Closing summary Time to wrap up… here are today’s main stories Germany is facing a winter recession after its economy shrank in the last quarter. New official data showed German GDP fell by 0.2% in the October-December period, worse than expected, as the energy crisis and higher interest rates hit growth. Analysts warned that Germany’s economic outlook is not too rosy, with ING’s Carsten Brzeski saying: Not falling off the cliff is one thing, staging a strong rebound, however, is a different matter. And there are very few signs pointing to a healthy recovery of the German economy any time soon. First of all, we shouldn’t forget that fiscal stimulus over the last three years stabilised but did not really boost the economy. Industrial production is still some 5% below what it was before Covid, and GDP only returned to its pre-pandemic level in the third quarter of 2022. Industrial orders have also weakened since the start of 2022, consumer confidence, despite some recent improvements, is still close to historic lows, and the loss of purchasing power will continue in 2023. Sweden’s economy also contracted in Q4, by 0.6%, while Belgium managed modest growth of 0.1%. We find out tomorrow how France, Portugal, Italy and the wider eurozone fared….. Investors are bracing for interest rates in major economies to hit their highest levels in around 15 years this week. The Bank of England and the European Central Bank are both expected to raise their key interest rates by half-a-percent, while the US Federal Reserve may restrict itself to a quarter-point hike on Wednesday. The European Union is to loosen state aid rules on tax credits for renewable energy projects, as it responds to America’s Inflation Reduction Act with its own subsidy support. European policymakers have been under pressure to respond to the US president Joe Biden’s $369bn (£298bn) IRA, which aims to encourage renewables investment in everything from electric cars to wind turbines. The European Commission plans to loosen state aid rules to enable investment into production facilities in green industries, according to draft plans. EU member states are divided over whether to introduce the new rules and how long for, according to the Financial Times, which first reported the plans. The president of the European Commission, Ursula von der Leyen, told the World Economic Forum in Davos this month that new law targeting the region’s green industries were being drafted, in a bid to make Europe the home of clean tech and innovation. Today’s worse-than-expected German growth figures come less than two weeks after chancellor Olaf Scholz said he was convinced Europe’s largest economy would not fall into a recession. Scholz told Bloomberg TV: “I’m absolutely convinced that this will not happen that we are going into a recession. “We showed that we are able to react to a very difficult situation.” Growth in Texas factory activity slowed in January, according to the Federal Reserve Bank of Dallas’ Texas monthly manufacturing index. Business executives reported that production slowed this month. This pulled down the Dallas Fed’s production index, a key measure of state manufacturing conditions, down from 9.1 to 0.2, a level suggesting output was flat. The survey also found that perceptions of broader business conditions continued to worsen in January, while the new orders index was negative for an eighth month in a row, which suggests a continued decrease in demand. But, factory bosses also reported stronger employment growth and longer workweeks. And there were signs that inflation eased, with price pressures “generally steady” and wage growth easing slightly in January. Timo Wollmershäuser of the Ifo Institute think-tank blames the cost of living crisis for pushing Germany into contraction. Wollmershäuser says (via the FT): “High rates of inflation have driven the German economy into a winter recession.” The EY Item Club, the forecasting group, predicts that the Bank of England will deliver better economic news on Thursday, as well as raising interest rates. They say: A significant fall in gas prices, lower market interest rate expectations and an economy less weak than expected should cause the Bank of England to dial back on the downbeat economic outlook of its last forecast when it presents new projections on Thursday. Stubborn core inflation and strong pay growth mean another 50 basis points rise in Bank Rate is likely. But the EY ITEM Club thinks this increase could prove the end of the current rate-rising cycle. There are good reasons for the Bank of England’s concerns about persistent underlying inflation to ease, they suggest: Core inflation is probably being held up by the past effect of high energy prices on businesses’ costs. Now that energy prices are falling, underlying inflation should also fall. And the EY ITEM Club expects pay growth to soften as price inflation falls, a weak economy weighs on demand for workers and labour supply is boosted by a reduction in inactivity. In the bond market, the Bank of England has sold £650m of long-dated UK government debt, or gilts, today. This is the first auction of bonds with a maturity of more than 20 years from the Bank’s main stockpile built up through its quantitative easing stimulus programme, Reuters points out. The sale was over-subscribed, with investors submitting bids worth £1.075bn – and the Bank choosing the best offers. Germany’s slide into recession has begun, fears Robin Brooks, chief economist at the Institute of International Finance, who points to recent weak export data: Wall Street opens lower ahead of Fed decision The New York stock market has opened, with the main indices in the red as investors brace for Wednesday’s Federal Reserve decision. The Dow Jones industrial average, which contains 30 large US companies, has dipped by 70 points or 0.2% to 33,907 points. The broader S&P 500 index has lost 0.6%, with the tech-focused Nasdaq dropping over 1%. Marios Hadjikyriacos, senior investment analyst at XM, says the markets have priced in a quarter-point rate hike from the Fed – but America’s top central banker, Jerome Powell, could hint at further rate rises to come. Hadjikyriacos explains: A massive week lies ahead for investors. Central bank decisions in the United States, Eurozone, and United Kingdom, earnings updates from several Wall Street tech giants, and a heavy dose of economic data releases that include the US employment report all have the capacity to inject volatility into global markets. All roads lead back to the Fed, which will announce its rate decision on Wednesday. Inflation finally seems to be cooling and leading indicators suggest economic growth is losing steam, but the US labor market remains historically tight and financial conditions have loosened, keeping the risk of a second inflation wave on the table and complicating matters for policymakers. Markets have fully priced in a 25 basis point rate increase, so the dollar’s reaction will depend mostly on Powell’s commentary. One way to balance these risks would be to accompany the smaller rate hike with strict language, reminding investors that the tightening cycle is not done yet and pushing back against market pricing for rate cuts later this year. Adani Group, which is fighting claims from a US short-seller alleging the ‘biggest con in corporate history’ has received a boost today from Abu Dhabi-based conglomerate International Holding Company (IHC). IHC has announced a $400m investment in Adani Enterprise’s fundraising through its subsidiary Green Transmission Investment Holding. This is IHC’s first investment of 2023, and its second investment in Adani Group. Last year it invested $2bn in three of its green-focused companies. Syed Basar Shueb, chief executive officer at IHC, says the group sees value in the Adani Enterprises Further Public Offering (FPO). “Our interest in Adani Group is driven by our confidence and belief in the fundamentals of Adani Enterprises Ltd; we see a strong potential for growth from a long-term perspective and added value to our shareholders.” Adani Group published a 413-page rebuttal of fraud allegations by Hindenburg Research today, likening the US investment firm’s report last week to an attack on India amid mounting financial pressure on the coal conglomerate. Ryanair is hiring significant numbers of Ukrainian pilots and cabin crew so that it will be ready to return to the country when the war with Russia ends. Chief executive Michael O’Leary revealed the move today, after the airline reported a jump in profits for the last quarter of 2022 (see opening post for details). “We are very committed to returning to Ukraine as soon as it is safe to do so,” said O’Leary (Reuters reports). O’Leary told analysts: “We are hiring quite a number of Ukraine pilots and cabin crew specifically so that we can ... restore bases in Ukraine if and when it is safe to do so.” The UK housing market could come under more pressure this week if, as expected, the Bank of England lifts UK base rate from 3.5% to 4% – the highest level since October 2008. This would be the BoE’s 10th interest rate rise in a row, since it started tightening policy in December 2021, adding to the pressure on homeowners. UK house prices have already fallen in recent months, according to Halifax and Nationwide. Berenberg bank predicts UK house prices will fall by around 10% peak to trough, back to their levels in mid-2021. Kallum Pickering, senior economist at Berenberg, points out that UK house price declines tend to have effects that extend beyond the housing sector, saying: During the previous two corrections – in the early 1990s and 2008/09 – falling house prices coincided with weakening consumer demand and disinflationary recessions. Will history repeat itself? We think the answer is yes. Although we doubt the situation will be anything like 2008/09, the early 1990s may provide a useful benchmark. The UK’s consumer-oriented economy is sensitive to large fluctuations in house prices. A fall in house prices lowers net worth, dampening confidence and the appetite to spend. The housing correction will contribute towards the UK’s outsized – albeit still mild – recession relative to continental Europe, Pickering predicts: We expect real GDP growth for the Eurozone to slow from 3.4% in 2022 to 0.3% in 2023 before a gain of 1.5% in 2024. For the UK, however, we expect real GDP to contract by 0.8% in 2023 after a gain of 4.1% in 2022– before snapping back with growth of 1.6% in 2024. More than 1.4 million UK households are due to renew their fixed-rate mortgages in 2023, the Office for National Statistics said earlier this month. Andrew Wishart, senior property economist at Capital Economics, says the shift away from floating-rate to fixed-rate mortgages presents risks as well as benefits. Wishart says: It will protect homeowners who are lucky enough to have a long time remaining on their fixed rate contract from higher mortgage payments. But that reduces the potency of monetary policy, raising the risk that interest rates have to be raised further or kept high for longer to compensate. Property website Zoopla reported this morning that house price growth was flat in the final quarter of last year.