The latest data from Germany indicates that their economy contracted 0.3% during the first quarter of 2023. Given that this follows a contraction of 0.5% seen over Q4 2022, Europe’s largest economy is now in a technical recession.
As alluded to above, German car production has been under pressure with the number of cars produced falling from 434, 962 units in March to 321,000 Units in April. This comes as the tides turn in car production around the world, with China recently overtaking Japan as the world’s top car exporter. (And just last year, China overtook Germany as the world’s second largest car exporter). Last week, official figures from Beijing indicated that China exported 1.07 million vehicles over the course of Q1, a gargantuan 58% increase from Q1 2022. Much of this rise in production is thought to have come from a rise in demand for electric cars going to Russia, a country whose car industry has been hit by Western sanctions. As Reuters notes: “Several Russian auto makers suspended production for periods of last year as the industry struggled to source parts and establish new supply chains following the imposition of the sanctions over Moscow’s military actions in Ukraine.”
China has seen the demand for new EV’s rise significantly as the world’s second largest economy tries to decarbonise areas of its economy. Demand for these cars abroad has also lifted production, and Tesla have been amongst some of the big names to invest in China, having built a manufacturing plant in Shanghai which exports cars to places such as Europe and Japan.
Debt Ceiling Concerns Raised
With the world’s largest economy being just days away from the prospect of X-date, tensions on Capitol Hill are growing. As looked at earlier this week, X-date the date which denotes the date at which the US will have breached their debt ceiling and given outstanding obligations, would be in technical default. While President Joe Biden and House Speaker, Kevin McCarthy have held “productive” discussions given that no agreement has been reached, analysts are raising their expectations of X-date being realised. For example, Michael Feroli, JPMorgan’s chief US economist said that “we still think the most likely outcome is a deal signed into law before the X-date, though we see the odds of passing that date without an increase in the ceiling at around 25% and rising”. With such concerns rising, Fitch Ratings have warned that the US’ AAA rating is under threat due heightened uncertainty over a deal being reached.
With money markets currently pricing in around a 30% change of the Fed raising rates by a further 25bps, the release of the FOMC’s minutes has illuminated the split amongst policy makers. For example, various FOMC committee members evidently favour a June pause with the minutes stating that “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary”. Meanwhile, the minutes also indicated that “many participants focused on the need to retain optionality after this meeting” and thus their view on whether to raise rates or pause will be driven by recent data. As such, all eyes are on the Fed’s interest rate decision on 14 June and whether they will pause or raise their hiking cycle, where the base interest rate stands at 5.25%.
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