Aurelia Butler

New EU rules slashing the amount of arsenic permitted in baby food have highlighted how Northern Ireland is caught between different rules set by Brussels and London, despite this month’s new post-Brexit trading agreement. Days after UK and EU leaders sealed their deal last week, Brussels cut the level of the carcinogenic substance allowed in infant formula and baby food by 80 per cent and set limits for its use in rice, fruit juice and salt. But consumers in Northern Ireland can still buy baby food with higher levels of arsenic if the ingredients or the finished product are imported from Great Britain. Food manufacturers in Northern Ireland, which remained in the EU’s single market after Brexit, will have to follow the new rules if they want to export to Ireland or elsewhere in the EU, a European Commission official said. “This is great news for babies, it’s just not good news for British babies or Northern Irish babies,” said Andy Meharg, a professor of plant and soil science at Queen’s University Belfast.“The UK should follow that [the EU’s] progressive move. If they don’t . . . it sends the worst signal for the most precious cohort of citizens,” he said.According to the European Commission, inorganic arsenic can cause cancer of the lung, urinary tract and skin.

Michael Bell, executive director of the Northern Ireland Food and Drink Association, a trade body, said his members were likely to adopt the EU’s higher standards, which will take effect this month. “We are trying to maintain the ability to trade both to Europe and GB which was possible before Brexit,” he said.While the baby food sector in Northern Ireland is relatively small, he added that the broader food and drink business is the largest industry in the region, employing 113,000 people. Maintaining alignment with EU food legislation to ensure it can continue to export means the question of different food standards will “go on and on”, he added, since the EU comes up with scores of new rules annually. The dilemma faced by such producers highlights the novel status of Northern Ireland, which remains subject to some EU rules for goods, despite last week’s deal.The Windsor framework, signed after two years of trade tensions, allows goods coming to Northern Ireland from Great Britain to comply with UK standards, while products made in the region or being exported for sale in the bloc follow EU rules.The British government emphasised that the new rule “would not apply for internal UK trade under the [Windsor] framework.” It added that Britain would “always maintain strong rules on arsenic levels and keep our position under very close review”, while working closely with regulators in the EU and elsewhere.The pro-UK Democratic Unionist party, has identified “key issues of concern” with the Windsor framework, notably that “EU law remains applicable in Northern Ireland”. The party did not respond to a request for comment on the new rules affecting arsenic levels in baby food. More

The British government will delay building the Birmingham to Crewe leg of the HS2 rail line and its link into central London, along with a number of road projects, as ministers grapple with the impact of inflation on capital budgets.HS2, which has long been dogged by cost overruns and delays, is being built in phases with an initial leg linking London to Birmingham already under construction. The controversial project, which was originally envisaged as a new high-speed line linking London to Manchester and Leeds via Birmingham, has suffered successive delays, cost overruns and reductions to its scope. The price tag of HS2 has soared from £33bn a decade ago to as much £100bn, making the project a prime candidate for savings. The opening of the first phase has already been pushed back from 2026 to between 2029 and 2033, while much of the line to Leeds has been axed.Mark Harper, transport secretary, announced the latest delays on Thursday blaming “headwinds from inflation” caused by Russia’s invasion of Ukraine as well as “supply chain disruption” owing to the Covid-19 pandemic. “These headwinds have made it difficult to deliver on our capital programmes and we recognise that some schemes are going to take longer than expected,” he said. “Refocusing our efforts will allow us to double down on delivering the rest of our capital programme.”Harper said construction work on the Birmingham to Crewe leg, known as phase 2a, would be delayed by two years. It is part of the second section of the project linking Birmingham to Manchester, whose completion has already been pushed back from 2033 to between 2035 and 2041.He also said the government would initially prioritise HS2 services from Birmingham and a new station of Old Oak Common in west London but insisted ministers remained “committed” to eventually taking the line into the central London terminus at Euston.The FT reported last month that the government was examining further delays and cuts to the project under two initiatives dubbed “Project Silverlight” and “Operation Blue Diamond” to reduce spending over the next five years.Louise Haigh, shadow transport secretary, said the north of England would have to “pay the price for staggering Conservative failure”.Chris Fletcher, policy director at Greater Manchester Chamber of Commerce, understood the government’s financial constraints but said the latest cuts raised more questions about ministers’ commitment to its flagship levelling-up policy designed to balance out regional economic inequalities.“We see the decision to delay the essential construction and further development of HS2 as a step in the wrong direction. We have already seen significant parts of the scheme scrapped or reduced significantly and further delays, dithering and uncertainty undermines any claim this government may have about taking levelling up seriously,” he said.Rail engineer and transport writer Gareth Dennis said the delay would undermine the entire scheme and the rail network as a whole. “Had government truly committed to this project and its outcomes, HS2 trains would have been running into Manchester by the end of this decade — at costs far closer to the original budget than we see today,” he said.Harper also announced that some road schemes would be delayed, including the A27 at Arundel and the A5036 at Princess Way in Liverpool.Likewise, there will be a two-year delay to the construction of the Lower Thames Crossing, a road tunnel under the Thames that will be the first new crossing of the river east of London for over 30 years.The cuts to the biggest infrastructure project come as the government grapples with a squeeze on capital spending across all departments after inflation hit its highest level in decades. Other projects set to delayed include some of the 40 new hospitals that are due to be built by 2030. More

Just when you might have thought that financial markets could not turn any funkier — they have. On Tuesday, Jay Powell, US Federal Reserve chair, indicated that the Fed may raise rates further than expected in order to combat inflation.Two-year Treasury yields duly jumped above 5 per cent for the first time since 2007. But 10-year yields barely moved. This pushed the yield curve deeper into an Alice-in-Wonderland state known as “inversion”, in which it costs more to borrow money short term than long term. By Wednesday, the gap had expanded to a negative 107 basis points — an extreme pattern only seen once before, in 1980 — when Paul Volcker, then Fed chair, was unleashing shock therapy.What has sparked this pattern? One explanation is that bond investors think Powell will follow in Volcker’s footsteps and unleash a deep recession. After all, historical models show that “every recession since the mid-1950s was preceded by an inversion of the yield curve”, as economists at the San Francisco Fed recently noted. They added that “there was only one yield curve inversion in the mid-1960s that was not followed by a recession within two years”.Or as Anu Gaggar, analyst at US advisory firm Commonwealth, observed last year: “There have been 28 instances since 1900 where the yield curve has inverted; in 22 of these episodes, a recession has followed.”But there is precious little evidence of this as yet. Yes, there are hints of rising consumer stress. But as Powell noted this week, the labour market is red hot, and when I met business leaders in Washington last week, the mood was strikingly bullish.So is there something happening that might cause the inversion pattern to lose its signalling power? We will not know for several months. But there are two key factors that investors (and the Fed) need to watch: speculative positioning and generational cognitive bias.The first issue revolves around some important data from the Commodity Futures Trading Commission. Normally, the CFTC reveals each week whether speculative investors, such as hedge funds, are “long” or “short” interest rate futures (ie whether they are collectively betting that rates will fall or rise, respectively).But in a ghastly, and ill-timed, twist, the CFTC has recently failed to issue this data on time due to a cyber hack. We do know, though, that in early February hedge funds had a record high “short” against two-year Treasuries, ie a massive bet that rates would rise.Without the CFTC data, we do not know what has happened since. However, regulators tell me they think there is now significant positioning by funds in Treasuries, echoing patterns seen in early 2020. If so, this might have exacerbated the inversion pattern (and could cause it to flip back in the future if positions are unwound).The second issue — that of generational cognitive bias — revolves around investors’ concept of what is “normal”. One interpretation of the inversion pattern is that investors expect the financial ecosystem to return to the pre-Covid pattern of ultra-low rates after Powell has curbed the Covid-linked wave of inflation.Some economists think this is a reasonable bet. This week, for example, a fascinating debate occurred at the Peterson Institute between economic luminaries Olivier Blanchard and Larry Summers. In it, Blanchard argued that we would soon return to a world where “neutral” interest rates (or a level that does not cause inflation or recession) were very low — implying that the current inversion pattern makes perfect sense. However, others believe it is a mistake to think we will return to the pre-Covid world of low long-term rates since there are bigger structural shifts in the global economy. “Some of what’s making the neutral rate be higher may be temporary, but there’s no reason to think that all of it is temporary,” Summers argued. Macroeconomic shifts aside, there is another, often-overlooked cultural issue as well: the propensity for people to define “normality” as what they grew up with. Most notably, financiers under the age of 50 built their careers in a world of ultra-low rates and inflation. They therefore tend to view this as “normal” (unlike the Volcker era, when double-digit inflation and interest rates were the “norm”). But that could be creating biases, causing the market to underestimate long-term rates, as Goldman Sachs has pointed out. “Investors appear to be wedded to the secular stagnation . . . view of the world from the last cycle,” it argues. “[But] we believe this cycle is different,” it adds, arguing that a recession seems unlikely, ie that the signals from the inversion pattern are wrong.Of course, history shows that when investors start invoking the phrase “this time is different”, they are also often completely wrong. Just look at the work that the economists Carmen Reinhart and Kenneth Rogoff have done on this for evidence.But as the Fed — and markets — grapple with a financial wonderland, the key point is this: while an economic slowdown may very well loom, it would be foolish to look at macroeconomics alone to make sense of market signals. Now, more than ever, investors need to ponder their own biases about “normality”. And pray that the CFTC manages to release its crucial positioning data [email protected] More

The writer is research director at the European Council on Foreign Relations and a former official in the US state departmentUrsula von der Leyen, the president of the European Commission, arrives in Washington on Friday amid what seems a typical US-EU dispute. The passage in the United States of new industrial policy measures such as the Inflation Reduction Act and the Chips and Science Act has caused much gnashing of teeth in Brussels. Many Europeans feel that the US, to better arm itself in its competition with China, is taking decisions without paying much attention to European economic interests. In fact, rather than resembling past rows over issues such as aircraft subsidies or sanitary standards, this debate is likely to follow a new rhythm for US-European economic relations. Call it “ex-post co-ordination”.Here’s how it works. The US acts without seriously consulting its European allies. There is a predictably angry response from across the Atlantic. The US government expresses surprise and concern that allies are upset and dispatches various high-level envoys to European capitals to listen attentively to complaints and pledge to address them. The president then announces that he has heard and understood these concerns, that there is a limited amount he can do at this stage, but he will then offer some token concession. The Europeans declare themselves satisfied with their effort to get the Americans to address their issues. What no one seems to notice is that the US has in the process succeeded in getting almost everything it wants.This is the template that the Biden administration followed during the Afghanistan withdrawal and in the Aukus debate in 2021 when the US went behind France’s back to conclude a new defence pact with Australia and the UK. And it seems to be the emerging rhythm in the reaction to the IRA and Chips act. To see this process in action, consider in more detail the European approach to the IRA. A curious thing happened on the way to that bill passing in the US Congress. Nobody considered its impact on Europe. Despite the potentially devastating implications of the bill’s $369bn in climate subsidies on European industry, the lengthy debate over it contained barely any mention of its effect on America’s allies across the Atlantic. Even more oddly, this lack of attention to the bill’s negative effect on European allies extended to the Europeans themselves. The Canadian government saw the dangers the bill contained and succeeded, through a concerted lobbying campaign, in getting an exception from its “Buy America” provisions. There appears to have been no similar European effort.Once the bill had been passed, there was an outcry in various quarters in Europe, particularly France. But von der Leyen’s commission still insists that the IRA is a key contribution to the effort to combat climate change. Rather than challenge the US head-on at the World Trade Organization or otherwise seek retaliation, the European Commission has chosen to tout that the EU is already running a green subsidy programme that outpaces America’s and to seek exemptions. “Together,” boasted von der Leyen, “the EU and the US alone are putting forward almost €1tn to accelerate the clean energy economy.” In other words, the EU doesn’t need a forceful response to the IRA; it can just boost its current green subsidies. The US government calmly supported this co-operative response. The Biden administration has decided to “bow slightly to European pressure” and is likely to allow European companies some access to the benefits of the new legislation. Biden and von der Leyen will probably announce some such compromise on Friday.In previous years, the US would never have considered initiatives such as the IRA without consultation, knowing that securing European partnership on geoeconomic initiatives was both necessary and non-trivial. Europeans would have participated in the early stages of formulating these policies, probably occasioning many hard negotiations and compromises. At the moment, however, ex-post co-ordination works because the EU’s deep and growing security dependence on the US means European governments have little choice but to defer to Washington on security issues. And, from an American perspective, the increasing integration of the security and economic spheres, particularly in the struggle with China, means that nearly every issue is a security issue. The IRA, for example, is both domestic economic policy and a weapon for the US in the struggle with China. America expects Europeans to defer to it on the latter and mostly ignore the former. So far, it is working. More

Britain’s obsession with the weather has drifted across the Atlantic (seemingly along with half its stock market). The Fed has no mandate to wade into climate policymaking, Jay Powell acknowledged again this week, moments after blaming an “unseasonably warm” January for a bout of higher-than-expected inflation.Preliminary data from the National Oceanic and Atmospheric Administration suggest the first two months of 2023 “may be close to the warmest on record” for that period in data going back to 1895, according to the US Energy Information Administration. As Powell alluded to in his testimony to Congress, data on US employment, consumer spending, manufacturing production, and inflation bear this out.The first indication that things were heating up economically came early last month, with January’s blockbuster jobs report. The US added some 517,000 nonfarm jobs in the first month of the year, nearly double December’s total and close to triple the consensus forecast. Why? Strikes, seasonal factors and you guessed it, the weather, said Morgan Stanley.Sunny skies accounted for 126,000 of the jobs added in January, according to the bank’s analysis, which drew on research into the effects of weather on employment by the Federal Reserve Bank of San Francisco. 

But one swallow does not make a summer. The San Francisco wonks found that in winter, “when warmer-than-usual weather increases employment in a given month, the effect reverses over the following three months, leading to zero cumulative effects over a four-month period”. Inflation doves with an eye on February’s jobs numbers, out on Friday, will be hoping this holds true. James Knightley, ING’s chief international economist, has “pencilled in” a 200,000 jobs gain for last month but admits he has “little confidence in that forecast given the seasonal adjustment factors and unusual weather patterns”. Just over a week after the release of the jobs numbers came the latest consumer price index report (up 6.4 per cent annually versus a 6.2 per cent forecast) and the Fed’s favoured core personal consumption expenditures index (4.7 per cent versus a 4.3 per cent forecast). “It could be that progress has stalled,” said Fed governor Christopher Waller, “or it’s possible that the numbers released last month were a blip, perhaps associated with unusually favorable weather”.Manufacturing output was meanwhile blowing with the wind, according to a Bank of America note from mid-February:Components of industrial production have been subject to excessive volatility from unseasonably cold weather in December, which may have held back production and hours, and warm weather in January, which may have supported both a modest rebound in manufacturing production (+1.0% m/m) and a sharp 9.9% decline in utilities output.Retail sales boomed unambiguously, rising 3 per cent over December’s figures for one of the biggest monthly increases of the past 20 years. Here’s a chart from State Street showing almost half (!) of all US retail sales in 2021 and 2022 occurred in the first month of both years. Warmer weather almost certainly fuelled a similar shopping bonanza in early 2023. 

© State Street

It also helped stave off a sharp slowdown in Europe, where muted demand sent prices for crucial natural gas tumbling over the usually bitter winter months, averting a widely-expected collapse in both production and consumption.JPMorgan notes “a general sense of complacency” emerging in the European natural gas market, however, thanks in part to the “extra cushion in storage created by an incredibly mild winter”:Ultimately, the market seems primed for asymmetric upside price moves – be it as a result of geopolitics, an upside surprise in Chinese demand in 2H23, or weather.Higher temperatures could even end up boosting natural gas prices further down the line, the bank reckons:Over the past several years, droughts – reducing hydro power generation and increasing natural gas burn throughout the globe – have been prevalent. Additionally, warmer temperatures overall have supported an increase in natural gas consumption in Europe – be it from low river levels preventing coal shipments, warm river temperatures suppressing nuclear power generation, or an outright increase in baseload cooling demand.Back in the here and now it should go without saying that the weather was far from the only factor that influenced inflation and economic activity in Europe and the US. Add to that list China’s economic reopening, buoyant global liquidity, a secular shortage of workers, robust consumer savings etc. etc. But the weather clearly matters when it comes to price stability, even if its precise effects remain hard to quantify. Climate forecasting is “arbitrary and capricious” in nature, senator Tim Scott reminded Powell on Tuesday. Financial modelling, on the other hand, is a famously exact science.  More