News of the week summary - 10/29/2023

European Central Bank pauses rate hikes amid recession risks

The European Central Bank decided to keep interest rates unchanged after a series of consecutive rate hikes. The central bank has raised rates by a total of 4.5 percentage points since July 2022 to combat rising inflation.

However, the recent economic slowdown and decreasing inflation have prompted a pause in rate hikes. ECB President Christine Lagarde suggested that further rate hikes were not ruled out but provided little guidance.

Despite her statement, investors remain skeptical and are betting on rate cuts in the coming months. The decision to hold rates is likely to impact the world's major central banks, suggesting they may be done with tightening policies.

 

China to implement fiscal stimulus to combat economic challenges

China is set to implement fiscal stimulus to support its economic recovery, primarily relying on debt and state spending. Some advisers are recommending an increase in the 2024 budget deficit target, which would allow Beijing to issue more bonds to revive the economy.

China's third-quarter growth exceeded expectations, but there are concerns about the decline of private sector activity and the lack of longer-term reforms needed for sustainable growth. The focus is on sustaining the recovery, but deeper reforms are needed for a shift towards consumer-led growth rather than the debt-fueled growth that has been propelling the Chinese economy but put it at risk after the property market turmoil.

 

              New data releases :

 

-          Strong GDP growth in the third quarter for the American economy

The US economy is expected to have shown robust growth in the third quarter, defying fears of a recession.

Higher wages resulting from a tight labor market have boosted consumer spending, and residential home buying is rebounding after more than 2 years of decline, although business investment has slowed due to fading boosts from factory construction.

Economists believe that the Federal Reserve can achieve a "soft landing" for the economy (meaning eliminating inflation without causing a recession). Growth is expected to slow in the fourth quarter due to factors like auto strikes and resumption of student loan repayments.

 

-          Euro Zone activity weakens

Euro zone business activity unexpectedly declined in October, pointing towards the risk of a recession. The euro zone's Composite Purchasing Managers' Index (PMI) fell to its lowest level since November 2020.

• The Purchasing Managers' Index (PMI) is an indicator based on surveys of purchasing managers in various industries, with values above 50 indicating expansion and values below 50 indicating contraction.

This decline is concerning for the European Central Bank, and it may challenge the bank's interest rate policy.

Germany, Europe's largest economy, is experiencing a downturn in business activity for the fourth straight month as manufacturing and services both decline. Meanwhile, France, the euro zone's second-largest economy, saw its second-steepest decline in business activity in close to three years.