Aurelia Butler

Janet Yellen’s China speech has been a long time in coming. It has been almost a year since Antony Blinken, the US secretary of state, said the country was “the most serious long-term threat” to world order. Yellen’s phrasing was more emollient. The US Treasury secretary spelt out that the administration of Joe Biden had no intention of decoupling from China, which would be “disastrous for both economies”. Though she emphasised that wherever US national security collided with economics, the former would always take priority, her address ought to be interpreted as an olive branch to Beijing. Whether China will see it that way — having rebuffed Washington’s overtures since the US shot down an apparently rogue Chinese spy balloon in February — is another question. Yellen cannot be accused of not trying.In an interview before her speech, Yellen made it clear she wanted to visit China as soon as Xi Jinping had appointed her counterparts to their jobs. If Yellen’s trip goes ahead, she would be the most senior US official to visit China since Biden took office. Blinken cancelled his planned trip earlier this year after the Chinese balloon furore. Yellen’s goal would be to revive dialogue at least on economic matters. During the original US-USSR Cold War, periods of detente were bolstered by commercial interaction. “I see myself as carrying on the agenda that Biden and Xi established at the G20 meeting in Bali [last November],” Yellen said. “I was at that meeting. They were both very clear with one another that they wanted to have a productive economic relationship. There was a clear understanding that economic relations are not a zero-sum game and that we need to step up our interaction.”In October, the US announced a ban on high-end semiconductor trade with China, which is being seen in Beijing as an act of economic aggression to curb the country’s development. Yellen was at pains to rebut China’s interpretation. Restrictions would be confined to trade that helped its military modernisation, she said. This included a new set of controls on outbound US investment to China that will be announced soon. “We’ve tried to provide guidelines so far for the export controls that we’ve put in place,” Yellen said. “Exactly what constitutes a national security concern is something that evolves over time. What’s important here is that we want the Chinese to understand that when we take these actions we do have a national security focus and that we are not trying to harm Chinese economic competitiveness. If the Chinese perceive these actions we have taken as harming their national competitiveness that’s a reason for us to step up our interaction and explain what our motivation is.”Most of America’s trading partners in the Indo-Pacific, such as Singapore and Australia, want to see more US engagement on trade and investment, even if Biden has ruled out rejoining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the renamed TPP, which China has applied to join). Other than the recently-launched Indo-Pacific Economic Framework, which critics have dismissed as a talking shop, and the equally young US-EU trade and technology council, nothing else is in the pipeline, according to Yellen. “Big trade deals are not being actively planned,” she said. Instead the US would push its “friends” to join Yellen’s so-called friend-shoring initiative. These include Indonesia, India and Vietnam. She said she is considering a trip to Vietnam. “We need to diversify our supply chains to avoid extreme dependence on countries who could use those against us, like Russia has with energy.” She added: “We do not mean a narrow set of developed countries.”Whether Yellen’s efforts to revive the economic side of US-China dialogue bear fruit is open to doubt. Xi has been meeting leaders from all over the world yet has resisted scheduling a call with Biden. Yellen is the most senior serving official who was part of the US-China Strategic and Economic Dialogue — an annual talking shop — that was set up by George W Bush and continued under Barack Obama. Donald Trump shut it down. During the 2008 financial crisis, Hank Paulson, Yellen’s predecessor as Treasury secretary, was in frequent co-ordination with his Chinese counterparts. Such co-operation is hard to imagine today.As a significant holder of US public debt, China has a material interest in the outcome to the looming battle between the White House and the Republican-controlled House of Representatives over lifting the debt ceiling. An American default could badly undermine the dollar’s reserve currency position. “I don’t see any immediate threat to the dollar’s status,” said Yellen. If anything could topple the US dollar, it would be the self-inflicted wound of a US sovereign default. Growing rivalry from the Chinese remninbi would be the least of Washington’s worries. [email protected] More

The theory that uncomfortably high inflation is partly or perhaps mostly caused by price gouging by opportunistic companies — is understandably a pretty hot topic. It even has a cracking portmanteau: “greedflation”. Isabella Weber and Evan Wasner of the University of Massachusetts examined the US data earlier this year in an already-influential paper titled Sellers’ Inflation, Profits and Conflict: Why can Large Firms Hike Prices in an Emergency? They concluded that the post-Covid US inflation surge was “predominantly a sellers’ inflation that derives from . . . the ability of firms with market power to hike prices”. Cue outcry. For obvious reasons, this is also becoming a hotter topic on the other side of the Atlantic, so Goldman Sachs’ economists have dug into the eurozone corporate profit and inflation data. Here’s what they found, with our emphasis below: — The outlook for profit margins has gained policymakers’ attention as a key factor in determining when and how quickly Euro area core inflation will cool from the current high levels. Unit profit growth now accounts for more than half of GDP deflator growth, with compensation per employee growth explaining a little over a third. While unit profit growth has been strong across sectors, contact intensive services following the pandemic re-opening and energy have been the biggest contributors to aggregate unit profit growth.— Following the sharp decline in gas prices, however, unit profits in the energy industry should decline, too. Surveys also suggest that margin growth is peaking, with room for some margin compression in particular in manufactured goods. Historically, higher wage growth has also led to slower margin growth, as some of the increased labour cost is absorbed into firms’ profit.— We estimate the effect of these factors using a simple statistical model. This suggests that unit margin growth should cool quite rapidly this year, as lower growth makes it harder for firms to raise their prices, while strong wage growth eats into unit margins. The deceleration of activity growth over the last year and our expectation for subdued Euro area growth this year is also likely to weigh on margin growth.— The outlook for inflation therefore is driven by a combination of two factors: higher wage growth is likely to push up inflation but a more subdued margin outlook is likely to weigh on it. On net, we forecast that stronger wage growth is likely to continue to push up on inflation, but that this will be offset by lower margin growth across goods — where margins are already plateauing — and lower services margin growth due to their sensitivity to wage growth. We therefore look for sequential core inflation to slow from 0.4%mom in March to 0.2%mom in December, implying a year-on-year rate of 3.9%yoy by year-end.You can read the full report here. More

Most rate-setters at the European Central Bank pushed for it to separate concern about turmoil in the banking sector from its efforts to tame inflation by raising interest rates when they met last month.The outcome of last month’s ECB meeting, which came less than a week after the collapse of Silicon Valley Bank and only a couple of days before Credit Suisse was pushed into the arms of its rival UBS, underlined how concern about high inflation remained paramount among rate-setters.Some ECB policymakers cited the “separation principle” to argue that monetary policy should be assessed independently of financial stability risks before they pressed ahead with a widely expected half-percentage point rate rise, according to the account of the March 16 meeting published on Thursday.“Unless the situation deteriorated significantly, the financial market tensions were unlikely to fundamentally change the governing council’s assessment of the inflation outlook,” the ECB said. “In light of the risk of persistent inflation dynamics, the ECB’s monetary policy had to be persistent as well.”Since then, several members of the ECB’s rate-setting governing council have said they expect it to keep raising rates at its next meeting on May 4, while adding that it could slow the pace to a quarter-percentage point rise depending on data due in the next two weeks.There was also scepticism among several council members at March’s meeting that its forecasts for inflation to fall steadily over the next few years were too optimistic. Some said its forecast for price growth to drop from an average of 5.3 per cent this year to 2.1 per cent in 2025 “gave the impression of an ‘immaculate disinflation’”.The doubters pointed to above-forecast inflation figures in February and said “the strengthening of wage growth was consistent with second-round effects having already started”. They cited several “risk factors” that could keep inflation high, including generous fiscal policy by eurozone member states, which bolster the case for more rate rises. After last month’s meeting, ECB president Christine Lagarde said there was “no trade-off” between its objectives of maintaining financial stability and raising rates to bring down inflation. She also said rates were likely to move higher if the ECB’s baseline inflation forecast remained unaffected by the upheaval in the banking sector.There were a handful of dissenters among the council’s 26 members, who called for a pause in rate rises to assess the impact of the banking sector’s problems.

They argued that “the risks from not raising rates, if the tensions turned out to be shortlived, were assessed to be much less severe than the risks associated with raising rates into a persistent crisis”. But they were outnumbered by those wanting to increase rates.Andrew Kenningham, an economist at research group Capital Economics, said the ECB’s account of the March meeting “confirms that it was only the banking sector turbulence that deterred policymakers from signalling further rate hikes to come”. He added that as banking failures “have now subsided” it would keep lifting rates, forecasting a rise in its deposit rate from 3 per cent to a peak of 4 per cent over the coming months.Isabel Schnabel, an ECB executive board member, said in a speech on Wednesday that the extra complexity created by recent banking tumult made it impossible for her to say what it would do at future meetings. But Schnabel presented data showing “inflation momentum remains high for all components except energy” and that the recent banking failures had hit US financial markets harder than those in the eurozone, while fiscal policy had become more expansionary in the euro area than in the US — developments that are likely to favour further ECB rate rises. More