Second, our analysis suggests that the retail investor segment appears to care more about inflation than institutional investors, given a lower level of access to inflation hedges (Figure 2). They also care about the level of prices. Even with zero inflation in 2023, prices will remain high and are likely to impact decision-making at the household level.

lastly institutional investors often assess their level of inflation protection. through the lens of real yields. These rose over the course of 2022 creating headwinds for gold.

In 2023 we could see some reversal of the dynamics at play in 2022, which were high retail investment demand but weak institutional demand.

indeed, any sign of yields moving down could  encourage more institutional interest in gold. On balance however lower inflation should mean potentially diminished interest in gold from an inflation hedging perspective.

Figure 2: Retail investors care about inflation, institutions care about rates*

*Four of the regression equations that comprise our Qaurum model on GoldHub. Inflation variables are significant for Bar & coin (retail) investors in green, but not for institutional investors, in red.
Source: World Gold Council

US dollar: trending down

After strengthening for nearly two years straight, the US dollar index (DXY) has recently seen a steep drop, despite continued widening of – both actual and expected – rate differentials. It seems that reduced demand for dollar cash was the likely culprit.

Next year, we see a more complex dynamic driving the US dollar. First the shoring up of energy needs in Europe will, in the immediate future, continue to reduce pressure on the euro. Second, as central banks in Europe, the UK and Japan continue to take a more hands-on approach to their respective currency and bond markets some of the pressure on domestic exchange rates could ease. All things considered, the dollar is likely to be pressured particularly as falling inflation and slower growth take hold. And a dollar peak has historically been good for gold, yielding positive gold returns 80% of the time (+14% on average, +16% median) 12 months after the peak. Although currently very high in REER terms and likely one of the catalysts for the recent turn, the starting valuation for the DXY has been less important in determining the magnitude of gold returns. (Chart 5)

Chart 5: If the DXY has peaked, that should bode well for gold

If the DXY has peaked, that should bode well for gold

Gold return 12m after DXY has peaked, US dollar REER at time of peak*

If the DXY has peaked, that should bode well for gold

Gold return 12m after DXY has peaked, US dollar REER at time of peak*

*Gold returns using the LBMA Gold Price PM 12 months following a peak in the DXY index compared to the BIS narrow Real Effective Exchange Rate (REER) value for the DXY at the peak. Peaks calculated since 1969 on monthly data of the DXY index. Latest data as of 2 December 2022.
Source: ICE Benchmark Administration, Bloomberg, World Gold Council

Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer

*Gold returns using the LBMA Gold Price PM 12 months following a peak in the DXY index compared to the BIS narrow Real Effective Exchange Rate (REER) value for the DXY at the peak. Peaks calculated since 1969 on monthly data of the DXY index. Latest data as of 2 December 2022.

Geopolitics: tightrope

If the past five years has taught us anything it is that shocks – trade war, COVID, war in Ukraine, and so on – can appear from left field to upturn even the most considered economic forecasts. The latest conflict further undermines the existing model of global trade and capital integration emphasising that geo-politics has returned as a source of economic and financial risk.  (Chart 6)

And while macro factors form the basis for much of the impact on gold, geo-political flare-ups could lend support to gold investment, as we saw in Q1’22, as investors look to shield themselves from any further turbulence. Moreover, as we have discussed previously, we attribute a large proportion of gold’s resilience in 2022 to a geopolitical risk premium, with gold’s return not fully explained by its historically important drivers.

Chart 6: Geopolitical threat level remains high*

Geopolitical threat level remains high*

Geopolitical threat level remains high*

*Data as of October 2022. Geopolitical threats reflect automated text-search results of electronic newspaper archives. See here for methodology.
Source: Matteo Iacoviello, World Gold Council

Sources:
Matteo Iacoviello,
World Gold Council; Disclaimer

*Data as of October 2022. Geopolitical threats reflect automated text-search results of electronic newspaper archives. See here for methodology.

China: a cautious rebound

Following a challenging 2022, we expect consumer gold demand in China to return to 2021 levels thanks to fewer COVID disruptions, a cautious economic rebound and a gradual pick-up in consumer confidence.

China’s economic growth is likely to improve next year. Signs that COVID-related restrictions are easing after the local authority optimised its zero-COVID policy in November, should improve consumer confidence and boost economic activity.

Meanwhile, Chinese regulators announced measures to support the local property market, including credit extension to developers and loosening of home-buyer restrictions. These stimuli may help stabilise real estate investment and housing demand, and encourage an upturn in consumer demand.

Europe: a tale of two winters

European gold bar and coin investment is likely to remain robust in 2023 as retail investors – especially in Germanic markets – look to protect their wealth. Even a decline in inflation is unlikely to encourage lower demand, given underlying risks.

Europe (and the UK) is facing a severe energy crisis, driven by a reduction in natural gas from Russia. While gas storage levels have been raised to almost 90% capacity, some question whether this will be sufficient for winter 2022. There are also concerns about energy supplies to the region ahead of next winter, if the supply of Russian natural gas remains limited and recovery in China intensifies the global demand for energy.

Cross-asset implications for gold

Bonds: holding on

Consensus forecasts suggest a bull-steepening of the US yield curve.  With the yield curve (10-year less 2-year US Treasury yield) already more inverted than at any time since 1981, the long end already appears to have factored in a recession and further inversion seems unlikely.

We therefore see a stickier long end of the curve, even if the short-end drops significantly. Adding to this, both risk and term premia are likely to be higher, putting pressure on long term yields to stay put. The former from an elevated bond-equity correlation and the latter from higher supply – through both issuance and quantitative tightening.

As gold has a stronger correlation to 10-year than shorter-term yields, we see less of a rates-driven benefit to gold in 2023.
Although higher bonds yields are associated with lower gold returns and might now be deemed attractive by some investors, current yield levels are historically not a hindrance to gold doing well, particularly when accounting for a weaker US dollar. (Chart 7)

Chart 7: Current rate levels not a threat to gold

Current rate levels not a threat to gold

Average gold returns in different rate level regimes*

Current rate levels not a threat to gold

Average gold returns in different rate level regimes*

*Average monthly return is calculated as the average of gold returns (LBMA Gold Price PM) during a range of historical real yield levels for the US 10-year TIP yield, US 12m Treasury yield less 1-year expected inflation (Michigan) and US 5-year Treasury yield less 5-year expected inflation (Michigan).
Source: ICE Benchmark Administration, Bloomberg, World Gold Council

Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer

*Average monthly return is calculated as the average of gold returns (LBMA Gold Price PM) during a range of historical real yield levels for the US 10-year TIP yield, US 12m Treasury yield less 1-year expected inflation (Michigan) and US 5-year Treasury yield less 5-year expected inflation (Michigan).

Equities: Ever the optimists

If 2023 is to bring us a mild recession, equities are headed for continued volatility. Moreover, current consensus EPS estimates seem conspicuously robust against the deteriorating macroeconomic backdrop and what earnings typically do during periods of recessions (Chart 8).

Chart 8: Recessions hammer earnings

Recessions hammer earnings

Recessions hammer earnings

Source: Bloomberg IBES, World Gold Council

Sources:
Bloomberg IBES,
World Gold Council; Disclaimer

The S&P 500 price-to-earnings ratio is currently 18.8. Since 1969, the average during recessions has been 13.6, with the level of inflation playing its part. The expected inflation rate for H1 is 5.5%, associated with a P/E of c.16. While falling earnings could lead stocks lower, gold has typically done well in this environment.

Part of this performance boils down to gold’s equity hedging credentials, correlating negatively as equities fall meaningfully.

Commodities: Caught in the crossfire

Despite a severely constrained supply outlook for many commodities (Chart 9), an economic slowdown is likely to dominate price action, at least in H1 as they get caught in the crossfire of housing and manufacturing weakness. As a result, gold – which is a sizeable component of the two main indices BCOM and S&P GSCI – could suffer due to its meaningful average correlation of 0.44 over the last 20 years.

Chart 9: Commodities supply constraints likely to resurface after recession*

Commodities supply constraints likely to resurface after recession*

Commodities supply constraints likely to resurface after recession*

12m trailing Capital Expenditure (CAPEX) and the number of commodities (in BCOM Index) in backwardation (4th future less 1st future) as a share of total.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

12m trailing Capital Expenditure (CAPEX) and the number of commodities (in BCOM Index) in backwardation (4th future less 1st future) as a share of total.

Risks to economic consensus

On balance, gold’s return in the environment consensus expects in 2023 is likely to be stable but positive, as it faces competing crosswinds from its drivers. But there are plenty of signals that the economy may not follow a well-telegraphed path.

With the impact of the monetary shock still rippling through the global economy, any forecasts for 2023 are subject to more uncertainty than usual.

Severe recession/stagflation

In this scenario, inflationary pressures remain as geopolitical tensions spike. Hypervigilant central banks risk overtightening, given the lag of policy transmission in the economy. This results in a more severe economic fallout and stagflationary conditions, a theme we covered last year (Chart 10). The hit to both business confidence and profitability would lead to layoffs, driving unemployment materially higher. This would be a considerably tough scenario for equities with earnings hit hard and greater safe-haven demand for gold and the dollar.

Chart 10: Stagflation favours gold

Stagflation favours gold

Gold returns in four combinations of growth and inflation

Stagflation favours gold

Gold returns in four combinations of growth and inflation

* As of Q2 2021. AAAR % – annualised average (stagflation) adjusted returns. Please see Appendix A.2 for AAAR definition.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

* As of Q2 2021. AAAR % – annualised average (stagflation) adjusted returns. Please see Appendix A.2 for AAAR definition in the report.

Soft landing

Downside risks also exist for gold via a soft-landing scenario, where business confidence is restored and spending rebounds. Risk assets would likely benefit and bond yields remain high – a challenging environment for gold.

Chart 11: Employment and housing showing strains

Employment and housing showing strains

Job cut announcements, US Fixed and ARM mortgages

Employment and housing showing strains

Job cut announcements, US Fixed and ARM mortgages

Challenger job cut announcements, y-o-y %, US 30-year fixed mortgage rate and US 5-year adjustable rate mortgage (ARM).
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

Challenger job cut announcements, y-o-y %, US 30-year fixed mortgage rate and US 5-year adjustable rate mortgage (ARM).

Strength in income-driven consumer demand would be offset by weaker institutional investment. Some retail investment could abate on higher confidence, but lingering inflation would unlikely result in a material drop. The case for a soft-landing hinges largely on hard economic data not yet confirming the case presented by soft economic data. In the US, non-farm payrolls growth has remained firm and there was a GDP uptick in Q3.  The Atlanta Fed GDPnow indicator points to an even stronger Q4 2022 (Chart 12). While a soft-landing won’t be great for gold, it is unlikely to be synonymous with a ‘Goldilocks’ environment until at least H2 (Chart 10), which we see as a remote risk.

Chart 12: GDP not confirming soft data malaise

GDP not confirming soft data malaise

US GPD QoQ SAAR and Atlanta Fed GDPnow forecast

GDP not confirming soft data malaise

US GPD QoQ SAAR and Atlanta Fed GDP Now forecast

Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

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U.S. economy posts strong fourth-quarter growth, but with underlying weakness – The Globe and Mail

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People shop for clothing at a Costco store in Monterey Park, Calif., on Nov. 22, 2022.FREDERIC J. BROWN/AFP/Getty Images

The U.S. economy grew faster than expected in the fourth quarter, but that likely exaggerates the nation’s health as a measure of domestic demand rose at its slowest pace in 2-1/2 years, reflecting the impact of higher borrowing costs.

The Commerce Department’s advance fourth-quarter gross domestic product report on Thursday showed half of the boost to growth came from a sharp rise in inventory held by businesses, some of which is likely unwanted.

While consumer spending maintained a solid pace of growth, a big chunk of the increase in consumption was early in the fourth quarter. Retail sales weakened sharply in November and December. Business spending on equipment contracted last quarter and is likely to remain on the backfoot as demand for goods softens.

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It could be the last quarter of solid GDP growth before the lagged effects of the Federal Reserve’s fastest monetary policy tightening cycle since the 1980s are fully felt. Most economists expect a recession by the second half of the year, though a short and mild one compared to previous downturns, because of extraordinary labour market strength.

“The U.S. economy isn’t falling off a cliff, but it is losing stamina and risks contracting early this year,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “That should limit the Fed to just two more small rate increases in coming months.”

Gross domestic product increased at a 2.9-per-cent annualized rate last quarter. The economy grew at a 3.2-per-cent pace in the third quarter. Economists polled by Reuters had forecast GDP would rise at a 2.6-per-cent rate.

Robust second-half growth erased the 1.1-per-cent contraction in the first six months of the year. For 2022, the economy expanded 2.1 per cent, down from the 5.9-per-cent logged in 2021. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25 per cent-4.50 per cent range, the highest since late 2007.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.1-per-cent rate, mostly reflecting a rebound in goods spending at the start of the quarter, mostly on motor vehicles. Consumers also spent on services like health care, housing, utilities and personal care.

Spending, which grew at a 2.3-per-cent pace in the third quarter, has been underpinned by labour market resilience as well as excess savings accumulated during the COVID-19 pandemic. Income at the disposal of households after accounting for inflation increased at a 3.3-per-cent rate after rising at a 1.0-per-cent pace in the third quarter. The saving rate rose to 2.9 per cent from 2.7 per cent.

But demand for long-lasting manufactured goods, which are mostly bought on credit, has fizzled and some households, especially lower income, have depleted their savings.

As a result, inventories surged at a $129.9-billion rate compared to a $38.7-billion rate in the prior quarter, adding 1.46 percentage points to GDP growth. There also were contributions from government spending and a smaller trade deficit.

Stripping out inventories, government spending and trade, domestic demand increased at only a 0.2-per-cent rate. That was the smallest increase in private domestic final sales since the second quarter of 2020 and was a deceleration from the third quarter’s 1.1-per-cent pace.

“Rising inventories could bode poorly for growth in early 2023 as corporations may look to reduce excess stocks of goods,” said Erik Norland, senior economist CME Group.

Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. Prices of U.S. Treasuries fell.

Despite clear signs of a weak handover to 2023, some economists are cautiously optimistic the economy will skirt an outright recession, suffering instead a rolling downturn where sectors decline in turn rather than all at once.

They argue that monetary policy now acts with a shorter lag than was previously the case because of advances in technology and the U.S. central bank’s transparency, which they said resulted in financial markets and the real economy acting in anticipation of rate hikes.

Though residential investment suffered its seventh straight quarterly decline, the longest such streak since the collapse of the housing bubble triggered the 2007-2009 Great Recession, there are signs the housing market could be stabilizing.

Mortgage rates have been trending lower as the Fed slows the pace of its rate hikes.

“A large portion of the reaction to higher interest rates is already in the economy and the financial markets,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “Since the Fed has succeeded in precipitating a rolling recession, it is time to think about an exit strategy.”

Inflation also subsided in the fourth quarter. A measure of inflation in the economy rose at a 3.2-per-cent rate, retreating from the third quarter’s 4.8-per-cent pace of increase.

While many parts of the economy have shifted to lower gear, the labour market is showing no signs substantial cooling.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 6,000 to a seasonally adjusted 186,000 for the week ended Jan. 21, the lowest level since April 2022. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.675 million for the week ended Jan. 14.

Companies outside the technology industry as well as interest-rate sensitive sectors like housing and finance are hoarding workers after struggling to find labour during the pandemic.

“There are no signs in the latest jobless claims data that the labour market is cracking at the start of the new year,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.

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To save Egypt's economy, get the army out of it – The Economist

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TO THE LIST of spectacular ruins across Egypt, you can now add its economy. The Egyptian pound lost half its value over the past year and has been the world’s worst-performing currency in 2023. On January 5th the government devalued it for the third time in less than a year. Nearly half of the state’s revenue goes to servicing its debts, which amount to 90% of GDP. Officially, inflation is running at 21%. The price of food is rising even faster. But official figures have not kept up with Egypt’s economic decline, so the reality is almost certainly worse.

This has brought misery to the Egyptian people. Around a third of them live on less than $2 a day. Another third are on the brink of joining them. They have been failed by officials who put their own interests above those of their citizens.

Egypt’s economic crisis has been a long time in the making, and is partly caused by forces beyond the state’s control. Russia’s invasion of Ukraine has hurt Egypt badly, since it is the world’s biggest importer of wheat and its two biggest suppliers have usually been Russia and Ukraine. Higher wheat prices have made it ruinously expensive for the government to provide the ultra-cheap, subsidised bread that Egyptians have come to expect (they may riot if it is unavailable). The war has also walloped tourism which, before the pandemic, generated about 5% of GDP. Costly grain and a lack of sunburnt Russians have put pressure on Egypt’s foreign-exchange reserves and the pound. Foreign investors have dumped Egyptian bonds. Egyptians now struggle to get hold of hard currency.

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But the country’s main underlying problem is the stranglehold on the economy exercised by the state, and specifically the army. Official statisticians are strangely reluctant to provide a measure of this. The government has said that the army controls just 1.5-2% of output. The true extent of its influence, both direct and indirect, is far greater. And under the rule of President Abdel-Fattah al-Sisi (previous job: commander-in-chief of the armed forces) it has expanded.

The army’s empire now includes everything from petrol stations to mineral water and olives. It has hooked the fish-farming market and engineered control over carmaking. The security services have bought up big chunks of Egypt’s media. The army built a huge new cement plant, causing a supply glut that crushed private firms. In industry after industry it squeezes out or scares off competitors, deterring private investment. No ordinary company can compete with an outfit that pays no tax or customs fees and which can throw its rivals in jail. For ordinary Egyptians, the army’s crushing of competition means slower growth, higher prices and fewer opportunities.

The imf should bear this in mind, as Egypt comes knocking on its door for the fourth time in six years begging for a bail-out. It is now the fund’s biggest debtor after Argentina. In the past Mr Sisi’s regime has agreed to carry out reforms in exchange for imf cash. Under the terms of a $12bn agreement struck in 2016, it has devalued the currency and trimmed subsidies. But Mr Sisi has conspicuously failed to keep his promises to reduce the state’s economic bootprint.

Under its most recent deal with the IMF, struck in December, the government has vowed once again to withdraw the state and the armed forces from “non-strategic” sectors. But the men in (or recently out of) uniform who dominate it have little incentive to do so. Many have benefited handsomely from rent-seeking. And in any case, in a country with a history of coups, few would dare challenge the army’s privileges.

Donors keep bailing out Egypt because they are terrified it might collapse if they do not. It is the most populous country in the Middle East and a key Western ally. An implosion might send fleets of refugees across the Mediterranean. These fears are not irrational. Yet supporting a regime whose refusal to reform makes Egypt steadily poorer and its people steadily angrier is no recipe for long-term stability. Egypt’s frustrated Gulf allies are becoming less generous. The IMF should now hold the government to its commitments. Egypt must start demilitarising the economy, or expect fewer handouts.

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US economy slowed but still grew at 2.9% rate last quarter

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WASHINGTON (AP) — The U.S. economy expanded at a 2.9% annual pace from October through December, ending 2022 with momentum despite the pressure of high interest rates and widespread fears of a looming recession.

Thursday’s estimate from the Commerce Department showed that the nation’s gross domestic product — the broadest gauge of economic output — decelerated last quarter from the 3.2% annual growth rate it had posted from July through September. Most economists think the economy will slow further in the current quarter and slide into at least a mild recession by midyear.

The economy got a boost last quarter from resilient consumer spending and the restocking of supplies by businesses. Federal government spending also helped lift GDP. But with higher mortgage rates undercutting residential real estate, investment in housing plummeted at a 27% annual rate for a second straight quarter.

For all of 2022, GDP expanded 2.1% after growing 5.9% in 2021.

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The economy’s expected slowdown in the months ahead is an intended consequence of the Federal Reserve’s aggressive series of rate increases. The Fed’s hikes are meant to reduce growth, cool spending and crush the worst inflation bout in four decades. Last year, the Fed raised its benchmark rate seven times. It is set to do so again next week, though this time by a smaller amount.

The resilience of the U.S. job market has been a major surprise. Last year, employers added 4.5 million jobs, second only to the 6.7 million that were added in 2021 in government records going back to 1940. And last month’s unemployment rate, 3.5%, matched a 53-year low.

“The news couldn’t have been any better,” President Joe Biden said of Thursday’s GDP report. “We’re moving in the right direction. Now, we’ve got to protect those gains.”

Yet the good times for America’s workers aren’t likely to last. As higher rates make borrowing and spending increasingly expensive across the economy, many consumers will spend less and employers will likely hire less.

“Recent data suggest that the pace of expansion could slow sharply in (the current quarter) as the effects of restrictive monetary policy take hold,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a research report. “From the Fed’s perspective, a desired slowdown in the economy will be welcome news.”

Consumer spending, which fuels about 70% of the entire economy, rose at a sturdy 2.1% annual rate from October through December, down slightly from 2.3% in the previous quarter.

More recent numbers, including a 1.1% drop in retail sales last month, indicate that consumers have begun to pull back.

“That suggests higher rates were starting to take a bigger toll and sets the stage for weaker growth in the first quarter of this year,’’ said Andrew Hunter, senior U.S. economist at Capital Economics.

Economists at Bank of America expect growth to slow to a 1.5% annual rate in the January-March quarter and then to contract for the rest of the year — by a 0.5% rate in the second quarter, 2% in the third and 1.5% in the fourth.

The Fed has been responding to an inflation rate that remains stubbornly high even though it has been gradually easing. Year-over-year inflation was raging at a 9.1% rate in June, the highest level in more than 40 years. It has since cooled — to 6.5% in December — but is still far above the Fed’s 2% annual target.

“The U.S. economy isn’t falling off a cliff, but it is losing stamina and risks contracting early this year,” said Sal Guatieri, senior economist at BMO Capital Economics. “That should limit the Fed to just two more small rate increases in coming months.”

One additional threat to the economy this year is rooted in politics: House Republicans could refuse to raise the federal debt limit if the Biden administration rejects their demand for broad spending cuts. A failure to raise the borrowing cap would prevent the federal government from being able to pay all its obligations and could shatter its credit.

Moody’s Analytics estimates that the resulting upheaval could wipe out nearly 6 million American jobs in a recession similar to the devastating one that was triggered by the 2007-2009 financial crisis.

At least the economy is likely beginning the year on firmer footing than it did at the start of 2022. Last year, the economy shrank at an annual pace of 1.6% from January through March and by a further 0.6% from April through June. Those two consecutive quarters of economic contraction raised fears that a recession might have begun.

On corporate earnings calls for the April-June quarter of 2022, nearly half of companies in the S&P 500 had cited a “recession” — the highest such proportion since 2010 — according to the data provider FactSet. Forecasters at Bank of America and Nomura had predicted that a recession would hit by the October-December quarter.

But the economy regained strength over the summer, propelled by resilient consumer spending and higher exports.

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AP Writers Christopher Rugaber and Josh Boak contributed to this report.

Paul Wiseman, The Associated Press

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