by tyler | May 12, 2023 | CNN, economy
The political unrest that’s engulfed Pakistan since former Prime Minister Imran Khan was arrested earlier this week will complicate efforts to secure a financial lifeline from the International Monetary Fund and exacerbate the country’s economic crisis.
Growth has stalled and inflation has soared in the South Asian country of 220 million over the past year. With Pakistan’s rupee sharply depreciating and reserves of foreign currency dwindling, the country has struggled to import essential products like food, leading to deadly stampedes at distribution centers. Fears Pakistan could default on its debt have lurked for months.
Now, as nationwide protests and violent clashes sweep the country following Khan’s dramatic arrest on corruption charges, the country’s ability to secure much-needed financial help has been cast further into doubt. Khan was released on bail Friday, but told CNN he expected to be arrested again.
“It makes things quite complicated,” said Sergi Lanau, director of emerging market strategy at Oxford Economics. “This is very bad news [in] a situation that was already very hard.”
The government can probably muddle through in the immediate term, thanks to the forbearance of foreign creditors such as China, but the risk of default will rise unless an IMF deal can be reached soon.
Paramilitary troops smashed their way into a courthouse in Islamabad on Tuesday to detain Khan, who was ousted from power last year. His arrest — which the Supreme Court deemed unlawful on Thursday — has unleashed an outpouring of anger. Supporters have stormed buildings and clashed with security forces. At least eight people have died and hundreds have been injured, according to government officials.
A spokesperson for the International Monetary Fund, which has been in talks with Pakistan’s government about restarting a $6.5 billion assistance program, said Thursday that negotiators are “heavily engaged” with authorities in Pakistan, which “faces a very challenging situation.”
Yet investors are skeptical Pakistan and the IMF can reach an agreement to unlock much-needed funds, with the volatile political environment adding to uncertainty ahead of elections in the fall.
The political tumult in Pakistan comes as the country grapples with a dire economic outlook.
Growth has slowed to a crawl, while a severe shortfall of dollars is hampering imports. Shortages of food items are contributing to skyrocketing prices. Inflation reached an annual rate of 36.4% in April, with the cost of food rising nearly 47% in urban areas and more than 52% in rural regions.
Foreign reserves at the central bank of roughly $4.4 billion are sufficient to cover about a month of imports, according to Tahir Abbas, director of research at Arif Habib, a financial firm in Karachi.
What’s known as a “balance of payments” crisis is eroding standards of living in a country still reeling from devastating flooding last year. It could “reverse the poverty gains achieved in the last two decades and further reduce the incomes of already poor households,” the World Bank warned last month.
Pakistan’s ability to maintain payments on its debt has also been called into question. Ratings agency Moody’s downgraded the country’s credit rating in late February, noting that foreign currency reserves were “far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term.”
Widespread protests could amplify the pain. Authorities blocked mobile internet services this week in a bid to quell the chaos, a decision GSMA, an industry group representing operators of mobile networks, criticized as harmful to citizens and businesses.
“The political uncertainty and crisis-like situation including [protests] are dampening the already ailing economy,” Abbas said.
The government has been working with the International Monetary Fund to resume a financing program that’s been stalled since November and expires in June. Julie Kozak, the IMF’s director of communications, said Thursday that the country has “very large financing needs.”
“The financing already committed by Pakistan’s external partners is welcome, however, significant additional financing is essential to support the authorities’ policy efforts,” Kozak said.
But with elections coming up and public ire mounting, investors think it’s unlikely that reforms requested by the IMF to improve the country’s fiscal position will be agreed, since they would contribute to economic hardship in the near-term.
The rupee hit a record low of nearly 300 to the US dollar this week. Pakistan government bonds in dollars, meanwhile, have been trading at distressed prices.
“Cutting spending and increasing taxes is not an easy thing to do at all,” said Lanau. “These are things that in the run-up to an election are not palatable to anyone.”
Gerwin Bell, lead Asia economist at PGIM Fixed Income, which holds Pakistan bonds, said the firm’s “long-standing” view is that “the government would not be able to provide needed assurances to the IMF.”
“The current political events only reinforce our view,” Bell added.
Prime Minister Shehbaz Sharif said in a televised address Friday that the country’s economic problems stem from his predecessor.
“As you know the currency is navigating through difficult times,” he said. “The challenges we inherited are contributing immensely to aggravating the situation.”
He continued: “The previous government violated an agreement with the IMF and we are making attempts to repair that.”
Without help from the IMF, which is seen as essential to unlocking funding from other sources, the risks Pakistan could default on its debt rise. But there’s still a chance the country avoids that outcome.
“We do not think the risk of default is very high,” Bell said. “Private sector bond debt is very small, and large bilateral creditors have so far been willing to roll over maturities,” he added, noting that China and the Gulf economies “are not eager to trigger defaults.”
Yet the threat could hang over the country for some time. Abbas said that while the country “can manage” through July, and possibly into August, “it will be absolutely crucial to resume the IMF program or embark on a bigger IMF program to manage the external sector crisis.”
Moody’s has estimated that Pakistan’s external financing needs for fiscal year 2024, which starts in July and runs through next June, are in the range of $35 billion to $36 billion.
In February, the ratings agency said about 50% of government revenue will need to go to debt interest payments “for the next few years,” compounding economic woes and fanning political discontent.
“A significant share of revenue going towards interest payments will increasingly constrain the government’s capacity to service its debt while also meeting the population’s essential social spending needs,” Moody’s wrote in its report.
— Sophia Saifi contributed reporting.
by tyler | May 12, 2023 | CNN, economy
Financial institutions were already tightening their lending standards at the beginning of the year, and that has intensified since a trio of bank failures upended the banking industry, surveys from the Federal Reserve and the private sector show. Money is getting harder to come by, and we’d like to hear what people, especially small business owners, are experiencing.
Please share your story with us in the form below.
by tyler | May 9, 2023 | CNN, economy
The US economy is going from broken to bizarre.
Covid crashed the American economy three years ago with no playbook for the wild recovery that would follow. Shutdowns and disease outbreaks disrupted global supply chains, leading to the highest inflation in 40 years and (eventually) to aggressive rate hikes from global central banks. Economists have forecast for months that a recession is just around the corner.
And yet, the US economy today is growing, the job market is strong, and the consumer is still spending.
Contradictions abound.
The headlines blare layoffs — from Walmart, Disney, Amazon, 3M, General Motors and Meta — but, overall, hiring picked up speed in April. The economy has added an astonishing 1.2 million jobs this year and the jobless rate matches the lowest since 1969. Despite Silicon Valley pink slips, there is still plenty of hiring happening in technology, especially in computer systems design and services. And construction sites are hopping. The government reported a record 7.9 million people employed in construction jobs in April.
After decades of weak wage growth, workers have enjoyed the best pay gains in a generation, especially workers at the lower end of the pay ladder. Now that inflation appears to be going from a boil to a simmer, it means less of that pay bump is going to cover higher inflation. (Key readings on consumer and producer prices come Wednesday and Thursday.) Those higher wages may complicate the Federal Reserve’s inflation fight, but they may also be underpinning consumer spending, helping the economy avoid a recession.
The narrative seems to shift by the week, in what has been the longest recession watch in memory. Stock markets had a banner winter on hopes the economy was on its way to a possible “soft landing.” Economic growth and inflation have cooled, without a corresponding spike in joblessness. Meantime, the Fed appears to be near the end of its rate-hike cycle. Goldman Sachs pegs recession odds at 35% and Fed Chair Jerome Powell last week said the economy could still skirt a recession.
“Avoiding a recession is, in my view, more likely than having a recession,” Powell said. “But I don’t rule that out either. It’s possible that we have a mild recession,” he told reporters at a news conference following the central bank’s latest rate decision.
Two dark horses have emerged to challenge the “soft landing” narrative: a regional banking crisis set off by little-known Silicon Valley Bank and a manufactured debt ceiling crisis due to political wrangling. The regional bank strain appears to have stabilized (for now) but the partisan drama over paying the country’s bills holds huge risks.
The US could default on its obligations as soon as June 1 if Congress doesn’t address the debt limit before then, Treasury Secretary Janet Yellen said Monday.
Yet markets have barely flinched. The S&P 500 is up almost 8% this year and the Nasdaq is up 17%.
“I think it’s going to be a difficult couple of weeks,” said Seema Shah, chief global strategist of Principal Global Investors. “As long as the equity market is coming across pretty firm, there’s very little pressure on Congress to come to some agreement. So you do need almost panic stations to arise in order to push them over that line, which is what happened in 2011 and 2013.”
In 2011, Congress reached a deal to raise the debt ceiling two days before the date Treasury estimated money would run out. It triggered the worst week for financial markets since the 2008 financial crisis and earned the United States its first and only credit downgrade. The debate over raising the debt limit in 2013 forced a government shutdown.
This time around, “the financial markets have not shown much anxiety,” said Greg Valliere, chief US policy strategist for AGF Investments. “Maybe the T bill market yields have moved higher, but I think for the stock market in general there’s a feeling that, you know, (it’s the) little boy who cried wolf [because] this will get solved at the last minute, which we’ve seen in the past. But this is different. I think the militants in the House are a new factor here and for the markets to be this sanguine to me is not warranted.”
Essentially, many on Wall Street don’t expect lawmakers to understand the urgency of raising the debt ceiling until their constituents’ retirement accounts get hammered first.
by tyler | May 8, 2023 | CNN, economy
It was already difficult for businesses and households to borrow money earlier this year — but after the collapse of three US regional banks and a cascade of rate hikes by the Federal Reserve, getting money has become a little harder.
More lenders have stiffened their standards in the wake of increasing turmoil within the banking sector, according to the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey (SLOOS) released Monday.
Survey respondents attributed the changes in lending standards to economic uncertainty, a reduced appetite for risk, deterioration in collateral values and broader concerns about banks’ funding costs and liquidity positions, according to the Fed report. Additionally, lenders reported that they expect to tighten standards across all loan categories for the remainder of this year, citing the above concerns as well as customer withdrawals.
When banks tighten their standards, loans can be harder to get or come with more onerous terms, making it difficult for businesses to make capital improvements or hire staff; or for consumers to buy a house, purchase or lease a car or make home improvements.
“The impact of tightening credit to small businesses, which are very large employers, and banks are major providers of credit to small and mid-sized businesses,” Warren Kornfeld, senior vice president of Moody’s Investors Service, told CNN. “So depending on how long this tightening and how significant this tightening is, has the potential to have material impacts on how fast the economy grows.”
The report doesn’t typically garner a lot of attention from the public; however, that’s not the case now, after three large regional banks failed within a four-week span and the Fed is attempting a precarious “soft landing” — to bring down inflation without causing a ballooning in unemployment.
“Further evidence of tightening lending conditions and a potential credit crunch can be seen in the notable decline in demand for credit by large and middle market firms inside the [SLOOS],” Joseph Brusuelas, chief economist with RSM US, said in a statement. “Policymakers and investors should anticipate this to impact the real economy in the near term as investment, hiring and growth slow on the back of tighter lending.”
The Fed surveys up to 80 large US banks and 24 domestic branches of foreign banks and asks officers about topics such as changes in lending terms and standards as well as household demand for loans.
The last SLOOS, released in January and generally corresponding to activity in the fourth quarter of 2022, showed that standards tightened for most business loans, especially commercial real estate products.
Standards tightened and demand weakened for residential loans as well as consumer-specific categories such as credit cards, autos and personal loans.
At the time, banks expected that trend of tightening credit, waning demand and deteriorating loan quality would continue.
Then in March, two regional banks failed in quick succession. The Fed, Treasury and Federal Deposit Insurance Corporation stepped in to shore up the banking system and stave off future bank runs; however, uncertainty spiked as to potential ripple effects within the banking industry as well as the economy.
“Perhaps what [this SLOOS report points] toward … is it shows that there is some evidence that banks are experiencing stress,” Jill Cetina, associate managing director of Moody’s Investors Service, told CNN. “I think we knew that before the survey, but now we have that quantified here with how it’s impacting lending.”
For consumers, the impacts have been varied, according to a separate report released Monday by the Federal Reserve Bank of New York.
The sharp decline in perceived credit access and availability seen in March wasn’t replicated in this month’s survey results. In April, declines were seen by both the share of households reporting that it’s easier to obtain credit as well as the share of households reporting that it’s harder.
Still, household income growth expectations declined slightly, but a bigger drop was seen in spending growth expectations. Those fell to the lowest level since September 2021. The latest federal snapshots on consumer spending showed a cooling that economists say could be indicative of either people “retrenching” or returning to more typical spending patterns.
Federal Reserve Bank of Chicago President Austan Goolsbee said in an interview with Yahoo! Finance on Monday that “the credit crunch, or at least a credit squeeze, is beginning” and that it should be something Fed officials should strongly consider when deciding interest rates.
Fed officials, including Chair Powell, have previously noted that credit tightening could act similarly to a rate hike.
“You do not land the plane nose down, so we want to just make sure that these bank stresses — I don’t know if it’s full blown credit crunch, but it’s certainly credit tightening,” Goolsbee said. “You see from talking to the lending officers or business contacts out here in the Midwest, that will slow the economy and we absolutely should take that into account when we’re setting monetary policy.”
He added that industries that are more dependent on credit to carry out their operations would be “more directly affected.”
“We have to figure out how much of the work of monetary policy is getting done already through the credit conditions and we have to be mindful that that’s not going to be evenly distributed around the country,” he said.
Separately on Monday, the Fed released its semi-annual Financial Stability Report, which assesses the resilience of the US financial system.
Ongoing stresses in the banking vaulted up into a “salient risk” since the previous stability report was released in November. Other risks include: persistent inflation, monetary tightening, US-China tensions, commercial and residential real estate and Russia’s war in Ukraine, according to the report.
“A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity,” according to the Fed report. “With a decline in profits of nonfinancial businesses, financial stress and defaults at some firms could increase, especially in light of the generally high level of leverage in that sector.”
Credit tightening does present risks to the economy, Treasury Secretary Janet Yellen told CNBC Monday in an interview. But she said she still believes a soft landing is possible.
“We can’t rule out a recession, but I don’t think that’s the most likely path,” she said.
— CNN’s Bryan Mena contributed to this report.
by tyler | May 5, 2023 | CNN, economy
Wages are now finally beating inflation, according to the latest quarterly data on wage growth. But, with a widely expected recession still looming, that might not last. That is, unless you work in a certain industry.
In the first three months of the year, median weekly earnings for full-time and salaried workers were 6.1% higher compared to the same period a year ago, outpacing the 5.8% increase in consumer prices during that period. And Friday’s jobs report showed that workers’ paychecks grew in April by 16 cents, or 0.5%, to $33.36 an hour on average. That was the biggest monthly increase since March 2022, though wage growth had gradually slowed since then.
Workers who switched jobs are still raking in higher wages than those who choose to stay; and employees in industries struggling to hire, such as leisure and hospitality, are also enjoying fatter paychecks, economists said.
“The folks who left one company and went to another are the ones who are still benefiting from wage growth,” said Morgan Llewellyn, chief data scientist at Jobvite.
Part of the continued strength in wage growth largely has to do with employers’ difficulty in hiring, which varies by industry. A recent survey from the National Federation of Independent Business showed that 53% of small businesses reported “few or no qualified applicants for the positions they were trying to fill.” The report said that vacancies in construction, transportation and wholesale remain the hardest to fill.
“This is still an incredibly tight labor market and employers are still having to beat out competition to secure talent,” said Julia Pollak, chief economist at ZipRecruiter. “And even if employers want to get back to normal and control wage growth, they just don’t have much choice but to raise wages to increase recruitment and retention.”
Constrained labor supply might be a reason why employers are still having such a hard time hiring. Labor force participation, or the share of workers employed or seeking a job, stood at 62.6%, below 63.3% in February 2020, ahead of the pandemic. Participation among “prime age” workers, those between the ages of 25 and 54, has already made a full recovery, but it remains below pre-pandemic levels for workers in their early twenties and those older than 54.
It could also be due to workers simply wanting other kinds of jobs, such as ones that pay more or allow for remote work, Pollak said.
“Wage growth has still been higher for job changers than job stayers and that suggests that there’s still a shortage of labor for some companies,” said Dawn Fay, operational president at staffing firm Robert Half.
Fay said that workers such as accountants, systems analysts and customer service professionals remain in demand and are still enjoying robust compensation packages, even from a year ago. She said she expects demand for those workers to persist even during an economic downturn because of their “core skill sets.”
Many economists, including those at the Federal Reserve, expect the US economy to tilt into a recession later in the year. A recession is defined as a broad economic downturn that typically includes a weak jobs market. That means wage and payroll growth would slow considerably, but not for every worker.
“If you think about a recession caused by rising interest rates, it won’t stop you from aging or needing a knee replacement, so there won’t be much of an impact on demand for health care,” said Llewellyn. “But it would have an effect on transportation, manufacturing, and other industries that are interest-rate sensitive.”
Workers in the leisure and hospitality sector, which includes bars, restaurants and hotels, have also enjoyed some of the strongest wage gains. That’s because pent-up demand after pandemic lockdowns means consumers are still traveling at a strong clip. It’s also a sector that has been slow to bounce back after losing millions of workers in the first months of the pandemic — and now, many of those workers are reluctant to return to what they see as a low-pay, unstable work environment.
If the economy heads into a recession and consumers cut back on discretionary spending like travel and dining out, that could potentially undo those wage gains in leisure and hospitality, Llewellyn said.
Demand for health care might even become greater because of the country’s aging population, he said. Health care firms added 40,000 jobs in April and averaged a gain of about 47,000 jobs a month in the prior six months.
Workers will also be less likely to switch jobs if there is a recession, thus weakening wage growth figures across the board, Llewellyn added.
Still, the US labor market is still holding up, even as other data points to a slowing economy. Employers added 253,000 jobs in April, trouncing economists’ expectation, and the unemployment rate fell to 3.4%, matching the lowest rate since 1969.
At the same time, US economic growth slowed to an annual rate of 1.1% in the January-through-March period, a weaker rate than the prior two quarters; and a key measure of business investment, orders for nondefense capital goods excluding aircraft, fell in three of the four months through March. The latest surveys released by the Institute for Supply Management showed that economic activity in the US manufacturing sector contracted for the sixth consecutive month in April.
by tyler | May 4, 2023 | CNN, economy
The European Central Bank raised interest rates by a quarter of a percentage point Thursday, the smallest increase since it started hiking in July, after data this week showed core inflation cooling and banks pulling back sharply on lending.
The decision comes a day after the US Federal Reserve also increased rates by a quarter-point, and takes the benchmark rate across the 20 countries that use the euro to 3.25%. The ECB has now raised borrowing costs at seven consecutive meetings since July in a bid to get inflation under control.
And ECB President Christine Lagarde hinted at further rate hikes to come. “We have more ground to cover and we are not pausing,” she told reporters later on Thursday, adding that interest rates were not yet “sufficiently restrictive.”
In its statement, the ECB said inflation had declined over recent months, but underlying price pressures “remain strong.”
“At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain,” it added.
Rising prices and higher interest rates have taken a toll on the euro area’s economy, which only narrowly avoided a recession in the first three months of the year.
While still some way off its highs, inflation in the region ticked up to 7% in April, from 6.9% in March, according to an initial estimate Tuesday from the EU statistics agency. The labor market has also tightened — unemployment dipped to 6.5% in March.
But core inflation, which strips out volatile food and energy prices, unexpectedly eased to 5.6% in April — sending a signal that price rises, while still steep, could be slowing. The ECB targets an inflation rate of 2%.
Lagarde stressed that the central bank’s fight against inflation was far from over. “There are still significant upside risks to the inflation outlook,” she said, citing increases in wages and the war in Ukraine, which could once again push up energy and food prices.
On the other hand, “renewed financial market tensions” could bring inflation down faster than expected, Lagarde said.
Since the ECB’s last meeting on March 16 — just days before the emergency sale of Credit Suisse
(CS) to rival UBS
(UBS) — the outlook for bank lending has weakened further, potentially reducing the need for future rate hikes.
Banks in the euro area, citing anxiety about the economy and lower appetite for risk, have “substantially” tightened their criteria for extending credit, the ECB said in a closely watched report Tuesday.
Lagarde noted on Thursday, however, that the effects of that on the real economy were less clear so far. “We are not yet seeing the complete impacts we desire in order to arrive at the 2% target,” she said.
The Fed also pointed to tougher bank lending standards on Wednesday, as it raised its benchmark federal funds rate to 5%-5.25%. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” it said in a statement.
A key Fed survey of bank lending activity in the first quarter will be published next week.
