Aurelia Butler

Welcome to Trade Secrets, cruising smoothly towards the summer lull. Next week’s newsletter is the last weekly edition before we go fortnightly during August. Next month there’s going to be the Brics summit in South Africa, of which more later in the week, to keep global governance fans entertained. (I guess for a group with two southern hemisphere countries, the concept of a summer break is a bit northern-centric.) Today I look at the continued non-appearance of a global food crisis despite Russia’s best efforts to create one, and how Brazil’s president Luiz Inácio Lula da Silva might cure or kill the Mercosur trade deal with the EU. Charted waters is about Germany’s probable lead in electric vehicle battery production in Europe.Entering a world of grainReaders will surely remember a surge of (well-founded) worry last spring and summer about a global food emergency. Lower grain exports from Ukraine, the oil and gas shock hitting energy-intensive agricultural production and transport, interruptions to global shipping, and general high inflation: it all added up.Moscow was weaponising grain by cutting off supply to world markets, potentially creating food crises in developing countries, especially in Africa. Then governments started restricting exports — India within weeks went from saying it would feed the world to blocking wheat exports — and a rerun of the 2007-08 food crisis seemed quite possible.And then . . . basically nothing. Food prices fell. The export restrictions were lifted. It would be nice to think this was because governments and the World Trade Organization have got better at managing food trade and constraining export controls. In fact, it was mainly a series of good harvests and the trading system adapting to unreliable supply from Ukraine.Over the past week we’ve had a bit of a reprise of last summer. As it briefly did last November, Russia suspended the Black Sea grain initiative, which provides safe passage to ships exporting food and fertiliser from Ukraine, and this time topped it off with an extra dollop of evil, bombing Ukrainian grain depots. Moscow is still trying to play grain geopolitics with a plan to turn sub-Saharan countries into vassals (its favourite kind of ally) by supplying them with the food they used to import from Ukraine. And India announced export restrictions on rice.Yet the reaction hasn’t been catastrophic. Global wheat prices rose by 12 per cent last week, but are still not much more than half the levels of a year ago.

Politically, Turkey and Qatar seem unlikely to play ball with Russian president Vladimir Putin’s African blackmail. Fertiliser prices have more than halved since last spring, reflecting the falling cost of energy. Rice prices are at multiyear highs, but India has granted exceptions to its rice export bans to food-insecure countries and may well do so again.Why the muted market response? One, investors may have already priced in a lot of disruption to Ukrainian supply. Two, global harvests have continued to do well despite the spate of extreme weather events. The US Department of Agriculture says wheat production will hit a record high in 2023-24, and the share of US output hit by drought has actually been falling.

The suspension of the Black Sea deal will mainly hit Ukraine and some food-importing poor countries. That’s obviously unwelcome, especially given the continued resistance in central and eastern Europe to accepting Ukrainian grain exports and the difficulty of finding alternative export routes. But it won’t be the kind of widespread disruption that will get Europe and the US leaning on Kyiv to agree ceasefires and peace talks. Sub-Saharan African countries might be charier about criticising Russia, but most low-income countries are avoiding taking sides in the war anyway. As with gas supply to western Europe, Putin’s attempt to weaponise food exports hasn’t really worked.Snaring the elusive MercosaurusMaybe it’s a certain weariness because negotiations before signing in 2019 took nearly two decades and post-signing ratification talks have stalled, but it feels like the global importance of the EU-Mercosur trade deal isn’t sufficiently recognised in some quarters. Assuming India isn’t going to sign meaningful big trade deals any time soon and China’s bid to join the Asia-Pacific CPTPP will get blocked, the South American bloc would be one of the last big chunks of the emerging market world to make substantive new agreements with big, rich trading powers.It would also rebut the idea that EU environmental neocolonialism prevents Brussels making agreements with middle-income countries, at least those with virgin forests. From Brazil’s point of view it would underline Brasilia’s diplomatic agility by getting along with both China and the rich democracies. So what to make of Lula’s remarks last week? The Brazilian president said he was optimistic about getting the deal ratified, but proposed what seems like a poison pill — relaxing the deal’s public procurement provisions so that his country can pursue an active industrial policy. Brazil has already unsuccessfully tried that for half a century, but there’s an appealing case for policy space given the EU’s own adventures in interventionism. And while the EU is normally obsessed with holding to its standard model trade deal, surely there’s an argument for agreeing tweaks here for the prestige of getting Mercosur in the bag.The problem is that unlike the other unresolved issue — a side letter on deforestation that Brussels wants Mercosur to accept — substantially changing the public procurement provisions makes negotiators’ hearts sink. It would mean reopening the text, doing parts of the talks all over again and letting lobbyists and campaigners swarm all over it. If Lula continues to condition ratification on making changes to the text, it will look like he considers the deal expendable.Charted watersIt started slowly and let China get a big lead in making electric vehicles. But a combination of manufacturing knowhow and lashings of state support mean Germany is projected to overtake the early leaders (including Hungary, which forms part of German carmakers’ supply chains) and have the largest EV battery capacity in Europe by the end of the decade.Trade linksEU trade commissioner Valdis Dombrovskis warns in an FT interview there will be no compromise on green steel with the US if it violates WTO rules. Counterpoint: the Biden administration outriders at the Roosevelt Institute explain why the US green steel proposal is the best. The Taiwanese chip giant TSMC, which has moaned mightily about a subsidy race distorting global supply chains, delays production at a chip plant in Arizona because it can’t find good workers.Peter Foster’s excellent Britain after Brexit newsletter shows how continued divergence from EU regulations (or even alignment, since that doesn’t automatically bring market access) will heap more burdens on UK business.The Asian Infrastructure Investment Bank, recently criticised by a departing senior staff member for being unduly influenced by the Chinese Communist party, has nonetheless sealed a partnership deal with the World BankTrade Secrets is edited by Jonathan Moules More

BUENOS AIRES (Reuters) – Mexico’s economy will likely slow in step with an expected moderation of growth in the United States, but the decline could be limited by increased investment from companies relocating to the Latin American country, a Reuters poll showed.Gross domestic product (GDP) in Mexico expanded more than forecast from the second half of 2022 to the start of this year, as low unemployment supported private consumption and remittances hit record highs, driving a strong “super” peso.However, the region’s second-largest economy after Brazil is set to decelerate in coming quarters along with an anticipated cooling in the U.S. following a string of rate hikes by the Federal Reserve that is expected to draw to an end.Mexican GDP growth will probably fall from 2.3% this year to 1.5% in 2024, according to the median estimates among 30 analysts polled in the July 10-20 period. This still would represent an upgrade for the two years combined, from the forecasts in the April poll of 1.5% and 1.6%, respectively.”Although consumption has slowed, it remains close to all-time highs due to rising real wages, greater optimism from lower inflation, a stronger exchange rate, and government transfers,” said Banco Base analyst Gabriela Siller.The Mexican central bank is expected to hold its key interest rate at a record 11.25% until the last three months of 2023, when a small cut of 25 basis points is anticipated, as inflation stays relatively elevated close to the 5.0% mark then.”So far, the interest rate level has not impacted economic activity … growth in coming quarters could be affected more by a slowdown in the United States, Mexico’s main trading partner,” said Ricardo Aguilar, chief economist at Invex.Analysts noted that moves to relocate production to Mexico from China could add a boost. “If ‘nearshoring’ begins to materialize this year, we see annual growth rates of 3.0% (in 2023) and above 2% in 2024,” economists at Finamex said.Nearshoring refers to the trend to move production closer to North American buyers and away from Asia, where supply-chain snarls during the coronavirus pandemic overshadowed the region’s low-cost advantage.On the negative side, Latin America is facing risks from the El Nino weather pattern, which is marked by a warming of water temperatures in the Pacific Ocean that may reignite food inflation and hit crops. Some initial impact has already occurred in Peru and other Andean nations.At the same time, the effects of a credit crunch induced by the longest period of hawkish monetary policy among top economies are reappearing in Brazil, where estimates pointed to a possible GDP growth reduction from 2.2% in 2023 to 1.5% next year.The downtrend should be offset by rising social spending which, in theory, could be paid for with additional tax revenues stemming from planned fiscal reforms the government wants to present next month, including measures affecting the wealthy.Argentina’s economy, however, is expected to worsen, with the poll showing a consensus call for a 3.3% GDP contraction this year and a 0.5% drop in 2024, versus forecasts of a 2.3% fall and 1.0% rise, respectively, in April’s poll.The Peronist government is seeking relief from the International Monetary Fund, as Argentina battles a severe financial crisis that could be aggravated by a lack of international reserves. More

UK economic activity slowed sharply in July as rising interest rates hit consumer spending and a manufacturing downturn deepened, a closely watched survey has shown.The flash UK PMI services output index, a measure of activity in the sector, fell to a six-month low of 51.3, according to new data released on Monday. Meanwhile the manufacturing output index hit a seven-month low of 46.5, indicating that a majority of businesses were reporting a contraction. This brought the composite index, which combines the two sectors, to a seven-month low of 50.7, down from 52.8 in June.Chris Williamson, chief business economist at S&P Global Market Intelligence, which publishes the index with the Chartered Institute for Procurement and Supply (Cips), said the data showed the UK economy had “come close to stalling”.“Rising interest rates and the higher cost of living appear to be taking an increased toll on households . . . Meanwhile, manufacturers are cutting production in response to a worryingly severe downturn in orders, both from domestic and export markets,” he said.Similarly, the HCOB flash eurozone composite PMI fell to an eight-month low after a sharper than expected slowdown in services and a steeper decline in manufacturing in July.The UK survey was conducted against a backdrop of sharply rising mortgage rates, after stubbornly high readings for inflation and wage growth led the Bank of England to raise its benchmark rate to a 15-year high of 5 per cent in June. The survey did not fully reflect more encouraging data on UK inflation published last week, which has led some investors to scale back their expectations for the peak in interest rates.The pound slipped to a two week low against the dollar, losing 0.2 per cent to trade at $1.283.But John Glen, chief economist at Cips, said: “Higher borrowing costs are here to stay and the private sector knows it,” adding that the rise in interest rates was affecting both new orders and spending plans “long into the future”.Thomas Pugh, economist at RSM UK, said the data suggested that “the economy is starting to buckle under the weight of the surge in interest rates and exceptionally high inflation”. “The increase in interest rates delivered to date appears to be increasingly slowing the economy,” said Samuel Tombs, at the consultancy Pantheon Macroeconomics. He added that the data bolstered the case for the BoE to stop raising interest rates soon, and to deliver only a 0.25 percentage point increase, rather than a 0.5 percentage point rise, next month.Service sector companies responding to the survey said a weakening property market was hitting activity, and both businesses and consumers were cutting back on discretionary spending.Manufacturers said a downturn in European markets was hitting demand for new orders. They bolstered their output partly by running down backlogs of work as previous blockages in supply chains eased and it became easier to hire staff who were previously in short supply.There was also evidence of inflationary pressures easing. Companies answering the survey said both costs and selling prices were still rising, but at the slowest pace since early in 2021.However, service sector companies were still managing to pass higher wage costs on to customers, a trend that will reinforce the BoE’s fears of a tight labour market fuelling persistent inflation.  More

The ECB deposit rate now stands at a 22-year high of 3.5% following a 25-basis point hike last month. Its euro short-term rate forwards currently implies the deposit rate would peak at around 3.9% in December or early next year.Following are forecasts from some big global banks:Brokerage July September Terminal Name Rate J.P.Morgan 25 bps hike 25 bps hike 4% Goldman 25 bps hike 25 bps hike 4% Sachs Citigroup (NYSE:C) 25 bps hike 25 bps hike 4% UniCredit 25 bps hike 25 bps hike 4% BNP Paribas (OTC:BNPQY) 25 bps hike 25 bps hike 4% RBC 25 bps hike 25 bps hike 4% BofA 25 bps hike Sees “significant risk” 3.75% of a 4% terminal rate in September Barclays (LON:BARC) 25 bps hike no hike 3.75% Morgan 25 bps hike 25 bps hike 4% Stanley Deutsche 25 bps hike “A further hike to 4% 3.75% Bank in September cannot be ruled out, but is also not a done deal” UBS 25 bps hike 25 bps hike 4% More