Aurelia Butler

This article is an onsite version of our Disrupted Times newsletter. Subscribers can sign up here to get the newsletter delivered three times a week. Explore all of our newsletters hereToday’s top storiesThe Bank of England needs to revamp its economic model to avoid repeating its failure to forecast surging inflation, according to a review by former Federal Reserve chair Ben Bernanke.The US proposed raising tens of billions of euros in debt to fund Ukraine using profits generated by frozen Russian state assets.The dollar notched up its strongest weekly performance since 2022 after hot US inflation figures caused ripples through world markets and led traders to reverse bets on early interest rate cuts by the Federal Reserve.For up-to-the-minute news updates, visit our live blogGood evening.UK Prime Minister Rishi Sunak received a much needed dose of positive economic news this morning as fresh data raised hopes that the country was emerging from recession.Gross domestic product rose 0.1 per cent in February, down from January’s revised 0.3 per cent but in line with expectations, thanks to improved production in sectors such as carmaking and food. The news helped push the benchmark FTSE 100 index towards a record high.The data points to a likely expansion of the UK economy in the first quarter. That would mark the end of the technical recession the UK slipped into at the end of 2023, defined by two consecutive quarters of negative growth. Retail industry data, released earlier this week, also pointed to signs of a recovery as price pressures eased. Whether a slowly improving economy is enough to save Sunak from defeat in the upcoming general election is another matter.  The opposition Labour party, some 19 points ahead of the Conservatives according to the FT poll tracker, is putting the economy at the front of its campaign. It is highlighting what it sees as the long-term failures of the government. Rachel Reeves, shadow chancellor, said that the Conservatives “cannot fix the economy because they are the reason it is broken”. “After 14 years of Conservative economic failure, Britain is worse off with low growth and high taxes,” she added.Hopes that Sunak’s party might benefit from lower mortgages have faded after unexpectedly high inflation in the US dented hopes on both sides of the Atlantic for imminent interest rate cuts. Traders are now expecting just two cuts this year from the Bank of England, in contrast with the more than six that markets anticipated in January. That scenario was given credence by BoE policymaker Megan Greene, who wrote in the FT yesterday that investors had underestimated the risk that inflation would remain high for longer in Britain than in other advanced economies.Chancellor Jeremy Hunt admitted in December that interest rate cuts were essential for the Tories’ prospects of re-election. He told the FT that falling interest rates were “probably the moment when people will begin to have more confidence about their own personal prospects and the prospects of their family”. In the meantime, Britons are still grappling with a biting cost of living crisis: data this week showed the population increasingly reducing the amount they save and invest as price rises continue to weigh on household finances. Still, if all else fails, Sunak has other irons in the fire.As we reported yesterday, the prime minister has built a close relationship with bosses at Blackstone, fuelling speculation about his post-election future. At a groundbreaking ceremony for the private equity giant’s new London headquarters, the PM, according to people who witnessed or were briefed on the event, quipped: “Where’s my office?”Need to know: UK and Europe economyPrivate investors have piled into UK government bonds this year to lock in attractive yields while interest rates remain at a 16-year high.A return to growth in demand for mortgages provided further evidence that the UK property market is stabilising.The European Central Bank kept interest rates on hold at 4 per cent but signalled it was considering a cut at its next meeting in June. Officials attempted to downplay the impact of the higher than expected US inflation data. Need to know: global economyThe global economy may have avoided recession but faces a decade of “tepid growth” and “popular discontent”, the IMF’s managing director Kristalina Georgieva warned. She added that “inflation is not fully defeated, fiscal buffers have been depleted and debt is up, posing a major challenge to public finances in many countries”.China’s exports fell sharply in dollar terms in March as lower prices for its goods hit producers, highlighting the challenges facing Beijing as it turns to manufacturing and trade to revive the economy. Weak inflation data meanwhile has exacerbated concerns over consumer demand in China.In sharp contrast to the Opec cartel, the International Energy Agency said oil use was slowing after a mild winter and normalising demand from China. Prices have been steadily rising over supply concerns due to the conflicts in the Middle East and Ukraine.Industrial metals including copper and zinc have outperformed global stocks this year as traders bet on a revival of demand. New capacity, as well as a slowdown in US and EU project closures, meant global coal use increased last year for the first time since 2019.Forget boomers vs millennials, the next conflict is millennials vs each other as a chunk of the cohort benefit from inherited family wealth, writes chief data reporter John Burn-Murdoch.Need to know: businessUS banks’ reporting season is under way. First-quarter profits at JPMorgan Chase rose 6 per cent, despite the bank paying an extra $725mn charge to cover the costs of last year’s regional bank failures. Citigroup reported better than expected profits of $3.4bn after it shed thousands of jobs in a revamp. BlackRock reported record assets under management of $10.5tn thanks to strong equity markets and the popularity of its new spot bitcoin exchange traded fund. Profits at Wells Fargo fell from $5bn to $4.6bn.Private equity pioneer KKR is predicting a revival in global IPOs and takeover activity after a two-year slowdown.TSMC’s decision to bring its latest technology to the US is a boost for President Joe Biden’s quest for supply chain security but still leaves Washington short of being able to completely produce the most complex chips needed for AI in the US. The electric vehicle revolution is running out of steam, says the FT editorial board. Governments need to do more to reduce obstacles such as the lack of reliable charging networks.Western pharma companies are on the hunt for alternative suppliers following a US crackdown on Chinese ingredient producers. Pressure of a different sort is building on Japanese companies: shareholder activists are urging them to disclose the value of their often fabulous hoards of fine art.Science round upSea surface temperatures in March were the warmest on record for the 12th month in a row, while on land they hit new peaks for the 10th month in succession. A scientist at the Copernicus Climate Change Service was left asking whether this year is “a blip, a phase change, whether the climate system is broken and behaving in a different way to what we expect.”The widely used Prostate-Specific Antigen or PSA screening test for prostate cancer is over-diagnosing insignificant cases while still missing some of the most aggressive cancers, according to a new study. Although brain-computer interfaces or BCIs have been around since the 1990s, Elon Musk’s Neuralink has generated huge amounts of interest and helped attract vast sums for start-ups that see BCI uses beyond medtech.Professor Peter Higgs, the Nobel Prize-winning particle physicist whose prediction of the Higgs boson helped revolutionise understanding of the universe, died this week, aged 94. His groundbreaking theoretical work in the 1960s was triumphantly confirmed by experiments at the Cern particle accelerator almost half a century later. Some good newsNew excavations at Pompeii, the ancient Roman city buried in an eruption from Mount Vesuvius in AD70, have uncovered stunning new artworks. The frescoes, said to be among the finest found among the ruins so far, will be featured in a BBC documentary later this month.One of the newly uncovered frescoes shows mythological characters inspired by the Trojan War More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Higher interest rates can be a double-edged sword. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup collectively made $253bn in net interest income (NII) for the whole of 2023 — a 19 per cent jump from 2022’s total.For Wall Street’s big four lenders, expectations that the Federal Reserve will delay rate cuts in response to stubbornly high inflation readings and a robust job market mean the good times should continue to roll. Or does it? The flipside to higher interest rates is people also want more for their savings. Banks have been able to profit from the higher rate environment by being quick to charge borrowers more on loans but slow to increase what is paid on customers’ deposits. But the wind is changing. As high rates persist, more customers are moving their money out of low-interest rate checking and savings accounts and into higher-yielding products like certificates of deposit, Treasuries and money market accounts. First-quarter earnings suggest 2023 may be as good as it gets when it comes to NII and net interest margins. At Wells Fargo, first quarter NII came in 8 per cent lower compared with a year earlier. At Citi, the metric eked out a 1 per cent year-on-year gain but fell quarter on quarter. While JPMorgan raised its NII outlook for this year by $1bn to $89bn, it also said deposit migration — or cash sorting — is not showing any signs of slowing. Defending deposit bases does not come cheap. During the first quarter, Wells paid a rate of 2.34 per cent on its interest-bearing deposits, nearly twice what it paid a year ago. At Citi, the figure increased nearly 100 basis points to 3.7 per cent. JPMorgan paid a rate of 2.85 per cent, up from 1.85 per cent in the prior-year period. Higher funding costs can be offset by stronger loan growth. But high rates can also stymie demand for loans. The average loan balances at JPMorgan and Wells both shrank during the first quarter compared with the fourth quarter.Wall Street retail lenders, which have more diversified sources of revenues like investment banking and wealth management, can afford the fight for deposit. Although profits are expected to be lower for many this year, shares in some of them may get a boost if Basel III capital requirements turn out to be not as bad as feared. Instead, it will be smaller regional banks that will feel more of this pressure. Over the past 12 months, the KBW bank index has gained more than 20 per cent, compared with the 6 per cent increase for the regional banking index. The gap will [email protected] More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Few central banks have emerged from the past three years of inflation fighting with the same credibility they had before. The Bank of England has had a particularly hard time. Net public satisfaction with the institution is in negative territory, and the proportion expecting inflation to be above 3 per cent in the long term has also picked up since 2019. If another shock comes along, it may be harder to keep inflation expectations anchored.Ben Bernanke’s review, released on Friday, was an opportunity to start addressing the central bank’s recent shortcomings. Importantly, the former US Federal Reserve chair shone a light on its “out of date” methods, and made some sensible recommendations that should help improve its forecasting processes and communication. But just how transformative this “once in a generation” review proves to be will largely be determined by how far the BoE decides to push Bernanke’s proposals.Regarding the BoE’s recent performance, there are two areas of concern — its economic analysis and communication. On the former, Bernanke called for an overhaul of its main economic model and a modernisation of the software it uses for data analysis. These are core pillars for any central bank’s operations. That there were notable deficiencies here is a concern. The BoE should now be given the resources to make the necessary improvements.Yet, the past few years have been characterised by a series of unprecedented shocks — the pandemic, war in Europe and a slowdown in globalisation. In that sense, the BoE’s models were unlikely to be the main factor in its recent poor forecasting record. But that does not absolve it. A lot comes down to judgment, including when to ignore and how to weigh what the models say. The bank raised rates too slowly, and stuck too long to the narrative that price growth would be transitory.The review did, however, stress some important points on how to improve on these “outside the model” considerations, including greater attention to supply-side factors, and more comprehensive assessment of price-wage dynamics. What matters now is how this is applied to the forecasting framework.On communications, there were sensible suggestions. Here, the BoE’s record has been poor. In this tightening cycle, it has often indicated that rates would not need to rise as far as the market was pricing, but has then gone on to raise them further than those expectations. Bernanke’s recommendation to use more scenario-based forecasting is welcome. It gives the BoE the scope to articulate its reaction function, risks and uncertainty better. The proposal to can its famous fan charts — which display the uncertainty around its forecasts — was inevitable. The public has often found it more confusing than informative.There are limits to relying on scenarios to help the market understand what the bank might do. A significant flaw in its communications is that it predicates its forecasts on the markets’ expectations for bank rate. As former MPC member Gertjan Vlieghe noted in 2019: “We communicate about what we think we may do, by showing you a forecast of what will happen if we do something else.” But the review suggested de-emphasising the central forecast alongside further deliberations, instead of recommending that the BoE uses — and shares — its own projections for interest rates. This sidesteps and defers a key issue.The BoE must now assess how much it needs to overhaul its model, how it will apply scenario analysis and how transparent it should be about its interest rate path. This review shows there is ample room for improvement. But how it is acted on is what matters most. More

BERLIN (Reuters) -German inflation eased in March, adding to the signs that euro zone price pressures are abating and increasing the pressure on the European Central Bank to start cutting interest rates. Inflation in Europe’s largest economy slackened to 2.3% helped by lower food and energy prices, final data from the federal statistics office showed on Friday. This is its lowest level since June 2021.German consumer prices, harmonised to compare with other European Union countries, had risen by 2.7% year-on-year in February.”Inflation is weakening. We should therefore continue our fiscal policy, including the debt brake,” German Finance Minister Christian Lindner said on social media platform X.The debt brake, enshrined in the German constitution, restricts the public deficit to 0.35% of gross domestic product.”In the United States it is clear that expansionary public finances with high levels of new debt can drive inflation up again,” Lindner said. The European Central Bank kept interest rates at record highs on Thursday but sent an even clearer signal that it may be preparing to cut them in June.That decision may now be complicated by uncertainty as to whether the Federal Reserve will be able cut its own rates in June as U.S. inflation stays stubbornly above its goal. Core inflation in Germany, which excludes volatile food and energy prices, was at 3.3% in March, down from 3.4% in February.Underlying inflation is closely watched by the European Central Bank to gauge the durability of price pressures. “In March 2024, food was cheaper for consumers than a year before for the first time since February 2015,” said Ruth Brand, president of the statistics office. Food prices went down 0.7% year-on-year.Energy prices were 2.7% lower in March than in the same month of the previous year. Since the beginning of the year, energy prices have consistently fallen, dragging headline inflation down.However, core inflation has barely slowed. Germany’s inflation is supported by a rising trend in services, whose prices are increasingly dominated by a sharp jump in wage costs, as well as a rise in rents.Prices for services overall were 3.7% higher in March on the year. Rents, with a price increase of 2.1% on the year, were significant for the price development for services.This is due to some extent to a boost from an early Easter, as inflation in airfares jumped to 10%, Pantheon Macroeconomics chief eurozone economist Claus Vistesen said. “We think services inflation will take a meaningful step back in April as early Easter effects reverse,” Vistesen said, adding that this should pull core inflation down significantly. While services prices showed a strong increase, the prices for goods increased by 1.0% on the year, below the increase seen in overall inflation. More

WASHINGTON (Reuters) – World Bank President Ajay Banga said on Friday he plans to highlight a range of process improvements next week to speed up the development lender’s loan approvals, improve the accountability of its 16,000 employees and attract private capital to projects. Banga told reporters ahead of the World Bank and International Monetary Fund spring meetings that the development lender had reduced its average 19-month project approval time by about three months and would cut it by another three months by the middle of next year.Banga, a former MasterCard CEO who took over the helm of the World Bank last June, is guiding the lender’s expansion of its traditional development and anti-poverty mission to include fighting climate change and other global crises. This requires far greater resources and a major expansion of its lending capacity, which was $128.3 billion in the fiscal year ended June 30, 2023.The World Bank adjusted its loan-to-equity ratio to unlock another $40 billion of lending capacity over 10 years, but this falls far short of the trillions of dollars needed annually to finance the global energy transition and climate mitigation.Banga said more steps were underway, including joint work with other multilateral development banks and credit ratings agencies to unlock the use of callable capital, the emergency capital pledged by governments but not paid in.Banga said the World Bank will launch a new enterprise-wide platform for loan and insurance guarantees that puts it on a path to more than triple its guarantee issuances to $20 billion by 2030.But a major new securitization initiative could also attract vast amounts of private capital.”We are at the beginning of a years-long effort to build a securitization platform for the emerging markets, making it easier for institutional investor – pension funds, insurance companies and sovereign wealth funds – to bring some portion of the $70 trillion they manage to these developing countries.”The World Bank also is reforming its business planning and budgeting processes to find savings to redeploy elsewhere, including $144 million from improving productivity at its core International Bank for Reconstruction and Development and International Development Association arms, Banga said.He added that a unified approach to real estate had saved the lender $150 million for 2023 and 2024. “We want to start every year looking for 5% productivity savings from our expenses,” Banga said. “This is all part of the work that we are trying to do to get the plumbing of the Bank to work even better.”In addition, the World Bank has recently launched a new “corporate scorecard” to measure its performance based on development and climate outcomes rather than dollars deployed. The new scorecard has 22 categories, down from the previous 153, Banga said. More

FRANKFURT (Reuters) – Inflation in the euro zone is different to that in the United States, much as ECB President Christine Lagarde insists, but the bloc will still face many of the same headwinds as others, limiting how far price growth can slow.The ECB put an interest rate cut in June on the table on Thursday, arguing that price growth was decelerating towards 2% and the 20-nation bloc was “not the same” as the U.S., which is struggling with unexpectedly stubborn inflation that may delay interest rate cuts there.While numerous differences underscore Lagarde’s point, Europe does not exist in a vacuum and problems in the U.S. are bound to make their way across the Atlantic, albeit over time and in a more muted form, economists say.Two fresh surveys by the ECB published on Friday reveal the contrast – one suggesting euro zone growth will be barely above zero this year, and another showing the bloc’s biggest firms see contracting investments, workforce cuts and poor retail sales.This is pushing the long expected recovery further and further out, and even if the economy seems to have bottomed out, the tentative signs of demand and sentiment recovery point only to a gradual and muted rebound.Annualised growth in the U.S., meanwhile, was above 3% in the final quarter of 2023 and inflation was driven primarily by demand.”We remain convinced that, given wildly different demand/consumption backdrops in the euro area and U.S., U.S. demand-driven inflation can sustainably diverge from mostly supply-driven euro area inflation,” TS Lombard’s Davide Oneglia said.Indeed, goods inflation is just 1.1% in the euro zone and data out of France and Germany on Friday showed that manufactured goods prices lowered the headline figure.Economists say part of this is due to a rise in cheap imports from China. While trade is rebounding from low levels, monthly import figures show a jump in trade with China in early 2024 and given weak domestic demand, these fresh imports are disinflationary.U.S. ROARSIn contrast, U.S. consumer demand remains so strong that any fresh import has better pricing power.Fiscal policy is another key factor in the divergence. While the U.S. government could run a budget deficit of 5.6% of GDP this year with a further increase in 2025, the fiscal impulse in the euro zone is shrinking, with the budget deficit seen down at 2.9% this year before another drop in 2025. The labour market is also crucial. Euro zone unemployment may be at a historic low, but broader measures of slack which also count underemployment stand at around 11% versus just above 7% in the U.S. More importantly, while much of the euro zone’s high employment is a factor of labour hoarding by firms who fear a loss of skilled workers, the U.S. continues to create new jobs much faster than expected. High interest rates also tend to feed into U.S. housing costs much quicker than in Europe, a key reason why “shelter” inflation is above 5%. LIMITSStill, Europe will suffer commodity price increases much like everybody else or possibly even more given that it is a net importer.Energy has been the biggest drag on inflation this year, but crude oil is up 14% since the start of 2024 and this will start adding to prices in the second half of the year, even as natural gas prices hold broadly steady.In addition, expectations of faster euro zone rate cuts have already weakened the euro, and this raises the prices of imported goods, thereby lifting consumer prices.Weakening labour productivity could also add to Europe’s inflation since it means greater unit labour costs that must eventually find their way into consumer prices.”We disagree with what Christine Lagarde said regarding U.S. inflation and the full decoupling of euro zone inflation developments from those in the U.S.,” ING economist Carsten Brzeski said. “Headline inflation developments in the U.S. have nicely led euro zone developments with a lag of around half a year; not necessarily the exact monthly inflation numbers, but definitely the broader direction of inflation.”Nevertheless, the divergence is clear and the ECB will be able to lower interest rates before the Fed, even if it will be buffeted by the same headwinds, limiting its ability to go it alone.”Given the relative data flow — slower growth, lower inflation, tighter fiscal policy — the ECB has the basis to act independently of the Fed and ease in June and maybe several times this year,” Deutsche Bank said.”However, there are likely to be limits to the ECB’s independence from the Fed over time to the extent that the euro area and U.S. are large trading partners of one another.” More