Aurelia Butler

This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. While the financial world has been laser-focused on one geopolitical crisis — the trade war — two others are heating up in Asia. China is provoking the Philippines in the South China Sea, and tensions between India and Pakistan are high after killings in Kashmir. Unhedged tends to play down the market impact of geopolitics. But this is, at the very least, seriously bad timing. Email us: [email protected] and [email protected]. We ain’t seen nothing yetThe difficult thing to grasp, after all the volatility and agita of the past three and a half weeks, is how strong the economy is right now, according to the most fundamental indicators, and how little future trouble is priced into markets. Not that much bad stuff has happened, and the market is projecting that not that much bad stuff will.The labour market is stable. Initial jobless claims reported last week were 220,000, on the low end of trend for the past few years. Retail sales are on a rising trend in real terms, as are personal incomes. Yes, the big economic readings are backward facing, the trade shock has not had time to appear in the numbers, and there are some worrying noises around the edges — for example in housing. But the market is telling you that bad news is not on the way. The S&P 500? Still within 10 per cent of its staggering all-time high of February, consensus expects earnings to grow 10 per cent this year, and the index’s forward price/earnings ratio is a plump and cheerful 21. Credit spreads have widened some but in recent days they have come down again:For some, the image all this will bring to mind is Wile E. Coyote: off the edge of a cliff, legs still spinning, and suspended in mid-air so long as he doesn’t look down. I don’t think this is quite the right metaphor, though. Markets are volatile, dispersed and confused. But the valuations of risk assets speak to a fundamental consensus that the Trump administration’s most damaging tariff proposals, including its embargo-level duties on China, will not stand for long. Perhaps this will be because, as the administration hopes, other countries will come to the table and deals will be done quickly; or perhaps they won’t stand because the administration will back down in the face of market pressure and angry consumers. The market won’t mind either way. This optimistic consensus is not blindly ignoring gravity. The administration has already shown a strong propensity to fold: on Chinese electronics, the non-China “reciprocal” tariffs above 10 per cent, and on the Fed. It is up to the Trump doomers to tell us why we should expect this pattern to change. This analysis is based on macroeconomic data and observation of White House behaviour. But it is worth moving down from high abstraction and looking at some details. In particular, several important consumer companies reported results last week, and had some interesting things to say about US households. The CEO of Colgate, which saw unit volumes fall in North America in the first three months of the year, said that “the macroeconomic and consumer uncertainty we saw in the first quarter, not just in the US but also in other countries around the world, had a negative impact on volume growth,” just as one might expect. But the trend has been a bit better in March and April, and he’s optimistic: Consumers will come back. They’ve destocked some of their pantries, but these are everyday use categories . . . we have an expectation as we built into our guidance that categories will come back in the medium term . . . the early signs that we’re seeing in April, at least give us some confidence that categories will slowly come back as the consumers settle down and the economic uncertainty that surrounds the markets around the world improvesProcter & Gamble managed 1 per cent volume growth in North America, as compared to a 4 per cent growth trend in the prior five quarters. The company put the change down to both a weaker consumer and falling inventories. Here’s the CFO: The consumer has been hit with a lot, and that’s a lot to process. So what we’re seeing, I think, is a logical response from the consumer to pause. And that pause is reflected in retail traffic being down. It’s also reflected in somewhat of channel shifting in the search for the best value, shifting into online, shifting into big box retailers, and shifting into the club channel in the US specifically. All of that put together means consumption levels are down in both Europe and the US The word “pause” is doing a lot of work there, and echoes the Colgate view that the economic environment will soon “settle down.” Other consumer facing companies also voiced the notion that consumers would hang tough. Kimberly-Clark, which makes paper towels, nappies, and the like, talked about “resilient demand” even as “affordability has become paramount”. The CEO of O’Reilly Auto Parts emphasised that replacing a part is a lot cheaper than buying a new (tariffed) car:We believe we’re in a market where consumers are placing a high value on investments in their existing vehicles and will continue to be motivated to avoid the significant cost and monthly payment burden that comes with a new or replacement vehicle . . . most of this [tariff] uncertainty was in the headlines and had yet to make its way to anything we would characterise as notable impact to our day-to-day businessOverall, the picture sketched by the consumer companies looks a lot like the one visible in the macroeconomic and market data. Things are slower, but hardly terrible, and should improve when and if the craziness comes off the boil.Fair enough, but how confident are we that the craziness will, in fact, subside? Consider this slide from Procter & Gamble’s earnings presentation, describing the factors excluded from the company’s 2025 targets:Unhedged agrees. So long as growth holds up, currencies stabilise, commodity inflation is tame, there are no political crises, supply chain integrity is maintained, and tariffs are not increased, everything will probably be fine.Consumer creditOne of the economic indicators that is fine for now — but a shade wobbly at the margins — is consumer credit volume and quality. Last year, Americans were borrowing and spending robustly, if not indulgently. Revolving credit volumes hit a record high in October. Issuance started to come down at the end of the year, however, and flatlined throughout the first quarter of 2025:Whether the fall shows pressure on households or a normalisation is hard to say. It could be that consumers have finally run out of their savings cushions from the pandemic — as suggested by rising delinquency rates among younger, poorer Americans. Or it’s possible that US consumers are starting to step back due to concerns about a recession or slowdown. We just don’t know.Other data series don’t give any clear answers. The proportion of banks that said they are tightening lending conditions on businesses and commercial clients increased a bit in the first quarter. But on consumer credit, banks are loosening up: Looking at the big banks, the picture to this point has been slightly more positive. Last quarter, Bank of America, which is relatively conservative in its lending, saw credit issuance increase and delinquency rates decrease. JPMorgan and Chase had less rosy, but still solid results: its lending decreased slightly, and, though it saw a modest increase in delinquencies over the past 12 months, delinquencies were at the same level as this time last year. But the banks’ outlooks were a touch more pessimistic. In its comments to analysts, Citigroup said a “deterioration in the macroeconomic outlook” could be coming; BofA more charitably noted “a changing economy”, which could affect its business. And both Citi and JPMorgan are adding to their reserves to buffer against consumer credit losses.The most negative indicator we have got so far was from the Fed. As of last week, a record proportion of households are paying just the minimum monthly payment on their credit cards (chart courtesy of Torsten Slok at Apollo), suggestive of a serious slowdown. But it is possible that, like other credit quality indicators in recent years, this one speaks to problems that are confined to the low end of the credit spectrum — households with lowish incomes and high, variable rate debt. It is hard to read the economic tea leaves at the moment. Economists and commentators like us have the privilege of waiting for the data to speak less equivocally. Investors are not so lucky.(Reiter)One good readOn pronataliism.FT Unhedged podcastCan’t get enough of Unhedged? 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This article is an on-site version of our Europe Express newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday and fortnightly on Saturday morning. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. News to start: Viktor Orbán has allegedly pumped more than €1bn in unlawful subsidies into pro-government media, according to a state aid complaint seen by the Financial Times, heightening concerns over the illiberal Hungarian premier’s grip on power.Today, our energy correspondent reports on headaches with EU gas rules that could imperil efforts to sign new US import contracts, and one of the bloc’s auditors tells our tech correspondent why Brussels’ industrial policy so often fails to make an impact.Pipe dreamMajor EU importers of gas have said that the bloc’s new rules to cut methane emissions are complicating contract negotiations, just as the bloc tries to wrap increased energy purchases into a trade deal to appease US President Donald Trump, writes Alice Hancock.Context: The EU adopted stringent rules to cut methane emissions in 2024. Methane, which often leaks from gas infrastructure, is 80 times more polluting than carbon dioxide during the 20 years after it is released, and a significant contributor to climate change. Fixing methane leaks is seen as one of the most achievable climate policies.Under the EU methane rules, fuel importers must monitor and report their methane emissions or face fines. Other countries’ rules can be deemed “equivalent”, but few have a framework as strict as the EU’s.In a letter to the European Commission sent today, gas companies including BP, Equinor and Uniper have said that “unresolved uncertainties” in the law concerning importers’ reporting requirements are “already disrupting contract negotiations and risking the EU’s energy security”. The companies, which will face fines of 20 per cent of annual turnover for non-compliance, have said that the commission must take “urgent action” to clarify the rules. Otherwise they will “further limit Europe’s ability to attract diverse and reliable gas supply”. Companies are due to make their first reports in May.The statement comes as the EU is in the process of finalising a plan for how to wean itself off Russian fossil fuels. A senior EU official said that the document would contain various legal options for how companies could break their Russian contracts. Brussels favours buying more US LNG as a way to fill any gap left by cutting out the last Russian imports, and Brussels has said it is happy to comply with Trump’s demands that the EU buy more US fossil fuels as a way to bridge its goods trade deficit with the US. Trump shook hands with commission president Ursula von der Leyen at Pope Francis’ funeral on Saturday, and the two used a brief exchange to agree to a meeting, her spokesperson said without providing details.But Trump has also moved to scrap US rules around reporting methane emissions, complicating any efforts to deem US methane rules equivalent in order to smooth imports.Chart du jour: Crumbling courtsSome content could not load. Check your internet connection or browser settings.After years of underfunding in justice systems across Europe, the continent is grappling with a crisis in its courts.Chipping awayScattered funding and competences complicate the EU’s attempts to implement an effective industrial policy, European auditor Annemie Turtelboom tells Barbara Moens.Context: Boosting competitiveness through industrial strategy is a key priority for the European Commission, as the single market struggles with trade wars, lagging investment and remaining internal barriers.The European Court of Auditors is due to publish an audit report on the EU’s strategy for microchips today, after having already scrutinised a number of other key industrial areas such as 5G, renewable hydrogen, batteries and artificial intelligence. The chips strategy is Brussels’ attempt to secure supplies of the semiconductors that drive today’s global economy, and will be closely studied by the EU’s tech chief Henna Virkkunen, who is preparing more legislation in that field.But the bloc has structural obstacles in achieving its industrial policy goals, including on chips, said Turtelboom, who led the audit. “What we see throughout all our reports is that the funding is scattered. The targets are ambitious and almost never achievable,” Turtelboom said. “And then there are the widely spread responsibilities that also don’t make it easy for the commission to steer the strategy.” The different competences shared between national and EU authorities often make it difficult for Brussels to achieve its industrial policy goals, as it can only nudge European capitals, according to the auditors.“The commission can stimulate, can try to influence, can provide some funding and can set aspirational targets,” Turtelboom said.It is then up to European capitals to realise those targets, who sometimes have different political priorities — even though all European leaders agree on the need to boost the European economy, she said.What to watch today Foreign ministers from Nordic and Baltic countries as well as Germany, France and Poland to meet in Denmark.Informal meeting of EU environment ministers in WarsawNow read theseRecommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe State of Britain — Peter Foster’s guide to the UK’s economy, trade and investment in a changing world. Sign up hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: [email protected]. Keep up with the latest European stories @FT Europe More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Chinese oil traders are setting aside concerns over the long-term economic damage of a US trade war as they seek to profit from one of the short-term consequences: lower crude prices.Imports of crude oil into China surged in March and have continued to accelerate in April, according to analysts, as the country replenishes stocks despite expectations that a weaker global economy will reduce demand.Kpler, a data company that tracks tankers sailing into China, said the country was importing nearly 11mn barrels a day, the highest level in 18 months and up from 8.9mn b/d in January.What started as a buying spree of Iranian oil, on fears of further US sanctions, has developed into a broader stockpiling of crude after President Donald Trump’s tariff announcements, coupled with an increase in production by oil cartel Opec, sent prices sliding to a four-year low. Benchmark Brent crude later rebounded to trade at just above $65 a barrel on Friday. Morgan Stanley believes prices will remain under pressure, falling to an average of $62.50 a barrel in the second half of the year.“China has always been very price-sensitive,” said Giovanni Staunovo, an oil market analyst at Swiss bank UBS. “If the price is low, they stockpile it, and then reduce their buying when prices rise. I expect this month’s data to be higher than last because of this strategic buying.”Kpler’s Johannes Rauball noted that Chinese oil stocks were low, and said he expected the current level of imports to continue over the next few months as buyers take advantage of low prices to restore their inventories. “You could see a rise in imports even if demand [for oil] does not pick up as strongly,” he said.Most analysts believe that the economic impact of the US-China trade war will start to bring down oil demand in the second half of this year, as the economy starts to slow.But the turbulence does not yet seem to have seriously affected China’s appetite for road or aviation fuel, and some refineries have delayed their annual maintenance in order to keep producing gasoline, diesel and jet fuel while crude prices are low and margins are healthy, said Emma Li, a Singapore-based analyst at market data company Vortexa.“Nobody knows what will happen in the following months, especially the second half,” she added. “But demand looks quite healthy so I am not expecting too much decline.”China is the world’s largest oil importer, and the main market for oil that has been forced out of other markets, including Russian, Iranian and Venezuelan crude.Chinese buyers have scaled back their purchases of Iranian oil since the beginning of April, when the US for the first time imposed sanctions on a refinery in eastern Shandong province, the home of many private Chinese refiners. After importing a record 1.8mn b/d of Iranian oil in March, purchases have dropped to 1.2mn b/d in April, said Kpler.“There is some cautiousness within private refineries and there have been some logistical hurdles with some tankers being sanctioned,” said Rauball, adding that the amount of Iranian crude sat in tankers at sea has risen rapidly. “We currently see 40mn barrels in 36 vessels. 18mn barrels are in Singapore, 10mn are in the Yellow Sea and around 4mn in the South China Sea.”He added that private refineries are likely to continue to import Iranian crude because of its discounted price. “Their margins are slim, and they don’t have an alternative. Either they import from Iran or they go bankrupt,” Rauball said. “A lot of them are not linked to the US financial system, so the consequences are less even if they do get hit.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Germany’s ambassador to the UK has expressed hopes that next month’s EU-UK summit will be just the start of a warming of relations and could lay fertile ground for a future review of Boris Johnson’s post-Brexit deal.Miguel Berger said that while much depended on the “level of ambition of the British government”, the EU would be open to discussing options when former prime minister Johnson’s Trade and Cooperation Agreement comes up for a scheduled five-year review in 2026.Leaders at the May 19 summit in London will initially agree a new EU-UK defence and security pact and a communiqué setting out a package of reforms, which both sides hope to negotiate by the end of 2025.Those areas include a youth mobility deal, energy co-operation, streamlining of border controls for foodstuffs and the mutual recognition of professional qualifications.But Berger said that if the talks in May were successful, they could pave the way in 2026 for a second wave of reforms when London and Brussels review the operation of the TCA, which took effect in January 2021. Berger told an evidence session organised by the cross-party UK Trade and Business Commission last week that the summit would be only the “starting point” of negotiations.“It’s very important that the review of the TCA that comes next year is a process that is politically connected,” he said. Some in Brussels see the TCA review as a mainly technical exercise and believe the deal is working well, but other diplomats think there is scope to make it work better in the interests of both sides. Prime Minister Sir Keir Starmer’s “red lines” — which rule out Britain returning to the single market, customs union or free movement — are also significant obstacles and Berger said: “We obviously accept the red lines as they were defined.”But he added: “In the end, for us, it’s the question of the level of ambition of the British government. If the British government would like to move further, we are open to discuss that.“Let’s start with what’s on the table. These are very substantial points. My hope is that once we move forward on these topics, we will hopefully create a dynamic of co-operation that may allow us to go further than what’s currently on the table.”Throughout the EU-UK reset process under the Labour government, Germany has been an enthusiastic promoter of deeper engagement with the UK. Berlin’s appetite for closer ties has often exceeded those of both British politicians and the central EU bureaucracy in Brussels.In January 2024 Berlin submitted a discussion paper to the European Commission, the bloc’s executive arm, which advocated improving the ability of both young people and professionals to work in the UK and EU, in a sign of its intentions to deepen relations with Britain.As well as youth mobility for 18- to 30-year-olds, the paper, seen by the Financial Times, said that if the coming discussion on mobility between the EU and UK “were to have a broader focus”, it could include a raft of provisions to help business-to-business exchanges.These included reduced costs and paperwork for German businesses looking to second employees and their families to work in the UK, easier terms for rotating NGO workers and extended visas for salaried professionals and the self-employed.While, from a trade perspective, the current reset talks remain tightly limited to a so-called veterinary agreement to remove border red tape for food and plant exports and a move to reconnect EU and UK energy markets, trade groups would like to see more ambition over time.In December, the British Chambers of Commerce set out a trade manifesto demanding more flexibility for business travellers, a VAT co-operation agreement, rejoining the Pan-Euro-Mediterranean trade agreement and aligning on industrial regulations, among other ideas.Thus far Brussels has rebuffed requests by the UK for deeper integration into the EU single market unless the UK accepts broader obligations including paying into EU budgets and accepting elements of EU law. Chancellor Rachel Reeves at the weekend signalled her support for a youth mobility deal, telling the Sunday Times that “we do want to enable young people from Europe and the UK to be able to work and travel overseas”. But she cautioned that net migration must fall. Anton Spisak, associate fellow at the Centre for European Reform think-tank, said “the real stumbling block to getting privileged access to the single market is mobility of people”. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Much the most important economic problem the UK confronts is long-term stagnation of productivity. That was the theme of my column two weeks ago. Yes, the turmoil of the moment cannot be ignored. But the urgent is not necessarily the important. Barring a catastrophe (a world war or global depression, for example, about either of which the UK can do little), the main determinant of our prosperity and stability will be decisions made by — and within — this country. The economy must be lifted out of its almost two decades of slump.This is not to argue that Donald Trump’s war on the open world economy is irrelevant. How can it be? He is raising huge and unpredictable barriers to global commerce and, at the same time, destroying the institutional architecture his wiser predecessors created over eight decades. Nevertheless, this in itself is unlikely to be the end of the economic world, at least for the UK.According to the Office for National Statistics, the UK exported £59bn worth of goods to the US in 2024, just 16.2 per cent of total exports of goods. Its £137bn worth of services to the US, 27 per cent of total exports of services, were far more significant. The details of UK exports to the US underline the contrast. The category of services with the largest exports to the US was “other business services”. These amounted to £61bn in 2024, which was 33 per cent of all exports of other business services. Remarkably, exports of other business services to the US were worth more than those of all goods combined. The biggest category of goods exports to the US was machinery equipment, at a modest £29bn. Moreover, only 19 per cent of exports in this category went to the US. Some content could not load. Check your internet connection or browser settings.This is a good position for the UK to be in. Trump — in this respect very similar to homegrown Brexiters — does not seem to care very much about services. That, the Maga fanatics feel, is not what “real men” do: they make steel or mine coal. Moreover, tariffs cannot apply to services. The indirect effects of Trump’s policies, both economic and broader, are far harder to analyse. As Megan Greene noted on April 25, the uncertainties multiply in every direction. It is certainly hard to see an upside for the UK, other than the opportunity to entice top-class people to work in a country that still clings to the idea of the rule of law.Yet the main implication of the Trump shock is that good policy becomes even more important: it always does in difficult times. In general, the aim should be to make the fiscal position and financial system more resilient, enhance the flexibility of the economy and substantially increase investment in human, physical and intangible capital — public and private.Some content could not load. Check your internet connection or browser settings.Unfortunately, there is no way such things can be done in a country with slow productivity growth and a large current account deficit, without suppression of consumption. This is a truth no government wishes to confront. But, according to the IMF, the UK’s average national savings rate between 2021 and 2024 was 15.6 per cent of GDP, which put it 35th out of 37 high-income countries, ahead only of Cyprus and Greece. This has to rise if the UK’s low investment is to do so, too.Yet the ability to fund higher investment is just one necessary condition of faster growth. There must also be opportunities in which to invest. Some of these will be produced by appropriate deregulation, such as relaxation of planning controls and elimination of the more absurd environmental restrictions and excessive curbs on employment flexibility. But others will require effort. In particular, growth means change and so requires innovation. This is a risky and costly process with many positive externalities: a successful new activity will almost always share the benefits of its pioneering with others.This is why there is a sound case for government support for innovation. The question is how to do this. David Willetts, a former Conservative minister, has just published a short pamphlet for the Resolution Foundation on “How to do industrial strategy”, which explores possibilities. My view is that the costs of not taking the risks of failure exceed the costs of taking them. It is pretty clear, as Alexander Hamilton believed, that government can and should act as a catalyst for change. There will be many failures. But there is a good chance that there will also be successes. A country as mired as the UK in stagnation has to risk the former if it is to achieve more of the latter.The big point I have been hammering home for some time is that the more perilous the world and the worse the economic performance, the more damaging is the UK’s reflexive conservatism. Fortune favours the [email protected] Follow Martin Wolf with myFT and on X More

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