Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Brussels has approved €902mn in state aid for battery maker Northvolt’s factory in Germany, the first use of a new mechanism that allows governments to provide more funding to companies that have been offered higher subsidies elsewhere.The Swedish company had threatened to pull plans for its plant in Heide in the northern state of Schleswig-Holstein, citing more generous subsidies available in the US through President Joe Biden’s $783bn Inflation Reduction Act.But it committed to the project in May after Berlin pledged funding under a new EU state aid regime that allows national governments to match subsidies on offer outside the EU if there is a risk that a project of “strategic importance” is likely to be taken elsewhere.The European Commission granted permission for the subsidies on Monday, making it the first approval under the new regime. The rules were drawn up in response to concerns that excessive bureaucracy and strict climate laws were hampering investment in clean technologies.“This €902mn German measure is the first individual aid being approved to prevent an investment from being diverted away from Europe,” said Margrethe Vestager, the EU’s competition commissioner.The funding consists of a €700mn grant and €202mn guarantee.German economy minister Robert Habeck, who was in Brussels for the announcement, said the agreement was vital to European competitiveness. “We need a more robust industry for the new sectors — semiconductors, batteries, electrolysers, hydrogen. But this means that climate action and industrial production fit very, very well together.”Northvolt was the first homegrown European company to produce a battery cell from a gigafactory, a term used to describe large-scale manufacturing facilities dedicated to electrification. The new factory could supply up to 1mn electric vehicles a year with its lithium-free, sodium ion battery cells, depending on the size of the battery, the commission said. It will reach full production capacity in 2029.Belgium, which assumed the six-month rotating presidency of the EU this month, has made it a priority for the bloc to “prioritise its long-term competitiveness and industrial policies”.The Northvolt funding was granted on the basis that the production was critical for the green transition and would benefit a disadvantaged area of Germany, the commission said, adding that it allowed the matching aid clause to be invoked because the subsidies were enough to trigger the investment in Europe without artificially boosting Northvolt’s profits should it invest in Germany and not the US.Vestager said the German offer was below that from Washington.Habeck dismissed concerns from poorer member states that giving large economies such as Germany and France permission to pump millions of euros into their industries will fragment the single market.He said the EU’s level playing field was important but in the race to develop clean technologies “the real competition is not so much between Germany and Italy or Denmark and the Netherlands, or Hungary and the Czech Republic. It’s between Europe and China and the US, and the system we have developed in the past decades only looks at the internal market.”Habeck warned that the European economy as a whole would be at risk if Germany failed to invest in critical technologies. “We need to think of Europe as an economic system as a whole,” he added. The money was approved in Berlin’s budgetary agreement last month, despite a ruling in November from the German constitutional court that deemed billions of euros of federal spending on clean energy and industrial subsidies unconstitutional.Final approval depends on the agreement of two German local authorities. Habeck said it would be a “terrible joke” if they blocked it. Climate CapitalWhere climate change meets business, markets and politics. Explore the FT’s coverage here.Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every MondayAnother year of trade and globalisation slides down the slipway and into the water. On this occasion the voyage starts with quite serious headwinds and choppy waves, thanks to the Houthi rebels’ attacks on cargo ships in the Red Sea that have restricted movements through the Suez Canal. Today’s newsletter asks how worried should we be about the Red Sea in particular and geopolitics in general. Charted waters is on the effects of China taking a pop at European brandy, and there’s a bumper links section as we catch up with lots of stuff that’s been going on since I last wrote.Get in touch. Email me at [email protected] pricier passage to EuropeOne day a shock from geopolitical or natural causes will arrive and do serious damage to the global trading system. Is the blockage of the Suez Canal by Houthi militant attacks the one? Probably not.I set a high bar for worrying about the death of globalisation. I’ve said this before, but if you’ve lived through the wolf-crying predictions of catastrophe during the 9/11 attacks in 2001, the Sars and avian flu outbreaks of the 2000s, the global food crisis of 2007-08, the Icelandic ash cloud of 2010, the Covid-19 pandemic, the Ever Given container ship getting stuck in the Suez Canal in 2021 and even Russia’s attack on Ukraine, you’re generally quite sceptical that a supply disruption will do lasting damage.The Houthi rebels’ attacks on shipping, unless they escalate very seriously or touch off a series of similar militant attacks around the world, seem likely to fall into the relatively benign category. (Climate change affecting the Panama Canal is more worrying.) Yes, freight and insurance rates have risen sharply and ships previously destined for the Suez Canal are being rerouted around Africa. But as these Oxford Economics charts show, rates are nowhere near the levels that the post-Covid surge in consumer demand achieved in 2021 and 2022, and supply chains more generally have enough slack to absorb the extra strain.Indeed, as it happens the attacks have come at a time when the global shipping industry, and indeed the world economy, is reasonably well placed to cope. Regarding the macro effects, inflation is generally coming down everywhere — a trend that would probably quite comfortably ride a one-off price level increase — and oil prices are pretty well-contained.As for the shipping industry, freight carriers have excess capacity given that the post-Covid demand surge has dissipated and new ships are being launched. Interestingly, the share prices of the big shipping companies have risen rather than fallen after the attacks (sure, freight rates have risen, but so have their costs from longer trips). That might tell you something worrying about concentration in the shipping industry, or it might just be that filling otherwise empty ships is good for earnings.A more substantive concern is if the attacks kick off a series of assaults on shipping elsewhere, and that may depend on the robustness of the US-led international response to the Houthis. The academic Alexander Clarkson points out that the Houthis and other nationalist and sectarian movements have shown they don’t care about the effects of their actions on the global economy. This is true enough, but then for the moment it doesn’t seem that the global economy is worrying too much about the Houthis in return.For geopolitical risk, one election Trumps them allThis brings us to a broader look at the year ahead. I examined specific issues in my last newsletter of 2023, but what of the general sense of geopolitics and especially the US-China rivalry interfering with trade? As my colleague Alec Russell has comprehensively detailed here, about half the adult population of the planet will have a chance to vote over the next twelve months. That includes the world’s three biggest democratic nations (assuming we still classify them as such) — India, the US and Indonesia — together with elections to the European parliament.Interesting thing though: although there’s a worrying trend towards illiberalism, it’s hard to see any of these elections producing much immediate change as far as geopolitics and globalisation goes. That excepts — and to be fair it’s a massive exception written in letters of fire twelve miles high — the US. India’s Prime Minister Narendra Modi, who is highly likely to be re-elected, has run a trade policy that’s destructive on a multilateral level, somewhat constructive bilaterally and a mixed bag unilaterally. Even if he lost, India’s position probably wouldn’t shift much.Indonesia is part of the large group of transactional middle-income countries who maintain diplomatic and trading relations with both the US and China, also a stance unlikely to change. In the EU, there’s a good chance of a swing towards the hard right in the European parliament. But though there have been persistent fears of the populist right taking the EU in a protectionist and nationalist direction, it hasn’t happened yet at either an EU or national level. The overwhelming political threat is from the US. For Donald Trump, as we saw in his first term, trade is foreign policy, and that foreign policy seems likely to be belligerent and matched by an assault on political freedom at home. It’s a savage irony that the nation that did more than any other to create the postwar trading order is now the biggest threat to it. And yet here we are.Charted watersChina has hit back at the EU (surprise!) for starting an investigation into subsidies to electric vehicle imports by threatening antidumping duties on European brandy. This is pretty squarely targeted at France, regarded as being mainly behind the EU’s antisubsidy probe, though it was actually initiated by the European Commission itself. The stock price of Rémy Cointreau fell accordingly.Trade linksNikkei reports that restrictions on the use of China-made components has reduced the number of electric vehicle models eligible for US tax credits to just eight. Others calculate it differently as 13. It’s not many, anyway.Relatedly, Henry Sanderson in Foreign Affairs notes a problem with “de-risking” from China — that transitioning quickly and cheaply to clean energy means buying Chinese technology.Also relatedly, the Chinese car company BYD has overtaken Tesla as the world’s number one producer of electric vehicles, and a Volkswagen joint venture with a state-owned Chinese manufacturer has started producing EVs for export to Europe.The research organisation Global Trade Alert has launched a monitoring service for industrial policy together with the IMF: a joint paper on the subject is here.Politico reports that Mercosur officials are contemplating a “one last chance” summit to try to get the trade deal with the EU over the ratification line. (It won’t be the last chance though: it never is.)The Indian Express suggests serious game-changing discussions are going on in the Indian government about dropping its fierce objections to cutting tariffs in bilateral trade deals.Javier Milei, Argentina’s new president and a strong critic of China, has pulled the country out of plans to join the Brics grouping, underlining that Brics is increasingly a gang led by Beijing than a meeting of middle-income equals. A terrific FT long read describes how the Australian cartoon “Bluey” conquered the world, including interesting detail on the media industry.Switzerland has abolished all its industrial tariffs, a strategy more usually followed by city-states or city-enclaves such as Singapore and Macau, or by small island nations.Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youEurope Express — Your essential guide to what matters in Europe today. 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BERLIN (Reuters) – Germany’s ailing economy is experiencing a bumpy start to the year with farmers launching nationwide protests against government plans to cut diesel subsidies and train drivers planning several days of strikes over wage disputes. The economy, Europe’s biggest, was the weakest among its large euro zone peers last year, as high energy costs, feeble global orders and record-high interest rates took their toll. The government then suffered a huge blow in November when Germany’s top court threw out its 2024 budget plans, forcing divisive political wrangling over how to fill a 17 billion euro ($18.6 billion) funding gap.Long-term structural problems surrounding Germany’s workforce and infrastructure also remain unresolved. The International Monetary Fund predicts Germany will be the only G7 economy that shrank in 2023 and at 0.9%, growth is expected to remain well below the average of 1.4% for advanced economies in 2024.Here are some of the challenges facing Germany’s economy in 2024: PROTESTSChancellor Olaf Scholz’s coalition has watered down proposals in its hastily reworked budget to cut diesel subsidies. However, the president of the German Farmers’ Association said this did not go far enough and kept plans for nationwide rallies this week. The Christmas truce declared by the GDL train drivers’ union also ended on Monday. GDL plans a strike that would last several days as a wage dispute with rail operator Deutsche Bahn continues. Deutsche Bahn presented a new offer on Friday which it hopes will resolve the dispute, but it is also seeking an injunction to stop the industrial action. GDL is studying the new proposal.BUDGET TURMOIL Scholz’s three-party coalition announced an agreement on the key points of the draft budget for 2024 in December following weeks of negotiations after the Constitutional Court ruling threw the government’s finances into disarray.As sought by Finance Minister Christian Lindner, an advocate of budgetary rigour, Germany will reinstate its cap on new net borrowing in 2024 and fill funding gaps worth a total 17 billion euros largely with cost savings.This will drag further on already insipid growth. Three leading German economic institutes cut their 2024 economic growth forecasts saying the budget crisis was delaying the recovery. Ifo now expects Germany to grow by 0.9% next year instead of 1.4%, while RWI cut its forecast to 0.8% from 1.1% and DIW dropped its prediction to 0.6% from 1.2%.”Uncertainty is currently delaying the recovery, as it increases consumers’ propensity to save and reduces the willingness of companies and private households to invest,” said Ifo’s head of forecasts Timo Wollmershaeuser.WEAKENED COALITIONThe budget wrangling has raised tensions in the already loveless three-way coalition and polls show the big winners of the crisis are the opposition conservatives and far-right Alternative for Germany (AfD).Increased tensions and the need to focus on finishing the 2024 budget agreement are delaying structural reforms promised by the government when it took office including cutting bureaucracy, bringing online access to hundreds of government services, achieving ambitious plans for net zero emissions and the modernisation of public transport.STRUCTURAL PROBLEMSGermany, like other industrialised countries around the world, is facing deep labour shortages, particularly in skilled high-growth sectors. Official estimates suggest Germany’s ageing society will be short of 7 million skilled workers by 2035.The government aims to foster immigration from countries from outside the EU to plug labour shortages. Despite the reform of immigration and citizenship laws in 2023, experts caution that progress may be slow, noting parts of Germany’s administrative machinery are already creaking under a big backlog of existing citizenship applications.Red tape and lack of investment are two chronic problems of the German economy which are slowing down the energy transition and the roll-out of high-speed internet connections. Germany aims to cut its greenhouse emissions by 65% by 2030 compared with 1990, a step to becoming carbon neutral by 2045.Meeting 2030 CO2 targets needs government financing, which has become significantly tighter after the court ruling cancelled 60 billion euros of unused debt earmarked for climate projects.TRADE The German economy is highly trade-oriented and therefore sensitive to international events that weaken foreign demand. Weak global growth, and particularly in China, as well as high interest rates, are expected to cap demand for German exports. Shipping disruptions in the Red Sea and escalating tension in the Middle East could further cloud the trade outlook.”Like the rest of the German economy, exports remain stuck in the twilight zone between recession and stagnation,” said Carsten Brzeski, global head of macro at ING.($1 = 0.9139 euros) More

LONDON (Reuters) – Britain’s next government will have little room to cut taxes or increase spending – at least according to bleak forecasts from the country’s budget office. But if the economy performs only a little better than expected, whoever wins an election expected later this year could have tens of billions of pounds more fiscal flexibility. Under that brighter scenario, Prime Minister Rishi Sunak’s Conservatives could find it easier to lower the highest tax burden since World War Two while still meeting debt promises.If the opposition Labour Party takes power, it would have more room to fund its annual 20 billion-pound ($25 billion) net zero investment plan.Of course, economic forecasting is notoriously inaccurate and the Office for Budget Responsibility (OBR) has proven too optimistic about the economy’s prospects before.If things go worse than it expects, the next government could face an even tighter budget squeeze.PARTIES PLEDGE DEBT CUTThe Conservatives and Labour both promise to lower Britain’s public debt burden, mindful of how the huge tax cuts planned by former Prime Minister Liz Truss hammered bond markets in 2022.Debt is nearly 100% of economic output after massive public spending during the COVID pandemic and the 2022 energy price surge, on top of the heavy costs of the 2008-09 financial crisis.Tackling debt is harder with the economy stagnating, while demands for public services – such as health spending for Britain’s ageing population – continue to mount.Finance minister Jeremy Hunt has promised to get debt falling as a share of gross domestic product within five years.The current forecasts show him meeting that target only narrowly, with less room for manoeuvre than his predecessors. But that “fiscal headroom” is likely to change, given the range of factors that feed into the OBR’s view. The question is whether the headroom expands or gets even tighter. THE PRODUCTIVITY WILDCARDA big wild card is what happens to productivity growth which has slowed, weighing on the economy and tax revenues.If the government can get productivity growing closer to its pre-2008 pace – 1.5% a year rather than 1.0% as expected by the OBR – the headroom for meeting Hunt’s target would rise to 72 billion pounds in five years’ time, the OBR says.That would dwarf the current 13 billion-pound estimate and approach the size of Britain’s 82 billion-pound public education budget during this financial year.But productivity could worsen. Should it grow by only 0.5% a year – in line with the past decade – the government would miss its debt target by more than 40 billion pounds, the OBR estimates, implying tax hikes, more spending cuts or yet more debt. The OBR has overestimated the chances of a productivity improvement in the past. But corporate leaders say Hunt’s announcement in November that tax incentives for business investment will be made permanent is a step forwards. The rise of artificial intelligence is also raising productivity hopes.How inflation behaves is another important factor, and not just because of expensive payouts on Britain’s huge stock of index-linked government bonds.If a future jump in inflation is driven by import prices, chiefly those of oil and gas, the public finances would take a hit, the OBR says. But if that jump in prices comes from higher wages and company profits, tax revenues would go up, potentially helping bring down debt, although the Treasury would face calls to increase spending to match inflation. BETS ARE ON INTEREST RATES FALLINGAnother big assumption by the OBR is what is likely to happen to interest rates which the Bank of England has raised to a 15-year high of 5.25% to fight inflation.Britain spent more as a share of GDP on debt interest than any other Group of Seven country except for Italy in 2022, mainly because it sells a lot of bonds linked to inflation. In November, the OBR forecast net interest costs in three years’ time would be an annual 109 billion pounds, more than double its assumption less than two years earlier.The government’s debt interest bill looked set to settle about 2% of GDP higher than it used to be, with the difference alone equivalent to the entirety of the defence budget, the Institute for Fiscal Studies think tank said at the time.But since November, rate expectations have fallen fast.Investors now see Bank Rate dropping to 4% as soon as December, three years earlier than the OBR assumed.Carl Emmerson, IFS deputy director, said a fall of one percentage point in Bank Rate and on government bond yields would save the Treasury about 15 billion pounds a year, rising to 19 billion pounds in five years’ time.To put that into context, Britain spent 12.8 billion pounds on overseas aid in 2022.”They’re pretty chunky numbers,” Emmerson said.Hunt may be able to turn some of the fall in expected future debt costs into tax cuts as soon as March 6, when he is due to make probably his final budget statement before the election.THE RULES KEEP CHANGINGPerhaps the biggest variable of all is what fiscal rules the next government adopts. While both main parties say they want to bring down debt as a share of GDP, Labour has not been specific about details and the Conservatives, if re-elected, could announce a new rule.Since 2011, successive Conservative-led governments have introduced six different fiscal rules.Emmerson said ministers also needed to stop using improvements in the fiscal outlook to cut taxes or raise spending while any deterioration led to more bond sales.”If whenever things get worse, you end up borrowing more but whenever things look better, you end up giving tax cuts, you’ll always end up borrowing more than you’re forecasting,” he said.($1 = 0.7868 pounds) (Graphics by Sumanta Sen; Editing by Catherine Evans) More

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WASHINGTON (Reuters) – The U.S. economy ended last year with the labor scars from the COVID-19 pandemic effectively healed and a quandary for Federal Reserve policymakers so far waiting in vain for wage and job growth to cool to a sustainable level.The addition of 216,000 jobs to U.S. payrolls in December and wage growth of 4.1% both beat expectations, leaving the central bank still looking for clear signs of a slowing labor market and prompting traders in contracts tied to the benchmark federal funds rate to trim expectations the Fed will start cutting rates at its March meeting.Monthly job growth of around 100,000 and annual wage growth of around 3% are the Fed’s rough benchmarks for growth in each that would be considered consistent with the Fed’s 2% inflation target.”Workers still have the upper hand in the current environment, with strong wage growth and plenty of job opportunities,” wrote Nationwide Senior Economist Ben Ayers. Wage growth remaining above 4% adds to concern that inflation in labor-intensive services industries may be hard to quell and represents “another blow to the odds that Fed will cut rates early this spring.”The Fed held the benchmark interest rate steady at its December meeting in the current range of from 5.25% to 5.5%. But the language in the policy statement issued after the Dec. 12-13 session was changed to allow the possibility that no further rate increases will be needed, while new projections showed a majority of policymakers expect rate cuts of three quarters of a percentage point will be appropriate by the end of the year.Minutes of that meeting reflected an increased sense among officials that they may be approaching a point where the risks to jobs and economic growth posed by the current level of interest rates are more serious than those posed by inflation that has fallen faster than expected of late and which by some measures is near the Fed’s 2% target already.Yet the job market remains a puzzle.Payroll employment has grown by 14 million over the past three years, a historic run that not only replaced the positions lost when parts of the economy were shut down at the start of the pandemic, but are now slightly beyond the level that would have been reached under the Fed’s benchmark for sustainable job growth.The unemployment rate has been below 4% since February of 2022.But while those headline numbers speak to continued strength in employment, there are also undercurrents that point to slowing.Revisions to prior months lopped 71,000 jobs from the estimated payroll additions in October and November. On a three-month average basis monthly payroll growth is now below the average of around 183,000 seen in the decade before the pandemic. Other aspects of the job market are also easing back to normal, including time lost to sickness and measures of labor churn like the worker quits rate, both of which are at or near pre-pandemic levels. The ratio of job openings to the number of unemployed jobseekers has also been approaching its pre-pandemic norm.Minutes of the Fed’s December meeting said that “a number” of Fed officials had begun questioning how much longer tight monetary policy would be needed, and “pointed to the downside risks to the economy that would be associated with an overly restrictive stance.””A few” went further and said the Fed may soon face explicit tradeoffs between maintaining a healthy job market and continued progress on inflation.The Fed under Chair Jerome Powell has so far avoided that difficult choice, with inflation continuing to fall even alongside job and wage gains.That could reflect changes in how the economy works. Fed officials currently estimate that an unemployment rate of around 4.1% is consistent with inflation remaining stable at the 2% target, but improvements in job matching, for example, or in worker productivity could have pulled that lower at least in the short term.Or it could just be a delayed reckoning, something worker advocates said the Fed should stay ahead of.”Job growth has visibly slowed,” said Skanda Amarnath, executive director of Employ America, pointing to both the revisions in prior months’ payroll numbers based on a survey of businesses and the weaker employment levels reflected in a separate survey of households. “The Fed should be rebalancing their focus away from yesterday’s inflation challenges to the potential downside risks the labor market faces in 2024.” More