Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.When Volkswagen decided more than a decade ago to build a plant in China’s Xinjiang region with Chinese partner, SAIC, the aim was not primarily to sell cars to the local market. It was also to appease Chinese authorities who demanded the joint €170mn investment in return for approving VW’s plans to expand in Guangdong, as someone acquainted with the discussions over the plant recently told me.Now the German auto group is learning the hard way that politically-driven investments have the potential to become hefty financial and reputational risks. The company has been disqualified by Germany’s Union Investment for its sustainable funds after media published claims that forced labour had been used by the joint venture to build a test track in the region. Forced labour has been a feature of the government’s crackdown on the mainly Muslim Uyghur population and other minorities. Human rights groups have estimated that more than 1mn Uyghurs and other Muslims were detained over a period of several years, while thousands have been reported to have been transferred out of the region to work in factories, some supplying global brands.After Handelsblatt published the allegations on the test track, VW announced that it was reviewing the future of its partnership there. VW’s review came just days after BASF revealed it would sell stakes in two Xinjiang chemical plants following separate allegations of human rights abuses involving its joint venture partner. Is it just coincidence that, after years of refusing to disinvest for fear of angering Chinese authorities, two of Germany’s biggest industrial companies are now willing to brave a political backlash by calling into question the future of their investments there? Not likely, according to several people with long experience of working in China. Each company has specific reasons, but it may also be that a rare window of opportunity has opened to exit uncomfortable investments in China — at least for those companies still publicly demonstrating their commitment to the country. This week Beijing reported that in 2023 China attracted the lowest level of foreign direct investment for 30 years. Investor confidence has been shaken by trade tensions with the US, slowing economic growth, a continuing property crisis and industrial overcapacity. In response, the government wants to revive growth by winning foreign investors back. So punishing two of the country’s biggest foreign investors for reviewing or selling insignificant investments in Xinjiang would be the wrong signal to send, says Max Zenglein, chief economist at China consultancy Merics. VW is pouring €5bn into China’s electric vehicle sector, while BASF is spending €10bn on a state of the art chemical plant.“This is a very opportune time to get out,” Zenglein says. “This is a chance for companies to stop saying nothing is going on in Xinjiang.”One executive who has lived and worked in China for more than 20 years also believes that for VW and BASF, at least, the timing is propitious. China “wants the foreign investment. Officials are very explicit about the economic challenge . . . Do you really want to punish those guys that are still pouring money into the economy when everyone is running for the exit?” Meanwhile, it is clear that western regulations demanding clean supply chains are beginning to bite, he adds. Ensuring traceability is difficult in most parts of the world, but particularly in China. VW found this out to great cost. Thousands of its cars have been held up in US customs because the company unwittingly violated the Uyghur Forced Labour Prevention Act when a small supplier used tiny components from Xinjiang. In Germany, companies found to have violated the country’s new supply chain laws, which also ban forced labour, face fines of up to 2 per cent of global turnover. Beijing may hotly deny allegations of human rights violations in Xinjiang. But it also wants foreign investment. Perhaps that means that VW and BASF can finally extricate themselves from Xinjiang without a political backlash. If so, that would be good for their shareholders. It may also encourage other companies to move faster to quit the region. But the departure of two such high profile names could also mean less access to international working conditions, and less scrutiny of operations. “It feels bad,” the executive said. “No one there will care any more if there is forced labour.”[email protected] More

In late 1989, no person better symbolised Japan’s postwar rise to economic superpower than Akio Morita, Sony’s co-founder, who stunned the world with a $3bn acquisition of Columbia Pictures.That same year, an unauthorised English translation of an explosive essay he co-authored, titled “The Japan That Can Say No”, went viral among America’s elite. Citing what he saw as the short-termism of US businesses, Morita warned: “You may never be able to compete with us.”It was a display of arrogance he later regretted, but it brilliantly captured the mood in Japan as its companies and billionaires dominated rankings of the world’s most valuable and richest.On Thursday the Nikkei 225 stock index finally surpassed the level reached 34 years ago. But gone is the sense of euphoria or achievement that was prevalent in 1989, when Japanese exports of cars and televisions soared and a rise in property prices appeared unstoppable.While the world has scrambled to bring inflation under control over the past year, Japan has yet to officially declare an exit from deflation and remains the only country with interest rates below zero. The clearest threat for the US now is the rise of China, while Japan has ceded its edge in consumer electronics and chips to rivals in South Korea and Taiwan.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Back then, policymakers were raising taxes and interest rates to calm everything down, said Jesper Koll, a market commentator who was an economist at Warburg. “Today they are all-in pro-growth, and worried about the risk of deflation returning.”In 1989, Japan was all-in in its bullishness. Today, domestic Japan is not even mildly optimistic.According to a 2022 Nippon Foundation survey of 17-19-year-olds in China, India, the UK, US, South Korea and Japan, young Japanese had by far the lowest percentage (13.9 per cent) who thought the country would improve.While Japan is now attracting global investors, “we should not enjoy it too much”, said Takeshi Niinami, chief executive of drinks group Suntory and chair of the Japan Association of Corporate Executives business lobby. “The yen is cheap and I’m afraid that investors will all of a sudden go and we’re left with an empty field.”EconomyAs the 1980s drew to a close, Tokyo was celebrating a stellar decade during which the economy had grown by an average of 4 per cent a year on the back of soaring stock and property prices.But by the summer of 1989, Kazuo Ueda, the current Bank of Japan governor who was teaching at the University of Tokyo at the time, was already worried. “The recent rise in Japanese shares is a bubble, and it could burst any time,” he warned in a column for the Nikkei newspaper.In May that year, the central bank began raising interest rates to head off inflation, increasing its discount rate from 2.5 per cent to 6 per cent by August 1990. As asset prices collapsed, financial institutions and property developers struggled to get rid of bad loans, triggering a banking crisis. The BoJ began to cut interest rates, and by 1999, inflation was below zero.The Japanese economy entered a long period of stagnation during the 2000s, when the economy grew on average only 0.7 per cent. As mild deflation continued, people stopped believing that prices or wages would go up. Debt has also risen. The IMF expects Japan’s ratio of public debt to gross domestic product to reach 256 per cent in 2024, compared with 65 per cent in 1989.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Today, the economy is at a turning point. The BoJ is preparing to begin its gradual exit from its ultra-loose monetary policy as soon as this spring. More companies are raising prices and labour shortages are contributing to higher wages.In a speech in early February, Shinichi Uchida, the BoJ’s deputy governor, voiced optimism: “We are now facing the opportunity to break out of the mindset and behaviour of the deflationary period.”Still, there is little sense of euphoria. The economy has contracted for two consecutive quarters, with household consumption remaining weak. “I wouldn’t call this a bubble,” said Koji Toda, a fund manager at Resona Asset Management. “And there is still no certainty of overcoming deflation.”BusinessWhen Nippon Steel announced its all-cash $14.9bn takeover bid for US Steel in December, bankers saw the purchase as a sign of the return of Japan’s cash-rich companies to global markets.But if the M&A deals of the 1980s were a demonstration of Japan Inc’s ambitions to take on the world, corporate executives say today’s overseas rush is driven by the need to find new revenue outside their rapidly ageing and shrinking home market.Following a domestic banking crisis and the bankruptcy of Lehman Brothers in 2008, Japanese groups such as Sony, Panasonic and Hitachi entered a long and painful period of restructuring.In 1989 Japanese companies, particularly banks, dominated the global top 10 by market capitalisation. No Japanese companies make the top 10 now.Today, Toyota has risen to become the world’s largest carmaker by sales and the most valuable company in Japan. Sony, which is now more famous for its entertainment business and PlayStation games than the Walkman portable music player, is ranked third while semiconductor equipment maker Tokyo Electron is fifth. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.In 1989, six of the world’s 10 richest people were Japanese. At the top of the list was Yoshiaki Tsutsumi, the former owner of Seibu Railway, whose wealth Forbes estimated at $15bn.Now, only three Japanese people are ranked among the world’s top 100 billionaires, with Tadashi Yanai, founder of Uniqlo owner Fast Retailing, and his family ranked 30th with an estimated net worth of $40bn.In terms of earnings, Japanese companies have emerged from the period of low growth with healthy balance sheets. According to finance ministry data, net profits generated by Japanese non-financial companies increased more than fourfold to ¥74tn ($493bn) from fiscal 1989 to fiscal 2022, while the amount of dividends they paid to shareholders jumped eightfold to ¥32tn during the same period.Decades of deflation and economic stagnation, however, have also sapped the appetite for investment, leaving companies sitting on a massive cash pile of ¥343tn. Roughly half of the companies listed in the top tier of the Tokyo bourse have undervalued stocks, with price-to-book ratios below one, prompting the head of Japan Exchange Group to launch a name-and-shame campaign to pressure businesses to deliver higher valuations.“The current rise in shares does not necessarily reflect the actual strength of Japanese companies,” Masakazu Tokura, chair of Japan’s powerful Keidanren business federation, said at a news conference this month.Japan and the worldIn December 1989, just two weeks before the Nikkei peaked, Yasumichi Morishita spent $100mn on paintings by Vincent van Gogh, Claude Monet, Pierre-Auguste Renoir and Paul Gauguin at New York art auctions. A month earlier, property tycoon Tomonori Tsurumaki made headlines by buying Pablo Picasso’s Les Noces de Pierrette for $51mn.In 1989, the global art market was increasingly in thrall to the power of the yen and the Japanese real estate bubble. The Japanese rush for fine art was symbolic of a country that suddenly wanted — and could afford — to buy everything. Its tourists seemed to be everywhere, and its companies also seemed to be muscling their way into every market or deal. “If you don’t want Japan to buy it, don’t sell it,” remarked Sony co-founder Akio Morita when asked about his company’s purchase of Columbia Pictures.Akio Morita More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.From the way some governments are going about it you’d never believe we live in a world where cross-border trade is increasingly measured in trillions of gigabytes rather than tonnes of grain. Next week in Abu Dhabi, an unpromising World Trade Organization meeting of ministers will witness a familiar yet peculiar situation. A small gang of middle-income countries — India, despite its status as a global software giant, Indonesia and South Africa — are threatening to abrogate a 26-year international moratorium on charging border tariffs on digitally delivered services, which the deal quaintly terms “electronic transmissions”.India and South Africa have threatened for years to end the moratorium. They have also threatened to block separate talks on digital trade among a subset of WTO countries, which also show the 1998 vintage of their origins with the antiquated title “electronic commerce”. Delhi and Pretoria are not even participating in the talks, which in any case are incremental rather than dramatic.In reality, taxing products like video streaming services as they flow through the ether across a notional border seems wildly impractical. But the issue illustrates how the governance of global data and digital flows is far from fulfilling the liberal dreams of internet pioneers.Digital rules are important not just because of trade in goods and services that consist of or rely on international flows of data. They also involve personal privacy, media disinformation, the accountability of tech giants and other issues of great societal importance. But just as with more traditional forms of trade, countries are erecting border barriers, maintaining intractable regulatory differences and holding the issue hostage to other disputes.Of the countries menacing the electronic transmissions moratorium, Indonesia is the only one with serious immediate intent to try imposing border measures. Multinationals concerned about the proposals are hoping that Indonesia will focus instead on its value added tax on the consumption of digital goods and services — which it already levies on hundreds of companies including TikTok, Facebook, Disney and Alibaba. The IMF weighed in recently with helpful suggestions on raising VAT on digital products.By contrast, India’s position is widely regarded as tactical. It has often threatened to end the moratorium to gain leverage in other WTO issues, such as its long-running campaign to subsidise its farmers in the name of building up buffer stocks of grain. The idea of holding a 21st-century industry hostage to a 19th-century one is bizarre, but there you have it. Previously, other countries have largely given India what it wanted for the sake of a quiet life. It’s not yet clear whether they will do so again next week.Other countries, of course, also have idiosyncrasies that hamper the promotion of open digital trade framed by sensible regulation. Thanks to successive rulings of the European Court of Justice about privacy, Brussels is essentially blocked from making broad and binding commitments on allowing free international flows of data in trade deals.Brussels has at least done a lot of thinking and regulating in the areas of personal data (the General Data Protection Regulation), competition and transparency in digital commerce (the Digital Markets Act and Digital Services Act) and most recently artificial intelligence. Those efforts, particularly GDPR, have partially served as a model elsewhere. But they are not perfect: the DMA in particular can credibly be accused of protectionism in effect if not provably in intent.It does not help the cause of regulatory certainty that at a federal level, the US is far behind on writing rules on data protection and AI, meaning it is in a separate sphere of digital governance to the EU. Moreover, the Biden administration recently made a huge about-turn and reversed traditional US support for addressing international data flow in trade deals. There’s a respectable argument for its new position, but the US’s volte-face was so sudden it had to abandon its own negotiating position in the trade part of the Indo-Pacific Economic Framework (IPEF) talks with Asia-Pacific countries, which are now stalled indefinitely. Meanwhile, China continues to enact increasingly invasive laws on personal data and espionage and conduct raids on multiple foreign companies. This atmosphere has led a number of multinationals to decouple their data storage and IT systems in China from the rest of the company.To their credit, some smaller countries including New Zealand, Singapore and Chile, which have created a Digital Economy Partnership Agreement, are trying to design a system that balances free flows of data with protection of personal privacy. But their model has yet to get any big takers.What happens with the moratorium on electronic transmissions next week is in the realm of political grandstanding, not rational decision-making. The degree of unpredictable and self-destructive policy in the area of digital and data trade is concerning. It may be asking the WTO processes too much to expect them to fix it. But until there is coherence and alignment in policy, the global market in data and digital services will remain uncertain and [email protected] More

Financial markets are falling into line with the Federal Reserve’s outlook for US interest rates, as stubborn inflation data forces investors to relinquish their bets on extensive cuts this year.This month traders have slashed their bets on the number of times the Fed will cut rates in 2024, from six in January to a current level of four. They have also pushed back their expectations of when those cuts will begin, from March to June.The retreat marks a shift in the relationship between the Fed and the market, which have been pushing competing outlooks for interest rates back and forth for several months.“The Fed and markets are in a slapping competition,” said Edward Al-Hussainy, senior analyst at Columbia Threadneedle, comparing it with Power Slap, a contest in which rivals take turns to hit each other across the face until one side submits.“The Fed is winning the fight for now — they’re in control at the moment. They only lose if things become disorderly,” he said.The debate over US rates, which stand at 5.25 per cent to 5.5 per cent, a more than two-decade high, was given fresh impetus in December when Fed officials on average projected three rate cuts for 2024 as slowing price growth raised hopes that inflation had been tamed.Minutes from the Fed’s January policy meeting, published on Wednesday, reaffirmed that officials were cautious about cutting rates too quickly, describing them as “highly attentive” to inflation risks.Investors, with memories of being wrongfooted by Fed projections in the past, had bet that a sharp deceleration in inflation would allow the central bank to move faster. However, a series of strong reports, from consumer inflation data to jobs figures, has strengthened the Fed’s hand and traders are coming around to its view.“After the December FOMC meeting, the market and the Fed’s expectations for interest rate cuts were historically out of whack,” said Meghan Swiber, a US interest rate strategist at Bank of America.“A big driver of that gap between the market and the Fed was the market’s expectation for a very quick pace of disinflation. The recent data flow has pushed back on that,” she added.Some have profited from the discrepancy. Rokos Capital Management, run by billionaire star trader Chris Rokos, has turned a profit of more than $1bn this year as the market came to accept the central bank’s forecasts.Consumer price inflation has proved to be more stubborn than traders were expecting. Price growth slowed in January — to 3.1 per cent — but not as quickly as economists had forecast. The closely watched core inflation measure, which strips out volatile food and energy components, was stagnant at 3.9 per cent.The middling inflation data comes alongside evidence that the US economy continues to boom, with employers adding nearly twice as many jobs as expected in January.Part of the opposition to the Fed’s forecasts reflects a widely-held view among investors that the central bank is slow to act on changing economic conditions. In December 2021, Fed officials projected on average three quarter-point rate rises in 2022, implying that rates would remain under 1 per cent. Surging inflation ripped through those forecasts, forcing the Fed to raise rates to a range of 4.25 per cent to 4.5 per cent by the end of the year.But what was true on the way up may not hold for the ride down. “My thought is [the Fed will] probably cut interest rates at consecutive meetings, assuming the economy is doing well,” said David Rogal, a portfolio manager on the Total Return Fund at BlackRock. “The thing the Fed doesn’t want to get into is a stop-start policy. They don’t want to risk restarting inflation, which they could do if they cut now.”A signal from the Fed that it was ready to ease could send consumer inflation expectations higher — which might encourage companies to raise prices — and could set off a rally in stocks and bonds, making it even easier for companies to borrow money. Moreover, the US unemployment rate remains stable, near historic lows at 3.7 per cent, and has taken pressure off the Fed to cut rates. “Rates at this level are not restraining anything, so why are cuts necessary? You would have to convince me that 5.5 per cent is causing problems — and I don’t see that,” said Jim Bianco, head of Bianco Research. “Unemployment is low, jobless claims are low, the US is adding jobs. Everything about this economy screams that the funds rate is not a problem where it is,” he said.Bianco is among a few who are betting that the Fed may not even cut three times this year, forecasting between two cuts and none at all. Larry Summers, the former Treasury secretary and noted inflation hawk, told Bloomberg he saw a 15 per cent chance that the Fed might be forced to raise rates.Despite the shifting expectations markets remain unruffled, with the S&P 500 hitting a fresh high earlier this month. January was a record month for US investment-grade bond sales while the “spread”, or premium paid by high-quality borrowers to issue debt over the US Treasury, stands at just 0.96 percentage points — the tightest level since January 2022, two months before the Fed launched its aggressive campaign of rate rises.Even so, retreating expectations on rates could still sting for some. Commodity Futures Trading Commission data shows that asset managers had the largest-ever long position in two-year Treasury futures — a bet that prices would rise and yields would fall — in November.Bank of America’s global fund manager survey for February still showed that investors were betting on a steeper yield curve — expecting yields on two-year yields to fall, or rise less than longer-term yields. Higher rate expectations could make this a “pain trade”, said Swiber.  More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is former chief economist at the Institute of International Finance In failing to take a tougher stance on sanctions against Russia over its invasion of Ukraine, the EU might have stored up a series of problems that investors need to pay more attention to.Two years after Russia’s full-scale invasion, it is now painfully clear that EU sanctions have failed to meaningfully curtail Moscow’s ability to wage war on its neighbour. What went wrong?The first and most obvious issue is excessive reliance on financial sanctions — that is, blocking some Russian banks from intermediating payments with the west. Central bank official foreign exchange reserves were also frozen, but that measure targets a stock of assets, not ongoing flows, which are what matter for economic activity.Financial sanctions can be highly effective when imposed on countries that run a current account deficit, because such countries must continually borrow from global markets to pay for imports. No more foreign credit causes the economy to collapse. However, before, during and after the invasion, the value of Russia’s exports has far exceeded what it pays for imports. As a current account surplus country, Russia effectively lends to the rest of the world: it accumulates foreign assets. (Russia’s current account surplus is forecast to be 4 per cent of GDP this year by the IMF.)By sanctioning some Russian financial institutions, the west merely caused the accumulation of foreign assets to shift from sanctioned to non-sanctioned banks. Effectively, Gazprombank replaced Russia’s sanctioned central bank as the main financial intermediary with the outside world. This shift did not in any way curtail payments to Russia for its exports, so there was no impact on its ability to pay for imports. (Russia’s imports in 2023 were 20 per cent above pre-Covid pandemic levels.)Why didn’t the G7 and EU sanction all Russian banks? That would be equivalent to a trade embargo (prohibition of exports), since countries would no longer be able to pay Russia for its fossil fuel exports (oil, gas and coal), bringing those exports to a halt. Russia exports about 8mn barrels of oil, on average, per day. How to squeeze Putin’s revenue without driving up the price of oil sharply?In December 2022, the G7 and EU found an ingenious way forward, imposing a cap on the price that Russia can receive for its crude oil exports when these are transported in western-owned ships or use western services. In early 2023, a roughly equivalent cap was extended to cover refined products. Unfortunately, implementation of this oil price cap was at every turn undercut by a small number of western operators, especially Greek shipping magnates, that sold their oil tankers to “undisclosed” buyers — allowing Russia to export oil outside the cap.To be fair, the Greeks are not alone. The massive rise in western exports to central Asia and the Caucasus is another example of western business at work. For example, German exports of cars and parts to Kyrgyzstan have risen 5,000 per cent since Russia’s invasion of Ukraine. There is no way these exports are staying in Kyrgyzstan. They are going to Russia, where they help keep the war economy going, and the same thing is happening via Belarus, Kazakhstan and other places.In the December package of EU sanctions, there were other examples. There was a ban on imports of Russian diamonds but that did not cover industrial diamonds. Croatia also secured an exemption on importing Russian vacuum gas oil. So did other central Europeans on crude oil and steel products. And Hungary gained an exemption on nuclear energy services for its Paks II power plant project. At a time of heightened geopolitical tensions, the vital security objectives of western countries are being undermined by short-term interests and the profit motive of a few western businesses. This weak sanctions enforcement has come at the expense of more aggressive action against Russia and thus — perhaps — a faster end to the war. That now risks coming back to bite it. If Donald Trump is elected in November, US support for Ukraine might end. Subsequently there would be a lot of squabbling in Europe over who pays for the defence of Ukraine.Given that most countries are grappling with high debt, this would raise scrutiny of the financial state of EU nations, potentially adding pressure on the euro and widening the spreads on sovereign bonds between core bloc countries and other member states. Through its terrible trade-off, the EU has stored up all kinds of economic and markets pain for later — and that later is fast approaching.Simon Johnson contributed to this article More

British government plans to require all meat and dairy products sold in the UK to be labelled “Not for EU” consumption will raise food costs, hit exports and deter investment in domestic food manufacturing, a leading industry group has warned.In a letter to ministers, the Food and Drink Federation said the post-Brexit labelling regime will cost “hundreds of millions of pounds” and had already caused international investors to “pause” plans to put capital into the UK.“It [the labelling plan] will lead to higher prices amid a cost of living crisis and to lower investment at a time when investment in our sector is already down,” FDF chief executive Karen Betts told Cabinet Office minister Steve Baker in a letter sent on Monday and seen by the Financial Times.The government’s introduction of “Not for EU” labels from October is a consequence of the Windsor framework deal, which sets out post-Brexit trade arrangements for Northern Ireland.The labels are intended to guarantee that products sold in Northern Ireland that have not undergone full EU border checks do not cross into the Republic of Ireland, which is part of the EU’s single market.As part of supplementary assurances signed last January, the UK government said it would pass legislation expanding the scheme UK-wide to “ensure no incentive arises” for businesses to avoid sending goods to Northern Ireland.The government has consistently argued that the measures are essential to protect Northern Ireland’s place in the UK internal market as part of their overall efforts to reassure the region’s Unionist community, even if that means putting some extra cost on to business.“These measures will help ensure that consumers in Northern Ireland have access to the same goods as those in the rest of the United Kingdom, safeguarding the UK internal market and the operation of the Windsor framework,” it said in a statement.But the FDF argues that the labels should only be used for products in Northern Ireland, warning that a UK-wide approach would hurt small and medium-sized businesses that cannot afford to run separate production lines for EU and UK markets.The government launched a consultation on the implementation of the scheme last month alongside a £50mn “transition fund” to assist businesses. It is considering an exemption for small businesses that have less capacity to adapt to the changes.The FDF also warned that exports to the Republic of Ireland, a key destination for British-made food, would be “particularly badly impacted”. It added that some larger companies were “considering abandoning their exports to Ireland altogether”.The industry also raised concerns that the labels, which are stamped on packaging beneath the barcode, will put off customers. A Survation poll for Best for Britain, the pro-EU pressure group, found that almost one in five consumers said they were less likely to buy products labelled “Not for EU”.Betts said the labelling regime was already deterring international producers from investing in the UK’s food and drink industry because of the additional bureaucracy needed to serve a smaller market than the EU.“We hear of investors already putting plans on pause, and considering investing in companies in the EU instead, from where they can decide about whether it’s worth supplying the UK market at all,” she wrote.The FDF said that investment in UK food manufacturing fell by a third last year compared with 2019, the year before the post-Brexit EU-UK trade deal came into force, citing data from the Office for National Statistics.  More

Steering the UK economy out of the inflationary storm would always require unusual finesse, but the task would be easier if the Bank of England governor had an unemployment number he could trust. The problem, highlighted by Andrew Bailey in a recent hearing, stems from deeply flawed labour market data from the Office for National Statistics, led by national statistician Sir Ian Diamond.The situation has cast a shadow over the ONS, an independent government agency tasked with producing reliable economic figures that are critical to BoE decisions about when and how far to cut rates this year.Lord George Bridges, the chair of the House of Lords economic affairs committee, this month warned that the BoE and Treasury were like pilots trying to plot a course while their instruments were “flashing and whirring around”. “How are the Treasury and the bank to make critical decisions based on dodgy statistics?” he said in a House of Lords debate. His view is widely shared among UK economists, business leaders and policymakers as they face as much as a year of uncertainty about the labour force, including questions like how many people are unemployed.The ONS said this month its new labour force survey would not be ready until September, six months later than it previously said and almost a full year after it first suspended publishing jobs data.Last week it resumed releasing jobs data, but it warned the figures were still not fully reliable because of the low response rate to its old survey.The body has not fully explained key decisions taken last year that proved deeply damaging to the reliability of UK labour market data. Diamond himself was not available for an interview, his spokesperson said.“The response rate to the labour force survey is shocking right now — it is a really poor situation,” said Erik Britton, a former BoE economist now at Fathom Consulting. “It is a problem,” BoE governor Andrew Bailey told the Lords economics committee last week.Though Bailey said the central bank could track employment through other sources, there was no real alternative to the labour force survey (LFS) to find out how many people were out of work or why.“Our staff have advised us that whether unemployment is 3.8 per cent or 4.2 per cent is really pretty hard to judge,” he said.The crisis besetting the ONS survey has been years in the making. Valued for its detail, the LFS is time-consuming for respondents. It has morphed so many times in its 50 year history as extra questions have been added that one researcher likened it to the children’s game of drawing monsters by blindly sticking together body parts. Because of its length, the LFS has been hard hit by a decline seen in many countries in the response rate to household surveys, as people become harder to contact and less willing to give personal details to cold callers. The LFS was designed to operate with a response rate of 55 per cent. A decade ago it was just below 50 per cent. It has now slid below 15 per cent.Alarmed by the long-term trend, the ONS had in 2017 already begun developing a simpler “transformed” labour force survey (TLFS) that would run primarily online and produce reliable results with a lower response rate.When Covid hit, forcing a switch from in-person to telephone interviews, responses to the old survey plummeted, forcing the ONS to plough resources into salvaging it by doubling the number of people contacted.The ONS also worried the disruption of the pandemic had changed the mix of people answering the survey, skewing the results. Users of the data increasingly noticed its results were at odds with other official figures.But by mid 2021, the ONS began drawing down the sample size. The agency maintained it was still confident about the headline jobless rate even if there was uncertainty around some of the more detailed breakdowns of the data. Meanwhile, it was taking longer than expected to get the TLFS right. Darren Morgan, who retired at the end of 2023 as director of economic statistics production, told the Financial Times in November he had to juggle resources between propping up the old survey and ramping up the new one.“Running two large surveys for longer than we thought — that takes capacity,” he said. The ONS had to redeploy staff while still protecting other surveys “as best we can”, Morgan said.He insisted the underlying problem was not one of money, but of trying to get people to respond to surveys.But in July 2023 the ONS made a decision that proved to be a tipping point. It pulled more resources from the old survey, returning it to its pre-Covid size. In July to September the response rate fell to an all-time low of 12.7 per cent, from 14.6 per cent in the previous three months.When officials crunched the numbers, the results looked implausible — with unusual swings in youth unemployment in particular — forcing the ONS to pull publication with just days’ notice in October.The ONS declined to answer questions about why it cut back on the old survey, who was responsible for the move, or the exact date of the decision.But it was clear that scaling back the LFS, while still relying on it because of delays to the new survey, was risky.On July 10, the Office for the Statistical Regulator warned the ONS about the “sustainability of the current LFS” and noted concerns about the agency’s use of statistical fixes to make up for the small sample size.The OSR told the FT it was not aware the ONS was reducing the sample size that month when it flagged up this concern in a progress report on the TLFS.Morgan’s successor, Liz McKeown, now faces an uphill battle to repair the damage. Even with more researchers in the field, a modest boost to the sample size from October and a bigger 50 per cent boost from January, it will take time and money for the LFS-based data to improve. The agency now uses branded notebooks and £10 vouchers to induce people to respond.Despite the failures at the ONS, the agency’s regulator has said the main problem has chiefly been communication. “The ONS is trying to do some difficult things,” Ed Humpherson, head of the OSR, told a parliamentary committee this month.He added: “The underlying common thread I would encourage the ONS to really think about is how it responds to users, to challenge, and how it communicates uncertainty.”Both the ONS and OSR are part of the UK Statistics Authority, which operates at arm’s length from government to ensure its independence from ministers. It is accountable directly to parliament, though the Cabinet Office is involved in appointing non-executive board members.With tight funding settlements across the government, the UKSA has committed to find efficiency savings of 10 per cent in its baseline budget, which will fall from £225mn to £220.8mn in 2024-25. However, it has additional funding of £17.6mn allocated in that year for improvements to key economic statistics, including on the labour market.The ONS has been through rocky patches in the past. It lost close to 90 per cent of its London-based staff after its headquarters shifted to Newport, Wales, in the late 2000s, costing it significant expertise at the time. Diamond wrote to MPs on the public administration and constitutional affairs committee in November setting out the ONS’s plans to rebuild the jobs data, but has otherwise said nothing publicly on the issue.The ONS said its work on the area was getting results. “Response rates have been improving since the autumn, with the survey sample boosted by 50 per cent to 24,000 homes. This will continue until we switch to the new survey. “Its later introduction in September will help it to yield better data for policymakers and address marked changes since the pandemic in public attitudes and behaviours in relation to official surveys.”But senior lawmakers such as Lord Bridges said progress dealing with the UK’s “shoddy data” is urgently needed.“This is mission critical.” he said. “This is not a peripheral matter that we can leave just to statisticians.” More

SEOUL (Reuters) -South Korea’s central bank left interest rates at a 15-year high on Thursday amid signs that the weaker economy is slowing inflation, with investors zeroing in on Governor Rhee Chang-yong’s comments on the timing of a policy pivot later this year.The Bank of Korea (BOK) held its benchmark interest rate at 3.50% at a policy review in Seoul, keeping it unchanged for a ninth straight meeting as expected by all 38 analysts polled by Reuters.The BOK kept its economic growth forecast for this year unchanged at 2.1% and inflation at 2.6%, it said along with the rate announcement.South Korea’s 300 basis points of interest rate hikes have stalled economic growth in Asia’s fourth-largest economy as construction investment took a hit from higher borrowing costs even as exports continued to improve.In a post-policy news conference, Governor Rhee is expected to join global peers such as the Federal Reserve and the Reserve Bank of Australia in pushing back against any bets on a near-term easing as inflation, while cooling, is still above the central bank’s target of 2%.In January, Rhee warned markets against rallying on premature expectations for a rate cut and said he sees very little chance of rate cuts for the next six months with inflation still high.Data released since then showed consumer inflation hit a six-month low of 2.8% in January, still far from the central bank’s target of 2% but easing for a third straight month mostly due to a fall in oil prices.”With inflation cooling and growth set to struggle, we don’t think cuts are far away,” Gareth Leather, an economist at Capital Economics said in a report after the rate decision. “With inflation concerns easing, we are expecting the central bank to start sounding more dovish.”BOK board members have warned acting too soon could trigger a resurgence in price pressures especially due to upside risks from supply-side constraints.The consensus forecast from analysts is that the BOK will start cutting rates in the third quarter of this year, but that would largely depend on when the Federal Reserve starts lowering it rates, analysts say.Thursday’s rate decision was the first for board member Hwang Kun-il, who began his three-year term on Feb. 13.Rhee holds a news conference at around 0210 GMT, which will be livestreamed via YouTube. More