Aurelia Butler

HIROSHIMA, Japan/WASHINGTON (Reuters) -President Joe Biden on Sunday called Republicans’ latest offers in talks on lifting the government’s debt ceiling “unacceptable,” but said he would be willing to cut spending together with tax adjustments to reach a deal.Speaking to reporters in Hiroshima, Japan, after a meeting of G7 leaders, Biden suggested some Republicans in Congress were willing to see the U.S. default on its debt so that the disastrous results would prevent Biden, a Democrat, from winning re-election in 2024.Less than two weeks remain until June 1, when the Treasury Department has warned that the federal government could be unable to pay all its debts. That would trigger a default that could cause chaos in financial markets and spike interest rates.Biden said he would speak to top congressional Republican Kevin McCarthy on his flight home and hoped the speaker of the House of Representatives had been waiting to negotiate with Biden directly.”Much of what they’ve already proposed is simply, quite frankly, unacceptable,” Biden said. “It’s time for Republicans to accept that there is no bipartisan deal to be made solely, solely on their partisan terms. They have to move as well.” The talks have grown increasingly heated in the past two days. Democratic and Republican negotiators said Friday meetings at the Capitol yielded no progress and the two sides did not meet on Saturday. Instead, each has reverted to calling the other’s position extremist.”Unfortunately, the White House moved backwards,” McCarthy told reporters late Saturday.The Democratic president said he believed he had the authority to invoke the 14th Amendment to the U.S. Constitution to raise the debt ceiling without Congress, but that it was unclear that enough time remained to try to use that untested legal theory to avoid default.Officials did not meet on Saturday and announced no progress from meetings on Friday or any plan to talk again. Instead, both sides cast the other’s proposals as too extreme.A source familiar with the negotiations said Republicans had proposed an increase in defense spending, while cutting overall spending. The source also said House Republicans wanted to extend tax cuts passed under then-President Donald Trump, which would add $3.5 trillion to the federal debt.The source said the Biden administration had proposed keeping non-defense discretionary spending flat for the next year.Another person familiar with the talks said Republicans’ latest proposal included “steep” cuts over a longer period of time than recent budget deals, as well as a variety of measures that irk Democrats, including work requirements for aid, cuts to food assistance and less money for the tax-collecting Internal Revenue Service.The person said Republicans had also rejected Democrats’ proposed measures to raise revenue, including drug payment reforms and closing “tax loopholes.”Concerns about default are weighing on markets. The U.S. was forced to pay record-high interest rates in a recent debt offer and worries about the lack of a deal weighed on U.S. stocks on Friday.SPENDING CUTS Biden heads back to Washington on Sunday after truncating his Asia trip to focus on the debt ceiling talks. The Republican-led House last month passed legislation that would cut a wide swath of government spending by 8% next year. Democrats say that would force average cuts of at least 22% on programs like education and law enforcement, a figure top Republicans have not disputed.Republicans hold a slim majority of seats in the House and Biden’s fellow Democrats have narrow control of the Senate, so no deal can pass without bipartisan support.U.S. Representative Patrick McHenry, a Republican negotiator, had said Republicans leaders were “going to huddle as a team and assess” where things stood.McCarthy could not be immediately reached for comment early on Sunday. Republicans are pushing for sharp spending cuts in many domestic programs in exchange for the increase in the government’s self-imposed borrowing limit, which is needed regularly to cover costs of spending and tax cuts previously approved by lawmakers.Biden stressed that he was open to making spending cuts and said he was not concerned they would lead to a recession, but he could not agree to Republican demands.The last time the nation has come this close to default was in 2011, also with a Democratic president and Senate with a Republican-led House.Congress eventually averted default, but the economy endured heavy shocks, including the first-ever downgrade of the United States’ top-tier credit rating and a major stock sell-off. More

The writer is chair of Rockefeller InternationalSomething is rotten in the Chinese economy, but don’t expect Wall Street analysts to tell you about it. There has never been a bigger disconnect, in my experience, between some of the rosier investment bank views on China and the dim reality on the ground. Perhaps reluctant to back off their calls for a reopening boom this year, sellside economists keep sticking to their forecasts for growth in gross domestic product in 2023, and now expect it to come in well above 5 per cent. That’s even more optimistic than the official target, and wildly out of line with dismal news from Chinese companies. Hopes for a reopening boom were based on the premise that, once released from lockdown, Chinese consumers would go on a spending spree, but company reports show no sign of one. If China’s economy were growing at 5 per cent, then based on historical trends corporate revenues should be growing faster than 8 per cent. Instead, revenues grew at 1.5 per cent in the first quarter.Corporate revenues are now growing slower than officially stated GDP in 20 of China’s 28 sectors, including consumer favourites from autos to home appliances. Weak revenues are in turn depressing earnings for consumer goods companies, which normally track GDP growth quite closely, but shrank in the first quarter. Instead of a reopening rush, the MSCI China stock index has fallen 15 per cent from the January peak and consumer discretionary stocks are down 25 per cent since then. If the analysts were right, and consumer demand was picking up in what one described as a “boomy” economy, imports would be strong. Imports fell 8 per cent in April. When retail sales and industrial output came in way below analysts’ estimates last week, one attributed this miss to “seasonal adjustment”, as if spring had come unexpectedly this year. China’s credit growth is weakening too, up by just Rmb720bn ($103bn) in April, half as fast as forecasters expected. The debt service burden of Chinese consumers has doubled in the past decade to 30 per cent of disposable income — a level three times higher than in the US. Many Chinese youth need a job before they can join a spending spree: urban youth unemployment is rising and last month topped 20 per cent. These facts point to the source of the rot. Since 2008, China’s economic model has been based on government stimulus and rising debt, much of it pouring into the property markets, which became the main driver of growth. With debts so high, the government was much more restrained in its stimulus spending during the pandemic. By the start of this year, the Chinese had accumulated excess savings during the pandemic equal to 3 per cent of GDP. The comparable figure in the US was 10 per cent of GDP. While the US got a big reopening boost from stimulus, China did not get one this time. A growth model dependent on stimulus and debt was always going to be unsustainable, and now it has run out of steam. Much of the stimulus over the past decade had flowed through local governments in China, which used their own “financing vehicles” to borrow and buy real estate, propping up the property markets. Those vehicles are fast running out of cash to finance their debts, which is curbing their investment in the property market and industry as well. Industrial sectors are slowing faster than the consumer-related businesses at the centre of the reopening story. Though Beijing still aims for growth of 5 per cent, its potential has fallen to half that. Potential for GDP growth is a function of population and productivity growth: China’s negative population growth means fewer workers are entering the labour force, and heavy debts are slowing output per worker. China’s government has long been suspected of massaging its GDP numbers to hit its growth targets. But cheerleading from Wall Street seems to be reaching a crescendo now, as analysts who called for a reopening boom find it more opportune to stay the course — even if this requires highly selective use of official data — than to reverse themselves. While analysts may have little to lose from rosy forecasts, the rest of us do. “Boomy” chatter has contributed to investors’ loss of hundreds of billions of dollars in China in just the past four months. Further, global growth may prove weaker than expected in 2023, since the hope is that a US downturn will be countered by the China reopening boom, which may never come. It is time to expose this charade before the fallout gets worse. More

“Not even a recession.” That is the verdict on how Germany coped when it abruptly had to do without Russian energy supplies last year — a dependency that had been cultivated by all German governments of the past half-century, for both commercial and political reasons.The phrase is the title of a new study by economists Benjamin Moll, Moritz Schularick and Georg Zachmann, who compare the outcome for the German economy with the predictions made immediately after Vladimir Putin’s full-scale assault on Ukraine. The invasion triggered what they call “the great German gas debate” between disagreeing groups of economists, with business lobbies and unions weighing in about whether the economic cost of ending Russian gas imports would be bearable.As Moll and his colleagues remind us, some of these predictions were apocalyptic: up to 12 per cent loss of economic output and millions losing their jobs. Those arguing the losses would be much smaller were berated by chancellor Olaf Scholz himself for “irresponsible” theorising.Politically, the debate was won by the doom-mongers. The impressive speed with which Berlin found substitute sources of gas and built emergency infrastructure makes it easy to forget that Germany did not in fact choose to go without Russian gas. That was a decision Putin made for it by throttling gas supplies before stopping them altogether late last summer. And the EU as a whole took too long to agree its still-incomplete restrictions on Russian energy imports.But the truth was on the optimists’ side. (I had a dog in this fight: I argued a week into the war that Europe could and should go “cold turkey” on Russian gas imports.) As Moll and his colleagues make clear, Germany’s growth outcome has been as good as the rosiest estimates of the energy war’s toll. There was no “cascade” of production cuts, bankruptcies and lay-offs from the most energy-intensive industries to the wider economy. Despite a drop in March, manufacturing output remains greater than a year earlier.The authors even find that, according to German meteorological data, temperatures were no higher than the multiyear trend: if so, the idea that Germany was saved by a warm winter seems to be a myth. The gas left in storage by the end of the heating season means Germany never needed the Russian gas it bought before Putin closed the taps. Cold turkey would have been perfectly feasible.The resilience of Germany’s economy is something to celebrate. More important is to learn the right lesson. Why did the balance of opinion wrongly oppose a morally and geostrategically right policy for being prohibitively expensive?The inexcusable answer is a desire by some in corporate Germany not to have to face any economic cost at all for standing up to Putin. The more understandable, if disappointing, answer involves intellectual mistakes. There is a general lack of appreciation in continental Europe — for this goes beyond Germany — of how adaptable market economies are. It is reinforced by mistaking challenges to existing businesses for threats to the overall economy, when in fact the creative destruction of unadaptive companies is what makes market economies grow. In addition, European leaders have long internalised an outdated criticism of the European economy as particularly inflexible and “sclerotic”.Germany’s great gas debate is only the most egregious example of how Europeans underrate their own economic adaptability. There are others. Few expected that the post-pandemic recovery would take employment rates to record highs — in stark contrast to the lagging US and UK labour markets. The EU’s taboo-breaking recovery fund is fuelling growth in countries many had written off as perennial basket cases.If we don’t draw the right lessons from such examples, we will persist in an overly timid understanding of what Europe’s economies can deliver. The policy risks from such misdiagnosis are all around us, reinforced by the self-pleading of corporate incumbents. Brussels has been forced to slow down the pace of its decarbonisation policies. Germany and France have both mounted rearguard actions against important legislation. French President Emmanuel Macron has demanded a “regulatory break”. German carmakers want to delay the EU-UK trade deal’s penalisation of electric cars with batteries made outside Europe.In all these examples, the argument is that too much change is too difficult. But as the German gas debate shows, an economy is more flexible than the sum of its parts. If some companies are unwilling to change, dynamic markets make space for those that are willing and able to adapt. European economic policy should reinforce these market pressures, not protect against [email protected] More

Everyone wants a slice of the electric vehicle market. Carmaking is not only a big employer, it has also long symbolised a nation’s manufacturing prowess, from British Minis to Italian Ferraris. As the sector goes electric to meet climate change targets, the US, EU and China have been thrust into a race to build up domestic EV production capabilities. In the frenzy of subsidies and deals, electric automakers need to decide how best to locate their complex supply chains.Last week, global carmaker Stellantis — which owns brands like Vauxhall, Peugeot and Citroën — warned UK lawmakers that it may have to close one of its electric van factories. It fears that production will soon cease to be competitive. From 2024, as part of the post-Brexit trading agreement, EVs traded between the UK and EU will need to have 45 per cent of their parts sourced from either region, or face 10 per cent tariffs. British and European carmakers say they are not ready, and worry about being displaced in each other’s market.While the so-called “rules of origin” regulations were clear when the Brexit deal was struck, carmakers claim Russia’s invasion of Ukraine and supply chain upheaval since have altered cost dynamics. Battery factories on both sides of the channel are also being set up later than expected when the rules were set. The rule itself acts as an important stick to both auto- and policymakers to invest in building a thriving domestic EV ecosystem. But if manufacturers feel this is not in place, the rules also risk denting the sector just as the US Inflation Reduction Act and China are luring them away. It could even mean EVs traded between the UK and Europe face tariffs, while petrol vehicles would not, keeping EVs more expensive for longer. That would not be ideal for the green agenda.At this stage an extension of the 2024 deadline, as firms are calling for, may make sense. But carmakers and governments must not use it as an excuse to delay action further. Indeed, the UK — which is further behind Europe in the EV space — must recognise that the tariffs are just one element of the large effort needed to build a competitive EV system. Batteries, which face local content rules too, comprise a significant share of EVs’ total cost. But the UK has only a handful of battery gigafactories in its prospective pipeline, compared with Europe’s 30. Attempts to woo battery makers from Asia and nurture homegrown ones have fallen flat — Britishvolt collapsed in January. Batteries also need critical minerals and refining processes in place. The US and EU are throwing money at this. The UK is trailing, right across the supply chain, even before factoring in broader issues like its high energy and logistics costs.Developing a thriving EV and battery industry requires long-term and joined-up thinking across sectors. To date that is lacking in the UK. The government shuns the notion of an industrial strategy altogether, and recent political upheaval has not helped. It has been left chasing standalone deals and lobbying Brussels — an ineffectual approach compared to the billions being promised in the US and Europe. For electric automakers, Britain is not looking like a serious long-term bet.In the end, hoping the European Commission delays the regulations is not a strategy, for either UK or European carmakers. The EU may have an incentive to postpone tougher requirements, being further ahead of the UK in the sector. But, equally, it could judge that with the damage likely to be greater on the UK than its own car industry, given the UK’s greater reliance on auto exports to the bloc, keeping it in place could help draw business across the Channel. Either way, the global battle for EVs is shaping up to be cut-throat and those that lack a strategic approach will be left behind. More

HIROSHIMA, Japan (Reuters) – U.S. President Joe Biden on Sunday said he was willing to cut spending but would not agree to a deal with Republicans in Congress on raising the U.S. federal debt limit and cutting the budget solely on their terms.Speaking at a news conference in Hiroshima in Japan, Biden said he would speak with Republican House Speaker Kevin McCarthy on his way home about the negotiations, but underscored that a U.S. default would have “serious” consequences and was not an option.”It’s time for Republicans to accept that there is no bipartisan deal to be made solely on their partisan terms. They have to move as well,” Biden said.The Democratic president said he believed he had the authority to invoke the 14th Amendment to the U.S. Constitution to raise the debt ceiling without Congress, but it was uncertain such action could be taken in time to prevent a default.Biden, traveling in Japan for the Group of Seven (G7) summit, sought the call with McCarthy after his negotiating team briefed him on the status of talks that broke up on Friday with no signs of progress, according to a White House official.There are less than two weeks before June 1, when the Treasury Department has warned that the federal government could be unable to pay all its debts. That would trigger a default that could cause chaos in financial markets and spike interest rates.Biden said he still believed he could reach a deal with Republicans, but could not guarantee that Republicans would not force a default by “doing something outrageous.” More