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Hong Kong Predicts Economy May Shrink More Than Expected in 2022

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(Bloomberg) — Hong Kong slashed its economic growth forecast this year and now sees the city headed into a deeper contraction as the city struggles with surging global interest rates, slowing demand and continued Covid fallout.

Gross domestic product is expected to fall 3.2% in 2022, the government said Friday. That’s more pessimistic than an earlier prediction of a range of a 0.5% drop to a 0.5% expansion given in August.

The revision is due to the economy’s performance through the first nine months of the year, along with “the subdued short-term outlook,” according to a statement from Adolph Leung, the government’s economist.

“Looking forward, the markedly deteriorating external environment will continue to pose immense pressure on Hong Kong’s export performance,” Leung said. “Elevated inflation and continued monetary policy tightening in major advanced economies will dampen global demand further.”

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The city’s third-quarter GDP contraction remained unchanged at a 4.5% fall, the same as an earlier estimate.

This is the third time officials have cut their 2022 forecast this year, after earlier downward revisions in May and August.

Economists downgraded Hong Kong’s growth outlook for the year after a disappointing slowdown in the July-to-September period, when the city recorded its worst fall in GDP since 2020. Goldman Sachs Group Inc. said after initial estimates were released that it expected the economy to contract worse than expected, while Citigroup Inc. economists downgraded their forecast from a slight expansion to a contraction.

Hong Kong’s economy has been hobbled by more than two years of Covid-related border restrictions, which have fueled a talent exodus from the city and strained trade, especially with China and its own Covid Zero policy. The financial hub has also been under pressure from interest rate hikes by the hawkish US Federal Reserve to restrain raging inflation, which the city follows given its currency peg to the US dollar.

Financial Secretary Paul Chan wrote in a Sunday blog post about the city’s urgent need to increase investments and economic momentum to attract businesses and talent, noting that it was “difficult to be optimistic” about the full-year GDP figures.

The city’s cloudy economic outlook comes as Chief Executive John Lee has sought to restore Hong Kong’s status as an international finance hub. Lee announced measures to attract foreign talent and ease property pressures last month, and recently rolled out the red carpet for global banking executives at a high-profile summit in the city.

Still, the business community has called for the government to do more to support growth, including further relaxing stamp duties and fully reopening its border with the rest of the world. While the city axed mandatory hotel quarantine in September, it has retained some restrictions and testing requirements for inbound international travelers.

Hong Kong is struggling from weak consumption, in part from sluggish inbound tourism from remaining Covid restrictions, and from human capital outflow, said DBS Bank Ltd. economist Samuel Tse, before the forecast announcement. Its growth is also being weighed down by rising interest rates, which may push local banks’ prime rates to 6% in the first quarter next year, he added.

“The economy is not doing well at all fronts,” Tse said. “Investment sentiment remains weak due to rate hikes and the gloomy economic outlook.”

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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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Oil advances on solid U.S. economic report, signs of China demand – BNN Bloomberg

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Oil gained on signs of better-than-expected U.S. economic growth and the potential for greater energy demand from China. 

West Texas Intermediate traded near US$81 a barrel, paring some earlier gains. Global benchmark Brent also advanced.

The U.S. economy expanded by more than forecast in the fourth quarter, figures released Thursday showed, easing recession fears and buoying markets. Meanwhile, a gauge of the dollar slipped to the lowest since April, making commodities priced in the currency cheaper for overseas buyers. 

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Oil has recovered from a steep drop at the start of the year, largely on hopes that Chinese consumption will pick up after years of lockdowns. The number of virus-related deaths and severe cases at hospitals in China is now 70 per cent lower than peak levels in early January, authorities said late Wednesday. 

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Energy demand is starting to pick up and the momentum will continue this year, Trafigura Chief Economist Saad Rahim said during a webinar. The rebound in Chinese tourism will have a big impact on consumption, he added, noting that the recovery takes place against a “backdrop of structural underinvesment” in supply.

Liquidity is also returning to the futures market, with open interest in global benchmark Brent near the highest since last February. 

Prices:

  • WTI for March delivery rose 1.3 per cent to US$81.20 a barrel by 10:03 a.m. in New York.
  • Brent for March settlement increased 1.1 per cent to US$87.09 a barrel.

U.S. crude inventories rose for a fifth week to the highest level since June 2021, the Energy Information Administration reported Wednesday. Still, the gain of 533,000 barrels was smaller than some market participants expected. 

Russian oil products will be subject to a European Union ban on seaborne imports and a Group of Seven-led price cap on the fuels in less than two weeks, with concern it may be more disruptive to markets than recent sanctions on Russian crude. Russian shipments of diesel-type fuel from the Baltic port of Primorsk are already on course to slow. 

Meanwhile, French strikes are hampering deliveries of fuels such as diesel and gasoline as labor action hits the refining industry for the second time this month.

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