Aurelia Butler

This article is an on-site version of our Trade Secrets newsletter. Premium subscribers can sign up here to get the newsletter delivered every Monday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersWelcome to Trade Secrets. Last week Olaf Scholz was in Beijing; this week Xi Jinping is in the EU, stress-testing EU unity and particularly the Franco-German relationship. Today I’ll make a couple of observations on that score and then Thursday’s Trade Secrets column will look in detail at Brussels’ apparent new get-tough regime towards Chinese companies in Europe. The rest of today’s newsletter is an author Q&A on the new book by former Australian trade negotiator and Trade Secrets favourite Dmitry Grozoubinski, a rare exception to the rule that nothing interesting on trade ever comes out of Geneva. Charted Waters is on China’s currency.Get in touch. Email me at [email protected] loves EU, yeah, yeah, yeah?The dynamics around Xi Jinping’s visit to the EU aren’t exactly difficult to make out. It’s clear from Olaf Scholz’s muted rhetoric during his trip to China last month that Germany’s dependence on the Chinese market still restrains Berlin from regarding China as a full-on economic competitor, let alone a strategic rival. Emmanuel Macron, whom Xi met yesterday, gives off a more combative air, and is trying to stop China from driving a wedge between France and Germany. The French president’s recent speech at the Sorbonne (here in translation) set out a strategy aiming to operationalise “strategic autonomy”, a concept the EU invented in 2020 and has been trying to define ever since, with much more interventionist trade and industrial policy to create European industries and actively to manage supply chains.But though Macron’s vision sounds cohesive, it will struggle not just with Germany’s continued reliance on the Chinese market but a lack of trust elsewhere in the EU. For one, Macron has a history of lurching back and forth on China. It’s not just his notorious comments on Taiwan after his trip to China last year but also a sudden last-minute switch to support the doomed Comprehensive Agreement on Investment deal with Beijing in 2020, reportedly because some trade and investment goodies were dangled in front of France to get it to shift.The immediate deliverable of yesterday’s Macron-Xi meeting was for China to hold off on retaliatory tariffs on cognac, another France-specific concession. (Meanwhile, Scholz’s trip to Beijing apparently won him some favours on German exports of beef, pork and apples: the Chinese approach to buying off trading partners’ discontent really isn’t subtle.)This feeds the old suspicion, fair or not, that France’s EU-wide solutions reflect its own interests. It’s less a strategic vision of the EU car industry that caused France privately to push for the investigation into subsidies for electric vehicle imports than French carmakers suffering more than their German counterparts from Chinese competition.One of France’s previous attempts to create a pan-EU industrial policy through a sovereignty fund essentially fizzled out, again partly because of a belief elsewhere in the EU that here was Paris wanting to bail out French companies again. Macron has identified pressing issues with an overarching analysis and proposed some solutions. But France unfortunately isn’t the best country to be pushing them, at least unless Macron can convince Scholz to embrace his vision as well. Lying trade lies and the lying pols who tell themDmitry Grozoubinski’s “Why Politicians Lie About Trade” comes out in May. If you want a two-word review, it’s great. It describes official myths and distortions, from overselling trade deals to claiming distance no longer matters in trade to saying corporations control the world by infiltrating the WTO. To give you a flavour of the tone, corporate lobbyists’ occasional visits to a WTO meeting have “the bemused and mildly horrified ‘what’s all this then?’ air of an English constable arriving on the scene of an out of control food fight at the local clown college”.AB You want the book to be “accessible hard work worth doing”. (Obviously a cynical play for the mass market.) Who most needs to know this stuff? Politicians themselves, journalists, businesses, voters?DG My publisher’s preferred answer would be “every man, woman and child on planet Earth”, but that’s probably a touch ambitious. I wrote this book for people who have policy issues they care about, whether it’s climate change, job creation, national security or anything else. Trade and the decisions governments make about it impact all of these.AB Brexit and Trump’s trade wars might be expensive ways to learn about trade, but have they oddly led to more appreciation of the issues?DG Absolutely. One of the reasons trade has historically been so easy to lie about is how separated causes and effects are. You sign a free trade agreement today and 10 years from now you can look back and (if you squint) make some guesses about what it actually did.Brexit and Trump’s trade wars, because they were about unpicking the existing order and potentially doing so very abruptly, forced all sorts of people to take these issues a lot more seriously and start asking far harder questions about what’s under the hood. There’s nothing like staring down the barrel of mile-long queues at the border and empty supermarket shelves to make everyone, from voters all the way up to prime ministers, ask a few follow-up questions.AB You had a very interesting observation about economists being brought in only at the end of trade talks to make up some figures to justify the deal.DG What I was trying to illustrate as gently as I could is that trade negotiations and trade policy are first and foremost about politics and power. In a fight between a policy the economic modelling says will have greater long-term GDP benefits, and a policy the political affairs folk say has the strong backing of a large and vocal interest group, my money is on the latter. Polish farmers aren’t being coddled on Ukrainian grain imports because some wonky IMF econometric analysis said so.AB I remember talking to Doug Irwin once who said that Nafta boosters said it would create half a million jobs and Nafta bashers said it would destroy half a million jobs. In fact jobs-wise it was probably a wash. How much is overstatement on both sides a problem?DG Overstatement is the greatest problem humanity has ever faced, or ever will. More seriously, yes I think it’s a problem that especially before the text is public, both supporters and detractors of a trade agreement can say literally anything about its impacts in an ultimately unfalsifiable way. A trade agreement could do just about anything. More practically though, I think the challenge is that we focus on tools like trade agreements when we should be having a discussion about the problems we’re trying to solve. A trade agreement isn’t a goal in and of itself, any more than “surgery” is an objective.AB I literally can’t think of a question to ask you about the WTO. Is that OK?DG Probably not a great sign for the organisation, but absolutely fine by me!AB If you had to advise governments to make a positive but honest case for more trade that they’re currently not making, what would you say?DG I would say that tariffs are taxes on your own citizens for being insufficiently patriotic in their purchasing choices, and that feels like there should be a high bar to clear before we reach for them as a policy tool.I would say that climate change requires us to pool the ingenuity, creativity and productivity of the entire world and we can’t afford to caveat our climate ambitions on all solar panels and electric vehicles being made exclusively in our swing electoral districts.And I would say that people are smarter than the current level of discourse and can be trusted to understand trade-offs if they’re clearly and honestly explained.Charted watersChina doesn’t want a sharp destabilising devaluation of the renminbi, as George Magnus argues here, even if in theory it would help its renewed export drive. But downward pressure on the currency from falling interest rates and capital outflows suggests that at some point it might not have much choice.Trade linksThe OECD, WTO and IMF are all predicting a sharp rebound in global goods trade this year driven by strong US economic growth and falling inflation.My FT colleagues consider the controversial plans among some of the rich democracies to seize Russia’s frozen assets.A report from the Center for Strategic and International Studies think-tank looks at new tools the US can use to combat Chinese coercion.The Economist examines how China and the US are trying to recruit countries as allies in their tussle with each other. The EU agriculture commissioner has asked China not to target agriculture in trade disputes, one of the more quixotic requests to come out of Brussels in recent years and one that essentially confirms where Europe’s economic weak spot is.Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youBritain after Brexit — Keep up to date with the latest developments as the UK economy adjusts to life outside the EU. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersIt is divergence time. The European Central Bank is expected to start cutting interest rates in less than a month, while the Federal Reserve is on hold for some time.Even though Fed chair Jay Powell was not as hawkish as markets feared, the transatlantic gap in rates is likely to grow. When asked about divergence in his press conference last week, Powell said the obvious.“We all serve domestic mandates, right?” he said. Inflation performance was similar, he added, but Europe is “just not having the kind of growth we’re having”. Many in Europe disagree about the similarity of the inflation trends, but senior officials at the ECB agree on the important issue. Interest rates are about to diverge. As president Christine Lagarde said last month, “we are data dependent, we are not Fed dependent”.Within the Eurozone, however, there is some tension over the looming transatlantic divergence. Let’s call it a trans-Adriatic divide. Boris Vujčić, governor of the Croatian National Bank, said that the ECB could move first and would look at domestic data, but he warned, “the longer a possible gap between us and the Fed widens, the more impact it is likely to have”. The implication was that there were limits to the possible divergence. His Italian counterpart, Fabio Panetta, however, sees things differently. Higher Fed rates for longer would tighten global financial conditions, he said, strengthening the case for Eurozone rate cuts. “If markets expect interest rates to drop but the Fed keeps them unchanged . . . the rest of the world faces an unexpected monetary tightening.”Who is right?Transatlantic interest rate divergenceSince the advent of the euro, global interest rates have tended to move broadly in sync. The big moves in interest rates, such as the cuts in the early 2000s, during the financial crisis in 2008 and the increases after the Covid pandemic, have been global.But, as the chart below shows, there were two principal periods of difference. The US was much faster to raise interest rates from 2004 and from 2016. In each case, US economic activity was stronger and appeared to be generating more inflationary pressure.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Although there were global economic crises following both of these periods, I am just going to assert that the interest rate differentials were not the cause. Email me if you disagree. What is the potential problem with divergence? As Powell stated above, the US sees no problem in divergence. It sets its interest rate according to its domestic inflation and employment mandate and allows the US dollar to float freely. This has often been a particular problem for emerging markets, where US interest rates can create massive capital flows and currency movements, leaving their central banks following the Fed and setting monetary policy inappropriate for their domestic economies. It can be tough. But the Eurozone (and to a lesser extent, the UK) is different. It is a large economy and it can clearly set its own monetary policy if it so desires. The empirical question is therefore threefold. First, do financial conditions diverge on either side of the Atlantic? Second, do interest rate differentials have a significant effect on the value of the euro? And third, what is the effect of the euro’s value on domestic demand and inflation? Do we see financial conditions diverging?The short answer is yes. The chart below shows the market expectations of interest rates for the end of 2024 in Europe and the US. A year ago, markets expected both the ECB and the Fed’s interest rates to be a little above 2.75 per cent by December 2024. While the expectations for the Eurozone have drifted higher to about 3.25 per cent, those for the Fed have shot up to about 5 per cent. The expected interest rate differential in December 2024 has jumped from 0.1 percentage points a year ago to 1.8 percentage points now. The same analysis for the Bank of England is different. A year ago, the UK was thought to be an inflation basket case and interest rates were expected to stay higher than those in the US. But since the autumn, market interest rate expectations for the BoE and Fed have converged and ever since have moved in lockstep. The pattern is the same for the end of 2025.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.These market movements suggest that the Eurozone’s financial conditions are not set by the Fed. The same cannot be said with so much confidence for the UK, where movements in expected Fed rates have translated to UK expected interest rates almost regardless of Britain’s economic circumstances of late. Do differential interest rate expectations move exchange rates?Again, there is a short answer: not very much. In the last chart we saw divergence in expectations for Fed and ECB interest rates with convergence in UK US rates. Alongside these significant changes, neither the spot exchange rates, nor future exchange rates, showed large swings. The chart shows little correlation between movements of expected interest rate differentials for the end of 2024 and 2025 and expected movements in currency valuations. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Once again, this demonstrates that predicting currency movements (especially from expected interest rate changes) is a mug’s game. Yes — the future value of the euro is down a bit when the interest rate differential rose, but this is not a currency shift that should stop Lagarde sleeping soundly. What is the effect of currency movements on inflation?Financial markets are not expecting large transatlantic currency movements, but these things can just happen. Knowing the size of effect is an important thing to have in the back of your mind. The ECB has done quite a lot of work on this and the broad answer is “small”. The scale of the exchange rate impact on inflation and GDP has weakened since 1999, according to the ECB research, but the exact size depends on the cause of the exchange rate movement. The last point is important. To get a visual representation of the small scale of effects, the ECB published the chart below. It shows that exchange rate movements (inverted and on the left axis) had a material but much smaller effect on import prices and producer prices, but barely any effect on core goods inflation. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Of course, the eagle-eyed will notice this chart was produced before the pandemic and recent inflation. An updated version below does not destroy the result, even if the scales need to be changed a lot. Exchange rates do not have big effects, but huge global supply chain shocks do. This chart below also shows that energy price shocks can bleed into core producer and consumer prices. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The upshot for the ECBThe world is uncertain, but the ECB should not be frightened by the prospect of reducing interest rates ahead of the Fed. The evidence from market pricing of interest rates and exchange rates is that divergence will be orderly. Financial markets are expecting it because inflation is less of a concern in the eurozone and growth has been weaker. This applies even after the slightly better-than-feared first quarter Eurozone GDP figures. The ECB can go it alone with rate cuts, while monitoring the data and financial markets to respond to events. . . . and for the BoE If it was brave, the BoE would cut rates even earlier than the ECB. That means on Thursday this week. There is more evidence the UK’s financial conditions are being set in Washington rather than London, and this is inappropriate for a European economy with feeble economic activity and falling inflationary pressure. The latest inflation data was not great, so we can probably expect the BoE to hold rates on Thursday, while perhaps signalling a June cut. But there are two possible reasons why the bank might act. First, governor Andrew Bailey and his colleagues loved talking about how they raised interest rates ahead of the ECB and Fed in late 2021. They might want an encore. Second, the sharp move up in expected BoE interest rates since January will make a mess of the bank’s forecasts and add to its difficulties in communication. Expect lower inflation in the headline predictions. This might prompt action. What I’ve been reading and watchingMohamed El-Erian welcomes the softer than feared inflation rhetoric from Powell. He predicts that US inflation will remain close to 3 per cent in this opinion piece and suggests that is a good outcome after last week’s FOMC meetingLord King will have made himself unpopular again at the BoE after the former governor slammed recent UK and US monetary policy for ignoring movements in monetary aggregates Head of the Bank for International Settlements, Agustín Carstens, tells Rob Armstrong that central banks are doing well in a bumpy final mile fighting inflationIn the UK, politicians on the Treasury committee are beginning to get concerned by “the staggering scale of unanticipated income high street banks are bringing in, with no work required, as a result of increased interest rates”. This is no surpriseA chart that mattersFinancial market expectations of interest rates can sometimes be difficult to show graphically. I devised this chart for the US, showing the number of rate cuts expected in 2024 and 2025. There has not been much change of view for next year, but a massive change of view this year. As a graphical tool, do you like it?You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK construction activity beat expectations in April, growing at its fastest pace for more than a year as a brighter economic outlook boosted commercial and civil engineering sectors, according to a closely watched survey.The S&P Global UK Construction Purchasing Managers’ Index rose to 53 in April, up from 50.2 in March and the highest reading since February 2023, data released on Tuesday showed.The figure surpassed the 50.2 forecast by economists polled by Reuters and stood above the 50 mark, which indicates rising output. Tim Moore, economics director at S&P Global Market Intelligence, said demand in the construction sector “was boosted by greater confidence regarding the broader UK economic outlook” and hopes of interest rate cuts in the second half of the year.The figures come ahead of official data this week that is expected to show the UK economy is bouncing back after entering a technical recession in the second half of 2023. Economists polled by Reuters expect GDP data released on Friday to show that output in the first quarter of 2024 increased by 0.4 per cent compared with the previous three months. Meanwhile, markets are pricing in an interest rate cut by the Bank of England later this year. But the Monetary Policy Committee is expected to hold interest rates at 5.25 per cent when it meets on Thursday.Commercial activity outperformed other areas of the construction sector in April, with civil engineering providing a solid contribution to overall growth as the residential building sector continued to slow.The PMI survey showed that commercial building activity reported the first reading above 50, indicating expansion, since August 2023. It was the fastest-growing area of the construction sector in April with an index of 53.9, up from 49.9 in the previous month. Surveyed builders said they had seen workloads rise and a turnaround in customer demand, in part driven by refurbishment projects. Civil engineering activity further expanded in April and at the strongest pace for nine months, with an index of 53.6, up from 50.4 in the previous month. But housebuilding activity registered a setback with the lowest reading since January, as construction companies noted sluggish market conditions and the impact of elevated borrowing costs. The reading “suggests that the tick up in mortgage rates since the start of the year is weighing on demand for new homes”, said Matthew Pointon, senior property economist at Capital Economics. Separate data published by the lender Halifax on Tuesday showed that house prices stagnated in April after contracting in March, reflecting volatility in the mortgage market. Optimism for the year-ahead business outlook across the construction sector edged up in April, with nearly half of the PMI survey panel anticipating a rise in output during the next 12 months. More

An IMF mission is likely to visit Pakistan within the next 10 days to discuss a new bailout programme, Finance Minister Muhammad Aurangzeb told a news conference. Pakistan last month completed a short-term $3 billion programme, which helped stave off sovereign default, but the government of Prime Minister Shehbaz Sharif has stressed the need for a new longer-term programme.”Steps must be taken to bring pension costs under control,” the finance minister said, adding that pension payments were a “big liability”. The retirement age in Pakistan is 60. “Age is now just a number,” Aurangzeb added. “Sixty is the new 40.” Law minister Azam Nazeer Tarar said a committee has been formed to propose pension reform recommendations.The finance minister stressed the need to reduce non development expenditure. The unfunded liability nature of the pensions and the growth in pension expenditure is increasingly a challenge for the government as it prepares its budget.Pakistan budgeted 801 billion rupees for ($2.88 billion) superannuation allowances and pensions for the fiscal year 2023-24 as a current expenditure, up 31% from the 609 billion rupees ($2.19 billion) budgeted for the last fiscal year. Pakistan’s financial year runs from July to June and its budget for fiscal year 2025, the first for Sharif’s new government, must be presented before June 30.”A mission is expected to visit Pakistan in May to discuss the FY25 budget, policies, and reforms under a potential new programme for the welfare of all Pakistanis,” the IMF said on Sunday. The IMF and finance minister did not specify the dates of the visit, nor the size or duration of the programme. The finance minister added that Islamabad will also hold talks with the IMF over climate finance. ($1 = 277.9500 Pakistani rupees) More

SYDNEY (Reuters) -Australia’s central bank chief said on Tuesday interest rates were at the right level after holding steady for a sixth month, but cautioned that inflation risks were on the upside in a sign policy was unlikely to be eased anytime soon.Wrapping up its two-day May policy meeting, the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35%.However, it stopped short of reinstating a tightening bias that some economists had tipped after first quarter inflation and the labour market failed to cool as much as expected.In unusually forthcoming remarks, RBA Governor Michele Bullock said she hoped the economy would not have to “stomach” higher interest rates, but the board was prepared to act if service sector inflation stayed stubbornly high.The dovish comments jarred financial markets, which had been wagering on a real chance of another hike in rates following a disappointingly high inflation reading in the first quarter.The Australian dollar fell 0.5% to $0.6587, while three-year bond futures rallied 8 ticks to 96.06. Markets slashed bets of another hike this year to imply a probability of just 13% for September, compared to 43% early in the day.Bullock said the board did discuss raising interest rates at the meeting, but judged that monetary policy was already restrictive enough to bring inflation back to the bank’s target band of 2-3% by late 2025.”Right now we believe that rates are at the right level to achieve this, but there are risks and at this stage, the board is not ruling anything in or out,” she said.The board also appeared to have looked past hawkish forecasts from the bank’s economists that showed inflation is expected to pick up to 3.8% and stay there until the end of the year, from 3.6% in the first quarter, even assuming no rate cuts until mid 2025.Inflation slowed less than expected in the first quarter, underlining a home grown inflation challenge, while recent labour market data confirmed only a gradual loosening, with the jobless rate at 3.8% in March.”The combination of the less hawkish than expected language in the post‑meeting statement and the larger than expected upward revisions to the RBA’s inflation forecasts over the next few quarters implies the hurdle to another hike could be higher than markets have been expecting,” said Adam Boyton, head of Australian economics at ANZ. “We continue to favour November for the start of the easing cycle, although the risks remain skewed toward that being delayed into 2025 and being shallower than we are forecasting.”Globally, other central banks are also struggling in their last mile attempts to get inflation back to target, complicating the outlook for eventual rate cuts.The Federal Reserve is now expected to cut less than twice in 2024, a change from about six reductions priced in at the beginning of the year.The Australian government delivers its annual budget statement next week and is under intense pressure to curb spending in the fight against inflation. More