Aurelia Butler

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The writer is Visiting Professor at Cardiff Metropolitan University and an associate at Independent EconomicsInflation and the cost of living crisis are now perceived as the most pressing problems facing economic policymakers. Fears that this will prove persistent and trigger a wage-price spiral have motivated the Bank of England to raise interest rates from negligible levels to 5.25 per cent.An important component of the surge in inflation was the rise in import prices as global energy and food costs soared with the outbreak of war in Ukraine. At one point last autumn that price surge ─ a sharp fall in the UK’s “terms of trade” ─ subtracted about 1.5 per cent from the country’s national income.However, the surge, which drove consumer price inflation to annual rates above 10 per cent, has now fully reversed. Indeed, the terms of trade are now slightly better than they were at the beginning of 2022.Consequently, inflation is falling fast: consumer prices in the month of June rose at an annual rate below 2 per cent, and in July the CPI index fell by 0.4 per cent, mainly owing to a decline in energy prices.The initial concern was that the UK had suffered an inescapable loss of real income as import prices rose, and that if companies and workers were to attempt to restore their previous levels of income, the result would be a wage spiral. The spectre of the 1970s loomed, when terms of trade loss and the subsequent battle over income shares resulted in persistent double-digit inflation.That fear is now obsolete, given the terms of trade recovery, but it has mutated into worries about the scale of wage increases and the prospect that they will perpetuate core inflation above the target rate.These are understandable concerns, but they need to be seen in context. Real wages are down 4.5 per cent since the beginning of 2022, having failed to keep pace with inflation. There has been a concomitant increase of some 5 percentage points in the share of corporate profits in national income. Household incomes have been supported by large government subsidies. Yet by all accounts labour markets are tight, so there is no reason to expect the share of wages to fall to such an extent. It must be expected, therefore, that increases in average earnings will run ahead of price increases for some time, and it is appropriate that they do so. To call for wage restraint to lower inflation at this juncture is simply a demand for salary cuts.Of course, all this has a sectoral dimension. Profit margins are up where wholesalers or retailers were marking up on higher input prices. If they hold prices when these costs fall, their margins will increase further. While the beneficiaries are probably concentrated in the energy and food sectors, the effect is felt on real wages in all sectors. Employers will face wage demands. If they concede and raise prices, inflation continues — unless prices fall in those sectors where profit margins have risen. This is happening in energy and to a lesser extent in food. It is to be hoped that importing and retailing of food and energy are competitive enough for that to continue.The policy judgment now has to be whether employers will respond to the inevitable above-inflation wage demands by attempting to preserve past improvements in profit margins. That obviously depends on the strength of demand and activity in the economy. The picture is clouded by the long and variable lags in monetary policy. The effect of interest rate increases on the cost of consumer credit has been quite rapid, but that on mortgages has been delayed while fixed-rate contracts work through. There are tentative signs of a slowdown in activity and a slackening in the labour market; longer leading indicators such as money supply point in the same direction.The BoE should be less concerned about bearing down on wages and cautious about further restriction. More

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The decision comes amid a fierce debate on a housing affordability crisis, which has been blamed on an increase in migrants and international students, fueling demand for homes just as rising costs have slowed construction.The government, under growing political pressure, has said it could consider capping foreign student visas.In a note on Wednesday, CIBC Capital Markets economist Benjamin Tal said the argument for any such limits would be even more pressing if the government had the real figures.Statistics Canada said it stood by its figures, but added that it will publish new, more detailed data on non-permanent residents next month using a revised methodology. “We constantly evaluate and review our methodology to consider emerging demographic trends and new data needs,” Statscan said in an emailed statement. Statscan’s terminology for non-permanent residents covers people living in Canada with work or study permits and asylum seekers. Tal said Statscan’s new approach would help to give a better sense of the actual numbers in the country.”A precondition for any policy in general, and housing policy in particular, is to know the size, the magnitude of the shortage,” Tal said in a phone interview on Thursday. More

TOKYO (Reuters) – Japanese companies raised spending on plants and equipment in April-June but the pace of annual gains slowed to the lowest in five quarters, the Ministry of Finance (MOF) said on Friday, reflecting global recession worries amid China’s slowing growth.Fears of a global downturn are clouding the outlook for export-reliant Japan, the world’s third-largest economy, as sharp interest rate hikes in the U.S. and Europe and surging inflation threaten to stymie demand. China, Japan’s largest trade partner, is battling a deepening property crisis as well.Capital expenditures rose 4.5% in the second quarter from a year earlier, the slowest growth since the start of 2022, and fell 1.2% on a seasonally-adjusted quarterly basis, the MOF data showed. The capex data will be used to calculate revised gross domestic product figures due on Sept. 8. A preliminary estimate indicated that Japan’s economy expanded at an annualised clip of 6.0% in the second quarter, driven by global demand. But analysts said the expansion appeared somewhat softer than the headline figure suggested, partly because it was caused by weaker imports reflecting tame domestic demand. Still, car exports rebounded after a pullback in micro-chip shortages and the reopening of inbound tourism offset sluggish private consumption and capital expenditures, preliminary GDP data showed last month. On the quarter, the capex component of the second quarter GDP stalled while exports grew 3.2%. Private consumption that accounts for more than half the economy fell 0.5%, while imports tumbled 4.3%. Friday’s MOF capex data also showed corporate revenues rose 5.8% quarter on quarter, and recurring profits increased 11.6% in the April-June quarter from the same period a year ago. More

SEOUL (Reuters) – South Korea’s factory activity weakened at a faster pace in August, extending its longest-ever slump by another month as export orders fell again, a private business survey showed on Friday.The purchasing managers index (PMI) for South Korean manufacturers, compiled by S&P Global, stood at 48.9 in August on a seasonally adjusted basis, down from a 12-month high of 49.4 in July.The sub-50 reading meant activity contracted for the 14th straight month, the longest downturn in the survey’s history stretching back to April 2004.Sub-indexes showed new export orders swung back to contraction, after their first increase in 17 months in July, keeping overall orders and output in contractionary territory for 14 months and 16 months, respectively. In August, worries intensified over slowing economic growth in China, which had already been dragging down South Korea’s exports amid weak demand. “August PMI data signalled that South Korea’s manufacturing sector saw a sustained deterioration in operating conditions,” said Trevor Balchin, Economics Director at S&P Global Market Intelligence. “The current downturns in output and new work are the longest in the survey history, although much less severe than those registered during the pandemic and global financial crisis.” On the inflation front, input prices rose again, after falling in July for the first time in more than three years. Still, output prices extended decline to a fourth straight month due to competitive pressures and client negotiations.Suppliers’ delivery times worsened for the first time in five months, as firms reported shipping delays and shortages of semiconductors in particular. Still, stocks of finished goods fell at the fastest rate since December 2021, while backlogs of work declined at the slowest in nine months. A measure of manufacturers’ optimism for future output climbed to the highest level since June 2022, signalling some hope of a recovery in demand. More

The banks, including Industrial and Commercial Bank of China and Agricultural Bank of China (OTC:ACGBF) on Friday cut their deposit rates by between five and 25 basis points, websites from each bank showed. Three sources familiar with the matter told Reuters on Tuesday that major state banks would cut deposit rates.The lenders cut rates on one-year time deposits by 10 basis points (bps) to 1.55%, and two-year time deposit by 20 bps and three-year and five-year time deposits by 25 bps.The deposit rate cut is the third such cut within a year, with the scale of cuts bigger than previous rounds in June and in September last year.The cut will partially offset various pressures on banks’ narrowing net interest margins – a key gauge of profitability, said Nicholas Zhu, a banking analyst at Moody’s (NYSE:MCO). “The impact of the deposit rate cut is material, given that close to three quarters of Chinese banks’ liabilities are deposits,” Zhu said.Some state-owned banks are expected to soon lower interest rates on existing mortgages as Beijing ramps up efforts to revive the debt-hit property sector and bolster a sputtering economy.Two of China’s midsized banks, Industrial Bank Co Ltd and China Bohai Bank Co Ltd, announced Thursday night that they will start cutting interest rates on a range of deposits from Friday by 10-25 basis points. More