Aurelia Butler

Good morning. Goldman Sachs’ investor day yesterday failed to produce much excitement. The most interesting thing about Goldman is that it just isn’t that interesting any more, and its best strategic option is becoming still less interesting. That tells you something important about how the finance industry has changed. Email us: [email protected] and [email protected]. The housing recession, and the plain old recessionWe check in on the housing market every few months, for a couple of reasons. Because something like two-thirds of Americans have a big chunk of their net worth tied up in the housing market, it tells you something about how a lot of people feel, financially — a feeling that factors into the performance of all other markets. Second, because the housing market is rate sensitive, the market tells you something about the transmission of monetary policy into the real economy, a crucial issue at the moment. The housing market story always begins with mortgage rates, which have changed direction lately, following inflation expectations back up; see the blue line, below. This mirrors, in part, the increase in 10-year Treasury yields. But notice also the pink line, which is the spread between Treasury yields and mortgage rates. That spread, as Jack Macdowell of the residential credit specialist Palisades Group pointed out to us, is 130 bps higher than usual. This reflects expected rate volatility. When mortgage lenders think rates might move quickly, they build a buffer into their pricing:When rates rise, housing affordability declines. Here, from Capital Economics’ Sam Hall, is a chart of US mortgage payments as a proportion of incomes. Houses were last this unaffordable in the mid-1980s.

Renting looks much more affordable by comparison (chart from Goldman, which calculates affordability slightly differently): 

Higher rates are creating not a price crash, as one might expect, but a frozen market. Measured by the Zillow home value index, prices are off their August peak but are only down a modest 1 per cent:Prices may be stable, but transactions are down, as both supply and demand feel the chill. On the demand side, mortgage rate sticker shock is scaring off would-be homebuyers, dragging down new mortgage applications. This year’s shortlived dip in rates did give applications a bump, but it hasn’t lasted:The dearth of willing buyers at current prices means that existing homes for sale just aren’t getting sold. Inventory is sitting around longer. The median single-family house listed on Zillow is more than two months old, the longest since early 2020. Contrast the rising stock of existing homes for sale — which accounts for about 90 per cent of home sales — against how many are actually being sold. The amount of existing homes on the market is back at pre-coronavirus pandemic levels (chart from Goldman):

Yet existing home sales (grey line below) are languishing at a fraction of 2019 levels. The chart below from Renaissance Macro shows both existing and pending home sales (pending tends to lead existing). Though pending home sales did jump in January, that probably reflects the fall in mortgage rates, which has reverted. Put together, existing home sales look a bit stuck:

The story is as much about supply as demand. High mortgage rates, which follow very low ones, create a lock-in effect. Homeowners (including one Rob Armstrong) cling on for dear life to their sub-3 per cent fixed-rate mortgages. It would take a lot to make them move. This limits how much of the existing home stock will come to market. A strong labour market also means few distressed sellers trying to dump their houses at a discount. Unless the economy craters (could happen!) the existing home market could be frozen for a while.We should acknowledge here that the new homes market looks healthier. New homes sales are rising and, thanks to the pandemic building boom, more supply is coming online. Homebuilders, for their part, have no choice but to move inventory, and fast. According to Rick Palacios of John Burns Real Estate Consulting, they’ve cut prices, and those with mortgage lending offshoots are offering lower rates to get people in houses. Homebuilders may well steal market share as from the existing home market.But, again, new homes only make up about 10 per cent of the market, probably too small to make a difference. As Goldman’s Vinay Viswanathan wrote recently:Record-low homeowner vacancy rates have essentially depleted housing inventory and materially tightened supply. On net, this implies a muted impact from completions on the current supply/demand balance of housing and, ultimately, prices. Even if every single home under construction was completed and listed on the market immediately, the months’ supply of homes (the ratio of inventory to annual sales) would still be below historic averages.So, what unfreezes the US housing market? Well, the easiest thaw would come from falling interest rates, which would restore affordability and help buyers and sellers meet in the middle. Another reason to hope the deflation fairy will appear soon, wand a-waving. But that might not happen, or happen soon.How about a decline in prices? When rates first began to rise, the consensus among housing pundits (as far as we could make it out) was that while price increases would slow or stop, a price decline was unlikely. The argument was that substantial price declines are driven by forced sellers, and there won’t be many of these this time around, because there are so few adjustable-rate mortgages now (less than 8 per cent of the total), and because mortgage credit quality has improved since the financial crisis.Now that rates have run as far as they have, more observers foresee only a smallish decrease in prices — 10 per cent or so down from the peak. This makes sense, provided we don’t get another big leg up in rates (a possibility we would not rule out). Supply is limited, and then there is the lock-in effect. This ain’t 2008. But even if rates remain high, at some point the outlook for the economy should become a little clearer, and expected rate volatility should stabilise. At that point, the Treasury/mortgage rate spread should head back towards normal, supporting affordability. In combination with a modest decline in prices, this could cause a partial market thaw. What does all this portend for the wider economy? There are two questions here. The first is simply how much lower housing activity drags on the economy. The second is more complicated: is housing just the part of the economy hit by higher rates first, with other parts of the economy following in time?On the first question, Dhaval Joshi of BCA Research argues that the current housing recession will pull fixed investment in residential real estate down from about 4 per cent to 2 per cent of GDP, with something more than half of the damage already done. If that is right, lack of housing activity will be a perceptible, but not huge, drag on GDP. Joshi’s argument is that housing investment is quite cyclical, but reverts towards a level corresponding to the number of households in the country. We overshot that level the pandemic boom, and are now set to undershoot. His chart:

The question of whether the housing recession is just the first step in a rates-driven slump is harder. Joshi argues that since 1970, housing recessions (defined as a 1 per cent decline in housing investment’s contribution to GDP) have always been followed by general recessions. Housing is the “canary in the coal mine”, he says: it won’t drag us into recession, but it shows what high rates will do to the rest of the economy sooner or later. We tend to agree. Other sectors of the economy are less sensitive to rates than housing. But if the economy is not cooling on its own — and it doesn’t look like it is — the Fed will have no choice but to tighten policy until what has happened in real estate happens elsewhere. (Armstrong & Wu)One good readThat infamous slap seems to be helping Chris Rock’s career. Good for him! More

The Russian rouble has fallen to its weakest level in 10 months, losing around 20 per cent of its value since the start of December, as western sanctions, Moscow’s waning energy revenues and high military spending exert pressure on the currency.With capital controls in place and foreign trading in the currency largely moribund, analysts said the value of the currency no longer reflected a forward-looking assessment of the state of the economy but more of a short-term snapshot.“Trade flows have become the main factor behind the rouble moves,” said Natalia Lavrova, chief economist at BCS Global Markets. The currency is trading at around Rbs75 to the dollar, from the peak of Rbs50 it reached at the end of July and around the level it was at before the full scale invasion of Ukraine a year ago. After the war started it collapsed to around Rbs140 to the dollar, according to Bloomberg data, following the imposition of sanctions, and then recovered after interest rates were raised to 20 per cent and capital controls imposed.The currency’s decline this year is being driven by lower energy revenues, a result of western sanctions on Russian oil exports including a $60-a-barrel price cap imposed by the EU in December. Moscow is now selling much of its oil to China and India, which can demand a discount on the price, particularly since February 5 when G7 sanctions were extended from Russian crude to oil products.The spread between Brent crude and Russian Urals was $29.24 on Tuesday, compared to $18.55 at the start of November. Revenues in January fell 46 per cent year on year, the finance ministry said.The rouble’s fall is being tempered by the central bank selling renminbi holdings from its national wealth fund, in accordance with its “budget rule”: when energy revenues are lower than expected, the bank sells assets from the fund to cover the difference. In January, according to the finance ministry, Russia sold Rbs54.5bn of renminbi and plans to triple this amount in February. If it did, this would account for less than 6 per cent of the fund’s total renminbi holdings, suggesting that the strategy can be maintained for some time. “These sales are not aimed to strengthen the rouble, as they cannot outweigh the trade flows, although may have a minor supporting effect,” said Vladimir Osakovsky, the chief Russia economist at the Bank of America. A weaker rouble gives Russia higher export revenues as it receives energy income mostly in dollars and euros, while government spending is largely in the local currency. “When the exchange rate goes one rouble down, the budget receives an extra Rbs120bn,” Lavrova said. The recent decline is not necessarily bad news for Moscow: last year the government worried that the currency had strengthened too much. Economy minister Maxim Reshetnikov said after it hit Rbs50 to the dollar that “the profitability of many industrial enterprises became negative at the current exchange rate”. Too weak a currency, however, poses risks for inflation — through more expensive imports — and financial stability as it triggers demands for liquidity, analysts at the Kyiv School of Economics Institute analysts said in a report this month. Government statistics demonstrate the pressure on the currency. In January, the current account surplus, the difference in net value between exports and imports, fell to $8bn. This was a year-on-year drop of almost 60 per cent.Falling oil and gas revenues also put pressure on government finances. But instead of tightening its belt, the state increased spending in January by 59 per cent year on year. By the end of February, Russia had spent 17 per cent of the 2023 budget but earned only received 5.3 per cent of its expected annual revenue, according to finance ministry data.“The scale of spending increase in January is quite unusual as the government usually trims spending at the start of the year,” Osakovsky said. He argued that the spending surge could be another reason behind the rouble’s decline, as “part of the rouble inflows could have been used to buy dollars to pay for imports”.It is unclear how low the rouble will fall. A recent central bank survey of Russian analysts forecast that the currency would trade in the Rbs67-Rbs77 range this year, a level which first deputy prime minister Andrei Belousov last year had described as “the most comfortable for Russian industry”. Analysts believe that the currency’s future direction will be determined by the same factors that are driving it now — the shifting pattern of imports and exports, particularly in the energy sector. Sofya Donets, chief Russia economist at Renaissance Capital, said: “The rouble exists in a relatively sterile environment and reflects one fundamental aspect of the Russian economy — the trade balance.” More

Spain’s fruit and vegetable exports to the UK have suffered “no fundamental disruption” from Brexit despite salad shortages in British supermarkets and added costs for exporters, the country’s agriculture minister has said.Echoing the UK government’s explanation, Luis Planas said a lack of cucumbers, lettuces and tomatoes in stores partly reflected frosty temperatures in southern Spain, which had slowed production in recent weeks. But he told the Financial Times the shortage was “an anomaly not a trend”.For Spanish exporters to the UK, Brexit had meant burdensome new “administrative procedures that come with additional expenses and additional difficulties”, Planas said. “Not being in the EU’s single market has a significant cost.”But despite that, he said “things have gone well” overall in Spain’s post-Brexit food trade with the UK, including its role as the country’s biggest single supplier of fresh vegetables.Trade data shows that although the value of vegetable shipments from Spain has increased since the Brexit trading regime came into effect at the start of 2021, the volume has dropped.

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Planas acknowledged that smaller-scale producers of wine, cheese and olive oil have had a particularly hard time accepting higher costs. “Some, honestly, have told me that they’ve stopped sending to the UK,” he said.Others had cut the frequency of deliveries to reduce costs and the administrative burden associated with each individual shipment, leaving UK buyers with less flexibility to respond to surges in demand or new trends.“You can’t do ‘just in time’. From a commercial point of view, it poses more difficulties,” Planas said. “When you are within the EU you can very easily send a small order to a customer. Now our small exporters — I’m thinking of exporters of artisanal cheese or wine — tell me they group shipments together so instead of weekly they ship monthly, bimonthly or quarterly.”Trade data does not point to a clear trend in Spanish sales to the UK. The value of Britain’s Spanish cheese imports hit a record of €43mn last year as volumes rose, but wine shipments were down in volume and value in 2022.

A worker closes a sack full of olives to upload it to a trailer in Jaen, Spain. The country accounts for about 30% of the EU’s entire produce yield © Carlos Gil/Getty Images

Fruit and vegetables are sold on a far larger scale, with the UK importing roughly €1bn of Spanish produce in each category every year since 2020 and Spain accounting for about 30 per cent of the EU’s entire production. While fruit shipments to the UK have declined in the past two years, the rising value of vegetable sales means the country has maintained its ranking as Spain’s second-biggest market for tomatoes and cucumbers after Germany.Planas said he had a “message of reassurance” on the UK’s current salad shortages. “There is no fundamental disruption. There are some problems that have occurred as a result of a few weeks of low temperatures in producing areas, but the supply is guaranteed.”The agriculture ministry said that as temperatures rise with the change of seasons, the situation would be “regularised”. The crucial agricultural regions hit by cold weather in southern Spain were Almería and Murcia.

Trade between the countries has been facilitated, Planas said, by the UK’s repeated delays to introducing sanitary and phytosanitary checks on foodstuffs entering the country post-Brexit.These checks, which include health certifications and in some cases physical inspections, are already being carried out on goods from the UK entering the EU, but have been delayed four times in the opposite direction and are due to begin at the end of 2023.The UK’s second-biggest vegetable supplier is the Netherlands, another EU country. But Planas noted that since Brexit the UK had signed trade deals with Australia, New Zealand and also Morocco, a north African country that has risen rapidly up the rankings to become the UK’s third-biggest vegetable supplier.Planas said: “The UK is one of our core markets from an agri-foods point of view and we are very keen to see that good relationship preserved.”Additional reporting by Emiko Terazono and Judith Evans in London More

Companies are seeking to cut their legal bills as they struggle with rising input costs and interest payments, some of the largest law firms have warned.The heads of three global firms told the Financial Times that corporate clients were asking for discounts on their legal bills or requesting payment be postponed until later in the year.“We had a number of clients who said ‘I’m not going to pay you all that now, I’ll do it over a different timeframe,’” said Tamara Box, Europe and Middle East managing partner of international law firm Reed Smith. “It really started in the third or fourth quarter of last year, [clients] — like us — were looking towards 2023 and thinking a lot of things were coming together in a way that looked bad — a war, rising inflation and rising interest rates,” she said.Clients were considering how their cash flows would look and were asking for writedowns on bills and to pull some work owing to budget constraints, she added. Many were dealing with more work in-house. The trend comes as top corporate law firms have found themselves dealing with a fall in transactional work due to slowing mergers and acquisitions.Average hours worked per lawyer fell to 119 billable hours per month in the year to the end of November, according to a report by the Thomson Reuters Institute — the lowest level since it began tracking the data in 2007, when lawyers logged an average 134 hours per month. At the same time, expenses rose at double-digit rates.Hogan Lovells, an international law firm, last week said revenue had fallen 6.7 per cent in dollar terms in the year to the end of December and partners took home 8.2 per cent less in profit shares on average.Chief executive Miguel Zaldivar said inflation, Covid-19 and the war in Ukraine had all weighed on the firm’s revenue. Lawyers told the FT that those same pressures were hampering clients’ ability to pay.The head of one large American law firm told the FT that a client had asked for a discount for the “first time in years” and that the firm was “not getting paid by some clients”, particularly in the technology sector, which had shed jobs in recent months. Separately Tim House, who manages magic circle firm Allen & Overy’s US practice, said that “lock-up periods have extended a little bit, so people are slower to pay”.But he added that in general rates had “held up quite well” and even increased, helping to cushion the blow of reduced demand.Lawyers said there were no norms in terms of the level of discount requested. Such negotiations also tend to be more common in certain types of work, while clients needing advice on high-stakes M&A, for example, may be less price-sensitive.John Quinn, chair of trial firm Quinn Emanuel Urquhart & Sullivan, said clients “under pressure” were asking “can you help us out?” He added some clients were requesting fixed fee deals — for example, where they pay a set amount — rather than paying by the hour.Richard Burcher, founder of law firm pricing consultancy Validatum, said: “It is a misconception that all clients want discounts . . . [when many want] greater price transparency and greater budgetary certainty.”He said law firms were often turning to models other than the billable hour and also noted that discounts and fee negotiations were coming after a year in which law firms had raised their hourly rates to keep up with inflation. More

More than 340,000 Americans will see an increase in their monthly pay cheque tomorrow after Walmart, the biggest private-sector employer in the US, raised its minimum hourly wage to $14. The retailer’s move will in effect set a new floor for pay in many US states. On the other side of the Atlantic, as many as half a million UK public sector workers have taken industrial action over pay and Germany’s public sector unions are also calling strikes. In Hungary and Poland, wage growth has reached double digits. Even in Japan, where many people have not had a pay rise for decades, big employers are weighing a shake-up of seniority-based salary structures that could finally put money in workers’ pockets. Whether the world’s workers can press home their demands for better pay is the single biggest question facing central bankers around the world this year as they fight to curb the rates at which prices are rising. “Even after energy and pandemic factors fade . . . wage inflation will be a primary driver of price inflation over the next several years,” Philip Lane, chief economist at the European Central Bank, warned in November. Joe Biden, US president, speaks last month at the IBEW electrical workers Local 26 union, in Lanham, Maryland. The Biden administration is celebrating an economic environment that has helped marginalised groups and low-wage workers climb the jobs ladder © Mandel Ngan/AFP/Getty ImagesCentral banks do not yet face the kind of “wage price spiral” that took hold in the US in the 1970s. Then, employees won inflation-busting pay rises for the best part of a decade, fuelling further price rises until Paul Volcker’s arrival at the US Federal Reserve brought about a change of monetary regime. Volcker quashed inflation, but at the cost of a deep recession. “You don’t see [a wage-price spiral] yet. But the whole point is . . . once you see it, you have a serious problem,” Jay Powell, the US Federal Reserve chair, told reporters after the Fed’s latest interest rate increase, adding: “That’s what we can’t allow to happen.”The worry, though, is that a year of rocketing prices may have triggered a lasting change in the expectations and behaviour of workers, employers and consumers. This could lead to something better described as “wage-price persistence” — where a strong jobs market allows service sector workers to demand bigger pay rises, and companies to pass on the costs to households bolstered by high employment rates and government support. Even relatively moderate-looking wage settlements could stop inflation falling back towards central banks’ 2 per cent targets — unless they jack up interest rates further to potentially recession-inducing levels.Demand, energy and productivityThe inflation problems facing the Fed and ECB are different, however. In the US, inflation has been driven chiefly by a stimulus-fuelled surge in demand after the end of lockdowns and the question for policymakers is whether higher wages can be justified by improved productivity. In the eurozone and UK, the dominant issue is the energy price shock caused by Russia’s invasion of Ukraine. Dramatically higher spending on energy has made societies poorer overall, and the question is how that cost is shared between companies, workers and taxpayers. In this context, even if wages lag behind inflation, they could still be too high for companies to bear without raising prices further.On both sides of the Atlantic, headline rates of inflation are set to slow sharply over the next few months, as gas prices have eased and higher borrowing costs are starting to moderate demand. But most workers have suffered a big hit to their living standards in the past year, because pay settlements that would look generous in normal times are still well short of inflation. Wage gains will be futile if they simply perpetuate high inflation, but workers want their pay to catch up with prices.They are well placed for that fight. Despite high profile lay-offs in the tech sector, and a leaner year ahead for dealmaking bankers and lawyers, in many countries unemployment is near record lows, labour shortages are widespread and employers are intent to retain staff even in a downturn. In this context, monetary policymakers worry that even pay growth of 4 or 5 per cent will be too strong for them to bring inflation sustainably back towards their 2 per cent targets — given the absence, so far, of any significant pick-up in workers’ productivity. Has wage growth topped out?The big unknown now is whether jobs markets are already slowing enough to take the edge off wage growth — or whether central banks will feel the need to raise interest rates further and keep them high for longer, in order to engineer job losses and financial pain. “Given tight labour markets, it is clear that central banks want to see convincing signs that the economy is turning down and subsequently that unemployment will turn up,” says Bill Diviney, economist at ABN Amro. At present, both hawks and doves can point to evidence that bolsters their case. Take US employment data; February’s payroll numbers will be announced on Friday, but January saw an unexpected surge in hiring, with more than half a million workers joining payrolls. In the same month, annual growth in average hourly earnings slowed from 4.8 to 4.4 per cent.The combination of blockbuster job creation and slowing wage growth could vindicate those who believe the Fed can engineer a soft landing for the economy, taming inflation without the need to increase rates to a point that will cause widespread lay-offs. “If you want to know what a full employment economy looks like, this is a good start. Strong but not over-strong nominal wage growth, plentiful jobs, many people climbing the jobs ladder, broad-based prosperity,” tweeted Arin Dube, a professor at the University of Massachusetts who has led research on minimum wages.

His argument is that wage gains reflect a genuine change in the structure of the US labour market because pandemic lockdowns, and the hiring surge that followed them, prompted workers to move out of low-paying service jobs into more productive sectors. Others take a less optimistic view on productivity, however. Jason Furman, a fellow at the Peterson Institute for International Economics, says that after factoring in revisions to figures for earlier months, “the pattern looks less like a slowdown in wage growth within 2022 and more like steady growth that is roughly consistent with 3.5 per cent inflation”.More recent data has made economists worry that even after raising US interest rates at the fastest rate in history over the past year, the Fed has not yet done enough to take the heat out of the labour market. One closely watched indicator of price inflation — which strips out volatile food, energy and housing costs and is therefore strongly influenced by service sector wages — accelerated in January. Furman says this shows that while the effects of the pandemic on the prices of timber, microchips or shipping are over, “demand and self-fulfilling wage-price persistence are still with us. As is very elevated inflation.”The latest data from France and Spain also points to persistent inflationary pressures in the eurozone. There, wage growth was surprisingly muted in 2022 but is expected to pick up this year as unions renegotiate multiyear sectoral deals that cover a big share of the workforce in some countries. Economists describe the deal struck in November by IG Metall, Germany’s biggest union, as a “Goldilocks” scenario balancing the risks to growth and inflation. It combined pay rises over two years with one-off payments to help with the rising cost of energy bills.But German public sector unions are now seeking a double digit wage rise and Dutch unions are agreeing pay awards of 5 or 6 per cent, well above historical norms. Spain’s central bank has flagged concerns over the rising use of indexation clauses in wage deals, pegging pay to inflation. Members of the French Democratic Confederation of Labour march against pension reform plans in Paris last month. France and Germany have offered tax breaks that incentivise companies to make up for below-inflation wage rises with one-off bonuses © Benjamin Girette/BloombergErwan Gautier, an economist at the Banque de France, found that scores of industries had revisited their sectoral deals in the course of 2022, sometimes twice or more, to keep up with the minimum wage, which in France adjusts automatically when inflation is high. Many more were still playing catch-up, suggesting wage growth would accelerate in 2023. Christine Lagarde, the ECB president, said last week the central bank was “looking at wages and negotiated wages very very closely”. Isabel Schnabel, a member of its executive board, has warned that probable wage growth between 4 and 5 per cent in the years to come is “too high to be consistent with our 2 per cent inflation target” and could persist longer in the eurozone than in the US, due to the more widespread use of centralised wage bargaining processes. One factor could limit wage pressures in the eurozone, however. In most of the bloc’s major economies, better job opportunities have drawn more people into the workforce, with economic activity above its pre-pandemic rate in France, Germany and Spain. UK rates: higher for longerThis is in sharp contrast with the situation in the UK, whose workforce has shrunk by more than 300,000 since Covid hit. The Bank of England sees little prospect of this changing, unless immigration rises, because it has been caused by people who are too sick to work or have chosen to leave the workforce. Even if this legacy of the pandemic fades over time, employers will increasingly run into the constraints imposed by an ageing population.Employers bidding for increasingly scarce workers is a key reason why interest rates could remain higher for longer in the UK than elsewhere — and why Andrew Bailey, the BoE governor, has warned of consequences for inflation and monetary policy if the government agrees to pay public sector workers more without raising taxes to fund it. “I am very uncertain particularly about price-setting and wage-setting in this country,” he said in evidence to MPs on 9 February.In all countries, though, there is a growing tension between central banks’ concern over inflation and governments’ wish to protect voters’ living standards and avoid social conflict. In Europe, many governments have tried to resolve this by boosting pay for those at the bottom. Statutory minimum wages rose by 12 per cent on average across the EU in 2022, double the rate of the previous year. This was partly due to a catch-up in eastern and central European states, but the wage floor also rose by 22 per cent in Germany, 12 per cent in the Netherlands and around 5 to 8 per cent elsewhere in the core of the bloc. Both France and Germany have also offered tax breaks that incentivise companies to make up for below-inflation wage rises with big one-off bonuses. These will have a more transient effect, but still bolster consumer spending and so increase companies’ pricing power. Workers at the Ford Motor factory in Saarlouis, Germany, in 2019. Economic activity is above its pre-pandemic rate in Germany, France and Spain © Krisztian Bocsi/BloombergAnd while the Fed frets that the US labour market may be running too hot, the Biden administration is celebrating an economic environment that has helped marginalised groups and low-wage workers climb the jobs ladder. “Our country is back to work. We’ve seen historic employment gains in the past two years,” the Treasury secretary Janet Yellen said last month, noting that unemployment was now near record lows for Black and Hispanic Americans and people with disabilities. Taming inflation: whose job is it?Some argue that a scarcity of workers is driving a much-needed correction in the balance of power between capital and labour, and that pay should rise to protect living standards. But this could only happen if companies absorbed the shock through lower profits — something that has rarely happened before.At present — except in the energy sector, where profits have soared — both workers and employers are feeling the squeeze. As Torsten Bell, at the UK’s Resolution Foundation, puts it: “The scale of the pain is so big there’s more than enough of it to lead to both profits and wages falling.”

This tension could make life tough for central banks if they press on with interest rate rises to stop wage pressures lingering before they are able to see the full effect of the tightening they have already delivered. “Governments facing constant social demand for indexation . . . may increasingly resent a monetary policy tightening, and so do businesses squeezed between rising labour and funding costs,” says Gilles Moëc, chief economist at Axa Group.Raising interest rates remains the standard prescription for dealing with these pressures — choking off economic growth until workers become too scared of losing their jobs to hold out for higher wages and companies too fearful of losing customers to raise prices any further. Olivier Blanchard, former chief economist at the IMF, has argued that this is “a highly inefficient way” to deal with inflation, which he describes as the result of a “distributional conflict, between firms, workers and taxpayers”. The OECD is in favour of governments using minimum wages to help the poorest manage rising prices, but has also urged greater use of collective bargaining mechanisms. It argues these can help avoid a wage-price spiral, because they help to share the costs of inflation fairly between workers at different income levels, and also allow for trade-offs between wages and other benefits that workers value, such as more flexible working hours. But in practice, Blanchard notes, it is almost always central banks that are left to resolve the conflict. “One can dream of a negotiation between workers, firms and the state, in which the outcome is achieved without triggering inflation and requiring a painful slowdown . . . Unfortunately, this requires more trust than can be hoped for and just does not happen.” More

HOUSTON (Reuters) -Oil major Chevron Corp (NYSE:CVX) on Tuesday expanded its share buyback program and laid out plans to add 750,000 barrels of oil and gas per day to its U.S. production on gains from the country’s shale basins and the Gulf of Mexico.U.S. oil companies have been moving more of their investments to the Americas to reduce costs and pare geopolitical risks, amid pressure from the White House for more in-country production.Chevron told investors at an annual presentation that it plans to raise global output at a 3% annual rate through 2027. The No. 2 U.S. oil producer delivered 3 million barrels of oil and gas per day last year.Chevron’s shares closed down 1.3% to $160.77.”We plan to grow both traditional and new energy supplies while safely delivering higher returns and lower carbon,” Chief Executive Michael Wirth said.Much of the increase will come from the top U.S. shale field, where Chevron expects daily output to reach 1 million barrels in 2025. Last quarter it pumped 738,000 barrels per day from the Permian basin, despite inflation costs and uncompleted wells. “Time will tell as to whether Chevron has convinced the market on moving past its Permian challenges,” Biraj Borkhataria, RBC’s director of European research, said in a note to clients.Chevron has added more than 40,000 barrels per day in Venezuela this year, but additional gains could be limited by political risks, Wirth said. In Kazakhstan, which accounts for 14% of its reserves, Chevron will increase output by 130,000 barrels per day by 2027 from an expansion project whose investments are now winding down. MORE SHARE BUYBACKS The company said this year’s spending on new oil and gas projects will be near the top end of its previously announced $15 billion to $17 billion guidance, with a greater share in the United States. While spending is growing, distributions to shareholders are greater. Chevron last year invested $15.7 billion in operations and returned $26 billion via dividends and buybacks. Wirth said Chevron will expand the share buyback rate by 17% to $17.5 billion a year starting next quarter. Just a month ago, Chevron had tripled the budget for the buyback program to $75 billion, with no fixed expiration date.It also doubled the annual range to between $10 billion and $20 billion by 2025, assuming Brent oil prices between $50-$70 per barrel. Brent settled at $83.45 a barrel on Tuesday. “We have just become much more efficient, we can get more done for every dollar that we spend,” Wirth said.The top Western oil companies benefiting from high energy prices posted a record $219 billion in profits last year, spurring some European Union countries and the United Kingdom to impose windfall taxes on the industry to help consumers with energy costs. The amount of cash available for companies has raised the prospect of a wave of oil mergers and acquisitions. Wirth did not rule out a consolidation among oil majors, but stressed that regulatory approval would make big deals difficult.”I never say never to anything,” he said.Chevron is not in a hurry for M&A in oil or renewable energy and remains committed to keeping a tight rein on spending, he said. More

Data from the Australian Bureau of Statistics on Wednesday showed real gross domestic product (GDP) rose 0.5% in the December quarter, down from 0.7% in the previous quarter and under forecasts of 0.8%.Annual growth was still solid at 2.7%, while the report contained plenty of evidence of cost and price pressures that underline the case for yet further increases in interest rates in the struggle against inflation. More

The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index released on Wednesday fell to 47.7 in February from January’s 48.9. Although higher than the flash reading, it marked the fastest decline since September 2020.”Both new orders and production levels, which make up 55% of the headline PMI figure, fell at the fastest pace since July 2020 as weak domestic demand and a global economic slowdown hindered sales and output volumes,” said economist Usamah Bhatti at S&P Global (NYSE:SPGI) Market Intelligence, which compiles the survey.Manufacturing output and new orders contracted for an eighth consecutive month and at the fastest rates in 31 months, the survey showed.The final PMI reading comes a day after government data showed Japanese factories slashed output in January at the fastest pace in eight months, dragged down by auto and semiconductor sectors.The downturn in factory activity is likely to be sustained over the near term, Bhatti said, “as the absence of new orders amid dampened client confidence lifted capacity pressure on manufacturers further.” The sub-index gauging backlogs of work was at the lowest since September 2020, underscoring the frail customer demand.Input price inflation slumped to its slowest pace in 18 months, while the rate of output price inflation rose for the first time in four months as more companies successfully passed on elevated costs to clients.On the brighter side, supplier delivery delays were the least prevalent in two years, the survey showed.Recent data showed Japan’s economy averted recession but rebounded much less than expected in the fourth quarter last year as business investment slumped. The Bank of Japan remains an outlier in the current global monetary tightening phase, committing to maintaining ultra-low rates to shore up its COVID-ravaged economy. More