Aurelia Butler

WASHINGTON (Reuters) – After vouching last week that a “gratifying” drop in inflation was underway, Federal Reserve Chair Jerome Powell will face questions on Tuesday about whether a blowout January jobs report has shaken his confidence the decline can continue without harsher steps by the U.S. central bank to slow the economy.Fed officials, including Powell, are typically reluctant to put weight on single data points, and the Labor Department report on Friday showing 571,000 jobs were added in January may be seen as particularly “noisy” given annual data revisions and seasonal adjustments. Indeed, on an unadjusted basis, employers cut jobs last month as they do every January but by a much smaller amount than usual, resulting in the largest seasonally adjusted increase in six months.But, with the unemployment rate hitting its lowest level since 1969 at 3.4%, January’s numbers were still far out of line with the looser labor market the Fed has expected and feels will be needed to ensure that wage growth also slows and inflation continues to fall. Investors skeptical of the Fed’s interest rate hike plans have now matched officials’ own projections in seeing the benchmark overnight interest rate increased by another half of a percentage point this year, to a range of 5.00% to 5.25%, while some economists pushed even further in suggesting the January jobs report showed the economy was still too hot for the Fed’s comfort and required even tighter monetary policy. Job gains remain strong https://www.reuters.com/graphics/USA-FED/POWELL/xmvjkrbdgpr/chart.png “It is increasingly difficult to make the case that the Fed has slowed the economy substantially enough to return inflation” to the 2% target, Citi economists wrote on Monday, seeing a “hawkish risk” in the remarks that Powell will make to the Economic Club of Washington starting at 12:40 EST (1740 GMT). The Fed last week increased its policy rate by a quarter of a percentage point to the 4.50%-4.75% range, returning to a more conventional rate-hike increment after nearly a year of three-quarters-of-a-percentage-point and half-percentage-point hikes.Powell said that in slowing down to quarter-percentage-point steps the Fed was trying to “make a fine judgment” about how high rates needed to go without stepping too far and tightening credit conditions so much that it increases the risk of, or even causes, a jobs-destroying recession.He noted that a process of “disinflation” seemed to be taking hold so far without throwing employment off course – a hoped-for outcome if it can continue but one that might prove unsustainable if job growth doesn’t slow. Rates and inflation Rates and inflation https://www.reuters.com/graphics/USA-FED/INFLATION/gkvlgnaywpb/chart.png HARDER CALLS AHEADBy the Fed’s preferred measure, prices as of December were still increasing at a 5% annual rate, but the pace has been slowing and is expected to continue doing so. The consumer price index report for January is due to be released next week, with economists projecting another decline in the annual pace though perhaps a smaller one than has been the case in recent months.David Kamin, former deputy director of the Biden administration’s National Economic Council and now a law professor at New York University, said after a wrenching move in interest rates last year the Fed’s toughest choices may lie ahead. Policymakers now must balance what may be slowing progress towards their 2% inflation target against risks to the economy if they move rates even higher than expected, he added.The full impact of the Fed’s already-anticipated rate increases still has not been felt on the economy, meaning the current strength in the job market and elsewhere may in fact begin to wane, Kamin said. At the same time, the easy progress in lowering inflation may have been realized, with goods prices moderating as supply chains improve but services inflation showing itself to be more stubborn. “The Fed will have to figure out a path through, taking into account on one hand that some share of the effects have not necessarily been felt in the economy, and on the other that some of the factors that brought inflation down may not repeat,” Kamin said. “The Fed has a series of harder calls to make.” Biden and the Fed https://www.reuters.com/graphics/USA-ECONOMY/JOBS/jbyprzlrqpe/chart.png Powell’s tone on Tuesday will be telling, whether he interprets the January numbers as evidence Fed policy is not yet “restrictive” enough, or as a possible step towards a pre-pandemic state of affairs he has lauded.In 2019, the unemployment rate stood at 3.5% alongside inflation that was around the Fed’s target and modest wage growth, conditions Powell at the start of the health crisis said he hoped the economy could regain. Though job growth has remained remarkably strong, the economy is by many estimates still perhaps a million or more positions short of what would have been reached given job growth trends before the onset of COVID-19, suggesting more room for growth. The issue for Powell and other Fed policymakers is whether the economy begins to look so strong – whether in terms of job growth, an expected rebound in manufacturing, or from financial markets that recently have been bidding home mortgage and other key market interest rates lower – it undermines their faith that inflation will continue slowing.”We should be open to the idea of an acceleration of activity in the first half of the year,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote. “The data overran the Fed last week, and Powell and his colleagues are falling behind the curve again. It’s time to start looking for a higher terminal rate.” More

WASHINGTON (Reuters) – U.S. President Joe Biden will face Republicans who question his legitimacy and a public concerned about the country’s direction in Tuesday’s State of the Union speech that is expected to serve as a blueprint for a 2024 re-election bid.In what will be his first address to a joint session of Congress since Republicans took control of the House of Representatives, Biden is expected to explain how he is trying to reshape the post-pandemic economy, highlight massive infrastructure and inflation bills passed in 2022, and stress that a bitterly-divided Congress can still make laws in the year ahead. “I want to talk to the American people and let them know the state of affairs… what I’m looking forward to working on from this point on, what we’ve done,” Biden told reporters on Monday after returning from presidential retreat Camp David, where he spent the weekend working on the speech.Aides to Biden say the primetime speech, which will draw millions of viewers and perhaps the president’s largest television audience of the year, is a key milestone ahead of the second presidential campaign he is expected to launch in the coming weeks.Biden turned 80 in November and, if re-elected, would be 82 at the start of a second term, a fact that concerns many Democratic voters, recent polls show. One area he will ask Congress to work together on is to toughen regulations on the technology sector – including what the administration perceives as a need for stronger privacy protections, one aide said.NOT NEGOTIATING ON DEBT Biden will face a rambunctious and splintered gathering of Republican lawmakers, eager to put their conservative mark on U.S. policy following four years of Democratic control of the House.Speaker Kevin McCarthy will sit behind Biden for the address for the first time. The two are at loggerheads over the $31.4 trillion debt ceiling, which must raised in the coming months to avoid a default.Some House Republican lawmakers have questioned Biden’s victory in the 2020 presidential race against former President Donald Trump and have indicated they plan to investigate his Cabinet and family. But with a razor-thin majority and intraparty divisions, Republicans had a difficult time electing a speaker and are expected to continue to struggle to unite their far-right and more moderate members on legislation.Biden will insist during his speech that raising the debt limit is not negotiable and should not be used as a “bargaining chip” by lawmakers, National Economic Council director Brian Deese said Monday. McCarthy on Monday called on Biden to agree to compromises and spending cuts, adding that “finding compromise is exactly how governing in America is supposed to work and exactly what the American people voted for.”WEAK UNION?While the U.S. economy continues to outperform expectations, faith in Biden is undermined by entrenched political divisions, high prices and concerns over his age, polls show. Just four in 10 Americans say the state of the union is strong, according to a Monmouth University poll published this week, in which many respondents blamed Washington’s problems on a lack of compromise.Biden’s senior aides plan to use the speech to build an argument that Biden’s policies have helped to stabilize the U.S. economy following the COVID-19 pandemic and are the way to go to bring down inflation and boost good-paying jobs.Biden plans to explain how his strategies “makes a clear contrast to the trickle-down economic philosophy that has pervaded thinking for years and decades in the past,” Deese said. More

China, which views democratically-governed Taiwan as its own territory, has been stepping up military drills across the Taiwan Strait since then-U.S. House Speaker Nancy Pelosi visited Taipei in August. In a survey released on Tuesday, which took place between Nov. 15 and Dec. 16, AmCham Taiwan said 33% of respondents said their operations had been “significantly disrupted” by the increase in tensions, compared with 17% when it did a flash survey in August right after China began war games.While what it termed “personal anxiety” about increased military activity or tensions remained flat between August and December, 47% of companies said they either have revised or plan to revise business continuity plans “to address the new geopolitical climate.””We are aware that companies are either initiating or renewing their planning efforts, operational contingency planning. We know that’s going on,” AmCham Taiwan President Andrew Wylegala told reporters. AmCham Taiwan, which said that 214 of its 437 members responded to the December survey, said one-third of companies reported being disrupted by elevated concern or policy changes from their global headquarters, followed by increased shipping, insurance, or financial costs and staff anxiety.Political uncertainty was the biggest factor deferring members from further investment in Taiwan, and more than half of respondents said cross-strait relations should be the government’s top priority in the coming three years, it said.The group has called for an ambitious agenda to accelerate economic cooperation with Taiwan through a new Taiwan-U.S. trade talks framework – and eventually a bilateral trade agreement, though it hopes to see faster progress.”Engagements are going on between the U.S. and Taiwan. A year and half ago there was none,” Wylegala said. “There is an expectation and hope that things will move faster.” More

Joe Biden will take aim at Wall Street and corporate America in his annual State of the Union address tonight, reviving his plan for a tax on billionaires and calling on Congress to quadruple the levy on share buybacks.The newest proposal that Biden will unveil is the quadrupling of the 1 per cent excise tax on share buybacks, which was passed as part of last year’s Inflation Reduction Act (IRA), and staunchly opposed by business.Biden will also reprise his attempt to enact a tax on billionaires’ unrealised investment gains, which he had championed throughout 2022 but failed to secure in the final round of negotiations over the IRA following a backlash from some Republicans and moderate Democrats.In addition, he will call on Congress to extend a cap on insulin costs to all Americans after the IRA approved it only for seniors through the Medicare government healthcare scheme.The proposals are part of Biden’s efforts to double down and defend his economic policies, which have delivered huge jobs growth but also high inflation. Polls show Americans disapprove of Biden’s handling of the economy.Fiscal policy is set to be a crucial political battleground over the next few months as Biden tries to secure an increase in the US debt limit from congressional Republicans to avoid a damaging default on America’s financial obligations.Go deeper: With US unemployment at its lowest level since 1969, Joe Biden is tonight expected to defend his economic record as he makes the case for a second term.Five more stories in the news1. Google reveals answer to ChatGPT The search engine has revealed plans to launch a chatbot to rival OpenAI’s popular ChatGPT. Called Bard, Google’s chatbot will give users access to its most powerful language-based artificial intelligence system as it seeks to make up for lost ground in AI technology. Chinese internet group Baidu joined the AI race today, announcing plans for its own search engine chatbot.2. New Carlyle chief could make $180mn in 5 years Carlyle Group’s new chief executive Harvey Schwartz stands to make more than $180mn over the next five years, a pay deal that would make him one of Wall Street’s highest-paid executives. Part of the Goldman Sachs veteran’s pay package will be based on Carlyle’s share price performance.4. Rescue teams in Turkey and Syria race to save survivors Rescue teams in Turkey and Syria worked through the night against freezing temperatures to pull survivors from rubble as the death toll from the powerful earthquake reached 5,000, with 20,000 wounded. Explainer: The calamitous earthquakes that struck Turkey and Syria were centred on one of the world’s most seismically active regions.3. No plans to return Chinese balloon The US said yesterday there were no plans to return debris from the balloon it shot down on Saturday, even after technical experts finish analysing the surveillance capabilities that were on board the craft. Washington also stressed it was still committed to stabilising relations with China.How much did Xi know? The episode has sparked questions about whether Chinese president Xi Jinping knew about the balloon mission and approved it.5. UK to design ‘digital pound’ The UK Treasury and Bank of England are designing a “digital pound” that could supplant banknotes by the end of this decade and fend off potential Big Tech competitors. With the decline of cash, ministers and officials said there was likely to be a need for a publicly-backed digital currency that ensured the central bank retained control of the heart of the UK financial system.The day aheadMonetary policy US Federal Reserve chair Jay Powell will deliver his first public remarks since the central bank downshifted to a smaller interest rate rises and Friday’s much stronger-than-expected jobs data. He is set to speak at the Economic Club of Washington, appearing in conversation with club chair and Carlyle Group co-founder David Rubenstein. Stocks in Europe edged higher ahead of Powell’s appearance.Economic data The US will release its December international trade data, which economists expect will show the trade deficit widening to $68.5bn from $61.5bn in November. Separately, Canada will disclose its trade balance for the same month, and is forecasted to report its own widened deficit.Corporate results Car rental group Hertz, Spirit Airlines, Royal Caribbean Cruises and private equity firms KKR and Carlyle Group report earnings before the opening bell. Burrito chain Chipotle and insurer Prudential report after the market closes.What else we’re reading How Russia bought a new sphere of influence on the cheap In Europe, Vladimir Putin’s invasion of Ukraine has been humiliating and costly. But in Africa, Russia has been making dramatic inroads, helped by a volatile mix of jihadist terror, anti-French sentiment and coups d’état. It has succeeded in challenging western influence and established what a senior adviser to Emmanuel Macron calls “a second front”.FT analysis: At least 16 vessels that formed part of a “ghost” network that allowed Iran to breach UN sanctions have begun to ship Russian crude oil.

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Central banks are not here to make profits Unlike businesses, central banks have a mandate to act in the public interest: to safeguard the value of the money they issue so that people can make financial decisions with confidence. Making a loss is sometimes the price to pay for keeping economies stable in extraordinary times, writes Agustín Carstens, general manager of the Bank for International Settlements.Brexit could be reversed — here’s how At the height of Britain’s Brexit debate, passions ran so high that some talked of a “new English civil war”, writes Gideon Rachman. But the side that won the civil war ultimately lost, as the English restored the monarchy 11 years after King Charles I was executed in 1649. Could a similar reversal happen with Brexit?Ford has bigger problems than an EV price war Ford’s stock is down more than 9 per cent since Thursday evening, when it reported earnings that missed both Wall Street’s and its own forecasts, writes Alexandra Scaggs. Analysts worry the shift to electric vehicle production will not improve profitability.Are CEOs with MBAs good for business? Researchers looked at the effects on a company when a chief executive with an MBA or undergraduate business degree takes over from one without such qualifications and found no evidence that CEOs with such degrees increase sales, productivity, investment or exports relative to the levels the company achieved before. Do you think businesses are better run by a MBA graduate? Email [email protected] and vote in our poll.

Take a break from the newsWhere can you find the best Japanese food in London? Tim Hayward points to Jugemu, a tiny 20-seater in Soho. More

Inflation peaked at over 10% in October but has been in rapid decline since on lower gas prices, even if underlying price growth is still inching up. Median inflation expectations over the next three years rose to 3% in December from 2.9% a month earlier, the ECB said based on a survey of about 14,000 adults in six of the euro zone’s biggest countries. But median expectations over the next 12 months held steady at 5%.The ECB has raised rates by 3 percentage points since July and promised another 50 basis point move in March, looking to restrict the economy enough to tame inflation expectations. The problem is that when expectations stay high, workers and businesses adjust their wage-setting behaviour, entrapping rapid price growth and making it harder for the ECB to get back to its 2% target. The survey also showed a moderate improvement in growth and wage expectations and slightly reduced expectation for unemployment. More

How much central banks might lose on their engorged bond portfolios as interest rates rise and whether these losses even matter has been a subject of interest at FTAV Towers for a while. Now the BIS has also tackled it. It’s a hot topic, given the scale of the already realised losses, what is to come, and (unfortunately) the political optics in some countries. Central bank accounting is pretty esoteric stuff, but that doesn’t mean that some politicians might not try to weaponise it. The Bank for International Settlement’s general manager Agustín Carstens has written up his thoughts on the matter for the FT today, but FT Alphaville wanted to dive into the underlying paper itself. So far ~deep breath~ the Reserve Bank of Australia, the National Bank of Belgium, the Bank of England, the Bank of Japan, the Netherlands Bank, the Swiss National Bank, the Czech National Bank, the Reserve Bank of New Zealand, Sveriges Riksbank and the US Federal Reserve have all already announced that they are facing losses on their asset purchases, according to the BIS report. Notably, the BIS has in the past been on the sceptical side when it comes to quantitative easing. But the report — authored by Sarah Bell, Michael Chui, Tamara Gomes, Paul Moser-Boehm and Albert Pierres Tejada — is clearly in the “nothing to see here, move along” camp.You can find the full report here, and here are their main points:— Rising interest rates are reducing profits or even leading to losses at some central banks, especially those that purchased domestic currency assets for macroeconomic and financial stability objectives. — Losses and negative equity do not directly affect the ability of central banks to operate effectively. — In normal times and in crises, central banks should be judged on whether they fulfil their mandates.— Central banks can underscore their continued ability to achieve policy objectives by clearly explaining the reasons for losses and highlighting the overall benefits of their policy measures. Basically, the BIS is saying that the losses don’t matter, they don’t affect a central bank’s ability to operate, should be seen in a wider context and should just be explained a bit better.The heart of the issue is that normal concepts of accounting and solvency don’t really apply when it comes to central banks, which can, well, create money, and are just one side of the overall sovereign balance sheet. Diving a bit deeper though, central banks take different approaches to how their profits and losses get tallied and reported. Here is a good overview:From the BIS report: The three main accounting approaches (Part A in Table 1) affect the size and volatility of net income from asset valuations in the short term, although the results wash out over the longer term. 6 For central banks that use fair value accounting, eg the RBA and BoE, current losses from declines in asset valuation have been front-loaded, and future valuation gains will be reflected as revenue as the assets approach maturity. Others, eg the Eurosystem and Sveriges Riksbank, reflect declines in asset values in reported losses, but reflect unrealised gains only in revaluation accounts. For those that use historic cost accounting, eg the Federal Reserve, unrealised valuation changes are disclosed for transparency, but not recognised in reported income. Income recognition and distribution rules (Part B in Table 1) determine the size of buffers against losses. These vary considerably across central banks. Some can establish discretionary loss-absorbing buffers before accounting P&L is calculated (eg NBB and DNB). Some make the size of the profit distribution contingent on targets for various types of buffers (eg the Riksbank and BoE). Some also use distribution-smoothing mechanisms, such as distributions based on rolling averages, to make profit transfers to government more predictable over a longer horizon. While these arrangements may reduce transfer volatility and offset accounting losses, they are unlikely to be sufficient to do so under all circumstances. Indemnity arrangements (Table 1, Part C) may reflect a desire to insulate the central bank from the financial consequences of some policy measures. For example, the BoE APF, established as a subsidiary to conduct APPs, is fully indemnified by the UK Treasury. 7 In other cases (eg RBNZ), the government authorised indemnities for specific operations without a subsidiary. In contrast, some central banks such as the RBA, do not have indemnities. Central banks that have indemnity arrangements view them as a way to ensure that policy measures are not constrained by the prospective financial impact on the central bank, thereby preserving independence. Some that do not have indemnities note that they are irrelevant from the perspective of the overall public sector balance sheet and could even risk reducing policy effectiveness if they weaken perceptions of central bank independence. However, whatever the approach taken, central banks have no minimum capital requirements, cannot become insolvent in a conventional way, and even sizeable losses don’t compromise a central bank’s ability to operate. For example, the central banks of Chile, the Czech Republic, Israel and Mexico have all had years of negative capital without impeding their primary job of ensuring financial and price stability, the BIS notes. The one caveat is when “misperceptions and political economy dynamics can interact with losses to compromise the central bank’s standing”. But for the most past the BIS is relaxed, concluding: . . . A central bank’s credibility depends on its ability to achieve its mandates. Losses do not jeopardise that ability and are sometimes the price to pay for achieving those aims. To maintain the public’s trust and to preserve central bank legitimacy now and in the long run, stakeholders should appreciate that central banks’ policy mandates come before profits. More

Ukraine’s battle against Russia is consuming ammunition at unprecedented rates, with the country firing more than 5,000 artillery rounds every day — equal to a smaller European country’s orders in an entire year in peacetime.The dramatic shift to a war footing is creating a supply chain crisis in Europe as defence manufacturers struggle to ramp up production to replenish national stockpiles as well as maintain supplies to Ukraine.Nearly a year since Russia’s invasion, the pace of demand for ammunition and explosives is turning into a test of Europe’s industrial production capacity in a race to re-arm.“It is a war about industrial capacity,” said Morten Brandtzæg, chief executive of Norway’s Nammo, which makes ammunition and shoulder-fired weapons.He estimates Ukraine has been firing an estimated 5,000-6,000 artillery rounds a day, which he said is similar to the annual orders of a smaller European state before the war.The pressure on producers has not been helped by lingering supply chain bottlenecks following the coronavirus pandemic, a lack of production capacity and a shortage of critical raw materials for some explosives, which is holding back efforts to increase output.Arms maker Nammo says the scale of investments to meet demand puts a ‘huge strain on the financials of an otherwise healthy defence company’ © John Macdougall/AFP via Getty ImagesSome components are in such high demand, Brandtzæg said, that their delivery time has increased from months to years.It has led to a scramble to source materials, from chemicals for explosives to metals and plastics for fuses and artillery shell casings. Most companies have increased production shifts ahead of expected orders from national governments, and are hiring more people, another challenge since the start of the pandemic.Yves Traissac, deputy chief executive at military explosives producer Eurenco, said the company is looking to increase production capacity to meet the higher demand from customers that include Germany’s Rheinmetall and Britain’s BAE Systems. “We are currently managing a ramp-up to meet our customer demand. It is a challenge but we are working on that,” he said.One particular challenge is sourcing nitric acid, which the company uses in small quantities to make explosives but which is also a key ingredient in the manufacture of fertiliser. With parts of Europe’s fertiliser production reduced due to the high cost of energy, the supply of nitric acid “has to be secured with our suppliers”, said Traissac. Eurenco, he added, is working to “have additional sources of critical raw materials”.Rheinmetall, Germany’s largest defence contractor, announced last month it would build a new explosives factory in Hungary in a joint venture with the government to address the shortage. The explosives produced in the new plant will be used for artillery, tank, and mortar ammunition, among other things. The company has also restarted decommissioned ammunition production facilities, it told the Financial Times, and has “bought in large stocks of important materials”. Mick Ord, chief executive of Britain’s Chemring, which supplies a range of explosives and propellants to defence contractors, said some customers have asked if it is possible to “increase output [of certain materials] by 100-200 per cent”. According to Ord, a “lot of the post-pandemic supply chain challenges are starting to abate”.The “bigger challenge is that our capacity has been sized to what our customer demand was and the industry has been run very broadly on that basis, where capacity meets demand”.To increase output significantly takes time and investment in new plants, he said. “These are pretty capital intensive projects which take a few years to build, commission and bring online. It’s not the kind of supply chain where you can just flick a switch.”UK-based Denroy, which makes shell casings and other components for a range of defence companies, has benefited from pre-ordering certain materials such as polymers and composites.The challenge, said chief executive Kevin McNamee, is “not so much our capacity but the lead times of some of the materials are very long — it can be a six-month lead time on some specialised materials”.A collection of shells in the Kharkiv region of Ukraine. The country is estimated to fire at least 5,000 artillery rounds a day © Sergey Bobok/AFP via Getty Images“Companies might do a batch once or twice a year, so if you miss that batch, you have to wait.”The crisis has prompted companies to work more closely with their suppliers and also with those further down the chain. Several industry executives said they were spending more time making sure on a daily basis that individual suppliers were able to deliver. The huge demand for investment is also prompting calls for a change in the way procurement is handled by governments, with executives saying they need longer-term contracts. Nammo, which is co-owned by the governments of Norway and Finland, usually receives annual contracts from state customers. The company started to invest in its facilities early last year and has been able to meet the demand from its customers. Nevertheless, Brandtzæg said the scale of the investments are such that they are a “huge strain on the financials of an otherwise healthy defence company”. The investments for the company were “more than three times higher in 2022 than in the year before”. The defence industry needs longer, multiyear contracts, he added, “so that they can carry those massive investments”. In the UK, BAE Systems has been in talks with the Ministry of Defence about ramping up production of a number of munitions for months. The company is the main supplier for the British Armed Forces and in January began a new 15-year supply contract but it is still waiting for a formal agreement to cover the additional output required by Ukraine.Lee Smurthwaite, programme director for munitions at BAE, said the company had already increased the number of shifts at its plants, in addition to hiring temporary workers, both to meet the demands of the new contract as well as in anticipation of more work. The company’s three main munition plants typically run two to three shifts over 24 hours a day, five days a week.The rush to re-arm and the prospect of the war lasting for some time has prompted debate about the need to pool purchasing across the EU, despite its separate industrial bases. Countries are also looking at collaboration further afield, with France late last month announcing it would work with Australia to jointly produce and send several thousand 155mm artillery shells to Ukraine. The production of the shells will be led by France’s Nexter. “You will never end up with just one propellant plant in Europe but if ever there was a time to say, we should be co-operating on munitions, it is now,” said Francis Tusa, editor of Defence Analysis, pointing to a recent speech by French president Emmanuel Macron where he revealed that the number of shells manufactured in France each year corresponded to a week of shelling sent by Russia into Ukraine. There could be merit in an agreement on common purchasing of weapons such as ammunition or explosives, he added. Work on this is under way. The European Defence Agency, set up in 2004, is part of an EU effort launched late last year to explore with industry how member states can co-ordinate the procurement of some critical equipment, including ammunition.“It was clear that for a number of capacities there was an urgent need,” said Pieter Taal, head of the EDA’s industry, strategy and European policies unit.Progress, however, will take time, he admitted, adding that “between member states it always takes a lot of talking back and forth”.Trevor Taylor, of the Royal United Services Institute, said: “Scale matters in defence production and the functional case for Europeans (including the British) working together is very clear.”But he warned: “The political hurdles to such co-operation are significant: settling who would pay for what would be challenging.” More

The writer is a former chief investment strategist at Bridgewater AssociatesWhile moderating inflation and more benign interest-rate expectations have helped boost markets this year, there is a more structural risk that remains under-appreciated: demographic decline. Policymakers have recently homed in on challenges stemming from ageing populations alongside shrinking workforces. But so far, their responses are woefully inadequate to prevent higher rates of inflation and more difficult fiscal trade-offs in the years ahead. This in turn suggests a greater probability of higher interest rates, as well as more policy uncertainty that weighs on spending and investments, both a drag on cyclical assets including equities. Demographics are often shrugged off — too slow moving, too far away. So why the policy focus now? Like many economic forces today, it comes back to the pandemic. Participation of those aged 55 and older fell sharply during Covid-19, stabilising now in the US around 15-year lows below 39 per cent. This larger than expected cut to the labour supply helped push wages up to multi-decade highs and left many companies struggling to meet production goals.The rise in inflation has also put governments under political pressure and central banks have had to pursue the fastest tightening cycle in decades to bring inflation back towards targets, slowing growth. This has left companies facing increased wage demands even as the economy slows.While policymakers have taken note, action so far is unlikely to materially assuage near-term voter unhappiness or longer-term economic risks. In France, protests over a push to raise the retirement age from 62 to 64 are evidence of how politically contentious it is to address demographic challenges.Only Canada among the larger economies seems willing to pull out the stops to meet labour needs, dramatically raising immigration goals and targeting half a million new immigrants in 2025. Immigration now accounts for nearly all the country’s labour-force growth and 75 per cent of overall population growth.Without significantly more immigration, more children, longer working hours and lives, and/or more technology to increase productivity, we face a combination of lower labour output combined with a larger group of dependants. The degree of the demographic challenge can be debated, but the risk for longer-term inflation and fiscal policy is not sufficiently discounted.Even without the union participation seen in the 1970s, labour supply trends will give workers more bargaining power in the years ahead, which should provide sustained support for wages. Further, without an offsetting increase in productivity, a smaller labour force suggests production will struggle to keep up with the broader population’s consumption — an additional inflationary dynamic. Contrast that picture with signals from trading in US Treasury inflation-protected securities. That implies annual inflation is expected to be about 2.2 per cent on average over 10 years.

Disinflation optimists will understandably point to Japan’s experience in recent decades to question the link between a growing dependency ratio and inflation. However, it’s important to note at least two factors that helped Japan keep wages and prices low that may not be replicable in other ageing countries. First, the Japanese have stayed in the workforce longer, which seems less likely in other countries where retirees appear content and financially able to remain on the sidelines. Second, Japan was able to increase its labour pool in recent decades via overseas investment and manufacturing that relied on foreign workers — this will be less politically palatable for many governments that would rather reshore.Beyond inflation, we should expect more difficult fiscal trade-offs for governments. Policymakers will increasingly have to choose between reducing expenditure in politically sensitive areas such as elderly-related spending programmes, raising taxes or accepting wider budget deficits. In the current polarised state of many countries, reaching any decision will be noisy, to say the least. For markets, these demographic headwinds should result in interest rates settling relatively higher. In addition, we should expect higher labour and borrowing costs to weigh on profit margins. Sustained higher levels of political uncertainty can also leave individuals wary on spending. Just as sentiment feeds into equity valuation multiples, more cautious investment and spending will flow through to earnings. More