News of the week summary - 23/04/2023

Chinese economy experienced strong growth, improving global growth outlook for 2023.

China's economy experienced its fastest growth rate in a year during this first-quarter. GDP expanded by 4.5% compared to the previous year, surpassing the economists’ expectations. This robust economic performance, driven by strong retail sales, has positioned China to achieve or even surpass its annual growth target of around 5%. The country is set to be a significant contributor to global economic growth in 2023, along with India, and the IMF believes it will be the top contributor to global growth over the next five years.

The positive GDP report prompted financial institutions to upgrade their growth forecasts for China, with Société Générale predicting a growth rate of 6%, respectively.

While these figures are encouraging, the recovery in China is gradual and not a fast rebound. Industrial output remains below pre-pandemic levels, and property investment is contracting, despite a resurgence in housing sales. Wage growth and the job market haven't fully returned to normal either, with youth unemployment rates reaching near-record levels.

Despite these challenges, China remains pivotal to the global economy, particularly as the United States and Europe are strained by issues like high energy costs and inflation.

 

New York FED warns banking stresses might tighten access to credit for households and businesses.

Federal Reserve Bank of New York’s President John Williams highlighted the fact that while the banking system is sound and resilient, the stress experienced because of Silicon Valley Bank’s collapse, may lead to challenges in accessing credit for households and businesses.

Despite the banking strains, the Fed proceeded with a quarter-point interest rate hike in March, continuing its year-long tightening campaign aimed at curbing high inflation. Further rate hikes are expected in May. Williams emphasized the need to maintain a restrictive monetary policy stance, and expressed confidence in the central bank's ability to achieve its inflation targets.

 

US House Speaker proposed to raise the debt limit by 1.5 Trillion dollars.

US House of representative speaker McCarthy has proposed a bill to raise the US debt limit for approximately one year while also implementing spending cuts. The bill seeks to increase the debt ceiling by $1.5 trillion, which would provide a buffer against a potential US payments default until April 2024.

McCarthy's proposal contains conservative measures that are unlikely to gain support from Democrats. The speaker's objective is to pass the bill in the House, with hopes that President Joe Biden will engage in discussions to resolve the ongoing deadlock over the debt limit, which, if not raised or suspended, could lead to a US default as early as June.

The bill aims to reduce discretionary spending to 2022 levels, resulting in a $130 billion cut, with future increases capped at a 1% annual rate for the following decade. The plan would also cancel unspent Covid-19 funds, impose stricter work requirements for anti-poverty benefits, ease energy project regulations, and eliminate certain tax breaks for clean energy initiatives, including electric vehicles.

 

The French government reveals its plan to accelerate debt reduction.

Macron's government has unveiled a plan to accelerate debt reduction in France, which includes cost-saving measures unpopular among the population. The 5 plan aims to bring budget deficits below 3% of GDP by the end of Macron's second term in 2027. Furthermore, the plan projects a lower debt-to-GDP ratio of 108% in 2027, down from the previous estimate of 112.5%. Public spending is set to decrease from 57.5% of GDP in 2027 to 53.5%.

Finance Minister Bruno Le Maire emphasized the importance of reducing debt today to avoid raising taxes in the future. France faces economic challenges due to significant spending during the energy crisis and the Covid pandemic. The price the country pays to service its debt is expected to rise significantly following interest rate hikes by the European Central Bank.

The government intends to achieve budget deficit reduction by boosting output through labor reforms and tax cuts, and by reducing the public retirement system’s deficit with the raise of the retirement age enacted last week.