Investing.com — Germany faces difficulty funding increased defense spending to meet NATO’s 2% of GDP target, with some advocating for even higher spending (up to 4% of GDP), as per analysts at Commerzbank (ETR:CBKG). 

While historically common (1960s) and adopted by some nations (e.g., Poland), Germany’s current economic situation presents obstacles.

Germany’s sluggish economic growth is a key obstacle. The country is projected to grow at an average rate of just 0.5% annually in the coming years, far below the levels required to accommodate a substantial increase in defense expenditure without impacting other sectors. 

Historically, faster economic growth allowed Germany and other nations to manage high defense spending more effectively, as rising GDP inherently increases government revenue. 

Without accelerating economic growth, Germany would need two decades to gradually increase defense spending to 4% of GDP, a timeline that is politically and strategically impractical, Commerzbank added.

Reducing spending in other areas of the federal budget offers a partial solution, but the scope for such savings is limited. 

To close the gap through budgetary cuts alone, Germany would need to reduce federal civilian spending by nearly 20% over four years. 

Potential savings from social spending cuts and government efficiency improvements would be insufficient to fully fund increased defense spending. 

While reallocating funds from climate initiatives, such as through more efficient carbon pricing, could generate savings, this would likely face significant political opposition.

Financing the defense increase through debt is another option, but it raises legal and economic concerns. Such an approach would nearly double Germany’s budget deficit from 2% to 4% of GDP, violating European debt rules and the constitutional debt brake. 

The current reliance on shadow funds to finance core state tasks like defense is unsustainable in the long term, emphasizing the need for these expenditures to be integrated into the regular budget.

Germany’s rising risk premiums on government bonds further complicate debt-based financing. As noted by Commerzbank, weak economic growth has already led to noticeable increases in financing costs for government bonds. 

To ensure sustainable debt levels, structural reforms are crucial to boost economic growth and tax revenue. 

Increasing productivity and investing in growth sectors can reduce the burden on public finances and improve the country’s ability to fund higher defense spending.

(Reuters) – Ratings agency Moody’s (NYSE:MCO) on Friday raised Argentina’s long-term foreign currency sovereign credit rating to “Caa3” from “Ca”, citing the government’s forceful policy shift that has helped address economic challenges and stabilize external finances.

Argentina achieved a record $18.9 billion trade surplus in 2024, according to official data released on Monday, which largely coincided with libertarian President Javier Milei’s first full year in office, reflecting the impact of his economic policies.

Milei’s administration inherited spiraling inflation, depleted international reserves, and extensive economic imbalances that led to a very high probability of a credit event, according to Moody’s.

“Decisive fiscal adjustment, alongside measures to halt monetary financing were put in place and have proven effective in addressing imbalances,” it said.

Argentina’s financial markets have been buoyant due to Milei’s tough “zero deficit” policies, cooling inflation and the government’s commitment to meet its debt obligations.

Moody’s upgraded Argentina’s credit rating for the first time in five years, following a downgrade in 2020 as disrupted debt restructuring talks amid the global pandemic increased the country’s risk of slipping into default.

Argentina’s outlook has also been revised to “positive” from “stable” on Friday, as the government continues to make progress on its macroeconomic stabilization program.

(Reuters) – Global ratings agency Moody’s (NYSE:MCO) revised Kenya’s outlook to “positive” from “negative” on Friday, citing a potential ease in liquidity risks and improving debt affordability over time.

The East-African country has been struggling with heavy debt and looking for new financing lines since last year due to nationwide protests against proposed tax increases.

Domestic financing costs have started to decline amid a monetary easing cycle and this could continue if the Kenyan government effectively manages its fiscal consolidation, opening doors for external funding options, the report said.

“Given low inflation and a stable exchange rate, there is potential for further reductions in domestic borrowing costs as past monetary policy rate cuts pass through to lower long-term borrowing costs,” Moody’s said.

The agency added that a new International Monetary Fund program would enhance Kenya’s external financing while other multilateral creditors such as the World Bank will continue to be significant financing sources, even without the IMF funding.

The agency affirmed Kenya’s local and foreign-currency long-term issuer ratings at “Caa1”, citing still elevated credit risks driven by very weak debt affordability and high gross financing needs relative to funding options.

Investing.com — Surging equity markets look set to persist, supported by solid U.S.-led economic growth, but this growth is likely to come at the cost of higher inflation, with risks skewed to the upside in the U.S. as President Trump pursues his plan for higher trade tariffs.

In the absence of clarity on U.S. trade policy, “risk-on should persist,” strategists at MRB Partners said in a Friday note, underpinned by solid U.S. economic growth and gradually strengthen in the rest of the world. But the downside of this economic outlook is that “it will put a floor under DM [developed market] inflation (and bond yields), with the risks tilted to the upside in the U.S.,” they added.

While Trump’s recent remarks have many breathing a sigh of relief as the president didn’t come out swinging on day one in office, “President Trump made clear during his campaign that tariffs were coming, and he has spent his first week issuing a number of statements about upcoming tariffs and other trade restrictions (and taxes, etc.),” the strategist said. 

Despite MRB Partner’s base-case scenario that U.S. tariffs will be applied “selectively and moderately,” trade restrictions are likely to lead to higher inflation just as they did during the first Trump administration.

While the economic picture for the U.S. in the 2025 is far more comforting than that of 2017 –when Trump first took office and the U.S. was still struggling with a negative output gap, which was deflationary– the inflationary backdrop is more acute increasing the risk the spillover from higher tariffs to inflation will be greater this time.   

“The U.S. economy is more inflationary and wage pressures much greater than in the late-2010s, so the spillover into other areas of the CPI basket will be greater this time,” MRB said. 

The big worry, according to the strategists, is that U.S. and global financial markets are “not priced for such an outcome, and not by a long shot.”

“U.S. asset prices and the dollar are both discounting a good economic outcome, yet such growth is somehow not expected to cause higher inflation,” they said. Should this outcome become a reality and Treasury yields break to the upside, then investors will need to de-risk, they added.

Investing.com — A strong dollar has often been described as a “wrecking ball” for the global economy, driving up the cost of worldwide trade, tightening financial conditions, and inflation for countries, particularly those in emerging markets, but while king dollar is expected to continue its surging run, Capital Economics believes worries about the impact of the “wrecking ball” impact are overblown. 

“The upshot is that while an appreciating dollar is a headwind for the world economy in the short run, it is usually not as harmful as often suggested,” economists at Capital Economics said in a recent note. 

The U.S. dollar has appreciated by 7% in trade-weighted terms compared to a year ago, reaching a fresh record high. In real terms, the dollar is the strongest since the Plaza Accord in 1985.

As most traded goods are priced in dominant currencies, chiefly the U.S. dollar, as the greenback strengthens, trade becomes more expensive globally.

While a “strong dollar poses a headwind to trade through this ‘invoice channel’, the share of trade that is negatively affected tends to be overstated,” the economists added.

Services trade, which accounts for a fifth of overall world trade, is much less affected by dollar strength. While falls in commodity prices, can mitigate increases in import prices, potentially dampening inflationary impacts.

Financial conditions tightening from dollar strength, meanwhile, pose a smaller threat to emerging markets than in the past, the economists said, with currency risks at their lowest levels in decades.

(Corrects headline, paragraphs 1, 2 and 6 to say 12 months through November not “12 months to November”, corrects paragraph 6 to add ended Oct/ 30 not “ended October”)

By Lucy Craymer

WELLINGTON (Reuters) -People leaving New Zealand hit record levels in the 12 months through November 2024, in another sign of the weakness in the country’s economy that moved to a technical recession in the third quarter.

Data released by Statistics New Zealand on Thursday showed that 127,800 people left the Pacific nation in the 12 months through November, up 28% on the prior 12-month period. This was provisionally the highest number of people leaving in an annual period ever, according to the statistics bureau.

Of those leaving, more than 50% were New Zealand citizens, according to the data.

New Zealand, which has a population of just 5.3 million, has seen its economy struggle over the last couple of years as the central bank increased the official cash rate to dampen historically high inflation.

Michael Gordon, senior economist at Westpac, said that a lot of people come to New Zealand for work opportunities and when these dry up people leave.

“It’s about work opportunities, especially here (New Zealand) versus Australia. Australia’s economy is still running reasonably strongly,” Gordon said. “There are more opportunities over there now so we are seeing quite high outflows of Kiwis.”

However, people leaving does continue to be offset by inward migration.

Statistics New Zealand said net migration – the number of people moving to New Zealand permanently minus those leaving New Zealand – was at 30,600 in the 12 months through November 2024. Net migration peaked in the 12 months ended Oct. 30, 2023 at 135,700.

Gordon added that net migration was now back at historic averages and that over the longer term net migration would support the country’s economy.

“It’s something to keep in mind, that for a big chunk of the world, New Zealand is an attractive place to live, but also for us (New Zealanders) there are also places that look more attractive like Australia, or going to the U.S. or the UK,” Gordon said.

By Alexander Smith and Elisa Martinuzzi

DAVOS, Switzerland (Reuters) – British industry and energy minister Sarah Jones said that meetings in Davos this week with CEOs considering where to make their next investment had been positive as the government took its growth mantra to the Swiss mountains.

“People are enthusiastic with the message that they’re getting from the government … what people want to see is evidence that we mean it,” Jones told Reuters on the sidelines of the World Economic Forum annual meeting.

Official data has shown Britain’s economy stagnated in the three months to September and the Bank of England has forecast that it flatlined again in the last three months of 2024, adding to pressure on the government, which faced a recent steep rise in borrowing costs as a result of a wider bond market wobble.

“Of course businesses are interested in what’s happening with interest rates, what’s happening with taxation, all of these things,” Jones said, speaking on Thursday. “Regulation … just knowing what the rules of the game are, and understanding who to talk to as well, and how to navigate your way through investing in the UK.”

Although Britain’s high-profile mission to Davos to rally support for its economic plans gave investors and financiers some encouragement, several told Reuters they needed to see the government deliver on growth rather than just talk about it.

Senior bankers and executives, who spoke on condition of anonymity, said there was a worried mood in the business community and one way to make investment in Britain more attractive was by making it more appealing to entrepreneurs.

One Davos attendee told Reuters that a change announced on Thursday to the rules around how wealthy, often foreign residents, pay tax on overseas income was “a small step in the right direction”.

Concerns over Britain’s debt levels have shown up in the bond markets, adding to its borrowing costs at the start of the year before they eased more recently.

Official data this week showed Britain ran a bigger-than-expected budget deficit in December, swelled by debt interest costs and a one-off purchase of military homes.

“In the end, to make debt sustainable you’ve got to grow the economy,” finance minister Rachel Reeves told Reuters on Thursday. “We are taking out those barriers that have stopped businesses investing and growing in Britain,” Reeves said, adding: “I’m confident we can get those growth numbers up.”

The worry for businesses is that Reeves may have little choice but to make more spending cuts to keep her fiscal pledges, piling more pressure on the economy, one executive said.

By Helen Reid and James Davey

LONDON (Reuters) -Online fast-fashion retailer Shein requires its contract manufacturers to only source cotton from approved regions, which do not include China, for products it sells in the United States, its biggest market, the company said on Friday.

Approved cotton sources include Australia, Brazil, India, the United States and, “in limited cases”, certain countries in Europe, Middle East and Africa, and Southeast Asia, Shein’s general counsel for Europe, Middle East and Africa Yinan Zhu said in written evidence to a British parliamentary committee chair.

Zhu said that requirement is for Shein’s compliance with the Uyghur Forced Labor Prevention Act, legislation intended to ban products made by forced labour in China from entering the United States.

Shein has faced allegations that its products contain cotton from China’s Xinjiang province, where the U.S. and NGOs have accused the Chinese government of forced labour and human rights abuses targeting Uyghur people. Beijing denies any abuses.

Shein, which sells in 150 markets worldwide, said its supplier code of conduct prohibiting forced labour applies regardless of the country its products are sold in.

But it did not specify whether its restrictions on cotton sources applied to products sold in other markets, such as the UK, where it is planning a London initial public offering.

“We do not prohibit the use of Chinese cotton in our products specifically where such use would not contravene the laws and regulations of the jurisdictions in which we operate,” Zhu wrote.

That did not satisfy Labour lawmaker Liam Byrne, the chair of the cross party Business and Trade committee which is conducting an inquiry into the new government’s Employment Rights Bill.

He said he has written back to Shein for clarity on whether Xinjiang cotton is used in goods sold in the UK.

“I just want to know the truth and I think British consumers want to know the truth and if that (IPO) moment ever comes I can tell you British investors are going to want to know that truth,” he told Reuters in an interview.

He said the committee reserved the right to recall a Shein representative for a further oral hearing.

Shein, like many other apparel retailers, uses isotopic testing firm Oritain to verify the origin of cotton in its products and check for cotton from unapproved sources.

Testing during 2024 found 1.3% of Shein’s cotton was from unapproved regions, Zhu wrote, without specifying which regions.

Zhu represented Shein at a parliamentary hearing on Jan. 7 but declined to answer lawmakers’ repeated questions about Shein’s use of cotton from China, prompting criticism from Byrne who then raised concerns with the Financial Conduct Authority, which is in charge of approving Shein’s IPO, and the London Stock Exchange (LON:LSEG).

In a reply to Byrne published on Friday, the CEO of the London Stock Exchange said she cannot comment on specific companies, but said the scrutiny on companies wanting to access UK public markets brings a higher level of discipline and transparency than if those companies remained privately owned.

In a separate letter, FCA Chief Executive Nikhil Rathi said the regulator aims to ensure any IPO prospectus makes all required disclosures for potential investors to understand the legal risks, and its review process also involves background checks on the company, its senior managers and board members. Rathi did not specifically mention Shein.

Byrne was unhappy with both responses and has written back, seeking more information.

“What we want to know is whether you ask firms to prove that there are safeguards against the use of forced labour and we want to know whether you ask firms whether they’re using goods or products from Xinjiang in their supply chains,” he said.

Byrne wants the government’s employment legislation to incorporate greater safeguards against forced labour.

This would ensure that “if and when the day comes that Shein seeks to float on the LSE we have the right safeguards around forced labour in place on the statute book,” he said.

By Jody Godoy

(Reuters) – U.S. Federal Trade Commission Chair Andrew Ferguson gained broad authority to purge diversity, equity and inclusion (DEI) policies at the agency after Democrats, who still have the majority on the commission, stood down.

Ferguson, who has criticized social media companies for left-leaning content moderation policies, asked the commission on Thursday to grant him authority to strip all mention of DEI from FTC documents after President Donald Trump’s executive order banning such programs in the federal government.

The first vote under Ferguson’s leadership on Thursday ratcheted up tension between Republicans and Democrats at the five-member agency, and surfaced a larger disagreement over the agency’s independent status.

Democratic Commissioner Alvaro Bedoya cast the lone vote against the proposal, criticizing Ferguson for rushing the vote and for focusing on DEI instead of the high cost of living.

Conservatives including Ferguson have said the president should be able to remove officials who do not align with his agenda.

Under 90-year-old U.S. Supreme Court precedent, FTC commissioners and members of many other bipartisan independent agencies are only fireable for cause — unlike executive branch agencies whose heads the president can fire at will.

Ferguson said Bedoya acted out of disagreement with Trump over DEI.

“I do not think an officer of the United States can refuse to comply with the President’s lawful orders on the basis of such an objection,” Ferguson said in a statement on the vote Thursday night.

Democrat Lina Khan, whom Trump replaced as the agency’s chair but who remains a commissioner, and fellow Democratic Commissioner Rebecca Slaughter declined to participate in the vote. Slaughter said in a statement that she believed Ferguson already had the authority to carry out Trump’s mandate.

“As Senate-confirmed Commissioners of an independent agency, my colleagues and I swear an oath to uphold the laws and the Constitution of the United States of America, not to serve any individual or ideology,” Slaughter said.

By Humeyra Pamuk

WASHINGTON (Reuters) – U.S. President Donald Trump’s 90-day foreign aid pause applies to new and existing assistance, according to a State Department memo seen by Reuters on Friday, which also states that waivers have been issued for military financing for Israel and Egypt.

Just hours after taking office on Monday, Trump ordered the pause in foreign development assistance pending assessments of efficiencies and consistency with his foreign policy.

But the scope of the order was not immediately known and it was unclear what funding could be cut given that the U.S. Congress sets the federal U.S. government budget.

The State Department memo, signed by the new Secretary of State Marco Rubio and dated Friday, said effective immediately, senior officials “shall ensure that, to the maximum extent permitted by law, no new obligations shall be made for foreign assistance” until Rubio has made a decision after a review.

It says that for existing foreign assistance awards stop-work orders shall be issued immediately until reviewed by Rubio.

Across the board, “decisions whether to continue, modify, or terminate programs will be made” by Rubio following a review over the next 85 days. Until then Rubio can approve waivers.

The State Department memo said waivers have so far been approved by Rubio for “foreign military financing for Israel and Egypt and administrative expenses, including salaries, necessary to administer foreign military financing.”

Rubio has also issued a waiver for emergency food assistance. This comes amid a surge of humanitarian aid into the Gaza Strip after a ceasefire between Israel and Palestinian militants Hamas began on Sunday and several other hunger crises around the world, including Sudan.