Aurelia Butler

London and Brussels have secured a breakthrough in the corrosive dispute over Northern Ireland’s post-Brexit trading relations, clearing the way for a new push to resolve the longstanding issue.After months of deadlock and acrimony, the UK and EU issued a joint statement proclaiming a tentative deal that would give Brussels access to the UK’s IT systems for trade across the Irish Sea.The statement described the talks between James Cleverly, UK foreign secretary, and Maroš Šefčovič, European Commission vice-president, as “cordial and constructive”. An EU official said: “It’s looking good.”Cleverly and Šefčovič will meet again on January 16, with EU and UK officials hoping the two sides could agree shortly afterwards to enter a final negotiating “tunnel” to resolve significant outstanding issues.Securing a deal will be complex and fraught with political danger, not least for UK prime minister Rishi Sunak, whose Eurosceptic Tory MPs could turn against him if he is seen to have “sold out” to Brussels.

Pro-UK unionist politicians in Northern Ireland also oppose the Brexit trading relationship and are refusing to sit in the region’s elected assembly at Stormont until the issue is fixed.But the atmosphere around the negotiations has changed dramatically since Boris Johnson, who negotiated the so-called Northern Ireland protocol in 2019, left office last September. “They are now talking as friends,” said one EU official. “We are entering a new cycle and there seems to be a genuine will on both sides to get things done.”Joe Biden, US president, has urged both sides to resolve the dispute before the 25th anniversary of the Good Friday Agreement at Easter and is hoping to visit Ireland and the UK around that time. Meanwhile, UK and European leaders have also noted that it is foolish for western allies to be divided on Brexit issues when they should be uniting to counter the threat posed by Russia.Allies of Cleverly said the two sides were not working to a specific deadline but said it was “a possibility” they could soon enter a “tunnel”, where talks are held in conditions of total secrecy until a deal is thrashed out.“Today’s progress on data sharing marks a positive step in discussions on the NI Protocol,” Cleverly said, while Šefčovič tweeted that the breakthrough meant there was now “a new basis for discussions on the protocol”.The EU has complained about a lack of “real-time” access to the system that it says is needed to provide full visibility of goods travelling into Northern Ireland across the Irish Sea border, which was created by the deal on post-Brexit trading arrangements for the region.In a statement, the two sides agreed that access to the UK’s data system was “a critical prerequisite to building trust”.The Democratic Unionist party, which wants to scrap the protocol because it places a trading border between Great Britain and Northern Ireland, said: “This is not a time for sticking plasters. It’s time for a serious negotiation which deals with the fundamental problem.”There remain significant political obstacles to sealing a grand bargain given the entrenched positions of opponents to the protocol, not least the role of the European Court of Justice in overseeing the trading arrangements on UK territory.The EU has said it can loosen implementation but not rewrite the deal.

EU officials say that while the principle that the UK would share customs data on cargo going in and out of Northern Ireland in a timely fashion has been agreed upon, there are still some points to iron out.The two sides have yet to agree on how detailed the data needs to be, said one. “There’s still some fine-tuning but we agree on the overall approach.” On Monday DUP leader Sir Jeffrey Donaldson said there was now an acceptance in London, Dublin and Brussels that the Northern Ireland protocol was “a problem for unionists”.An Irish government spokesman was last week forced to clarify that the new taoiseach, Leo Varadkar — who helped clinch the protocol deal with Johnson in 2019 — had not been calling for full-scale renegotiation of the protocol when he called it “too strict” recently. More

The Bank of England’s chief economist on Monday warned that the UK faces a more serious threat of persistently high inflation than other advanced countries, signalling interest rates might have to stay higher for longer. In a hawkish speech in New York, Huw Pill suggested the UK’s “distinctive” inflation problem combined the worst of both US and European pricing problems. He said the BoE initially had to deal with a surge in natural gas prices, but the risk of inflation staying high was compounded by low unemployment, Britons quitting the jobs market, and companies finding it relatively easy to raise the cost of their products.In response, Pill said the central bank’s Monetary Policy Committee had raised interest rates from 0.1 per cent in December 2021 to 3.5 per cent last month, in nine consecutive increases, but this was unlikely in his view to be enough. Stressing the “persistence” of inflationary pressure in the UK as being of key importance, Pill, an MPC member, added: “The distinctive context that prevails in the UK — of higher natural gas prices with a tight labour market, adverse labour supply developments and goods market bottlenecks — creates the potential for inflation to prove more persistent.”He said this combination was what “will strongly influence my monetary policy position in the coming months”.Pill set out three inflation challenges that central banks had to deal with across the world: raising interest rates from ultra-low to more normal levels, the ability of companies to raise prices and tight labour markets pushing up pay levels, and an energy shock stemming from Russia’s invasion of Ukraine.He said all advanced countries faced the first problem, the US and UK had to deal with the second, and European countries were still struggling with the third, even though wholesale energy prices had fallen sharply in recent weeks. “None of these challenges is unique to the UK,” added Pill. “But — at least in the way I have described it — the UK is distinctive in facing all three of these challenges at the same time.” Economists expect UK inflation to have peaked at 11.1 per cent in October and for the rate to fall sharply this year as energy price rises drop out of the annual comparison. But with unemployment close to a 50-year low, private sector wages growing at an annual rate of close to 7 per cent and companies expecting to raise prices sharply again this year, Pill was concerned that inflation would remain well above the BoE’s 2 per cent target for too long. He said this persistence of high inflation was damaging and would lead to the BoE having to increase interest rates even further and keep them high. Pill added the MPC was committed to “respond forcefully” if there was a threat of persistently too high inflation. “The scope for energy price rises to trigger the infamous second round effects in price, wage and cost dynamics . . . is greater when the corporate sector enjoys pricing power and the labour market is tight,” he said.Financial markets expect the BoE to raise interest rates by another percentage point to 4.5 per cent by this summer and to keep them at that level until spring 2024, but not to drop below 4 per cent until the end of next year. More

Emerging market equities have rallied more than a fifth from their October trough as easing global inflation and hopes the US central bank will soon slow its interest rate rises prompt investors to shift in to the asset class. The MSCI Emerging Markets index has risen more than 21 per cent from its intraday low on October 25, according to Refinitiv data. Typically a rise of 20 per cent from a recent low is considered a bull market. The more upbeat recent run comes after a painful stretch between February 2021 and late October last year, when the MSCI EM index tumbled more than 40 per cent. Last year’s big Federal Reserve rate rises and a strengthening US dollar sucked money out of risky assets including EM equities and local-currency bonds. Investment funds that buy such assets suffered their biggest outflows on record last year before staging a recovery from November on the promise of a reversal in US rates.David Hauner, strategist at Bank of America Securities, said a survey published last week showing a drop in activity across the dominant US services sector had raised expectations among investors that the Fed would increase interest rates this year by less than previously forecast.“There is increasing enthusiasm to pile into what could be a secular outperformance of EM over US assets,” he said.Emerging market assets such as stocks, currencies and local-currency bonds tend to perform well when US rates are low and the dollar is weak, as less attractive returns available in the US and other advanced economies encourage investors to buy riskier, higher-yielding assets.External conditions such as US monetary policy often have a greater impact on EM asset performance than conditions on local markets. Disruption caused by the pandemic and Russia’s invasion of Ukraine has hit some emerging markets particularly hard.Paul McNamara, investment director at GAM Investments, said that, like other risky assets, EM stocks and bonds were being driven by Fed policy.“If the Fed moves beyond high interest rates and we start to see inflation rolling over, that will be a powerful combination,” he said. “There is very little that is happening in emerging markets themselves to justify this.”Nevertheless, he said, investors have seen cause for optimism in the Chinese economy, where the worst impact of the sudden lifting of the government’s zero-Covid policy restrictions was likely to be followed by a recovery in activity later this year. An increase in Chinese output is often good for other emerging economies, which supply many of the commodities and other inputs China needs.Chinese stocks, which are the biggest weight in the MSCI EM index, have risen sharply since the autumn: the MSCI index tracking the country’s share market has rallied more than 45 per cent since October 31 in US dollar terms, according to FactSet data. The more widely followed CSI 300 index is up 23 per cent on the same basis. Markets in Taiwan and South Korea have also posted strong gains over the period. The recent sharp fall in natural gas prices, to less than their level before Russia’s war in Ukraine sparked a steep and sudden increase, would also be good for some emerging economies, McNamara said, especially big energy importers such as Turkey and those closest to the conflict in eastern Europe. But Hauner at BofA said that while EM investors were right to see lower inflation and US rates as a positive signal, they would be wrong to ignore the warning signs of a slowing US economy. Weaker than expected US employment and other advance indicators, including the very low gap between short and long term Treasury yields, suggested “one of the nastier cycles of recent decades”, he warned.“The market has become completely conditioned by the idea of central banks always supporting markets — quite a large share of participants have never seen anything different,” he said. “But we are heading into quite a sharp downturn. There will be no soft landing about it.”  More

Today’s top storiesUK ministers met health, rail and education union chiefs in a fresh bid to halt a new round of public sector strikes, but failed to secure a breakthrough.Eurozone unemployment hit a new low of 10.9mn in November while industrial production in Germany, its biggest economy, increased more than expected, adding to evidence that the bloc may be facing only a mild recession.Police regained control after thousands of supporters of rightwing former president Jair Bolsonaro stormed Brazil’s Congress, supreme court and presidential palace, raising questions about the loyalty of the country’s security forces. Here’s our explainer on who the rioters are.For up-to-the-minute news updates, visit our live blogGood evening.Today is a red letter day for the world’s airlines, hotels and luxury businesses: the Chinese are back.For the past three years, the world’s largest tourism population has been effectively cut off from the rest of the world by Beijing’s strict “zero Covid” policies of mass-testing, lockdowns and quarantine for arrivals, but Chinese citizens are now free to travel again without fear of being isolated on their return.Hong Kong is one of the first places to benefit. Thousands streamed in both directions between the city and the mainland yesterday as internal borders were reopened. As well as allowing families to reunite, the move is welcome relief to Hong Kong’s luxury goods stores, the lifeblood of its retail sector, which lost its position as the world’s most expensive shopping district to New York last year. The wider €353bn global luxury market could benefit by 6 to 8 per cent in sales this year from the return of the Chinese, according to consultancy Bain, with Japan in particular set for an early boost.Although limited commercial flights and backlogs of visa applications may mean the rest of the world has to wait a little longer to feel the benefits of China’s reopening, the rewards are significant: in 2019 before the pandemic hit, 155mn Chinese travelled abroad and spent $255bn, according to Citi. The China Outbound Tourism Research Institute estimates 18mn will travel internationally in the first half of the year, followed by 40mn in the second.Asian airlines, already boosted by the reopening of Japan in October, are an obvious beneficiary. The Asia Pacific region has experienced the biggest uptick in passenger traffic over the past year, despite being generally slower than the rest of the world to end restrictions. Also set to benefit from the lifting of travel curbs are the casinos of Macau which have missed China’s high rollers who used to make up half of the gaming revenues in the city, the only place where casino gambling is legal in China.As Asia business editor Leo Lewis notes, the return of the “collective globetrotting titan” is not only economically significant but could also help reset negative views about the country that have taken root during the pandemic.“It is perhaps no coincidence that the China-west decoupling narrative feels much more plausible now than it did in 2019 when Chinese business leaders, mid-level executives and shopaholic middle classes were criss-crossing the planet in their tens of millions,” Lewis writes.It could also help shift the narrative that Beijing has suppressed the voices of global business, he argues. “The resumption of Chinese overseas travel is no panacea to the onset of decoupling and deglobalisation,” he concludes, “but it may serve to reinvigorate the voices of those who wish it to slow”.Need to know: UK and Europe economyThe UK government is exaggerating the benefits of recent financial reforms and being “disingenuous” in arguing they were a Brexit dividend, according to the Conservative chair of a key parliamentary committee.Ireland’s investment-for-residency scheme is proving a big hit with wealthy Chinese. Since it began in 2012, Chinese investors, including those from Hong Kong, have accounted for more than 90 per cent of successful applicants and €1.18bn has been invested in total. Need to know: Global economyIf investors want to avoid last year’s mistake of believing the surge in global inflation would be short and shallow, they need to realise that slowdowns in China, the EU and the US are happening for different reasons, says investment expert Mohamed El-Erian.A survey of foreign policy experts pointed to a decade of political tumult, forecasting that Russia would become a failed state, China would invade Taiwan and at least one additional country would obtain nuclear weapons.Europe was the world’s biggest importer of liquefied natural gas in 2022 as it tried to replace pipeline supplies from Russia, leapfrogging Japan and China. With Europe’s need to refill storage facilities, the global LNG market is set to remain tight, potentially pushing up prices for gas users worldwide.Indian central bank governor Shaktikanta Das told the FT he was concerned at the debt levels among his regional trade partners but was optimistic about his country’s own growth prospects. Need to know: businessAs Wall Street banks get ready to announce fourth-quarter earnings, the FT revealed Goldman Sachs could begin cutting up to 3,200 jobs within days as it tries to rein in costs. The cuts are the deepest Goldman has made in its recent history and more drastic than plans from its peers. The Lex column (for premium subscribers) says the outlook for profits for European companies is overly optimistic.Despite a “substantial” hit from the ending of sales to Russia, Rolls-Royce last year sold more cars than ever, driven by demand from the US, its largest market. Meanwhile in China, the world’s biggest electric vehicle market, Tesla owners protested against the company’s price cuts, upset that their cars have lost a significant amount of their value.The recent fall in tech stocks has been good news for at least one group: short sellers. Until recently they had been squeezed by low interest rates and the rapid bounceback of stocks from the pandemic.South Korea’s leading vaccine producer said “national pride” meant China was likely to continue with its less effective homegrown Covid jabs, even as the country was hit by its biggest outbreak of the pandemic. A glimmer of hope comes from a handful of Chinese manufacturers trialling messenger RNA shots.Lloyd’s of London insurer Beazley launched the first ever cyber catastrophe bond, enabling investors to get involved in the fast-growing business of protecting organisations from ransomware strikes. The World of WorkAs the balance of authority in the workplace tilts towards employees, how can managers still assert their authority? Good management is a balancing act between firm leadership and support, writes business psychotherapist Naomi Shragai.Rival European cities are outpacing London when it comes to recovering activity in offices and hotels after the pandemic, according to a survey that measures the use of lifts in buildings.Columnist Emma Jacobs says companies should follow the decision by ecommerce platform Shopify to purge pointless and time-consuming meetings.Some good newsUS animal health company Dalan says it has received approval from regulators for the world’s first vaccine to protect honeybees from brood disease.

The new vaccine will protect honey bees from the infectious bacterial disease that can wipe out colonies © AFP/Getty Images More

The writer is a former central banker and a professor of finance at the University of Chicago’s Booth School of BusinessWhy is the US Federal Reserve finding it so hard to convince the market that it means business when it comes to not cutting rates? The December meeting minutes stated clearly, “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.” Yet this hawkish statement did little to shift market expectations, making the Fed’s job of slowing the economy harder. Central bank statements have influence because people still believe the institutions will do what they say. And such credibility is obtained through a mix of central banker reputations (either as doves or hawks), past actions, the policy tools they have and the frameworks they operate under. Unfortunately, the kind of credibility needed to escape a regime of overly low inflation, which we had until recently, is different from the kind needed to curb high inflation, which we have now. And by its very nature, credibility does not turn on a dime.Traditionally, central banks grappled with high inflation. Government spending typically overstimulated the economy to generate growth. Central banks aided and abetted this, not just by holding rates low, but by financing government spending. In the process, they managed to fuel inflation, which hurt growth as it became entrenched. Then, perhaps learning from the Fed under Paul Volcker, countries decided it was better to have an independent technocratic central bank, mandated to keep inflation under control through an inflation-targeting framework. And so the banks gained credibility as inflation fighters. But after the global financial crisis, inflation fell too much, making the challenge pushing it back up. In order to boost inflation, central banks had to develop a new kind of credibility. In the phrase of economist Paul Krugman, they had to “credibly promise to be irresponsible” when they saw inflation, by committing to hold back rather than fight it ferociously. And so central banks embraced a new set of tools. Quantitative easing, for example, whereby the bank announces it will buy government bonds for an extended period, worked in part by committing the bank to not raise rates until it came to the end of its announced purchase programme. Indeed, this may be part of the reason both the Fed and the European Central Bank were slow to raise rates when inflation picked up in late 2021. Central banks also acted in ways that undermined beliefs about their rate-raising resolve, as when the Fed stopped rate increases after markets started swooning in late 2018. Finally, central banks changed their frameworks to embed inflation tolerance within them. A key element of the Fed’s new framework, adopted in 2020, was that it would no longer be pre-emptive in heading off inflation. The old mantra, that if you are staring inflation in the eyeballs it is already too late, was abandoned.While none of this was particularly effective in moving inflation higher, it may have emboldened the government to spend more, knowing the central bank would not raise interest rates quickly. When the pandemic hit, there were few constraints on government spending which, together with the war in Ukraine, pushed us back into a high-inflation regime. But central banks again find themselves with the wrong kind of credibility — namely the assumption that they will tolerate inflation. No wonder markets continue to price in Fed cuts, even as the Fed insists it will not turn accommodative until inflation is tamed. In sum, central bank credibility is only useful when appropriate for the inflation regime it faces.Should the Fed work once more to regain credibility as an inflation hawk? Credibility takes a long time to build, and inflation regimes could switch again. It is not unthinkable that ageing populations, low immigration, deglobalisation and China’s slowing will plunge the world into a low-growth, low-inflation environment once more.Nevertheless, central banks will probably be most effective if they rebuild their commitment to combating high inflation. And if inflation falls too low, perhaps we should learn to live with it. It is hard to argue that all the frenetic activity in the recent low-inflation regime was effective, and it distorted credit, asset prices and liquidity in ways that are hurting us today. But so long as low inflation does not collapse into a rapid deflationary spiral, central banks should not fret excessively. Instead, they should put the onus back on governments and the private sector when it comes to generating sustained growth.   More

Eurozone unemployment hit a record low, while output from German factories rose in November, boosting hopes of a milder economic downturn in the bloc.The new data helped the euro gain almost 1 per cent against the dollar, hitting a high for the day at $1.0760 — its strongest level since June. It also lifted European stock markets, extending a rally that had already gained fuel from relatively tame inflation figures last week. The Euro Stoxx 600 index closed 0.9 per cent higher and Germany’s Dax finished Monday 1.25 per cent stronger. A surge in energy prices last spring following Russia’s invasion of Ukraine triggered concerns of power shortages and a deep recession in the eurozone. But economists have steadily upgraded their estimates for growth over recent months on the back of better than expected incoming data and declining wholesale gas prices. The Sentix index of market sentiment rose for the third consecutive month in January to its highest level since June 2022. “Investors are hoping for a mild recession,” said Sentix managing director Patrick Hussy.The unemployment rate dropped in Italy, France and Spain by 0.1 percentage point to 7.8 per cent, 7 per cent and 12.4 per cent, respectively. It stayed at 3 per cent in Germany.German industrial production increased 0.2 per cent between October and November, a slightly better reading than the 0.1 per cent expansion forecast by economists polled by Reuters.Franziska Palmas, senior Europe economist at Capital Economics, a research firm, said the rise confirmed that German manufacturing “held up better than expected” during the final quarter of 2022.

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However, the improving outlook for the eurozone economy will put pressure on the European Central Bank to maintain efforts to bring inflation under control. A stronger economy could spur workers to push for higher wages without fear of losing their jobs and give companies greater confidence in their ability to raise prices to defend profit margins. Economic resilience is expected to lead to more interest rate rises by the central bank. With unemployment stuck at historically low levels, “the ECB’s hawkish tone will likely double down on more tightening in the coming months”, said Paolo Grignani, economist at Oxford Economics. Markets are pricing in a 50 basis point increase in interest rates when the ECB meets on February 2. A tight labour market could boost wage growth and keep underlying inflation higher for longer. Headline inflation dropped to single digits in December, coming in at 9.2 per cent. But core inflation, which excludes changes in food and energy costs and is seen as a better measure of longer-term price pressures, edged up from 5 per cent to 5.2 per cent. The strength of the labour market “makes it a key risk for second-round inflation effects for the ECB”, said Bert Colijn, senior economist, eurozone at ING. With a labour market this tight, “it is unlikely that unemployment will run up enough to make labour shortages a thing of the past,” he added. Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said that fiscal support across the eurozone should prevent “a significant increase in unemployment”, despite the economic downturn.   More