Aurelia Butler

The UK will escape a recession this year, the IMF said on Tuesday, adding that the country’s economy had been “buoyed by resilient demand in the context of declining energy prices”.But the fund cautioned that Britain risked being stuck with persistent inflation unless interest rates stayed high.“Economic activity has slowed significantly from last year and inflation remains stubbornly high,” the fund said in the periodic stocktaking of the UK economy known as the Article IV report. It added: “The outlook for growth, while improving somewhat in recent months, remains subdued.” The IMF predicted in January that the UK economy would shrink by 0.5 per cent between the final quarter of 2022 and the last quarter of this year. It was still forecasting a recession last month.But, in a significant upgrade on Tuesday, it said the economy was now set to expand 0.4 per cent in 2023, reflecting stronger wage growth, more supportive fiscal policy and the easing of global energy prices and supply chain blockages.The fund expects gross domestic product to grow 1 per cent in 2024 and to average 2 per cent in 2025 and 2026.Survey data released on Tuesday confirmed the picture of consumer-driven growth combined with wage rises that put pressure on prices. S&P Global’s flash UK composite purchasing managers’ index edged down from April’s high of 54.9 to 53.9 in May. But S&P said it still signalled a “solid expansion”, with resilient demand for travel, leisure and hospitality offsetting weakness in the manufacturing sector. UK chancellor Jeremy Hunt said the IMF upgrade reflected the UK government’s “action to restore stability and tame inflation” and showed that the country’s long-term growth prospects were now “stronger than in Germany, France and Italy”.But the IMF warned inflation was set to remain above the Bank of England’s 2 per cent target for six months longer than it had forecast last month, until mid-2025.Cautioning against “premature celebrations”, the fund noted the risk that high energy prices would be replaced by more persistent price and wage pressures that could lead inflation to “plateau” at an elevated rate.The IMF added that if inflation remained high, the authorities would need to engineer a sharper downturn to bring it under control.“Some further monetary tightening will probably be needed and rates may have to remain higher for longer,” it said.The fund urged the Bank of England to focus on underlying measures of inflation, such as wage growth and services inflation, rather than the headline rate, which it said was bound to drop on lower energy prices.It also warned the UK government to avoid a pre-election spending splurge that could complicate the BoE’s task of bringing down inflation.“Fiscal policy should stay the course by adhering to the announced consolidation path,” the fund said.But it argued that in the medium term the UK government needed to overhaul its fiscal plans to take account of intense pressures on public services and the investment needed to boost the country’s long-term growth.Current spending plans implied big cuts to some government departments, even before factoring in extra funding to address challenges in the NHS and social care, invest in the green transition, and boost public sector pay, the IMF said.To accommodate such “critical needs”, it advised that Britain should replace the so-called triple lock that ensures that pension payments rise in line with inflation, average earnings or by 2.5 per cent each year, whichever is higher. It also urged the government to strengthen carbon taxation and reform property taxes by moving away from the stamp duty system on home purchases, which it said constrained housing and labour mobility. More

1. ‘Productive, not progress’The scramble in Washington to reach a deal to raise the U.S. debt ceiling has intensified after a crucial meeting between U.S. President Joe Biden and House Speaker Kevin McCarthy failed to produce an agreement.Biden said the discussions on Monday were “productive,” but McCarthy said “no progress” was made in breaking the impasse. Both sides remain at odds over spending plans, although Biden and McCarthy were optimistic that they will eventually find a path toward lifting the $31.4 trillion borrowing limit.However, McCarthy has flagged that a deal needs to be hashed out this week in order to give Congress time to vote on it before the U.S. crashes into a damaging and unprecedented default.Treasury Secretary Janet Yellen has reiterated that the federal government could run out of money to pay its bills as soon as June 1. Investors are nervous that this could create ripple effects through global markets.2. Futures volatile amid debt limit talksU.S. stock futures were mixed in choppy trading on Tuesday as investors digested comments from Democrats and Republicans on the debt limit negotiations.At 04:54 ET (08:54 GMT), the Dow futures contract moved down 44 points or 0.13%, S&P 500 futures lost 3 points or 0.07%, and Nasdaq 100 futures rose by 1 point or 0.01%.The main indices ended the trading day on Monday muted, with the Dow Jones Industrial Average slipping by 0.42% and the benchmark S&P 500 inching only 0.02% higher. The tech-heavy Nasdaq Composite also gained 0.50%.3. U.S. PMI data aheadTraders today will also be keeping an eye on the release of the monthly U.S. purchasing managers’ index, which is expected to provide insight into how elevated interest rates are impacting the performance of the country’s service and manufacturing sectors.The preliminary PMI reading is projected to show that activity in both industries slowed in May, although the figure for services – a major portion of the world’s largest economy – is projected to remain in expansion territory.Meanwhile, the PMI number for manufacturing is seen touching the 50-mark exactly, a level that denotes neither growth nor contraction.Elsewhere on the economic calendar, data for new home sales is also due out, with economists estimating that the amount of new single-family properties sold in April dipped compared to the prior month.4. Lowe’s on deck as first-quarter earnings season winds downHome improvement chain Lowe’s (NYSE:LOW) is set to release its first-quarter results before the start of U.S. trading on Tuesday, headlining a waning stream of U.S. corporate earnings.Lowe’s latest returns are expected to shed more light on the health of the U.S. consumer following a string of numbers from other brand-name retailers last week.Rival Home Depot (NYSE:HD) and big-box group Target (NYSE:TGT) were both hit by cost-of-living pressures that convinced more shoppers to rein in spending on high-priced discretionary items. Home Depot saw three-month sales drop 4.2%, while quarterly comparable sales at Target were flat.However, Walmart (NYSE:WMT) posted a stronger-than-anticipated revenue bump and raised its financial outlook. The megachain known for its low-cost offerings was buoyed by solid demand for groceries, a sign that demand is shifting to essential items as inflation eats into customers’ wallets.Other retailers reporting on Tuesday include sports equipment seller Dick’s Sporting Goods (NYSE:DKS) and kitchenware business Williams-Sonoma (NYSE:WSM). 5. Crude prices slip into the redOil prices moved slightly lower on Tuesday, paring back earlier gains, with the ongoing uncertainty around the debt ceiling talks denting risk sentiment even as the start of the U.S. driving season edges closer.At 04:22 ET, U.S. crude futures inched down by 0.12% at $71.96 per barrel, while the Brent contract slipped by 0.10% to $75.89 a barrel.U.S. fuel consumption is set to pick up with the start of the summer season, which is usually marked by the upcoming Memorial Day weekend at the end of May. This, coupled with disruptions in Canadian supply due to wildfires in the oil-rich Alberta province, has suggested that oil markets may be tighter in the coming months. More

Talks between President Joe Biden and Republican House Speaker Kevin McCarthy ended without a deal yesterday, but the negotiations were “productive”, the latter has said. While talks recently stalled when Biden briefly attended the G7 summit in Japan, the pace may be picking up. “We know the deadline. I think the president and I are going to talk every day . . . until we get this done.” McCarthy told reporters. In separate remarks, Biden also used positive language: “We reiterated once again that default is off the table and the only way to move forward is in good faith towards a bipartisan agreement.” On the same day, Treasury secretary Janet Yellen again warned that the US would start running out of money to pay its bills in early June, potentially by June 1. Oxford Economics estimated the Treasury would be able to “squeak by” until June 14.Both Democrats and Republicans have accused each other of blocking progress on talks. Biden has urged Republicans to ditch their “extreme” stance, which includes deep spending cuts over the next decade compared with Democrats backing smaller cuts over a shorter period. The uncertainty on whether a deal would materialise has started to be felt in the corporate bond markets, as US companies bring forward billions of dollars in deals to sidestep any turmoil caused by a default. Richard Zogheb, head of global debt capital markets at Citi, said the move reflected “a combination of ‘let’s avoid the nonsense of the debt ceiling and let’s take advantage of what’s a pretty good market’”.Here’s what else I’m watching today:Results: Lowe’s is forecast to report that its revenue declined 8.7 per cent to $21.6bn, as consumers rein in spending on home improvement projects. Sports retailer Dicks Sporting Goods and luxury homeware company Williams-Sonoma will report before the opening bell. Software group Intuit will report after the bell.US new home sales: Economists have forecast that sales of new homes in the US declined in April to an annualised pace of 665,000 units, down from 683,000 in March.International Booker: The winner of the book prize is announced in London.Who will win the US-China tech war? Join FT and Nikkei Asia journalists for a subscriber-exclusive webinar this Thursday and put your questions to the panel.Five more top stories1. Exclusive: New climate-friendly biofuels will “never achieve the price of jet fuel”, Boeing’s chief Dave Calhoun has warned, pouring cold water on a central pillar of the aviation sector’s strategy to slash emissions. Sustainable fuels account for less than 1 per cent of global aviation consumption and cost twice as much as traditional jet fuel.2. JPMorgan Chase, the largest bank in the US, is planning a massive spending spree of $15bn this year, $2bn more than it spent last year. The bank has raised its 2023 forecast for net interest income following its acquisition of First Republic. 3. Florida governor Ron DeSantis is expected this week to file paperwork for the 2024 presidential race. But DeSantis’s popularity is floundering compared with Donald Trump, who at present has the support of more than 56 per cent of Republican voters, according to an opinion poll. Another Republican hopeful: Tim Scott, a South Carolina senator, has joined the race for the presidency, adding another name to an increasingly crowded field of Republicans vying for the party nomination.4. Exclusive: TikTok has restructured its ecommerce business to refocus on certain markets. Staff in Brazil who were working on launching TikTok Shop there are being relocated to markets where the service has already been introduced. Read more on the ByteDance-owned platform’s plans.Related: TikTok is suing Montana to stop the US state from banning it over national security concerns, arguing the move is “unlawful” and “unconstitutional”.5. China is worried that new Japanese export controls could cripple the country’s chipmaking industry. The new rules could be more restrictive than even the US’s and would make it difficult for China to produce the most basic chips found in household goods. The Big Read

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US Congress members who buy or sell a stock are required to report the transaction within 45 days. But these individual transaction reports leave out the vast majority of lawmakers’ investment portfolios because purchases of collective investment funds only need to be revealed once a year in complex and harder-to-access reports. Here’s how Capitol Hill is struggling to keep up with new insider trading risks.We’re also reading . . . Artificial intelligence: Building AI safely and responsibly isn’t something one company can do alone, writes Google chief Sundar Pichai.Future of work: As pandemic-era graduates enter the workplace, managers have a responsibility to help ease the anxieties of the Covid-19 generation. Liberalism’s problems: National conservatives’ solutions to the rich world’s challenges have difficulties of their own, writes Stephen Bush.Chart of the dayAfter a rough year, “bonds are exciting again”, with yields on Treasury notes at one of their highest points in the past decade. Mike Gitlin, chief executive of Capital Group, which manages $2.2tn in assets, said the company was seeing an average of $500mn in net new flows entering the market every week, and that $1tn could enter the bond market over the next few years. Take a break from the newsSalman Rushdie was last year repeatedly stabbed onstage at a literary festival in upstate New York, which resulted in him losing his sight in one eye. In one of his first public appearances since then, the 75-year-old novelist told the FT Weekend Festival on Saturday that he was planning to write a book about the attempt on his life.

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Additional contributions by Amanda Chu and Tee Zhuo More

KYIV (Reuters) – An International Monetary Fund mission started work on Tuesday on the first review of a $15.6 billion loan program that it approved in March, the Ukrainian finance ministry said.The IMF’s four-year program for Ukraine is part of a $115-billion global package to support the country’s economy as it battles Russia’s full-scale invasion.The ministry said in a statement that Ukraine’s economic performance, the situation in the energy sector, and efforts to ensure the rule of law, increase transparency and fight corruption would be discussed during meetings in Vienna. Some meetings between Ukrainian officials and IMF experts will also take place in an online format.”We are working to create an international compensation mechanism in order to direct confiscated Russian assets towards Ukraine’s reconstruction,” Prime Minister Denys Shmyhal said on the Telegram messaging app.”We count on the IMF’s support in this area, as well as further assistance to consolidate financial support from partners from around the world.”To ensure continued IMF support, Ukraine must meet a number of conditions, including steps to boost tax revenue, maintain exchange rate stability, preserve central bank independence, and strengthen anti-corruption efforts.Ukraine’s economy has been devastated by the war and the government relied heavily on Western aid to finance its social and humanitarian payments. Ukraine’s Extended Fund Facility (EFF) loan is the first major conventional financing program approved by the IMF for a country involved in a large-scale war. More

WASHINGTON (Reuters) – A tight U.S. job market and rising wages are beginning to have more of an impact on inflation and could embed faster rising prices if the demand for workers is not brought into better balance with the labor force, new research from an ex-Federal Reserve chief and a former top International Monetary Fund economist has concluded.Ben Bernanke, who led the U.S. central bank from 2006-2014, and Olivier Blanchard, the IMF’s chief economist from 2008 to 2015, said the inflation surge starting in 2021 was largely stoked by energy markets and shortages of automobiles and other durable goods.”However, over time a very tight labor market has begun to exert increasing pressure on inflation … That share is likely to grow and will not subside on its own,” they wrote in a paper released on Tuesday by the Washington-based Brookings Institution. “The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance.”The U.S. central bank has raised interest rates aggressively since March of 2022 to try to slow the economy and reduce the overall demand for goods and services. While policymakers are expected, for now, to hold off on another rate increase at their June 13-14 policy meeting, they have remained noncommittal as they await upcoming inflation and jobs data.The paper adds a new set of arguments, from two influential economists who witnessed inflation’s broad retreat during their policymaking terms, to one of the Fed’s central debates: what role a looser job market and slower wage growth will need to play in any continued lowering of inflation from levels that remain high and are only slowly improving.LABOR MARKET SLACKSome Fed economists and policymakers feel a point of steady “disinflation” may be close, and hinges only on families and businesses spending final doses of pandemic-era cash. Others, most notably Chicago Fed President Austan Goolsbee, have argued that wage gains say little about future price increases, but largely reflect past price hikes. Atlanta Fed economists have cast it differently still, saying that after COVID-19 pandemic years in which businesses saw outsized profits, there is room for wages to grow through a decline in business margins rather than a rise in prices. In a joint appearance with Bernanke at a U.S. central bank research conference last Friday, Fed Chair Jerome Powell seemed to have settled in a place similar to the former Fed leader, saying that much of the work left to be done in lowering inflation will have to come from a job market still sustaining a 3.4% unemployment rate, abnormally high numbers of vacancies, and wage gains outpacing the rate of price increases.”I don’t think labor market slack was a particularly important feature of inflation when it first spiked in spring of 2021,” Powell said. “By contrast, I do think that labor market slack is likely to be an increasingly important factor in inflation going forward,” reiterating his observation that price increases are proving most stubborn in service industries where “labor costs are a high proportion of total costs.” A Fed intent on producing weaker hiring and slower wage growth would, at least in the past, imply rising joblessness. Indeed, policymakers expect the unemployment rate to increase as their fight against inflation continues. How fast and by how much remains a contested point: Some outside economists have estimated unemployment rates as high as 6% or 7% will be necessary, while Fed policymakers remain hopeful of a more modest dislocation. Bernanke and Blanchard did not take an explicit stand on that issue, but said it may still be possible for the labor market to ease largely through a drop in the number of job openings rather than a rise in joblessness.INFLATION EXPECTATIONSTheir study, however, points to some of the risks Fed officials may face as they decide whether to be patient in allowing time for inflation to slow, or use further rate increases to force a faster adjustment in an effort to ensure high inflation does not become embedded.Bernanke and Blanchard estimate that inflation could return to the Fed’s 2% annual target if over the next two years their preferred measure of labor market slack – the number of job openings for each unemployed job seeker – falls below 1 to around 0.8, meaning more unemployed workers are competing for jobs than there are open positions. If over that time the ratio falls only to the pre-pandemic rate of around 1.2, by contrast, inflation as measured by the Consumer Price Index would fall to around 2.7% – still high, but “within striking distance” of the Fed’s 2% target, the authors said, given the differences between the CPI and the Personal Consumption Expenditures Price Index the Fed prefers. But “allowing (the ratio) to remain near current levels does not bring inflation down in our projections. Indeed, because an extended period of inflation raises long-term inflation expectations, it leads to slowly increasing inflation,” they wrote.The current ratio is 1.6, down from a peak of around 2 last year. “The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance,” Bernanke and Blanchard concluded. “Labor market balance should ultimately be the primary concern for central banks attempting to maintain price stability.” More

Last year some economists caused a minor stir by suggesting the concept of something they called R**. It looks pretty prescient in light of the recent US banking mess, and they’ve now updated their paper with more detail.First, some background. In economic equations, R stands for interest rates, and stars are used to denote long-term variables. So R* has become shorthand for the idea of a long-term “neutral” interest rate that neither slows nor quickens economic growth and inflation. It’s theoretical unknowable number until you really know you’ve jacked rates up beyond it, but R* has become such a eco-nerd meme that Alphaville even used it for our own line of swag.

Anyway, at a conference at the NY Federal Reserve last autumn, economists Ozge Akinci, Gianluca Benigno, Marco Del Negro and Albert Queralto presented a paper on what they dubbed R**, or R-double star (yes, really).The idea is that there is also a neutral level of interest rates for financial stability, and, crucially, it is not the same as R*. Basically, R** is a measure of an economy’s financial sturdiness. When it’s low, a country is vulnerable to financial shocks from rate increases, and when it is high it can more easily shrug them off without major mishaps. Crucially, if R** drifts lower than R* — for example, if prolonged low interest rates encourages leverage, risk-taking and general stupidity — a central bank’s rate increases can cause financial calamities long before it gets to the point where rates really start to contain inflation. That the Fed’s rate increases precipitated a banking crisis before they got inflation down to even vaguely near their target looks like a good example of what Akinci et al were arguing last year. They’ve now revised the paper to flesh out some details and models of R**. You can also read a summary of at the NY Fed’s Liberty Street Economics blog.Since R**, like R*, cannot be directly observed, the economists have tried to model of what it probably is, constructed out of other measures of financial instability and using machine learning (naturally). The basic question they wanted to answer is: How large a shock to real interest rates can the financial system take before entering a crisis?Here’s what some R** variants look like over the past 50 years:You can probably spot some issues just eyeballing this chart. The problem is that R** cannot in practice actually be used as a way to predict financial disasters. So unless we’re missing something it’s of questionable practical use, beyond as a new conceptual take on an ancient realisation: rate shocks often reveal financial faultlines.As the paper points out, the modelled R** readings looked comfortably high in the late 1990s — until LTCM suddenly blew up. It was similarly sanguine in the noughties — right up until the global financial crisis erupted. Still, it’s a pretty fascinating paper that the researchers promise they will follow up with more work. And the fact that financial and economic stability are multi-faceted, dynamic and sometimes at odds deserves more attention. Further reading— The fault in R-stars More

China’s semiconductor industry fears Japanese curbs on exports of crucial chipmaking equipment will be so broad that they risk hitting its production of lower-grade silicon, used in everything from cars to washing machines.Tokyo has said it intends to put restrictions on exports of 23 types of crucial chipmaking equipment from July, as it aligns itself with the US and the Netherlands in implementing sweeping export controls that could limit China’s access to cutting-edge chips. However, Chinese industry executives who have examined the fine print of the intended rules say they could potentially go further than the US in restricting China’s ability to make semiconductors.“Japan’s export controls will be more disturbing to China than Washington’s sanctions last year,” said a Chinese chip factory executive, who did not wish to be named. Last October, Washington put limits on the export of equipment capable of producing chips at miniaturisation levels of less than 14 billionths of a metre, or in some cases, 16 nanometres.The nanometre node refers to different generations of chip production technology. The most advanced chips for smartphones, for example, are 3nm ones, whereas more mature chips for household appliances, vehicles, and Internet of Things gadgets are produced at 28nm and above.However, Japan’s specifications encompass chips as basic as 45nm, in export controls for equipment such as that used in immersion lithography provided by Nikon, because some of the technology can be essential in producing advanced chips. A Chinese government official who works closely with chipmakers said the Dutch lithography giant ASML only expected restrictions on machines that produced advanced chips, while its smaller rival Nikon would face more extensive limits in Japan. One person close to ASML said the company was still awaiting final details from the Dutch government, which is expected to spell out its restrictions by mid-July.“What the Japanese government is saying is that they will require licences for everything — whether they grant those licences or not is the question . . . the Japanese are further ahead than us,” the person said.Nikon said it did not anticipate any impact from Japan’s export controls for the current 2023-2024 fiscal year. Another equipment supplier, Tokyo Electron, expects its annual revenues to fall 23 per cent from a year earlier to ¥1.7tn ($12.3bn), but executives declined to comment on how much of the decline was a result of the measures and which of its equipment would be affected.China’s Semiconductor Industry Association, which represents 900 companies, warned last month that the scope of exported equipment that could be restricted by Japan was “too broad” and could affect supply chains for more mature chip technology.It called on the Chinese government to “take decisive countermeasures if the Japanese government insists on destroying the friendly and co-operative relationship between the Chinese and Japanese semiconductor industries”.According to research company TrendForce, chips produced at 28nm and above nodes are expected to occupy 75 to 80 per cent of the production capacity of foundries globally in the next three years.

Such mature chip production is also a key part of China’s strategy in response to US restrictions. China’s largest chipmaker SMIC has ramped up production of lower-grade chips and is building four new factories after being put on the US entity list for export controls. Although it has directed funding and lent policy support to local equipment suppliers, China is still highly reliant on imported chipmaking tools and had hoped to turn to Japan and South Korea for replacements for US technology as geopolitical tensions increased. Instead, there are now fears that Japan’s potentially tighter restrictions on equipment exports could be a sign of things to come from other governments.“We are concerned about whether the US and Netherlands governments will issue export controls as strict as Japan’s,” said a government official working closely with Chinese fabrication plants.However, Applied Materials, Lam Research and KLA, three of the biggest US tool manufacturers for chipmakers, have all said commerce department clarifications meant they should be able to ship equipment to help make older-generation chips.Government officials in Tokyo cautioned it would be difficult to judge which restrictions were the most stringent based on the specifications alone, since companies could still get a licence to export the equipment even if they needed to go through the screening process. And while Washington’s measures specifically target China, Japanese export controls have a far wider geographical coverage. “The systems are different, so it’s not an apples-to-apples comparison,” one Japanese official said.Additional reporting by Andy Bounds in Brussels More