News of the week summary - 02/18/2024
UK fell into recession at the end of 2023
The United Kingdom slipped into a technical recession (2 quarters of GDP decline) at the end of last year, posing a significant challenge to Rishi Sunak's efforts to stimulate economic growth amidst the ongoing cost of living crisis, which continues to impact household spending and business activity. GDP contracted by 0.3 percent in the final quarter of 2023, following a 0.1 percent decline in the third quarter, according to data released by the Office for National Statistics.
These figures present a formidable backdrop for Chancellor Jeremy Hunt, who is contemplating significant cuts to public spending in the upcoming Budget to finance pre-election tax cuts. Despite recent suggestions of potential tax reductions, the chancellor is now attempting to temper expectations. Labour seized on the data, asserting that Prime Minister's promises regarding the economy are now in ruins, citing over 14 years of economic decline under the Conservatives.
Nevertheless, Hunt remains optimistic, pointing to signs that the British economy may be "turning a corner." He highlights forecasts indicating strengthened growth in the coming years, along with rising wages, reduced mortgage rates, and low unemployment rates. However, when factoring in population growth, output per head contracted by 0.7 percent in 2023, declining in every quarter and failing to show growth since early 2022.
Bank of England Governor Andrew Bailey cautioned against placing undue emphasis on the technical recession, noting expectations of a shallow downturn.
Market reactions include expectations of approximately three quarter-point interest rate cuts by the Bank of England this year, with a 65 percent likelihood of the first cut occurring by June. Despite the economic downturn, 2-year gilt yields remained relatively stable, while the FTSE 100 index experienced a slight increase, and the sterling saw a modest rise against the dollar.
Economists had anticipated a 0.1 percent contraction in the final quarter, attributing the decline to factors such as high borrowing costs, inflation, and strikes. The UK's economic performance in 2023 largely stagnated, growing by only 0.1 percent, substantially lower than the expansion rates seen in the US and the eurozone.
The Bank of England has revised its forecast for 2024 growth upwards to 0.25 percent and anticipates 0.75 percent growth for 2025. Despite January's inflation rate matching that of December at 4 percent, concerns persist regarding underlying price pressures, particularly in light of strong pay growth revealed in recent official data.
China's Year of the Dragon commenced with a notable surge in consumer spending and travel during the lunar new year holiday, signaling a positive boost for the country's economy, which has been grappling with challenges such as a property crisis and weak investor confidence.
According to the country's culture and tourism ministry, there were 474 million domestic trips during the eight-day lunar new year festival, marking a 34 percent increase year-on-year and a 19 percent rise compared to pre-pandemic levels in 2019. This holiday period, unaffected by the pandemic or related restrictions for the first time in five years, served as a crucial gauge of consumer sentiment.
Chinese policymakers are relying on domestic demand to revitalize the sluggish economy, with hopes that increased spending during the lunar new year will contribute to economic recovery. Tourists spent almost $90 billion during the holiday period, reflecting a 50 percent surge from the previous year and an 8 percent increase compared to 2019.
Travel and tourism have emerged as bright spots in China's economic recovery, with significant increases in trips to destinations such as Singapore, Malaysia, and Thailand during the holiday. Additionally, 3.6 million Chinese tourists traveled abroad, while 3.2 million travelers entered China during the spring festival.
After the lunar holiday, the Hong Kong stock exchange reopened and experienced a nearly 5 percent increase in the Hang Seng China Enterprises Index over the past week.
While recent gains in Chinese equities have sparked renewed interest from some investors after years of underperformance, activity on Hong Kong's exchange has been relatively thin, with foreign institutional investors largely staying on the sidelines.
China's benchmark CSI 300 index, which experienced a sharp decline earlier in the year, rebounded just before the holiday, narrowing its losses for the year. However, it remains significantly below its peak from early 2021, and MSCI's decision to remove 66 constituents from its benchmark MSCI China index reflects ongoing share price declines among China's largest listed companies.
Much of the recent gains in Chinese stocks have been attributed to state intervention by China's "national team" of state-run financial institutions, expected to resume share purchases upon Beijing's directive when markets reopen. While global investors have shown increased interest in Chinese shares, expectations for the country's stock market remain subdued ahead of the "Two Meetings" in Beijing next month, where top leaders will set China's national policy agenda.
Analysts emphasize that a sustained rally for Chinese shares will require policymakers to address issues such as the property market crisis and local government debt. While there have been previous attempts to boost market sentiment, continued support and implementation of policies addressing these challenges are deemed essential. Despite recent gains, uncertainties persist, and the Chinese market is viewed as still facing significant hurdles.
Apple to be fined €500 million by EU
Brussels is set to impose its first-ever fine on tech giant Apple, amounting to approximately €500 million, for allegedly violating EU law concerning access to its music streaming services. The fine, expected to be announced early next month, follows a European Commission antitrust probe initiated after music-streaming app Spotify lodged a formal complaint in 2019.
The investigation centers on whether Apple has exploited its platform to favor its services over those of competitors, particularly by allegedly blocking apps from informing iPhone users of cheaper alternatives to access music subscriptions outside of the App Store. The Commission will accuse Apple of breaching EU competition rules by engaging in anti-competitive practices and imposing unfair trading conditions on rivals.
This penalty represents one of the most significant financial sanctions imposed by the EU on big tech companies, signaling a renewed confrontation between Brussels and major tech players. It comes amidst heightened scrutiny as companies like Apple, Amazon, and Google are required to demonstrate compliance with new rules aimed at fostering competition and enabling smaller tech rivals to thrive under the Digital Markets Act.
While Apple has never been fined for antitrust violations by Brussels before, it faced a €1.1 billion fine in France in 2020 for alleged anti-competitive behavior, later reduced to €372 million after an appeal. Despite recent efforts by Apple to make changes to its iOS mobile software and App Store to comply with EU regulations, Spotify criticized these actions, calling them a "complete and total farce."
In addition to this case, Brussels is also consulting with Apple's rivals regarding concerns that the tech giant is impeding financial groups from accessing its Apple Pay mobile system. The Commission's forthcoming announcement of the fine, though the timing is yet to be finalized, is not expected to alter the direction of the ongoing antitrust investigation. Apple, which has the option to appeal to the EU courts, declined to comment on the impending ruling but reiterated its commitment to addressing concerns while promoting competition.
Private Equity giants’ market capitalizations surge
The founders and top executives of the largest private equity groups in the US have seen a remarkable increase in the value of their shares, surpassing $40 billion since the beginning of 2023. This is primarily attributed to a substantial inflow of new assets into their firms, propelling shares in industry giants Blackstone, KKR, Apollo, Ares, and TPG to approach or exceed record highs. The robust financial results, driven by growth in overall assets, particularly in credit and insurance-based investment operations, have been fueled by the rapid rise in interest rates.
While traditional corporate buyouts have experienced a slowdown, these private equity behemoths have strategically diversified their portfolios, placing a strong emphasis on lending businesses that have experienced significant growth in assets and returns, thanks to higher yields. For instance, Blackstone attracted around $150 billion in new investor funds in 2023, predominantly from its credit and insurance operations, while Apollo Global saw an equivalent amount in gross inflows, with a substantial portion originating from its Athene insurance unit.
The appreciable gains in share value have been particularly noteworthy for key figures such as Stephen Schwarzman of Blackstone, whose firm has emerged as the world's largest asset manager by market value, boasting a market capitalization larger than that of Morgan Stanley or Goldman Sachs. Schwarzman attributes Blackstone's resilience to market volatility to its diversified business model, which has effectively insulated it from recent market turmoil.
In aggregate, private equity groups collectively generated $15.5 billion in fee and spread-based earnings in 2023, marking an 11 percent increase from the previous year. Additionally, they have expanded their footprint in the lending market, with Apollo Global and Blackstone making significant strides in originating debt and acquiring lending platforms. This growth trajectory is seen as a response to fundamental shifts in the financial landscape, characterized by low interest rates and heightened regulations, which have redirected activity away from public markets and traditional banking systems.