Aurelia Butler

A US banking crisis is unlikely to deter the European Central Bank from increasing eurozone borrowing costs this week, but analysts expect rate-setters to be more reluctant to commit to another rise in May.The collapse of Silicon Valley Bank on the back of the sharp rise in US interest rates has sent shockwaves through markets. It has also raised questions about whether financial stability risks will stop central banks from raising rates much further.The ECB has already said it intends to raise borrowing costs by half a percentage point when its governing council meets in Frankfurt on Thursday. Most economists expect it to go ahead with that move to lift its benchmark deposit rate to 3 per cent despite sharp falls in European bank stocks on Monday. What the collapse of SVB is likely to diminish, however, is the appetite of ECB policymakers — including its president Christine Lagarde — to commit to raising rates by a specific amount at its next policy meeting in May.“SVB’s collapse may prove to be a catalyst for a more cautious approach from central banks,” said Frederik Ducrozet, an economist at Switzerland’s Pictet Wealth Management, predicting that Lagarde would “strike a hawkish but non-committal tone on Thursday”.“The ECB will not back away from the 50 basis point rate rise they plan to do this week,” said Holger Schmieding, chief economist at German investment bank Berenberg. “They will probably suggest there are more rate hikes to come without saying if they will be 25 or 50 basis points to give themselves time to see how this plays out.”The failure of SVB has revived fears that the sharp rise in borrowing costs will increase stress in parts of the financial industry. An ill-judged UK government budget last year sent bond yields soaring and forced the Bank of England to restart bond purchases.Analysts think the problems in the US banking sector are unlikely to be replicated in Europe. But ECB supervisors were on Monday checking lenders’ exposure to interest rate risk and the Bundesbank convened a crisis team that it created after Lehman Brothers collapsed in 2008.European bank shares fell on Monday as investors fretted that the crisis may spread beyond the US. Several European lenders suffered double-digit share price falls including Spain’s Banco Sabadell and Germany’s Commerzbank, while the Stoxx banking index dropped 7 per cent.In contrast, bond markets rallied — sending borrowing costs sharply lower — as investors sought the relative safety of government debt while reassessing how much further central banks will tighten monetary policy now the risks to financial stability have been laid bare.Erik Nielsen, chief economics adviser at Italian bank UniCredit, said the SVB collapse was “a perfect example of the trouble with pre-announcing policies”, as the ECB did following its meeting in early February. There was “no obvious reason why the US mess should spread to Europe,” he said, predicting the ECB would raise rates by half a percentage point this week as anything less would “raise a lot of eyebrows”.Tensions have been intensifying between ECB rate-setters over how much further it should raise rates. Austrian central bank governor Robert Holzmann has called for four more half point rate rises, but Italian central bank boss Ignazio Visco criticised this approach, calling for prudence.Uncertainty about ECB policy puts extra importance on its publication of the latest quarterly forecasts, due to be released on Thursday. The projections, which show what the ECB thinks growth and headline inflation will be this year, next year and 2025, will provide vital pointers on how quickly it might stop raising rates. In December, the central bank said it expected eurozone inflation to hit 6.3 per cent this year, 3.4 per cent in 2024 and 2.3 per cent in 2025. All three forecasts were above the its 2 per cent target — a clear indication that policymakers believed they needed to raise rates further. But since then wholesale gas prices have more than halved to €49 per megawatt hour, based on Dutch TTF gas futures contracts for the coming month, the European benchmark. Adding to the downward pressure on prices, European banks have already raised lending rates and tightened borrowing conditions significantly, which should reduce the flow of credit and lower demand. The SVB collapse could make banks even more conservative, squeezing financing conditions further and reducing the need for the ECB to raise rates.Economists have already downgraded their inflation forecasts for the rest of this year, and most think the central bank — which in December estimated gas prices would average €124/MWh this year — will follow suit for the first time since December 2020. However, some ECB watchers believe the stickiness of underlying price pressures will make it harder to justify cutting its forecasts for 2024 and 2025. Core inflation, which excludes energy and food prices and is a better indicator of longer term pressures — hit a record high last month. Morgan Stanley economist Jens Eisenschmidt predicted the ECB would cut this year’s inflation forecast to 5.8 per cent. Yet he said stronger core inflation in 2023 “likely means” it will raise its price growth forecast for 2024, while the impact of recent rate rises in reducing activity would lead to a lower figure for 2025. A resilient economy, rising wages, a boost to corporate profit margins and the delayed feed-through of last year’s energy shock to other sectors could all keep core price pressures elevated — maintaining the pressure on the ECB to keep raising rates for at least a few more months. Katharine Neiss, an economist at the investor PGIM Fixed Income, said: “Our view remains that core inflation will continue to rise until late spring, as previous energy price rises push up on non-energy goods and services with a lag.”The ECB declined to comment. But Lagarde said recently that while headline inflation would fall rapidly from March, core prices would “be stickier in the near term”. More

The UK economy is in the doldrums. The IMF has forecast it will be the worst-performing large advanced economy this year. But the problems stretch back much further. Average annual growth rates have more than halved since the global financial crisis of 2007-08. The UK economy is no bigger now than it was on the eve of the coronavirus pandemic at the end of 2019 and the Bank of England does not expect to recover that ground until 2026 at the earliest.Michael Saunders, who recently left the bank’s Monetary Policy Committee and now advises Oxford Economics, says that “in policymaking terms, we’ve been careless about potential growth”. The lack of success in stimulating economic growth since 2007 has been especially notable. If the UK’s gross domestic product per person had grown as rapidly in the 15 years after 2007 as it did in the 27 years since 1980, every person in the UK would be £10,600 or 31 per cent a year better off in real terms versus the £33,700 of GDP per head that the UK achieved in 2022, according to IMF data.For all these stark statistics on the UK economy’s decline, Jeremy Hunt, who will present his first spring Budget on Wednesday, has spent the first two months of the year noisily dismissing concerns. “Declinism about Britain is just wrong,” the chancellor said in his flagship economic speech in January. “It has always been wrong in the past — and it is wrong today.”Using judiciously selected statistics, Hunt painted a picture of UK performance since 2010 being in “the middle of the pack” as he hailed the fact that “output per hour worked is higher than pre-pandemic”.

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Few UK chancellors before Hunt would celebrate a marginal rise in productivity over a three-year period when 2 per cent growth every year was previously the norm. There is also a remarkable consensus across the political spectrum and among almost all economists that the UK does indeed have a growth problem. While Liz Truss’s plan to kick-start dynamism in an effort to achieve a 2.5 per cent annual growth target backfired when markets reacted to her “mini” Budget last September, the ambition has been taken up by Sir Keir Starmer, who last month pledged to make the UK the fastest-growing economy among the G7 if Labour wins the next general election. Economists looking at the post-2007 UK economy tend to split the 15 years into three distinct periods. There was the financial crisis itself, during which a crisis in the banking system spread into a deep recession. This was followed from 2010 by the austerity period, where growth was slower than before 2007 but UK GDP growth per head was still at the top of the G7 league table. The UK’s performance then deteriorated further after the Brexit referendum in 2016 both in absolute terms and relative to other G7 nations.Although all G7 economies were hit by Covid-19 and the Russian invasion of Ukraine, the UK is the only of these advanced economies not to have returned to its pre-pandemic level of output. The forecasts are even worse. Catherine Mann, an external member of the BoE’s MPC, noted in a speech last month that the BoE’s outlook was much less optimistic than the US Federal Reserve and European Central Bank. The latter two expect the US and eurozone economies to be between 7 and 10 per cent larger, respectively, at the end of 2025 than they were before coronavirus struck. The BoE does not expect the UK’s economy to have grown at all in that period.Austerity BritainEven though the UK’s growth performance has been worse after 2016 than it was during the austerity period, economists are still arguing over the reasons for the initial decline in the growth rate during the 2010 to 2016 period.Those close to George Osborne, then chancellor, point to the UK’s large financial system and its consequent deep exposure to a global banking crisis, a declining North Sea oil sector and a global productivity problem. This weakness of the UK’s previously strongest sectors and companies has been corroborated in multiple studies, most recently by the Centre for Cities, which also found that London’s productivity growth dropped from being almost double that of the rest of the UK to lagging behind other parts of the country.The dispute on the causes of the growth slowdown relates to the impact of austerity on economic performance. Most economists now accept that the sharp reductions in public spending between 2010 and 2015 delayed the recovery from the financial crisis, but the crucial question for the longer term is whether the effects of austerity can still be felt today in lower living standards. Professor Jonathan Portes, of King’s College London, is convinced that austerity “contributed to the [UK] underperformance in a way that was significant, but clearly not the whole story”. He cites cuts to public investment lowering the nation’s capital stock and contributing to weaker private investment, worse-performing public services and the absence of a “hot economy” driving dynamism and growth as the mechanisms at work. Many other economists are sceptical about these forces — not because they deny they existed, but because they believe the scale of any impact was small. Tim Pitt, partner at Flint Global, a consultancy, and former adviser to chancellor Philip Hammond, says that the public investment cuts were shortlived and minuscule compared with the size of the existing capital stock. “The idea that public investment overall explains the growth slowdown does not add up from a numbers perspective,” he says. “When you’re talking about £10bn here or there are you really saying that this is the difference between poor productivity and everything being OK?”Others note that business investment actually grew strongly in the period, especially after 2012. Kitty Ussher, chief economist of the Institute of Directors and a former Labour minister at the time of the financial crisis, says the business climate and investment sentiment “got better in the summer of 2012 when there was suddenly a lack of negatives”. Employment grew faster after 2010 than before 2007.Flip-floppingBut the disappointments that British citizens endured in the early 2010s, when compound annual growth rates were still over 2 per cent, were mild compared with what has happened since. And in the latter period, there is much less disagreement over the fundamental causes of poor economic performance.There is no doubt that one of the most important restraints on growth has been the frequent external shocks hitting the UK economy and many other advanced economies.

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Britain’s GDP fell more during the pandemic, partly because the Office for National Statistics took a harsher approach to measuring output in schools, hospitals and other parts of public services than other countries. If the services were shut they produced no output, the statistical agency judged. This was a temporary effect and the UK’s recovery as it emerged from lockdowns was also stronger than other countries for the same reason.The UK was also heavily exposed to Russia’s invasion of Ukraine and the surge in wholesale natural gas prices, because UK households use gas more than other countries to heat their homes and for all its success at decarbonising, the nation is more reliant than most on the fuel for electricity generation.These factors are not, however, sufficient to explain why the UK economy alone has not recovered the level of GDP from the end of 2019. For that, economists point to three uniquely British impediments to economic performance.First is Brexit, which raised import prices, generated uncertainty for business, raised trade barriers, complicated regulatory compliance and hindered the recruitment of workers. John Springford, deputy director for the Centre for European Reform think-tank, estimates that these effects and more had cost the UK economy 5.5 per cent of GDP by the summer of 2022. “Weak investment from 2016 is curtailing today’s output, car manufacturers are running down capital and stocks, immigration from the EU has slowed, and the retained EU law bill could mean divergence from EU rules,” he says. The BoE has a lower estimate of 3.25 per cent, but judged in February that, “these [Brexit] effects might have occurred more quickly than previously assumed”. As Mann of the MPC tartly noted last month, “no other country chose to unilaterally impose trade barriers on its closest trading partners”. Unlike ministers, who still pay lip service to the economic benefits of leaving the EU, Brexit-supporting economists are more willing to say there was a cost, although they emphasise the weakness of government policy since rather than the rupture with the bloc itself. The second British problem according to Julian Jessop, a fellow at the free-market Institute of Economic Affairs, is the tendency of government policy after 2016 to “flip-flop” from one idea to the next. “It’s been a period of high uncertainty and companies have spent loads of time staying afloat rather than building their businesses,” he says. Rising levels of tax and regulations, particularly on the finance and energy sectors, have also not helped, he adds. The third UK weakness on the charge sheet has been a rapid and unexpected deterioration in the UK’s labour market performance during the pandemic. Although companies are still able to provide more jobs to UK citizens than the European average, fewer people are now employed or looking for work than in 2019. This almost unique drop in participation in the jobs market, particularly for those over 50, is likely to persist, the BoE says, because “many of the people who have left the labour force appear unlikely to return soon”.A toxic mixOn top of these new reasons for concern about the UK’s economic performance are longstanding issues that governments have failed to resolve over many decades. The UK’s planning and land-use system attracts much criticism for giving opponents to any development the upper hand and stopping growth. Sam Dumitriu, head of policy at Britain Remade, a new campaign to promote growth, says the UK’s problem is an “inability to get what we need built”. “We do not build enough homes near the best jobs, but it is not just housing,” he says, citing a shortage of laboratory space in Oxford, Cambridge and London and the difficulty in building new energy facilities whether onshore or far from the coast. Britain’s skill levels for those without university education lag behind those of other rich countries and for decades there has been a “long tail” of companies with poor productivity levels, which neither seem to improve nor go out of business. And the nation, much like the entire western world, is ageing rapidly. “Underlying [the UK’s growth problem] is also demographics”, says Saunders. “If we hadn’t had Brexit and Covid, we’d have talked more about demographics lowering growth rates over the past five years.” The explanation for the UK economy’s growth crisis since 2007 is therefore not one single problem, but a combination of global crises and self-inflicted policy errors. There is little doubt, however, that the disappearance of large UK boom industries, global shocks, Brexit, poor governance and a deteriorating labour market have been a toxic mix.

Video: The Brexit effect: how leaving the EU hit the UK More

The writer is managing partner and head of research at Axiom Alternative InvestmentsOf all the ways a bank can die, the route pursued by Silicon Valley Bank on the way to implosion appears to have been one of the most reckless.Banks exist to take and manage liquidity, interest rate and credit risks. It is therefore stunning to hear that a US bank has just failed because it invested much of its swollen base of deposits, mostly redeemable at demand, into a long-term, held-to-maturity bond portfolio without any interest rate hedge. A failure this size will raise many questions — about contagion risk, supervisory or regulatory failures, the impact on the venture capital market and so on — but the root cause is a global phenomenon: interest rates have gone up quickly everywhere and it is reasonable to ask if a similar high-speed crash could happen elsewhere.There are three ingredients to this explosive recipe: volatile deposits, high interest rate risk on the asset side and insufficient hedges. Once the ingredients are there, it is a movie you have seen before: a deposit flight materialises, long-term assets have to be sold at a loss and, absent hedges, banks fail.With this framework in mind, let us compare the vulnerabilities of three large banking markets — the US, the eurozone and Japan. The level of deposits is key. What do banks do when they have too many deposits? Buying long-term bonds is a common tactic. European banks, scarred by losses during the eurozone crisis, have learned the hard way that there is no free lunch to be gained from such a strategy — they know that their bond books should be hedged. Since the first European banking regulatory stress tests in 2009, banks have been tested for their sensitivity to falls in value of government bonds. Poor tests indirectly led to the bailouts of Italian lender Monte dei Paschi. Is it possible to quantify such risk and the impact of hedges banks use for the three banking markets? Well, the fundamental structures of deposit markets are similar. For example, the aggregate share of insured deposits is similar in the eurozone and the US at about 58 per cent. But, compared with Europe or Japan, the US experienced a sharper rise during the Covid pandemic in deposit growth. A slowing to long-term average growth seems logical. Moreover, the unwinding of the central bank bond-buying programmes of recent years, known as quantitative tightening, is happening faster in the US. This reduces the amount of money in the financial system, thus mechanically decreasing bank deposits. EU bank rules also give a preferential treatment to retail depositors, irrespective of whether the deposits are insured or not. Hence, US deposits are slightly more vulnerable, in my view.Faced with a similar problem (investing massive deposit inflows despite an expensive Japanese government bond market increasingly owned by the central bank), Japanese banks diversified by investing abroad. In other words, they adapted themselves to the world of negative rates and lossmaking deposits. But some risk always remains.And assessing this is a tricky exercise, mostly because it requires an accurate understanding of the behaviour of depositors. An on-demand deposit paying no interest from a loyal client can look like a 5-year debt and used as a hedge against a 5-year asset. But if the client changes their mind, the hedge immediately evaporates. It is therefore crucial that banks model their clients’ behaviour properly.To quantify the risks, an international framework (the so-called IRRBB for interest rate risk in the banking book) was introduced — but largely voided by President Donald Trump for US banks with assets under $250bn. What do the numbers tell us?The eurozone looks like a safe place. Overall, an increase in benchmark rates of about 2 percentage points could lead to a decrease in the value of the equity of banks in the bloc of about 4 per cent. But there is dispersion and apparently size matters. The German Bundesbank estimated that the large systemic lenders had a risk of potential equity hit of about 6 per cent but for co-operative or saving banks it was 22 per cent. Numbers for the US are surprisingly hard to find, and even some systemic banks do not report them. I think the potential risks are higher than in Europe. But the outlier is Japan, which adopted the global regulatory framework on the issue in 2018. Even only using test of a 1 percentage point rate rise shock, the estimated hit to equity is 18 per cent. And this average number, again, hides very large differences between sophisticated large institutions (10 per cent) and smaller players such as the regional Shinkin co-operative banks (a whopping 30 per cent). Higher rates in Japan will need to be introduced with extreme caution. This has been long acknowledged in markets. The collapse of SVB has now belatedly put the issue front of mind for investors worldwide. More

The EU is exploring ways to police how European companies invest in production facilities overseas, following similar US moves to limit the ability of China and other rivals to acquire cutting-edge technologies from the west.Valdis Dombrovskis, the bloc’s trade commissioner, told the Financial Times that new restrictions were needed to prevent companies circumventing export bans on sensitive technology by manufacturing it elsewhere.The EU has prohibited its companies from selling products that could help Russia’s armed forces in their war in Ukraine, but re-exporting loopholes remain. The new measures would come against the backdrop of Washington having long pressed its allies to follow its export bans on sensitive technology to China. After months of direct negotiations with the Biden administration, the Netherlands said last week it would bar the most advanced silicon chip making machines from reaching China.The White House is working on an act that would establish an outbound FDI screening agency with a narrow scope to prevent offshoring production, after the US Congress has so far failed to agree on a text with a broader scope.“Outbound investment controls are the other side of the coin of export controls,” Dombrovskis said. “Because you can effectively ban exports of so-called dual use technologies — which we have done for instance to prevent feeding Russia’s war machine — but that still leaves room for the leakage of sensitive technologies through investments on the ground. “So we need an EU-wide discussion on how to capture this possible circumvention in a way that achieves the desired result, but being very mindful of any unintended consequences on financial markets and on the EU’s own investment environment.”Officials acknowledge that plans are at an early stage and could take years to implement in the face of member state scepticism. They are in charge of export and investment controls and countries such as the Netherlands and Germany want to preserve their deep economic ties with China. Bulgaria does not even screen inward investment. But Russia’s war in Ukraine has led to greater collaboration. European countries are broadening their definition of economic security after years of laissez-faire economics left them exposed to Russian energy blackmail and Chinese inputs for the green transition, officials say. The bloc is getting closer to the US approach of seeking to retain key capabilities and a technological edge over rivals.In 2020 new rules obliged governments to notify Brussels of inbound FDI that could threaten security or public order. In 2021 member states submitted 414 notifications under the FDI Screening Regulation to the commission, 10 per cent of the 4,000-plus transactions in the EU that year, according to an annual report. They are advised, but not bound, to follow commission opinions.Overall only 1 per cent of all EU cases were blocked and 3 per cent withdrawn by the parties after questions were raised.A quarter received clearance with conditions attached and the rest were approved. The IT and manufacturing sectors were most likely to be screened. Dombrovskis also said the EU needed a more joined-up approach to export controls, especially as international forums, which used to enforce the rules, are blocked by Russia’s presence. “We face a rapidly evolving geopolitical and technological environment characterised by new risks. These come from ‘emerging’ technologies such as high-end semiconductors, AI, quantum, hypersonics and biotechnologies,” the Latvian politician said. “At the same time, current approaches to export controls in the EU are under pressure. Events in Ukraine have also highlighted the risk of member states adopting national controls without much co-ordination to address their pressing ‘national security’ considerations.”He said that would initially involve an “EU approach” with governments aligning their controls.“In the medium term, we need to reflect on how we could reinforce the EU framework and create the capacity to adopt proper EU-level export controls, while respecting the priority given to the adoption of controls, whenever possible, by the multilateral export control regimes,” Dombrovskis said.Some EU officials are pushing for this to give the region more bargaining power. The Netherlands announced the introduction of export licences for the “most advanced” chipmaking tools after heavy US pressure, with Belgium prime minister Alexander de Croo accusing Washington of bullying. Dutch trade minister Liesje Schreinemacher has urged other EU countries to follow The Hague’s upcoming rules, to be outlined in the next few months. But she made clear last week that co-ordination was the most Brussels should do, as decisions on export controls remain firmly in national hands. More

Two spokespersons for Minera Panama, First Quantum (NASDAQ:QMCO)’s Panama unit, told Reuters the suspension dated Jan. 26 had been ended, which was confirmed by a source at the Maritime Authority.The company, which spent weeks at loggerheads with Panama over Cobre Panama, had said that once the suspension ended, it would be able to resume activity at the port quickly.The Panamanian government and First Quantum said on Wednesday they had agreed on the final text for a new contract on the operations of Cobre Panama, which accounts for about 3.5% of the country’s gross domestic product. Because it could not work at Punta Rincon, First Quantum halted ore processing operations on Feb. 23 after reaching the maximum storage level of copper concentrate – about 100,000 tonnes – at the mine in Panama’s Donoso district.About 60% of the copper concentrate exported through Punta Rincon is destined for factories in China. The rest is exported to other markets including Spain and Germany.(This March 11 story has been corrected to say that the maximum storage level is 100,000 tonnes, not 10,000 tonnes, in paragraph 5) More