Canadian chief executives are more pessimistic than their global peers on the economy, with just one-quarter expecting the Canadian economy to improve this year compared to 44% globally who expect better times ahead for their countries’ economies, according to PricewaterhouseCoopers (PwC).

Despite a gloomier short-term outlook on the economy, Canadian CEOs weren’t as down on their businesses’ longer-term prospects, said PwC’s annual CEO survey released Tuesday. About one-third (32%) of Canadian CEOs said their business may not be viable in 10 years compared to 45% globally, the report found.

Canadian CEOs (36%) are more likely than CEOs in other countries (32%) to have already adopted generative AI, but they also have realistic expectations about the risks it presents and the need to retrain workers.

“The findings speak to the tensions between the potential risks, uncertainties about the new technology and the pressure to move quickly to seize the opportunities,” the report said.

Half of Canadian CEOs said generative AI will improve the quality of their products and services in the next 12 months.

Canadian workers, too, have less to worry about when generative AI makes it to their workplace as only 14% of Canadian CEOs believe it will lead to a decrease in headcount in the next year, compared to 25% of global CEOs. In addition, over half (55%) of Canadian CEOs agreed that generative AI will require significant upskilling of their workforce in the next three years, with 53% believing that a lack of skills will inhibit future growth.

“Closing these skills gaps will be key, including when it comes to equipping employees to do their part in helping mitigate the increased risks CEOs foresee as a result of generative AI,” the report said.

Canadian CEOs had more moderate expectations of generative AI’s benefits, with 29% expecting it to increase revenues in the next 12 months versus 41% globally. Canadian respondents also said the technology would increase risks in cybersecurity (68%), misinformation (52%) and legal or reputational harm (47%) over the next year.

The International Monetary Fund has upgraded its outlook for the world economy this year, envisioning resilient growth led by the United States and a slower pace of inflation.

In its latest outlook, the 190-country lending agency said Tuesday that it now expects the global economy to grow 3.1% this year, unchanged from 2023 but better than the 2.9% it had predicted for 2024 in its previous estimate in October.

Worldwide, the IMF thinks inflation will ease from 6.8% in 2023 to 5.8% in 2024 and 4.4% in 2025. In the most advanced economies, the agency expects inflation to drop this year to 2.6% and next year to the 2% level that the Federal Reserve and some other central banks have set as a target.

The combination of steady growth and falling inflation has raised hopes for a so-called soft landing for the global economy – a slowdown sufficient to contain inflation without causing a recession.

“We are now in the final descent toward a soft landing,’’ Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters ahead of the report’s release.

The forecast for overall global growth this year and next (3.2%) trails the 3.8% average from 2000 to 2019. That is partly because the Fed and other central banks aggressively raised interest rates to fight high inflation, and the resulting higher borrowing costs have slowed spending and investment.

Gourinchas said he expects “relatively limited’’ economic damage from the attacks by Yemen-based Houthi rebels on shipping in the Red Sea. The attacks have forced container ships carrying cargo between Asia and Europe to avoid the Suez Canal and instead take the long way around the tip of Africa, thereby delaying and disrupting shipments and raising freight charges. But Gourinchas said that for now, the Red Sea disruptions don’t seem to be “a major source of reigniting supply side inflation,” which arose from far more severe shipping backlogs in 2021 and 2022.

For the United States, the world’s largest economy, the IMF sharply marked up its estimate for growth this year – to 2.1% from the 1.5% it had penciled in three months ago. The U.S. economy expanded 2.5% in 2023 after an unexpected burst of year-end growth fueled by consumers willing to spend despite higher borrowing costs.

The outlook for the slumping Chinese economy was also upgraded by the IMF. It now expects the world’s second-biggest economy to grow 4.6% this year, up from the 4.2% it had forecast in October but down from 5.2% growth in 2023. Government spending has helped offset the damage from a collapse in the Chinese housing market.

“There was a lot of resilience in many, many parts of the world,’’ Gourinchas said, singling out Brazil, India, Southeast Asia and Russia, which has remained surprisingly sturdy in the face of Western sanctions imposed after its invasion of Ukraine.

But the IMF downgraded the outlook for some places. Europe, for example, continues to struggle with dispirited consumers and the lingering effects of the energy price shock caused by the Russian invasion of Ukraine. The IMF expects the 20 countries that share the euro currency to collectively grow a meager 0.9% this year. That would be up from 0.5% growth in 2023 but down from the IMF’s October forecast of 1.2% growth for the eurozone this year.

The IMF also modestly downgraded the outlook for the Japanese economy, to 0.9%, a drop from 1.9% growth in 2023.

The improving inflation outlook is a result of higher interest rates, the end of the supply chain backlogs of the past couple of years, more workers entering the job market and lower energy prices after the spike caused by the Ukraine war. The IMF expects oil prices, which plunged 16% in 2023, to fall a further 2.3% this year and 4.8% in 2025.

The world economy still faces risks. One is that financial markets have become too confident that the Fed will reverse course and start cutting rates as early as its meeting in March. Gourinchas said he doesn’t expect the rate-cutting to start until the second half of 2024. Disappointed investors could drive down stock prices if they don’t see lower rates as soon as they hoped.

Another is that geopolitical tensions, especially between the United States and China, could disrupt world trade. Gourinchas suggested that some of President Joe Biden’s economic policies, including those that benefit American producers of computer chips and green technology, could violate World Trade Organization rules.

The IMF expects world trade to grow just 3.3% this year and 3.6% in 2025, below the historical average of 4.9%.

Europe’s economy failed to expand at the end of 2023, dragging out the stagnation for more than a year amid higher energy prices, costlier credit and a downturn in former powerhouse Germany.

Zero economic growth for the October-to-December period of last year follows a 0.1% contraction in the three months before that, according to figures released Tuesday by EU statistics agency Eurostat.

That extends a miserable run of economic blahs: The 20 countries that use the euro currency have not shown significant growth since the third quarter of 2022, when the economy grew 0.5%.

And the start of this year looks no better, with indicators of business activity still flashing red for contraction. Plus, disruptions to shipping in the Red Sea have constricted global trade through the Suez Canal, a major route between Asia and Europe, surging shipping costs and threatening to boost inflation.

The new figures underlined the growing divide between Europe and the United States, whose economy grew 0.8% in the fourth quarter compared with the previous three-month period, or an annual pace of 3.3% — better than expected.

The eurozone grew 0.5% for the full year, while the U.S. grew 2.5%. The International Monetary Fund on Tuesday upgraded its outlook for the world economy this year, envisioning global growth of 3.1% led by the U.S. but downgrading expectations for the eurozone to a meager 0.9% expansion.

“The big picture is that eurozone GDP has been flat since the third quarter of 2022 when gas prices surged and the ECB started raising interest rates,” Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, said in a written analysis.

Not all the news is bad. For one thing, unemployment is at record lows and the number of jobs rose in the July-to-September quarter.

Energy prices also have come down from recent spikes — though they remain higher than before Russia invaded Ukraine — and storage levels of natural gas, which is used to heat homes, power factories and generate electricity, are robust. With gas storage 72% full and most of the winter heating season nearly over, fears of higher utility bills and another energy crisis have eased.

While the economy has stagnated, inflation also has declined rapidly from its painful double-digit peak, falling to 2.9% in December. But people’s pay and purchasing power are still catching up to the levels lost through the price surge.

It’s seen as French farmers pushing for better pay, fewer constraints and lower costs have set up barricades around Paris this week.

Meanwhile, the anti-inflation medicine applied by the European Central Bank — sharply higher interest rates — has curbed business investment and real estate activity like construction and home sales.

Europe’s biggest economy, Germany, shrank 0.3% in the fourth quarter. Formerly a model in how to grow, Germany was one of the worst-performing major developed economies last year.

It is bogged down with multiple issues including higher fuel prices for energy-intensive industries after Russia cut off most of its natural gas to the continent. Germany also has been held back by lack of skilled workers and years of underinvestment in infrastructure and digital technology in favor of balanced budgets.

While the incoming numbers for Europe “don’t point to a significant improvement” and could signal a slight contraction in the first three months of this year, the eurozone should benefit from falling inflation that is restoring consumer purchasing power and expected lower interest rates, according to economists at Oxford Economics.

Some analysts expect the ECB to cut interest rates as early as April, while others think the central bank may wait until June to ensure inflation is definitely under control.

But risks remain, including the attacks by Yemen’s Houthi rebels on ships in the Red Sea, where 12% of global trade passes, amid Israel’s war on Hamas.

Transport costs have risen as shipping companies route vessels around the southern tip of Africa, adding a week or more to voyages. With higher shipping costs and delays to products from clothes to keyboard components, concerns are growing of new consumer price spikes if the conflict in Gaza drags on or escalates.

The trade disruption could add as much as 0.5% to core inflation, which excludes volatile fuel and food prices, Oxford Economics said. Core inflation is closely watched by the ECB.

“We think the impact on core inflation will be enough for the ECB to wait a little bit longer,” delaying lower rates to June, Oxford Economics analysts said in a note.

American consumers, fresh off strong holiday spending, are feeling more confident than they have in two years.

The Conference Board, a business research group, said Tuesday that its consumer confidence index rose for the third straight month, to 114.8 in January from 108 in December. January’s reading came in just slightly higher than the 114 that analysts were expecting.

The index, which measures both Americans’ assessment of current economic conditions and their outlook for the next six months, is at its highest level since December of 2021.

Anxiety over the possibility of an economic recession in the next 12 months continued to fade for most Americans.

Consumer spending accounts for about 70% of U.S. economic activity, so economists pay close attention to consumer behavior as they take measure of the broader economy.

The index measuring Americans short-term expectations for income, business and the job market rose to 83.8 from 81.9 in December.

Consumers’ view of current conditions jumped to 161.3 from 147.2 the previous month.

Despite the uptick in confidence, consumers’ intent to purchase homes, autos and big-ticket items declined modestly.

Last week, a government report showed that the economy expanded at a surprisingly strong 3.3% annual pace in the final three months of last year. Solid consumer spending propelled the growth, capping a year that had begun with widespread expectations of a recession but instead produced a healthy expansion.

Americans stepped up their spending at retailers in December, closing out the holiday shopping season and the year on an upbeat tone and signaling that people remain confident enough to keep spending freely.

America’s employers posted 9 million job openings in December, an increase from November and another sign that the U.S. job market remains resilient despite the headwind of higher interest rates.

The number of openings was up from November’s 8.9 million, which itself was revised up in Tuesday’s report from the government. Job openings have gradually but steadily declined since peaking at a record 12 million in March 2022. But they remain at historically high levels: Before 2021, monthly openings had never topped 8 million.

Still, in a cautionary sign, layoffs rose in December. And the number of Americans quitting their jobs — a sign of relative confidence in their ability to find a better position — dipped to the lowest level since January 2021.

The U.S. economy and job market have remained surprisingly durable despite sharply higher interest rates, which have led to higher borrowing rates for consumers and businesses. The Federal Reserve’s policymakers raised their benchmark interest rate 11 times between March 2022 and July 2023, bringing it to a 23-year high of around 5.4%.

The Fed wants to see the job market cool from the red-hot levels of 2021 and 2022, thereby reducing pressure on businesses to raise pay to attract and keep staff — and to pass on those costs to customers through higher prices.

Higher rates have contributed to a slowdown in hiring, though the pace of job growth remains relatively healthy: U.S. employers added 2.7 million jobs last year, down from 4.8 million in 2022 and a record 7.3 million in 2021. When the government issues the January employment report on Friday, it is expected to show that employers added a solid 177,000 jobs, according to a survey of forecasters by the data firm FactSet.

The job market is cooling in a mostly painless way — through fewer openings. Despite a wave of high-profile layoffs, the number of job cuts across the economy remains relatively low.

The unemployment rate has come in below 4% for 23 straight months, the longest such streak since the 1960s. And the number of people applying for unemployment benefits — a proxy for layoffs — has remained unusually low.

At the same time, while inflation has sharply slowed after peaking in mid-2022, it remains above the central bank’s 2% target.

The Fed has signaled that it expects to reverse course and cut rates three times this year, though it’s set to leave rates unchanged after its latest policy meeting ends Wednesday. Financial markets have been anticipating the first rate cut as early as March, though continued strength in the job market might make the Fed’s policymakers wary of acting before mid-year.

“These data — which show demand for workers remains robust — do not support imminent rate cuts,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “They support a cautious approach going forward, so that policymakers can be sure that inflation” will reach their 2% target.

Chair Jerome Powell will enter this week’s Federal Reserve meeting in a much more desirable position than he likely ever expected: inflation is getting close to the Fed’s target rate, the economy is still growing at a healthy pace, consumers keep spending and the unemployment rate is near a half-century low.

A year ago, most economists had envisioned a much darker outlook. As the Fed raised interest rates at the fastest pace in four decades to fight high inflation, most economists warned of a recession, possibly a painful one, with waves of layoffs and rising unemployment. Even the Fed’s own economists had projected that the economy would sink into a recession in 2023.

The unexpectedly rosy picture — one that’s sure to be subject to heated debate in the 2024 presidential race — may have left some Fed officials saddled by uncertainty. With their frameworks for assessing the economy upended by the pandemic and its aftermath, it’s hard to know whether the economy’s healthy conditions can endure.

“It almost feels like what we saw in the second half of last year was too good to be true,” said Nathan Sheets, chief global economist at Citi and a former Fed economist. “When things are too good to be true, you want to try to scratch the surface and say, how durable is this?”

Some Fed officials have raised similar questions and expressed caution about their next moves. When they last met in December, the Fed’s 19 policymakers who participate in interest-rate decisions said they expected to cut their benchmark rate three times this year. Yet the timing of those rate cuts, which would lead to lower borrowing costs for consumers and businesses, remains uncertain.

Most economists say they expect the first rate cut to occur in May or June, though a cut at the Fed’s March meeting is not off the table. The timing of rate cuts will almost certainly be the top issue at the Fed’s two-day meeting, which ends Wednesday. The Fed is all but sure to announce after the meeting that it’s leaving its key rate unchanged at about 5.4%, where it’s stood since July, its highest point in 22 years.

The Fed’s consideration of rate cuts is taking place against an intensifying presidential campaign as President Joe Biden seeks re-election with the economy a polarizing issue. Rate cuts have the potential to provoke an attack from former President Donald Trump, who nominated Powell to be Fed chair but later publicly assailed him for raising rates during the Trump presidency and demanded that he lower them. Trump might view any Fed rate cuts carried out this year as aiding Biden’s prospects in November.

At a news conference last month, Powell said: “We don’t think about politics. We think about what’s the right thing to do for the economy.”

On Wednesday, the Fed’s policymakers could signal that they’re close to cutting rates by adjusting the language in the statement they issue after each meeting. In December, the statement still suggested that the officials were willing to consider more rate increases. Removing or altering that language in this week’s statement would signal that they’re shifting to a new approach, focused on rate cuts.

The Fed’s aggressive streak of 11 rate hikes, beginning in March 2022, was intended to tame inflation, which peaked in June 2022 — according to the central bank’s preferred gauge — at 7.1%. But data released Friday showed that over the past six months, inflation has fallen all the way back to the Fed’s 2% annual target level. In the past three months, year-over-over inflation that excludes volatile food and energy costs has dropped to just 1.5%.

Yet Fed officials are expected to wait for at least a few months, to try to build confidence that inflation has been truly beaten, before they start reducing rates.

Christopher Waller, an influential member of the Fed’s governing board, sounded a note of caution in a recent speech.

“Inflation of 2% is our goal,” he said. “But that goal cannot be achieved for just a moment in time. It must be sustained.”

Waller has previously referred to having been “head-faked” on inflation. On more than one occasion, when initial government reports had indicated that inflation was falling, subsequent revisions to the data showed that price increases actually remained high. In his speech, Waller mentioned the government’s upcoming revisions of inflation data, to be released on Feb. 9, as a report he will be watching closely.

It’s possible that inflation could stay undesirably high, especially if the economy remains strong, which could cause the Fed to leave rates unchanged. Fed officials have said that as long as the economy stays healthy, they can take time before cutting rates.

Average paychecks are still increasing at about 4% to 4.5% annually, and apartment rental prices are still rising faster than they did before the pandemic. Officials expect rent prices to cool as a slew of new apartment buildings are completed. But that has yet to show up in the official data. And some prices in the service sector, such as for restaurant meals, are still accelerating.

“We would argue we’re not out of the woods yet,” said Tiffany Wilding, a managing director and economist at PIMCO. “The Fed does not want to be Arthur Burns,” she added, referring to the Fed chair from the 1970s who is widely blamed for cutting rates too soon and allowing inflation to become more deeply entrenched in the economy.

At the same time, the Fed is grappling with an equivalent risk in the other direction: That it might keep its key rate too high for too long and potentially trigger a recession. Consumers spent at a healthy pace in the final three months of last year, but they could eventually pull back in the face of higher borrowing costs and prices that are still well above where they were three years ago.

“They run the risk of overstating their welcome at high rates and slowing the economy down in a way that really isn’t necessary,” said Bill English, a finance professor at the Yale School of Management and a former Fed economist.

Still, the Fed could also accelerate its rate cuts later this year if the economy does weaken, just as it rapidly raised rates after waiting too long to start boosting them in 2022, said Claudia Sahm, founder of Sahm Consulting and a former Fed economist,

“I fully expect them to wait as long as humanly possible to cut rates,” she said. “The Fed excels at being behind the curve.”

KEY TAKEAWAYS

• Economists say the degree to which capping study permits will ease rental prices is unclear
• Shelter costs are rising quickly and interest rate hikes can do little about it
• To reach the BoC’s 2% inflation goal, prices in other parts of the economy may need to fall as an offset

As the debate rages on about how to tackle rapidly rising housing costs, Bank of Canada governor Tiff Macklem says the newly announced cap on international student enrolments should help ease rent price inflation. 

“You saw this week the government capping student visas,” Macklem said in an interview with The Canadian Press. “That, I think, will help take a bit of pressure off rents going forward.”

The federal government announced a two-year limit on new study permits to get a handle on a soaring international student program. 

Immigration Minister Marc Miller said at a cabinet retreat in Montreal on Monday that the number of new visas handed out this year will be capped at 364,000, a 35% decrease from the nearly 560,000 issued last year. The number for 2025 will be set after an assessment of the situation later this year.

The decision was prompted in part due to the strain strong population growth is putting on the housing market.

Many economists agree that capping the number of new study permits issued may help moderate rent price inflation, however the degree to which it could ease rental prices is unclear. 

“While I could see the growth rate and rent cooling off a little bit, I sincerely doubt that rents are going to go in the opposite direction,” said Douglas Porter, chief economist at Bank of Montreal. “So bottom line is, I believe, we’re still going to be dealing with some pretty serious rent inflation in the next couple of years.”

The Bank of Canada has made significant progress in its fight against inflation that began in March 2022 when it started raising its key interest rate target. Prices are growing at a slower pace across the economy and fewer goods and services are seeing abnormally large price increases. 

Though there have been bumps on the path back to the bank’s 2% target, Canada’s inflation rate has become much more manageable, sitting at 3.4% in December. 

However, the Bank of Canada faces a thorny problem: shelter costs are rising quickly and interest rate hikes can do little about it.

Porter says that during normal times, the Bank of Canada may have been able to ignore a sharp rise in shelter costs.

But after two years of above-target inflation, he says the central bank can’t afford to let inflation stay elevated for much longer because it risks feeding into higher inflation expectations.

“We are in this tough situation where, yes … inflation [other than for] shelter basically has to be below target for a while here for the bank to come close to hitting its target,” Porter said.

On Wednesday, the Bank of Canada announced its decision to hold its key interest rate at 5% once more and signalled it has begun discussing the timeline for rate cuts. 

But the central bank emphasized the role housing and food prices are playing in holding up inflation, noting shelter costs are now the primary driver of above-target inflation.

“We do expect to see some continued deceleration in food prices,” Macklem said in the interview Wednesday. “Housing, I will admit, is tougher to predict.”

In December, shelter costs, which take into account home ownership and rental costs, were 6% higher than a year ago, significantly outpacing overall inflation.

Data from Rentals.ca and market research firm Urbanation showed the average asking rent for December in Canada jumped 8.6% year-over-year to a record high of $2,178 per month. 

When asked how the central bank envisions getting back to 2% inflation if shelter prices continue soaring, the governor said slower price growth in other parts of the economy would need to offset housing cost increases.

“You do need to see some further deceleration in some of the other components [of inflation],” he said.
Royce Mendes, a managing director and head of macro strategy at Desjardins, says the Bank of Canada should be patient and allow for shelter price inflation to ease over time. 

“The governor should be careful about reading too much into shelter price inflation when it comes to determining the future path of monetary policy,” he said. 

Being too aggressive and keeping interest rates high for too long time would cause significant economic pain, he said. 

“If the bank wants to get total inflation down to 2% in the near term, they’re going to have to crush the economy to get all of that other inflation down to virtually zero,” Mendes warned. 

Housing affordability has been a major issue in Canada post-pandemic for a host of reasons, including strong population growth that’s exacerbated a pre-existing housing shortage. 

Mike Moffatt, a housing expert and economics professor at Western University, said the crush of international students coming to Canada has put stress on the housing market. 

The increase in temporary residents means thousands more people are competing for lower-cost rentals and investors are buying up properties to convert into student housing, he said.

“It’s good to see the federal government start to bring some rationality back to the number of international students,” Moffatt said. 

“We need to bend the curve and allow the housing market to catch up to our population growth.”

The Bank of Canada’s policy decisions however have also contributed to shelter price inflation by raising mortgage interest costs for homeowners. Meanwhile, housing developers are less inclined to build when financing is expensive, leading to more strain on housing supply.

At best, Mendes said that the effect of monetary policy on housing costs is “ambiguous.”

“At worst, the Bank of Canada’s elevated interest rate policy is actually fuelling some of that shelter inflation,” he said. 

The Bank of Canada has been more vocal over the last few months about its limited ability to control soaring housing costs.

It has noted that strong population growth has blunted the effect of higher interest rates on other components of shelter, such as home prices, and pointed to a lack of housing supply.

Rents have also skyrocketed as more newcomers enter the country and look for a place to live. 

“We’ve had a long-standing structural supply issue on housing in Canada,” Macklem said. “With the rapid rise in immigration recently, that has exacerbated that problem.”

The governor didn’t have an answer when it comes to the net effect of population growth on inflation and thereby the central bank’s monetary policy decisions. Instead, he noted that population growth fuelled inflation through housing, but helped alleviate price pressures by easing labour shortages. 

Both Mendes and Porter estimate that the recent population growth has contributed to the run-up in inflation.

“I think the net impact of population growth on inflation has been positive. But that’s due to the fact that it’s exacerbated existing, longer term structural supply constraints in the housing market,” Mendes said. 

In the long run, Porter said the effect of population growth on inflation could be neutral.

Although Canada’s housing challenges are expected to persist in the short run, Macklem expressed some optimism that recent government announcements regarding housing — including making more land available and reducing red tape — will help narrow that gap between supply and demand over time.

With files from Mia Rabson

China’s leaders launched a barrage of new policies this week to prop up languishing financial markets and rekindle growth in the world’s second-largest economy.

The moves to support lending and spending with billions of dollars of fresh cash gathered pace when the central bank cut bank reserve requirements and issued new rules to encourage banks to lend more to property companies.

A collapse in China’s real estate market has been one of the key factors hindering the country’s recovery from the shocks of the Covid-19 pandemic. What’s at stake: stable financial markets and a major driver of global economic growth.

How is the Chinese economy doing?

The Chinese economy grew at a 5.2% annual pace in 2023, exceeding the government’s target, and many indicators including factory output and retail sales show signs of improvement. But most economists are forecasting a slowdown this year and next that will drag on global growth.

Meanwhile, Chinese stock markets have swooned since late 2023, deepening losses that amount to trillions of dollars over the past several years. A real estate downturn, job losses and other trials of the Covid-19 pandemic have left consumers cautious about spending. That threatens to become what some economists say could be a deflationary spiral as prices for housing and other goods fall, discouraging investment that would create jobs and spur a stronger recovery.

Why are China’s leaders acting now?

The weakening economy and crackdowns on the technology industry, along with disruptions during the pandemic and trade tensions with the United States, have left foreign investors wary about the business outlook in China.

Premier Li Qiang chaired a meeting of the State Council, or Cabinet, this week where he said more has to be done to “stabilize the market and boost confidence.” Last week, speaking at the World Economic Forum in Davos, Switzerland, he sought to sell investment in China as “not a risk, but an opportunity.”

A vital priority is ensuring growth is fast enough to generate ample jobs for young workers as they leave school. The rate of unemployment among young Chinese surged in 2023 to a record of over 21%. It’s fallen since to about 15% but still remains perilously high, adding to the urgency to get growth back on track.

What is the government doing?

The central bank will cut the ratio of reserves it holds on behalf of banks by 0.5 percentage points as of Feb. 5. People’s Bank of China Gov. Pan Gongsheng said that would free up an extra 1 trillion yuan (US$140 billion) in funds. The PBOC also reduced the interest rate banks charge each other and issued new rules meant to expand access to commercial bank loans for property developers.

Until the year’s end, real estate companies will be allowed to use bank loans pledged against commercial properties such as offices and shopping malls to repay their other loans and bonds. Earlier, regulators cut mortgage rates and lifted curbs on property buying. After share prices tumbled, state-owned institutional investors reportedly were ordered to buy shares.

Why is the property crisis such a big problem?

Dozens of developers defaulted on their debts after the government cracked down on excessive borrowing in the industry several years ago. The largest, China Evergrande, is still trying to resolve more than US$300 billion in debts and a Hong Kong court is due to hold a hearing on its restructuring plans next week.

It’s unclear what impact the new policies might have on the overall crisis gripping the property market. Land sales have long been a major revenue source for local governments that also are now heavily in debt. At the same time, stalled construction of new homes has hit contractors and suppliers of construction materials and home furnishings. That has wiped out untold numbers of jobs, rippling through the economy.

Sales of new homes and home prices have been falling, discouraging consumers from spending since Chinese families tend to have much of their wealth tied up in property. The industry as a whole accounts for more than a quarter of business activity in China.

How will the measures taken so far affect ordinary folks?

As China’s rapid rise as an economic superpower loses momentum, foreign investors and consumers are watching for signs that Beijing has a clear game plan for navigating the economy through an era of slower growth.

The moves to put more money into the economy and encourage bank lending might not go far enough, many analysts said. The cut in required bank reserves frees up more credit, but “it doesn’t tackle the root issue; hence you can lead a horse to water, but you cannot make him drink,” Stephen Innes of SPI Asset Management said in a report.

Economists tend to concur that longer-term reforms, such as creating a better social safety net to enable families to spend rather than stashing their rainy day savings in banks, are needed to sustain strong growth. Too much of the nation’s wealth still goes into construction of infrastructure such as roads and railways, and uncertainty over policies has discouraged investment in small, private businesses that create the most jobs.

The Federal Reserve’s preferred inflation gauge cooled further last month even as the economy kept growing briskly, a trend sure to be welcomed at the White House as President Joe Biden seeks re-election in a race that could pivot on his economic stewardship.

Friday’s government report showed that prices rose just 0.2% from November to December, a pace broadly consistent with pre-pandemic levels and barely above the Fed’s 2% annual target. Compared with a year ago, prices increased 2.6%, the same as in the previous month.

Excluding volatile food and energy costs, prices also rose just 0.2% from month to month. And compared with a year earlier, so-called “core” prices climbed 2.9% in December — the smallest such increase since March 2021. Economists consider core prices a better gauge of the likely path of inflation.

Friday’s mild inflation data arrived a day after government figures showed that the economy expanded at a surprisingly strong 3.3% annual pace in the final three months of last year. Solid consumer spending propelled the growth, capping a year that had begun with widespread expectations of a recession. Instead, the economy grew 2.5% in 2023, up from 1.9% in 2022.

Biden’s Republican critics have sought to highlight what had been the biggest inflation spike in 40 years, for which they have largely blamed the president’s spending policies. But with inflation having dropped sharply after an extended period of gloomy consumer sentiment, Americans are starting to show signs of feeling better about the economy. A measure of consumer confidence by the University of Michigan, for example, has jumped in the past two months by the most since 1991.

The latest data suggests that the economy is achieving a difficult “soft landing,” in which inflation falls back to the Fed’s 2% target without a recession. That outcome could make it easier for the Fed to consider cutting its key interest rate, which it raised 11 times since March 2022 to attack inflation.

Higher interest rates have throttled home and auto sales by raising the cost of borrowing. Businesses have also chafed under the higher interest rates.

In December, the Fed’s policymakers projected that they would carry out three quarter-point rate cuts this year. Yet they provided little hint of when the first cut might occur. Late last year, Wall Street traders had bet that the first rate cut would occur in March.

Several Fed officials, though, have pushed back against such assumptions. Christopher Waller, an influential figure on the Fed’s Board of Governors, last week reiterated his view that inflation is on track to return to the Fed’s 2% goal. But Waller cautioned that any decision to cut rates should be “carefully calibrated and not rushed” — remarks that were widely interpreted as downgrading the likelihood of a March cut.

Many economists credit the Fed’s sharp rate hikes — which boosted its benchmark rate from near zero to about 5.4% after the most recent hike in July — with cooling demand and helping slow inflation.

Rate cuts by the Fed, conversely, would eventually lead to lower borrowing costs for consumers and businesses.

Friday’s price data showed a lower level of inflation than did the most recent consumer price index, released earlier this month, which showed inflation at 3.4% in December. The more widely known CPI shows higher inflation than the Fed’s preferred measure partly because it puts greater weight on housing and rents, whose prices are higher than for many other goods and services.

During 2023, inflation fell steadily as global supply chains recovered from pandemic-era disruptions and more Americans came off the sidelines to take jobs, which helped slow wage growth. Slower-rising pay eases the pressure on businesses to raise prices to offset higher labour costs. According to the Fed’s preferred measure, inflation peaked at 7.1% in June 2022.

European Central Bank President Christine Lagarde pushed back Thursday against market expectations for quick interest rate cuts even as Europe’s economy sputters and financial markets froth in hopes of cheaper credit that would boost business activity and stock prices.

The bank left its benchmark rate unchanged at a record-high 4%, and Lagarde said afterward that “the consensus around the table … was that it was premature to discuss rate cuts.”

Financial markets have been expecting a cut as early as April, but Lagarde said bank officials would make decisions based on the latest figures about the economy’s health, rather than offering a longer-term timetable for rate moves. She did say she stood behind a comment she made last week about a “likely” cut this summer.

Inflation has declined markedly to 2.9% in December from a painful peak of 10.6% in October 2022 that made everything from groceries to energy more expensive. Lagarde acknowledged the drop — which is getting closer to the bank’s goal of 2% — and said inflation was expected to keep easing this year.

She cautioned, however, that disruption stemming from the Israel-Hamas war, including attacks on ships in the Red Sea by Yemen’s Houthi rebels, could disrupt that progress.

Risks for higher inflation “include the heightened geopolitical tensions, especially in the Middle East, which could push energy prices and freight costs higher in the near term and hamper global trade,” she said.

Though Europe’s economy has been shrinking and is particularly at risk from trade turmoil in the Red Sea, some analysts agreed that the time isn’t now to start making it easier for people to borrow money to buy houses or invest in businesses.

“The job of bringing inflation back to target is not done yet,” said Carsten Brzeski, global head of macro at ING bank who foresees a first cut only in June. “As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts.”

But with inflation falling considerably in major economies like Europe and the United States, financial markets are soaring in hopes of cheaper credit that would boost business activity and stock prices.

Stock investors saw their holdings, such as those in U.S. retirement accounts, spike in the last weeks of 2023 as the U.S. Federal Reserve and ECB indicated that a rapid series of rate hikes was ending.

Fed Chair Jerome Powell said officials discussed prospects for rate cuts at the bank’s December meeting, and the U.S. central bank has indicated it would cut its key interest rate three times this year.

The S&P 500, a broad measure of U.S. large company shares, has hit record highs this week, and European indexes also have risen. The global stock rally faces questions about whether gains can continue.

Rate cuts make riskier investments like stocks relatively more attractive compared to safer bets like money market accounts and certificates of deposit. They also stimulate business activity and thus prospects for share prices to go higher.

Like the ECB, Norway’s central bank kept rates steady Thursday. The same day, the central bank in Turkey, a country that is suffering from out-of-control inflation of nearly 65%, raised its key rate to 45%, expected to be the last increase for some time.

While rate hikes are a central bank’s chief weapon to snuff out inflation, they also can slow the economy — which has been seen in Europe and countries around the world, feeding expectations for cuts now that inflation has dropped closer to preferred levels.

The economy of the 20 European Union member countries that share the euro currency, where the ECB sets interest rates, shrank slightly in the July-to-September quarter of last year. Expectations are no better for the following months.

The economic squeeze follows a surge of inflation fueled by a supply chain crunch during the Covid-19 pandemic and then higher food and energy prices tied to Russia’s war in Ukraine. The worst of the energy costs and supply problems have eased, but inflation has spread through the economy as workers push for higher wages to keep up with the boost in prices they’re paying.

Analysts say there are good reasons for the ECB to move cautiously. For one, having to reverse course and raise rates if inflation doesn’t keep falling — or spikes again — would only prolong the pain from tighter credit.

Another is the speed of pay raises for Europe’s workers. ECB officials have indicated that they want to see figures for wage increases for the first months of this year before deciding where they think inflation is headed.

“We need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner,” Lagarde said.