Aurelia Butler

EU rules to curb deforestation could have a “catastrophic” impact on global trade if the bloc does not help small producers and developing nations to adapt, the head of the multilateral International Trade Centre has said.Pamela Coke-Hamilton, executive director of the ITC, a joint agency of the UN and World Trade Organization, told the Financial Times that a ban on goods linked to deforestation from entering the EU favoured big companies that can trace where their produce had been grown and risked “cutting off” smaller suppliers.“What the biggest producers may do is, not being able to do the traceability for these small farmers, simply cut them off,” she said. Countries such as Brazil or Honduras, among the main suppliers of coffee to the bloc, or Indonesia and Malaysia, key palm oil and rubber exporters, are among those most affected by the regulation. Coke-Hamilton warned that exporters from those countries could try to sidestep the regulation by sending goods to countries with less stringent import rules, which would disrupt trade flows.Depending on how well the EU addressed its outreach to developing countries the impact of the law on global trade could be “catastrophic or it could be OK”, she added.The legislation, which will come into force at the end of next year, is the first in the world to ban imports of products linked to deforestation, including cattle, cocoa, coffee, palm oil, soya, wood and rubber.It is part of an ambitious environmental agenda set out by the European Commission’s president Ursula von der Leyen in 2019 that gives the bloc the target of reaching net zero greenhouse gas emissions by 2050.Ministers from Indonesia and Malaysia, concerned for their palm oil industry, are among those that have urged the EU to ease the new rules.If small producers could not meet the requirements for exporting goods covered by the law this risked “a vicious cycle”, Coke-Hamilton said. “Once you have loss of market share, you have loss of income, then you will have lots of increased poverty, then increased deforestation because at the root of deforestation is poverty.“We [risk] falling into the trap of reinforcing something that we’re trying to change,” she added. The ITC provides technical support on trade matters to smaller countries.The law will benchmark countries according to whether they have a low, “standard” or high risk of deforestation or degraded forests. More goods that come from high-risk areas will be checked by customs officers.The EU’s 27 member states will be responsible for carrying out checks and refusing goods that come from areas where forests have been cut down or damaged since 2020.The UN’s Food and Agriculture Organization estimated that 420mn hectares of forest — an area larger than the EU — had been lost worldwide between 1990 and 2020. Every year the world continues to lose an additional 10mn hectares of forested land, according to the commission.The law states that “when sourcing products, reasonable efforts should be undertaken to ensure that a fair price is paid to producers, in particular smallholders, so as to enable a living income and effectively address poverty as a root cause of deforestation”.The commission has held meetings with stakeholders from various countries, including one at the WTO in June.Coke-Hamilton said that, given the acute climate crisis, she was supportive of the act’s intentions. But despite leniency being applied to small producers, information requirements and the obligation to use geolocation technology still presented too much of a burden.“Many [smallholders] are trying to just keep up with post-Covid, the cost of living crisis, climate change. They’re just caught in this maelstrom of survival,” she added.The commission said the regulation “applies to commodities, not countries, and is neither punitive nor protectionist, but creates a level playing field. It will be implemented in an even-handed manner that does not constitute arbitrary or unjustifiable discrimination for third-country producers, or a disguised restriction to trade.” It added that the law should be “fully compatible” with WTO rules and was “expected to boost market opportunities for sustainable producers regardless of their size”.Brussels must review the law and its effect, particularly on smallholders and indigenous communities, by June 2028. More

The statement, following a joint meeting on Friday by the People’s Bank of China (PBOC), the country’s top financial regulator and the securities regulator, comes amid growing concerns that China’s deepening property crisis is starting to spillover into its financial system. China unexpectedly lowered several key interest rates earlier last week in a bid to shore up activity and it is expected to cut its prime loan rates on Monday, but analysts say moves so far have been too little, too late, with much more forceful measures needed to stem the economy’s downward spiral.Financial departments should coordinate support to resolve local debt risks, enrich tools to prevent and resolve debt risks, strengthen risk monitoring and firmly hold the line on avoiding systemic risk, according to the PBOC statement. China’s Politburo, a top decision-making body of the ruling Communist Party, in late July reiterated its focus on preventing local government debt risks and said it would carry out a basket of measures, but no plans have been announced yet.Bloomberg reported on Aug. 11 that China will offer local governments a combined 1 trillion yuan ($137 billion) in bond issuance quotas for refinancing.Analysts believe that a coordinated rescue package would likely involve a combination of additional funding or refinancing channels, debt swaps and payment extensions, and possible debt restructurings.Debt-laden municipalities represent a major risk to China’s economy and financial stability, economists say, after years of over-investment in infrastructure, plummeting returns from land sales and soaring costs to contain COVID-19.The finances of many local governments have deteriorated alongside a severe slump in the once-mighty property sector, which has caused a growing number of developers to default on their debts.But Fitch Ratings said earlier this month it expects the central government will try to avoid outright bailouts of more troubled municipalities, as that would undermine policymakers’ years-long effort to bring debt levels down to more manageable levels.The Friday meeting, attended by PBOC Governor Pan Gongsheng, deputy director of the National Financial Regulatory Administration Xiao Yuanqi, vice chairman of the China Securities Regulatory Commission Li Chao and other officials from financial departments, also urged banks to step up lending. “Financial support to the real economy must be strong enough” while major banks should increase lending, the statement said. The PBOC also reiterated that it will optimise credit policies for the property sector, and strongly support small firms, technology innovation and the manufacturing sector.But analysts note many consumers and companies are in no mood to boost spending or borrowing given the extremely uncertain economic climate. New bank lending fell to a 14-year low in July.($1 = 7.2800 Chinese yuan renminbi) More

China is expected to make the biggest cuts this year to two of its core lending rates as pressure mounts on policymakers and banks to reverse slowing momentum and revive flagging demand in the world’s second-biggest economy.The People’s Bank of China is set to announce reductions to both one-year and five-year loan prime rates, which affect borrowing costs for businesses and households, at a monthly meeting on Monday, after making a surprise cut to its closely related medium-term financing rate last week.Policymakers in Beijing have struggled to counter a host of challenges since lifting pandemic restrictions at the start of the year, including a property sector slowdown, weaker exports, record youth unemployment and price deflation as consumer confidence wanes.In a statement released on Sunday, the PBoC urged banks to increase lending to companies to bolster growth and stimulate consumption. The statement was released with China’s financial and securities regulators, which met on Friday to discuss the country’s “tortuous” economic recovery. The majority of economists polled by Bloomberg expect the one-year LPR, which underpins mortgage lending, to be cut by 15 basis points, the largest margin since January 2022. A similar cut to the five-year rate would be the biggest in a year. The LPR rates are currently 3.55 and 4.2 per cent, respectively.The polled economists were unanimous in anticipating a cut to the LPR, which typically follows a reduction in the medium-term lending facility. The MLF rate, which manages banking sector liquidity, is now 2.5 per cent, the lowest since it was launched in 2014 after last week’s cut.Beijing has stopped short of unleashing major stimulus despite months of disappointing economic data, with consumer prices slipping into deflationary territory in July and growth of just 0.8 per cent in the second quarter against the previous three months. But missed bond payments from real estate developer Country Garden and on savings products linked to investment conglomerate Zhongzhi this month have increased alarm among observers.“We believe the risk of systemic concerns emerging in China remains low, though spread[s] will likely remain volatile until the macro volatility subsides,” Goldman Sachs analysts wrote on Saturday, adding that this “may require a more concerted easing effort by China policymakers”.On Friday evening, China’s securities regulator announced a series of reforms designed to boost investment in its capital markets, including encouraging share buybacks to stabilise prices and cutting transaction fees for brokers.The LPR is partly determined by China’s biggest banks, which are set to release financial reports for the second quarter this month. The one-year LPR, which was cut in June by 10bp, is closely watched because of its relationship to mortgage borrowing costs.

Analysts at Nomura projected further cuts to the one-year LPR to 2.35 per cent by the end of the year, while the MLF would be reduced by 15bp to 2.35 per cent.“However, the real issue for the current growth downturn is low credit demand, rather than insufficient supply of loanable funds,” they wrote. “At some point in time Beijing might be compelled to take more measures to stem the downward spiral.”China’s real estate sector, which typically drives more than a quarter of economic activity, has been paralysed by a liquidity crisis over the past two years following the 2021 default of Evergrande, the world’s most indebted property developer. Last week, Evergrande filed for bankruptcy protection in the US as part of a prolonged restructuring.Additional reporting by Eleanor Olcott in Hong Kong More

Gloom has replaced relief as the overriding sentiment about Germany among economists. Experts are warning of another downturn in Europe’s largest economy, despite it emerging from last winter’s energy crisis in better shape than initially feared.The longstanding structural problems, from an ageing population to crumbling infrastructure, have been aggravated by the war in Ukraine, rising interest rates and faltering global trade.The IMF and OECD both expect Germany to be the worst-performing leading economy in the world this year. The country’s top-selling tabloid newspaper Bild Zeitung recently raised the alarm, declaring: “Help, our economy is crashing” as it appealed for chancellor Olaf Scholz to take action. Why is Germany doing so badly?The world’s fourth-largest economy stagnated in the three months to June, after shrinking in the previous two quarters — underperforming all its large rivals. A big reason is the global downturn in manufacturing, which hits Germany disproportionately hard as the sector contributes a fifth of its overall output — a similar level to Japan, but almost double that of the US, France and the UK. Oliver Holtemöller, head of macroeconomics at the Halle Institute for Economic Research, said the higher energy prices and trade tensions triggered by Russia’s full-scale invasion have had an acute impact on the sector. The higher cost of capital and shortage of skilled workers has also put it “under severe pressure”, he added. German gas and electricity prices have retreated since last year. But they remain higher than in many non-European countries and production in Germany’s energy-intensive industrial sectors, such as chemicals, glass and paper, is down 17 per cent since the start of last year, suggesting permanent losses.“The outlook for German industry is bleak,” said Franziska Palmas, senior economist at consultants Capital Economics.Adding to the country’s worries, its traditional strength in carmaking is under threat, as its big brands are losing market share to cheaper Chinese rivals in the fast-growing electric vehicle sector. “The country’s major export goods — cars — are increasingly contested,” said Martin Wolburg, senior economist at Generali Investments Europe.Analysts surveyed this month by Consensus Economics forecast German gross domestic product will shrink 0.35 per cent this year — a reversal from the slight growth they predicted three months ago. They also cut their 2024 growth forecast to 0.86 per cent, down from the 1.4 per cent they expected at the start of the year.How long has it been underperforming?Germany rebounded faster from the 2008 financial crisis than the rest of the eurozone, as global trade grew and southern members of the bloc grappled with banking and sovereign debt crises. But the leader has since become the laggard. German GDP only snuck above pre-pandemic levels in June, while the eurozone was 2.6 per cent above that level.“If you take the coronavirus crisis out, the underperformance started in 2017, so the structural issues have been there for a while now,” said Jörg Krämer, chief economist at German lender Commerzbank.The country’s competitiveness has been steadily eroded by rising labour costs, high taxes, stifling bureaucracy and lack of digitisation in public services, experts said. This is highlighted by Germany’s slide down the IMD business school’s competitiveness rankings to 22nd out of 64 major countries — from being in the top 10 a decade ago.“The advantage Germany built in the first 10 years of the euro has largely eroded as German unit labour costs rose faster than in the rest of the euro area and labour costs in Germany’s eastern European supply chains have converged with the west,” said Christian Schulz, deputy chief European economist at US bank Citi.The ZEW Institute recently branded Germany “a high-tax country for investment”, pointing out its effective tax rate on company profits of 28.8 per cent was well above the EU average of 18.8 per cent last year. What is the government doing about it?When Scholz was asked this in a TV interview on ZDF earlier this month, the chancellor said the government was setting “an incredible pace” with lots of “concretely imminent” projects to accelerate the switch to renewable energy and boost labour supply.He also hailed how chipmakers Intel and Taiwan Semiconductor Manufacturing Company plan to build vast plants in Germany — although these were only secured thanks to about €15bn of subsidies.Most economists think Berlin is heading in the right direction by trying to tackle structural issues rather than provide a short-term fiscal stimulus. “The government is already addressing some key issues,” said Holger Schmieding, chief economist at German bank Berenberg, citing planned laws to streamline planning approval for priority investments and to attract more skilled workers from overseas.But Scholz’s three-way ruling coalition has also been hampered by infighting, most recently when the Green family minister this month vetoed a proposal by the liberal finance minister Christian Lindner that was intended to spur growth by giving companies several billion euros a year in tax relief.Is there any hope of a rebound?Despite all the gloom, some economists think Germany will not keep underperforming for long, betting its cyclical difficulties will ease as energy prices moderate and exports to China recover. “I would say the pessimism is overdone,” said Florian Hense, senior economist at German fund manager Union Investment, forecasting the country’s growth will be back to the eurozone average of 1.5 per cent by 2025.Consumer spending may rebound as German wages rise more than 5 per cent, while inflation is forecast to halve to 3 per cent next year. “Rising real wages is one of the main reasons why we think there will only be a shallow recession,” said Commerzbank’s Krämer.Some believe the current economic woes will force the government to tackle difficult labour market and supply-side reforms that could unlock a new era of outperformance, as it did in the 1990s. “The bigger the problems, the more likely there is to be real change in policy,” said Stefan Kooths, director at the Kiel Institute for the World Economy.Others are more pessimistic. “The country needs an all-encompassing reform and investment plan,” said Carsten Brzeski, global head of macro at Dutch bank ING. “But we are far from getting it.”Additional reporting by Valentina Romei in London and Laura Pitel in Berlin More

Post-conflict reconstruction in Ethiopia following a deal to end its two-year civil war will cost about $20bn and require help from international institutions and investors, according to the country’s finance minister.“We need about $20bn over five years,” Ahmed Shide said of the sum needed to help conflict-hit areas, mainly in northern Ethiopia, recover from the fighting that ended with a peace accord signed in November.Federal and regional budgets would be deployed to achieve this, but support from the likes of the World Bank — whose president, Ajay Banga, visited Ethiopia this month as part of his first trip to Africa — would also be needed, Ahmed told the Financial Times at his offices in the capital Addis Ababa.The civil war cost Ethiopia more than $28bn in damages and “economic losses”, he said. “Given the unprecedented levels of damage and destruction . . . the recovery and reconstruction will come at a significant financial cost.”Fighting broke out in Ethiopia’s northern Tigray region in 2020 after Prime Minister Abiy Ahmed accused fighters there of attacking the federal army. The conflict spread to the Amhara and Afar regions before a deal was agreed in South Africa between the Ethiopian government and the Tigray People’s Liberation Front two years later. Hundreds of thousands of people are estimated to have died in a war that became notorious for the atrocities committed by the warring sides.The fighting also derailed one of Africa’s fastest growing economies. The economy of Ethiopia, Africa’s second-most populous country, grew at an average of 10 per cent annually for 15 years before the civil war broke out, according to World Bank data.Foreign donors withdrew billions of dollars in support after the fighting started, while the US ended Ethiopia’s tariff-free access to its markets. The latter cost about 12,000 jobs in the burgeoning textile industry, according to data from Ethiopia’s industry ministry.More recently, violence in the Oromia region and renewed conflict in Amhara — where the government has declared a state of emergency following fighting between the federal army and a local militia over attempts to disband it — pose new risks, analysts said.Despite the challenges, the economy of the coffee exporter grew 6.4 per cent in the 2022-23 period, according to finance ministry data, almost double the sub-Saharan Africa average. In the 2023-24 period, the ministry forecasts growth of 7.5 per cent.Ethiopian officials hope the African Union-backed deal in Tigray can unlock funding that was frozen during the conflict and open the way for “billions” worth of international financing to help push through reforms in the $126bn economy.Ahmed, the finance minister, described talks with the World Bank as “positive” and said Ethiopia was in “advanced negotiations” with the IMF ahead of a visit by the fund’s representatives to Addis Ababa next month.“We’re very optimistic on this renewed relationship with our development partners as Ethiopia . . . continues to implement new economic reform measures,” he said.

Ethiopian finance minister Ahmed Shide, second from right, meets World Bank president Ajay Banga, second from left, this month © Ministry of Finance Ethiopia

IMF spokesperson Julie Kozack recently said the US-based lender could “potentially” support some Ethiopian “economic policies and reforms”. A senior official from another international institution added: “The conflict has abated and they’ve done seminal work, but they still have much work to do.”Abiy initiated a series of pro-market reforms after taking office in 2018 as part of a plan to open up the Ethiopian economy that was state-controlled for decades, a process that was undermined by the Tigray war.His government now envisages selling a 45 per cent stake in Ethio Telecom, parts of Ethiopian Shipping Lines and a state-owned but Hilton-managed hotel opened by emperor Haile Selassie in 1969. It is also due to launch the first open stock market in Ethiopia’s 3,000-year history.Mamo Mihretu, Ethiopia’s central bank governor, said the government was “committed to not only implement economic reforms, but also deepen them”, including opening the banking sector to foreign companies as soon as this year.“The market potential is high and interest is there,” said Mehrteab Leul, managing partner at MLA, an Ethiopian law firm that advises foreign investors. “One challenge after coming out of a conflict is that government needs to proactively work to get the trust and confidence of the foreign investor.” More