Aurelia Butler

For at least a couple of years, it has been clear that the wheels are coming off China’s Belt and Road Initiative, the $838bn programme launched by Beijing in 2013 to build infrastructure in about 160 mostly developing countries. Yet as Beijing seeks to contain the fallout from stalled projects and non-performing loans, it risks complicating matters with a surge in “emergency lending”.New data from AidData, a US-based research lab, has uncovered evidence of Chinese rescue loans to Pakistan, Argentina, Sri Lanka, Mongolia, Kenya, Venezuela, Ecuador, Laos, Angola, Suriname, Belarus, Egypt and Ukraine. Three of the largest recipients, Pakistan, Sri Lanka and Argentina, have together received as much as $32.83bn since 2017, AidData has found.This type of credit is very different from the infrastructure loans that dominate the BRI. It is intended to save countries from default on their foreign debt, including that borrowed from Chinese institutions and used to build ports, airports, roads, railways and other BRI infrastructure.In one respect, such assistance is to be applauded. The Covid-19 pandemic has hit many emerging markets hard and driven more than 100mn people into extreme poverty, according to World Bank estimates. If it were not for Chinese rescue loans, it is likely that financial crises would have erupted in more countries least able to deal with them.But a broad emerging market debt crisis remains a distinct possibility. Kristalina Georgieva, the IMF’s managing director, said this month that about a quarter of emerging countries and more than 60 per cent of low-income countries face difficulties, sometimes severe, in paying their debts.Georgieva called upon major creditors such as China to “prevent difficulties from arising”. What can and should China do? In the first instance, Beijing should co-operate with IMF-led rescue packages, as it has done in the case of Zambia and provisionally for Sri Lanka, under the auspices of a debt relief framework drawn up by the Group of 20 largest economies.But the next stages present a real test. Chinese creditors will have to put aside their longstanding aversion to recognising losses on their loans. What is more, such creditors will have to allow the terms of their lending, which have long remained largely hidden, to be exposed to public view. Such transparency will be necessary if all creditors are to be convinced they are carrying a fair share of the likely haircuts.However, the number of different Chinese creditors, which include the central bank, policy banks, state-owned commercial banks and others, may complicate the task of reaching early resolutions. With speed of the essence, such institutions should move quickly to agree on issues of seniority so as not to hold up proceedings. Over the longer term, the G20 is the best forum in which China can co-operate with other bilateral creditors over debt restructuring in emerging markets. Beijing has long favoured this forum in international affairs because its membership combines large emerging countries as well as wealthy western nations.Ultimately, however, it will be in everybody’s interests — including those of Beijing — to create an efficient system of debt resolution and emergency lending able to deal speedily with debt crises in emerging markets. This means bringing China’s “rescue lending” practices alongside those of other international creditor organisations such as the Paris Club and the IMF. The chances of averting crises, or dealing with them swiftly, will be greatly enhanced by such a spirit of co-operation between China and western-led agencies. More

Fast food restaurants burnt by red-hot inflation are turning to customers to cool down. From McDonald’s to Domino’s Pizza, big chain operators are raising menu prices and shrinking portions. So far that has not kept diners away. That is because an even steeper rise in grocery bills can make eating out a relative bargain. Keeping these price increases going will be a supersized challenge however, especially if more cash-strapped consumers trade down. At McDonald’s, same-store sales in the US rose nearly 4 per cent in the second quarter. The gain was driven mainly by price increases — which were in the “high single digits”, the company said. That comes after a similar percentage price hike in the first quarter. Elsewhere, rival Burger King has reduced the number of chicken nuggets from 10 to eight pieces per order. Domino’s Pizza has raised the price of its popular Mix & Match delivery deal by a dollar to $6.99. For now, McDonald’s and its ilk are benefiting from the fact that eating out can be a better deal than cooking at home. Grocery prices jumped 13.5 per cent year-on-year in August, compared to an 8 per cent rise in restaurant food prices, according to the Labor Department. This makes the gap between the two the widest since 1974, a Lex analysis of the data shows.The advantage provided by the trend is unlikely to last. Supermarket chains and grocers have noted that consumers are buying more private label brands and cheaper cuts of meats to save money. The average cost of a Big Mac in the US stood at $5.15 in June, according to The Economist’s Big Mac Index. That is 30 per cent higher than a decade ago. Yet the federal minimum wage has remained unchanged at $7.25 an hour since 2009.To put it another way: it once took a minimum-waged worker 33 minutes to earn the price of a Big Mac. It now takes 43 minutes. Investors who have loaded up their portfolios with burgers, fries and pizza could end up feeling queasy. More

The writer is an economist at Oxford university and London Business School, and author of ‘The Great Economists: How Their Ideas Can Help Us Today’Last week, the pound sank as low as $1.14. This year alone, sterling has fallen 15 per cent against the US dollar, dropping to its weakest level since 1985. The pound-dollar exchange rate has surpassed the lows reached in March 2020 at the onset of the pandemic. Against its trading partners, though, sterling’s low point was in October 2016. The pound’s weakness began with the financial crisis. After a brief and partial recovery, it fell to a record low following the Brexit referendum, about 30 per cent below its January 2007 level. Sterling’s weakness is therefore a reflection of the strong dollar and of the uncertain economic outlook. The former is beyond the control of British policymakers, but the latter is not. The fortunes of the pound highlight the need to set out a robust plan for economic growth.During times of uncertainty the dollar tends to strengthen as it is the world’s reserve currency. Also, dollar-denominated assets are bought as a safe haven. The start of 2022 has seen sizeable shocks, notably Russia’s invasion of Ukraine that compounded the cost of living crisis that was already under way due to pandemic-related supply chain disruptions. The US Federal Reserve’s aggressive interest rate rises have added support to the dollar, while the unwinding of quantitative easing further contributes to tighter monetary policy. However, the weakness of sterling is not solely due to the strong dollar. The pound has still not recovered to its pre-crisis level. That period of slow recovery was punctuated by the uncertainty around Brexit, followed by Covid-19. New data show that the economic effects of the pandemic were worse than originally estimated. The Office for National Statistics has revised down UK gross domestic product for 2020 to a contraction of 11 per cent, the biggest fall in national output since 1709 and the worst among G7 countries. What has also weighed down the pound is the forecasted lengthy recession. The Bank of England expects the economy to contract for 15 months from the last quarter of the year. That is longer than the average recession and comparable to the protracted downturn that followed the 2008 crisis. Worryingly, the bank estimates that growth is expected to be “very weak by historical standards”, so that by the third quarter of 2025, the economy would be 0.8 per cent smaller than before the pandemic. One consequence of a weak pound is more expensive imports. The UK is an open economy with a relatively high trade-to-GDP ratio. As BoE governor Andrew Bailey has stressed, 80 per cent or so of inflation is due to global factors. So, a weak pound adds to the cost of imports, which contributes to inflation being higher than in the rest of the G7 since more inflation is imported. The new government has stressed the centrality of economic growth to its fiscal and regulatory plans. Any such plans would need to increase investment and productivity growth, and the two are related. Business investment has been about 10 per cent of GDP versus 13 per cent in France, Germany and the US, all of which have higher productivity growth.Investment in the UK remains about 9 per cent below its pre-pandemic level, and 8 per cent below where it was in early 2016 before the EU referendum, reflecting high business uncertainty. Reducing uncertainty through a clear economic strategy would go a long way to raising productivity and therefore economic growth. While the weak pound reflects the strong dollar, it is also an indicator of how markets see the UK’s prospects. As the new government embarks on a pro-growth agenda, its success may well be first seen in the reaction of sterling. More

Inflation is hitting the government’s ability to deliver its flagship local regeneration agenda as soaring building costs force projects across Britain to be delayed, scaled back or potentially cancelled, councils warn.Plans to spend £4.8bn on its “levelling up” programme — designed to reduce regional economic disparities by rejuvenating high streets and upgrading infrastructure — are central to the Conservative party’s electoral promise.But with inflation expected to hover in the low double digits this autumn, councils are already reporting that funds crucial to delivering projects before the 2024 general election will no longer be sufficient, creating a looming political headache for the new prime minister Liz Truss. “It’s a massive issue for our councils,” said Sharon Taylor, vice-chair of the District Councils Network, a cross-party group of 183 councils. “The government has to recognise the increasing cost or these projects won’t get done and we’ll end up in 2024 with half the number . . . or lots not completed,” she added.A DCN membership survey this summer found that 40 per cent of respondents said the effects of inflation would force them to delay proposals, or make them unviable in their current form.The survey found that 12 developments, with a value of £184mn, were at risk, including a high-street project where costs had increased by 10 per cent, and a leisure centre where they had gone up 15 per cent.Delivering projects from the various “levelling up” pots, including those for towns, high streets and levelling up, is key for Conservative candidates, particularly in “red wall” areas — seats in the north and midlands that traditionally voted Labour, many of whom were won by the Tories for the first time in 2019, often with by slim majorities.Will Tanner, director of the Onward think-tank, which has been instrumental in developing Tory thinking on the policy, said inflation would present serious challenges for Simon Clarke, the new levelling-up secretary. “We may see projects scaled back, or terminated entirely because they can’t be delivered and the politics of that are very difficult for the PM and the Conservative party,” he said.Among the options for Truss would be to uprate the fund in line with inflation, which Tanner said was unlikely given other budgetary pressures, or ask the Treasury to raid other underspent budgets. The levelling up department said it was working with councils to understand the effects of inflation. “We are working closely with all levels of government to relentlessly drive forward our shared ambition to see improvements delivered through our levelling up, towns and high streets funds,” it added.However, councils and Whitehall insiders said there was no expectation of extra cash from central government.Shoppers at Bury market. The local council has warned that rising construction costs were weighing on grants that it had received for upgrades © David Bagnall/AlamyEamonn O’Brien, Labour council leader in Bury, a town in north-west England with a hyper-marginal Tory parliamentary constituency, said rising construction costs were weighing on grants that the authority had received for local upgrades.“So far, the government has been adamant that they will not top up the successful projects, despite some estimates showing millions more being needed,” he added.In nearby Bolton — an area with two marginal Tory seats that has had £20mn from government for a new college — Conservative leader Martyn Cox said contractors were inflation-proofing contracts, demanding a cost review every few months. In Bolton, contractors are inflation-proofing contracts, the council leader has said © Mark Waugh/Alamy“Anyone with a fixed amount to spend recognises they need to spend it sooner rather than later,” he said, but warned the rush to deliver was likely to create a construction capacity crunch. Councils are also facing a wider budget squeeze, making it harder for them to make up shortfalls in their spending plans. In the eastern city of Norwich, plans for a £1.7mn refurbishment of a 1960s office building with 4,000 new homes clustered around have been reshaped due to rising costs.Stephen Evans: ‘In allocating money, the government has to be considerate of construction pressures councils are facing’ © Gov.ukStephen Evans, Norwich council chief executive, said that with the authority’s budget gap expected to triple to £6mn thanks to inflationary pressures, carrying out its capital investment programme was becoming harder than ever.It was “highly unlikely” that the government would uprate grants, he said, and would need to think of ways to help councils, such as by giving more flexibility to shift grants in order to prioritise delivery of at least some projects.“In allocating money, the government has to be considerate of construction pressures councils are facing,” he added.In the former mining area of Barnsley, South Yorkshire, the council won £20mn from the towns fund to regenerate the former pit town of Goldthorpe.With construction sector inflation running at about 13 per cent, adding millions in extra costs, the entire capital programme is being reviewed. Labour leader Steve Houghton said some schemes “would have to be deferred”.Delayed levelling up projects would leave a big dent in the Conservatives electoral plans, he said, adding: “They’re not going to get those wins in the timescale they thought they would. “They’re going to struggle to achieve that — that’s a fact.” More

The writer is the Alfred Lerner Professor of Banking and Financial Institutions at Columbia Business School and is a former governor of the Federal Reserve Paul Volcker is considered to be a GOAT (greatest of all time) central banker because he and the US Federal Reserve broke the back of inflation in the early 1980s. However, less talked about is the serious policy mistake that the Volcker Fed made in 1980. The result was a more prolonged period of high inflation that required even tighter monetary policy, which then resulted in the most severe US recession since the second world war up to that time. There are many parallels between the current situation of Jay Powell’s Fed and what happened then. So it is imperative that we learn from history to avoid repeating the error.By the time that Volcker became chair of the Fed in July 1979, the central bank’s credibility on inflation had been destroyed by the disastrous policies of the prior chairs, Arthur Burns and G William Miller, with inflation climbing to more than 12 per cent by October 1979.At a surprise press conference on October 6 1979, Volcker announced that the Fed would allow the benchmark federal funds rate to “fluctuate over a wider range”. The federal funds rate climbed to more than 17 per cent by April 1980. Pressure on the Fed to reverse these rate increases began to build, with farmers blockading the Fed headquarters in Washington with their tractors and car dealers sending car keys in little coffins to the Fed. Politicians of both parties then piled on and strongly urged the Fed to scale back interest rates.With the unemployment rate rising by more than a percentage point to more than 7 per cent in May after a recession began, the Fed decided to reverse course and sharply lower the federal funds rate by more than 7 percentage points. This action was taken despite the fact that inflation reached a peak of 14.7 per cent in April. The Fed had blinked and Volcker’s credibility as an inflation fighter took a hit. Inflation expectations stayed stubbornly high and actual inflation remained above 12 per cent through to the end of 1980.With the recession ending in July 1980, the Fed got back into the inflation fighting business and started to raise the federal funds rate again. But this time, to re-establish its credibility, the Fed had to raise the federal funds rate to a crushing level of nearly 20 per cent by the middle of 1981. Volcker finally had the courage to take out the baseball bat to slam the economy and slay inflation. The ensuing recession that started in July 1981 became the most severe downturn since the second world war. Only after clobbering the economy, and keeping the federal funds rate near 15 per cent until the middle of 1982, did inflation expectations and the inflation rate start a steady, but slow, decline to about the 3 per cent level in 1983.

This review of history tells us that the loss of credibility from reversing policy before the inflation task was completed required much higher interest rates and a far larger cost to the economy of lost output and high unemployment than if the Volcker Fed had stuck to its guns.There are many parallels to what happened in the 1979-82 period with what the Fed is facing now. The Fed’s credibility to keep inflation under control was weakened by its policy mistakes — abandoning a pre-emptive policy to control inflation in 2021 and the flawed execution of a new strategy framework targeting an average inflation rate in late 2020. The Fed has now appropriately reversed course and is raising the federal funds rate at the fastest pace for more than 40 years. The Fed’s loss of credibility, I think, will lead it to raise rates much more than Fed projections or market forecasts suggest. The likelihood of a soft landing is therefore quite low and a recession is increasingly likely. So far, the rhetoric from Powell and his colleagues is encouraging, with most of them saying that a recession will not deter them from keeping interest rates high until inflation is heading back towards the 2 per cent inflation target. However, it is easy to take this stance when the economy is doing well and when political pressure to lower interest rates remains moderate. This is likely to change when workers can’t find jobs and interest rates on mortgages and car loans rise even further. When the going gets tough, the Powell Fed needs to stick to a plan of keeping rates sufficiently high for long enough to achieve their inflation objectives. It must continue to raise rates to uncomfortable levels and keep them there. The mistake that the Volcker Fed made in 1980 must not be repeated. More

Industrial groups in the euro area suffered their biggest monthly fall in production for more than two years in July, underlining the impact of surging energy prices and supply chain bottlenecks on the region’s growth prospects. Factory output in the 19 countries that share the euro dropped 2.3 per cent in July from the previous month, its biggest fall since April 2020, Eurostat, the European Commission’s statistics office, said on Wednesday. It was a larger decline than the 1 per cent decrease expected by economists polled by Reuters, and was party explained by a sharp drop in Ireland. Economists expect the higher cost of power to continue to hit manufacturing, and consumer spending, in the coming months. “Further contractions in industry are on the horizon,” said Rory Fennessy, an economist at Oxford Economics, adding that companies would be “forced to cut back production even if hard rationing is to be avoided”. Many economists, including Fennessy, believe the region’s economy will contract in the third quarter and not grow again until the opening months of 2023. While monthly production fell in Germany, France and Spain, the decline in the eurozone figures was exacerbated by a plunge in Irish output. Excluding Ireland, industrial output in the bloc fell about 0.6 per cent.“There’s a trend here — Irish data is becoming so volatile, it’s increasingly affecting eurozone aggregate numbers,” said Conall Mac Coille, chief economist at stockbrokers Davy in Dublin. “We’re seeing moves of this order all the time and they seem to be getting worse.” The biggest drop for the eurozone was in the production of capital goods, such as buildings, machinery and vehicles. But production of durable consumer goods, such as laptops and jewellery, and intermediate goods including steel and wheat also fell. The decline would have been bigger without increases in the production of energy and non-durable consumer goods, such as clothes and food. “Energy-intensive industries in particular are struggling more than most, with output almost 4 per cent lower than at the start of the year,” said Jessica Hinds, an economist at Capital Economics. Some of Europe’s biggest energy users, from steel to chemical companies, are cutting back on production, and business leaders are warning that soaring prices risk eroding the region’s competitiveness.On Wednesday, VCI, the German chemicals and pharmaceutical industry association, forecast its production would fall 5.5 per cent this year due to the high cost of energy and raw materials. But it said revenues in the sector had so far proved resilient, rising 21.6 per cent year-on-year in the second quarter thanks to a 24 per cent surge in factory gate prices.The July decrease in eurozone industrial output ended three consecutive months of growth and meant it was 2.4 per cent lower than 12 months earlier. The level of output is now below pre-pandemic levels.Ireland’s 18.9 per cent drop was due to the often lumpy export activity of the multinational pharmaceutical groups that base their EU operations in the country.“We believe that this number for Ireland is more related to the pharmaceutical sector, which is driven by the export decisions of a relatively small number of very large firms based here,” said Dermot O’Leary, chief economist at the Dublin-based stockbrokers Goodbody.Irish industrial production has often been volatile from one month to the next. A 14.5 per cent decline in April was followed by growth of 19.5 per cent in May and 11.2 per cent in June. More

LONDON (Reuters) – While Queen Elizabeth’s funeral on Monday will be observed across Britain, thousands of people face cancelled doctor appointments, closed food banks and shut supermarkets because of a surprise national holiday.Many patients have been left frustrated after being told that National Health Service (NHS) appointments they had waited months to secure were suddenly cancelled.”For patients who may have been waiting up to two years for elective surgery or appointments — if they are then cancelled on the 19th, this will be incredibly distressing,” Ellen Welch, co-chair of doctors’ lobby DAUK, told Reuters.”As frontline NHS staff, DAUK are left wondering if the decisionmakers in government really understand how their decisions play out on the ground,” Welch said.Britain’s state-run NHS is already facing its worst ever staffing crisis and has more than 6 million people on waiting lists for hospital treatment. It handles an average 888,000 general practice appointments each day, according to Reuters calculations from data from the last six months.There are also concerns about the NHS resources needed to rebook appointments and doctors having to make childcare arrangements at short notice.”The issue is the short notice, really. We can always organise around planned holidays,” said Helen Salisbury, a doctor and Oxford University professor.”If you think about people who are waiting for cancer diagnostics, or chemotherapy, it’s really difficult to know how they’re going to proceed.”As with any national holiday, NHS staff will ensure urgent and emergency services are available, a spokesperson said.The NHS will “continue to operate and operate at scale on that day,” a spokesman for Prime Minister Liz Truss said.”Obviously individual trusts are monitoring for any possible impacts due to postponements.” ‘THIS COUNTRY’S GONE MAD’Other organisations have faced criticism for their decisions to suspend services as a mark of respect.British Cycling was forced to withdraw guidance asking people to limit bike rides on Monday after facing ridicule.”The country’s gone mad…British Cycling strongly recommends that nobody rides a bike while the Queen’s funeral is taking place,” musician John Spiers wrote on Twitter (NYSE:TWTR).Center Parcs, which operates holiday villages, abruptly advised guests in the middle of their vacations to leave on Monday and come back the next day as its staff watches the funeral.It later backtracked and allowed guests to stay in its villages after facing an outcry, media reports said.The government has said there is no obligation to cancel or postpone events or close venues and left such decisions to individual organisations.A range of other economic activity is also likely to grind to a halt on the day of the Queen’s funeral.Many supermarkets, which usually operate for limited hours during other national holidays, have declared they will be closed on Monday. They include Britain’s biggest retailer Tesco (OTC:TSCDY), as well as Asda, Iceland, Aldi and Poundland.Other retailers including Primark, Ikea, Harrods and WH Smith, besides cinema operator Cineworld have also said they will be shut.Even people hankering for a cheeseburger will have to wait. McDonald’s (NYSE:MCD) said all of its restaurants in Britain would be shut until 5 p.m. on Monday. Some food banks – a lifeline for poorer housholds – have also announced closures, while several striking workers’ unions have also suspended planned industrial action as a mark of respect.Other events that were cancelled during the mourning period include London Fashion Week shows, English Premier League soccer matches and a range of other sporting fixtures.London’s Heathrow, Britain’s busiest airport, said it expects changes to its operations on Monday, while warning of disruption to flights for nearly two hours on Wednesday as the Queen’s coffin is carried in a procession in central London. More