Aurelia Butler

The UK economy stagnated in the three months to July, as the cost of living crisis hit household finances and business activity with growth falling short of expectations.UK output was flat over the period, according to data from the Office for National Statistics released on Monday, with growth down from the 0.3 per cent registered in the three months to April.Gross domestic product fell short of the 0.1 per cent expansion forecast by economists polled by Reuters, with the size of the economy in July the same as during the six months before.The UK growth rate has lost momentum since the start of the year as rising costs hit businesses and consumers. Inflation soared to a 40-year high in July, eroding the money people have available to spend on goods and services.

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Output grew 0.2 per cent between June and July, largely reflecting the loss of two working days in June linked to Queen Elizabeth II’s jubilee celebration. In June, the economy contracted by 0.6 per cent, while July’s rebound was weaker than the 0.4 per cent expansion forecast by investors. “The disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession,” said Paul Dales, chief UK economist at Capital Economics. Some economists believe that the freeze in average annual household energy bills at £2,500 over the next two years, announced last week by new prime minister Liz Truss, will help support demand in the economy over the coming months.James Smith, economist at ING, said the package of measures did not guarantee that the economy would avoid sliding into a technical recession, but “should help limit the depth of any downturn over winter”.However, with many households and businesses struggling to keep up with payments, even before bills are planned to rise on October 1 when the energy price cap is increased, the UK economic outlook remains downbeat. “Households still face a further decline in their real incomes during the second half of this year,” said Martin Beck, chief economic adviser to the EY Item Club. “As things stand, the economy is unlikely to do more than stagnate over the coming year.”Economists expect the Bank of England to raise interest rates for the seventh consecutive time at its next meeting, which is likely to cause a further slowdown in consumer demand. Markets are pricing in a 79 per cent probability of a 75 basis point increase from its current 1.75 per cent. According to the latest PMI index, economic activity has been contracting since August when consumer confidence dropped to the lowest level since records began.The services sector rebounded in July, growing 0.4 per cent and driving GDP growth. Meanwhile, production fell 0.3 per cent, after a decrease of 0.9 per cent the previous month, with construction activity also registering two consecutive sharp contractions.Separate data published by the ONS on Monday showed that the trade in goods and services deficit, excluding precious metals, widened by £1.2bn to £27bn in the three months to July compared with the previous quarter, a near record since comparable data was first collected in 1997. This widening was due to the surging value of imports, reflecting rising energy prices due to Russia’s invasion of Ukraine and a weak export market. Gas prices reached a new high in August, with exports likely to continue to struggle as external demand from key trading partners softens and Brexit trade frictions remain.

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“The trade deficit will reach enormous proportions over the coming months,” said Gabriella Dickens, economist at Pantheon Macroeconomics.GDP was estimated at 1.1 per cent above pre-pandemic levels in July, according to the ONS. However, the figure does not factor in revisions that put the pandemic’s hit to economy in 2020 higher than initial expectations. More

Are we entering a new era of wealth redistribution? Or will the imbalances between capital and labour that have characterised the past half century of economic history linger on?It’s a question worth asking, particularly in the US, as inflation bites and midterm elections loom.A little over three years ago in this column, I argued that we were leaving the era of wealth accumulation that began with the Reagan-Thatcher revolution and moving to a new era in which the balance of power between capital and labour would shift somewhat in the direction of the latter.Putting aside the UK’s new prime minister Liz Truss, who seems to want to bring back the 1980s, I think we are finally entering the post-neoliberal era, particularly in the US, where the power imbalances are most pronounced. There has been, in many OECD nations, a decoupling of productivity and wages over the past 40 years, during which time the corporate sector took a larger share of national income gains. But while 55 per cent of productivity gains in western Europe still go to labour, American workers have to duke it out for a mere 14 per cent — and most of that goes to the top third of workers.Deglobalisation, which will favour local labour markets in some industries, is starting to shift that dynamic. Ageing demographics, which will create a structurally tighter labour market, as well as millions of new onshore jobs in the caring professions, is too.But the third part of the capital-labour story is the increasing pressure on companies to bolster the position of consumers and the state in a time of rising costs. Inflation is happening for all sorts of reasons, but one of those is a shift in economic focus from efficiency to resilience. Both the public and private sectors are looking to buffer themselves from climate change, geopolitics and market shifts. Changes in supply chains, reserve currency allocations and fiscal policies are all part of this. But resilience costs money. The question is, who will pay?Governments want companies to bear some of the burden. Consider the discussion about price controls in the energy and power sector, as the G7 nations look for ways to curb spiralling gas and electricity costs. The EU is hoping to levy windfall taxes on non-gas electricity producers when their market prices exceed a certain threshold.In the US, Congress wrote price controls on prescription drugs into the Inflation Reduction Act budget bill in August. There is also a push to put a floor under labour markets across entire industries (something that’s atypical in America, where unionisation usually happens company by company). California’s governor Gavin Newsom just signed a bill that may increase wages in the fast-food industry to $22 an hour starting next year. Even the business-friendly commerce secretary Gina Raimondo is advocating that companies pony up more to help pay for worker training and childcare.There is also a huge push around President Joe Biden’s worker-centred trade policy, which was front and centre at last week’s Indo-Pacific Economic Framework for Prosperity Ministerial in Los Angeles. Some national security officials are eager to cut new deals with countries such as Vietnam, Malaysia, Thailand and Brunei as part of America’s effort to increase its own economic and security power base in Asia to counter China. Katherine Tai, the US trade representative, is keen to ensure domestic labour doesn’t suffer in the process, as are progressives such as Rosa DeLauro, Elizabeth Warren and Bernie Sanders. They, along with 42 House Democrats, wrote a letter to the Biden administration last week requesting more transparency around the Asia trade negotiations, so they don’t become a race to the bottom.As Tai put it to me: “There’s a lot in play in terms of balancing domestic and international economic policy.” But new trade deals, in her view, must not mean lower wages for American workers, lower environmental standards or allowing multinational companies to avoid taxes or lock in monopoly power. “This is about building the economy from the bottom up and the middle out,” she says.Tai only controls trade talks. The Department of Commerce, which has been more sympathetic to Big Tech, for example, is in charge of talks around supply chains, infrastructure and tax. And security hawks are sympathetic to the “bigger is better” argument being put forward by corporate America.But it would be folly for Democrats to do anything that is seriously problematic for the labour outlook, in advance of the autumn midterm elections. Recapturing the working class is crucial to keeping a majority in Congress. Research shows that the Democratic loss of factory towns (such as the one I grew up in) hollowed out by the past 20 years of neoliberal trade policy are a large part of what made Donald Trump possible.President Biden has always been sympathetic to labour interests and key appointees such as the Federal Trade Commission’s Lina Khan and the Securities and Exchange Commission’s Gary Gensler have put this at the heart of their mission. But to make the “work not wealth” slogan really meaningful, Democrats need to win big in the midterms. If they do, look for the capital-labour power balance to shift even [email protected]  More

No one loves free trade anymore, the great powers have embraced protection, the EU can achieve little. So goes the narrative. But in her seventh-floor office in Brussels, the jovial Sabine Weyand tries not to take it too seriously. “Trade and investment ties are holding up. Capital flows are continuing. I don’t really think that you can say that there is an age of deglobalisation. We live through a reconfiguration of globalisation,” says the director-general of the EU’s trade department. Yes, Covid-19 led to a search for resilient supply chains. But Russia’s invasion of Ukraine “has really put the wind in the sails” of Brussels’s plans for trade deals. The EU’s official buildings look and feel like black holes for personality. Weyand has avoided being swallowed whole. After nearly 30 years in the European Commission, she is recognisable not just by her black glasses and bob, but by her blunt phrasing and willingness to make a joke. As the EU’s deputy Brexit negotiator, she was known as the brains behind Michel Barnier. She rejected British proposals for the Northern Irish border as “unicorns”, earning the scorn of Brexiters. “It’s unusual for an official to have so much public visibility: I didn’t like that so much.” That is the irony: Brexit was partly a revolt against the European bureaucrats; Brussels bureaucrats like Weyand ensured it achieved much less than its proponents wanted. The other irony is that Weyand is an Anglophile, who studied at Cambridge from 1986-87 and whose free-trading outlook is in line with the UK’s historic instincts. She concedes that Brexit “has made integration easier” for the EU on security and justice and home affairs, but adds: “On trade, we are missing a liberal voice, which we had at the table. It has taken the EU a while to find a new equilibrium here, but I think we are there now.”

That new equilibrium is a major shift. Under French influence, the EU decided that nice guys finish last and that assertiveness pays. The commission has responded to Donald Trump, Chinese subsidies, and sustainability concerns by developing new defensive powers, including a carbon tax on imports. The trade directorate has dragged its feet on the most expansive proposals. But Weyand insists the direction is right: “We need partners more than ever, but we have to [engage] on the basis of strength.” ***Weyand’s belief in the EU is born of her upbringing in the German village of Körprich, Saarland, half an hour’s drive from the French border. “Europe has always been the reality on the ground for me, but also an aspiration . . . We always went over to France to have a good meal.”In person, she is forthright but controlled. I mention that her father was a politician. “A local politician,” she says. Is the distinction important, I ask. “I don’t know. I just wanted to be precise.” She studied politics, economics and English literature, then did a masters at the College of Europe and “got hooked”.In Brussels, she is mastering both the detail and the context: “You need to be a policy wonk but also a politics wonk.” Her border upbringing has helped. “She understands what drives the French and what drives the Germans,” says Pascal Lamy, who appointed her to his cabinet when he was trade commissioner. “She’s a four-wheel drive. She can do very different things.”By 2016, Weyand was a deputy director-general at the trade directorate. Negotiating Brexit might have seemed like a hospital pass. But she “wanted the job . . . There is my girl-scout attitude kicking in . . . I wanted to serve the European project.” Did she ever believe that the UK would really leave without a deal? “The one thing I stopped doing fairly early was to assume that all choices by the UK would be rational. Leaving without a deal would not be the rational choice, but that wouldn’t mean that it wouldn’t be made. But it was very largely seen as a bluff. And it didn’t happen, did it?”Weyand left the Brexit role in mid-2019, before Boris Johnson negotiated the Northern Ireland protocol. The new UK prime minister Liz Truss is committed to ripping up the protocol. Are we still in the land of unicorns? “No, I think we are in the land of nostalgia. I would wish we could stop talking about Brexit, because the UK has left the EU. I very much feel that the UK is still clinging to the past — by prolonging this discussion about Brexit . . . We have to find a new accommodation. It will not happen as long as the UK seems to be fighting the battles of the past.”Is the EU really up for a trade war, given events in Ukraine? “I’m not going to speculate. But it makes it very difficult to have an alliance in defence of a rules-based international order if in our bilateral relationship these rules are not respected.”Relations with the US have improved under Joe Biden, but Washington’s chips act, which gives $58bn in subsidies for domestic manufacturers, poses issues. “If I look at all the public money that goes into semiconductors, we have to guard against a risk of a subsidies race, which will turn out to be very expensive,” says Weyand, without naming the US. “People will say, in order to make it work, let’s not import anything. It’s the risk of the beggar-thy-neighbour policy.”Some subsidies are justified, but without co-ordination, companies can go “subsidy shopping”. “We’ve seen that: they go around on both sides of the Atlantic and say who offers me more. There we have to be careful.”***Are the west’s sanctions on Moscow working? Weyand, a self-described “news junkie”, cites recent leaks from within Russia. “They are running out of chips, which affects their industrial production but also their military capabilities . . . Look at a flagship product like a Lada [car] now being produced without airbags. And that is just emblematic. If you hear that they depend on drones from Iran and ammunition from North Korea, you do realise that the sanctions are working.” So far, the EU finds little evidence that the sanctions are being circumvented. Is there anything left in the EU’s toolbox? “We have done a lot indeed on the goods side, there are more things we can do on the services side. But it’s a matter of how does it work in practice, where are there gaps or unintended consequences.”Weyand argues that Russia’s aggression has spurred trade co-operation. First, EU countries now see the need to diversify their trade. “We found out that we are dependent on Russia not just for fossil fuel, but on a number of critical raw materials. We can’t afford that . . . Then we realise that there are certain dependencies with respect to China, and there also we have to be careful: we never know when dependencies might get weaponised.” Second, other countries are in the same positions. “Everyone is looking at their dependencies: they are vulnerabilities, not trade links.”She hopes to conclude trade deals with Mexico and Chile this year. “We may need a little bit more time with [the trade bloc] Mercosur, because we still have to negotiate an additional instrument on deforestation . . . The priority is looking at Latin America, which we have left very much in the hands of China over the last few years.” Concluding a deal with Australia is now aimed for spring 2023. Meanwhile, India is “challenging”: the hope is to conclude negotiations before the end of the present commission in 2024.***Whatever deals the EU strikes will inevitably be compared with those signed by the UK, post-Brexit. Brussels arguably drove a harder bargain with New Zealand than London did. “In international trade negotiations, size matters,” says Weyand. “On the other hand, the UK has taken the choice of basically doing a full opening of their agricultural market. That’s not the choice we have made or would ever make.”But the real strategic challenge is China. In response to abuses in Xinjiang, the commission is proposing a ban on marketing products made by forced labour. An outright import ban would risk being “discriminatory”, given there is evidence of forced labour inside the EU.

Does taking unilateral actions undermine the EU’s credibility in multilateral forums like the World Trade Organization? “It depends.” Some developing countries, including Indonesia, are “concerned that it would be very difficult to meet our criteria for access to our markets on deforestation and other production method criteria.” But there are few complaints about the EU’s measures to protect against subsidised imports and economic coercion. “Brazil has been looking at an anti-coercion instrument of their own, because we all face the same problem of the erosion of the multilateral trading system.”Weyand may spend her whole career in the commission; her husband also works there. Does the negative stereotype of Brussels bureaucrats ever get to her? “You know, I am very much into Max Weber, into the importance of competent bureaucracy to help politicians realise their objectives for which they are elected. There are distortions and prejudices, there are clichés, but you know, you have to accept that.” Has Brussels changed her? She exhales. “You need roots somewhere. What roots me is still my family and friends in Germany, but also in other places. I don’t really feel that I’m confined by the Brussels bubble.” More

Ajay Rajadhyaksha is global chair of research at Barclays.All eyes have been on the Federal Reserve this year, with the US central bank in the midst of its most aggressive hiking cycle in decades. September is no exception. Will the Fed hike 75 basis points this meeting? How high will the fed funds rate ultimately go? Will cuts start next year, as markets are pricing? Every conversation I have had with investors includes some version of these questions. In contrast, little attention has been paid to the Fed’s other tightening tool — the QT (quantitative tightening) program to reduce the size of the balance sheet. To some extent, this is understandable. After all, there hasn’t been much in the way of QT yet; the last three months have seen the securities portfolio drop from $8.5tn by less than a hundred billion dollars. In the real world, that is of course an unthinkable amount of money. But it isn’t much of a dent in the Fed’s holdings, despite three months of QT.

Moreover, Fed officials have previously played down the impact of balance sheet reduction; Treasury secretary Yellen (when she was Fed chair) once said that quantitative tightening was like “watching paint dry”. And perhaps most importantly, the Fed has never sold securities outright. Instead, as the Treasuries and mortgage-backed securities (MBS) it owns mature, the bank has simply not reinvested the proceeds, allowing its balance sheet to fall.This cycle may be different. And possibly sooner than investors expect.In recent weeks, two regional Fed presidents — the Atlanta Fed’s Raphael Bostic and the Cleveland Fed’s Loretta Mester — have brought up the idea of the Fed actually selling its MBS holdings. Admittedly, both were carefully vague on timing. But it is well known that the central bank is not thrilled about holding MBS on its balance sheet in perpetuity. Returning to a Treasury-only portfolio has been a frequently stated goal. The problem is — without outright sales, this is easier said than done.Most US mortgages have a 30-year maturity. But few borrowers stay with the loan for 30 years. Home-owners move, and when they sell the house, the existing mortgage is paid off and so matures early. Some tap into home equity to take out a bigger loan, thereby paying off the old one. And when interest rates are low, many borrowers refinance into a lower rate. But the process can also work in reverse if mortgage rates rise a lot, as in 2022. The 30-year mortgage rate has more than doubled over the past 12 months, from 3 per cent to over 6 per cent.

And sure enough, refinancing has fallen off a cliff. After all, who refinances into a much higher rate? In fact, the move in mortgage rates has been so sharp that it has also made homeowners more hesitant to move or tap into home equity. The end result is that the amount of MBS maturing has started to drop — by a lot. In theory, QT kicks into high gear from September; the Fed will now allow as much as $60bn in Treasuries and $35bn in agency MBS to mature each month. In practice, the $35bn cap in agency MBS will not be hit in any month between now and the end of 2024, if interest rates stay here. Not remotely close. Barclays MBS analysts forecast that the Fed’s MBS holdings will pay down at an average of just $18bn a month from now until December 2024 (if QT lasts that long). Which will leave the Fed owning over $2.2tn in agency MBS, even after 30 months of quantitative tightening. Moreover, the Fed’s Treasury holdings will run off at a quicker pace. In other words, if the US central bank’s QT plan stays on autopilot the share of MBS in the Fed’s overall portfolio actually go up over time, rather than down. That is what we have seen so far:

There are a few other arguments in favour of selling MBS. Perhaps the Fed could announce that it will sell so that the $35bn a month cap is hit. After all, the initial announcement implied that they were comfortable with the MBS portfolio reducing at that pace; does it matter if it is due to pay-downs or outright sales? In this approach, the Fed would sell around $200bn in MBS across 2023, averaging $17bn a month in sales (in addition to our estimate of $18bn a month in pay-downs). That seems a manageable number. Net MBS issuance was over $850bn in 2021, but will be $300-350bn lower this year, and likely lower still in 2023. This leaves theoretical room to absorb an extra $200bn or so in Fed selling next year. Naysayers will argue that any sales will push up mortgage rates by widening the spread of MBS to Treasuries. But MBS spreads have already widened 70-80 basis points from late 2021. And yet, the majority of the rise in mortgage rates has been because Treasury yields have climbed so much. If officials want to get mortgage rates lower — which they don’t in any case, as they work to slow the economy — the simplest way is to get US Treasury yields lower. But this is the exact opposite of what the central bank has been trying to achieve all year.No, the best argument for the Fed to not sell MBS next year might simply be principle. Specifically, the principles Fed officials laid out in January this year, on how they would implement QT (our emphasis below):— The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.— The Committee will determine the timing and pace of reducing the size of the Federal Reserve’s balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.— The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).— Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.— In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimising the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.— The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.The phrase “longer run” is subjective. But put together, these principles suggest that the Fed plans to get its balance sheet to the desired size primarily by allowing securities to mature. And only later will it focus on reducing its MBS holdings.The Fed is allowed to change its mind; the speed of the 2022 hiking cycle is ultimate proof. And as month after month passes and MBS paydowns continue to disappoint, the temptation to consider sales will rise. At the same time, officials have repeatedly promised to provide plenty of advance warning to markets if they plan to sell. This suggests that if any such move is coming in 2023, the process of preparing investor expectations will start sooner than later. Ultimately, the decision on sales might depend on how the Fed perceives the trade-off between adhering to its self-imposed QT principles versus practical expediency. Regardless of the path the central bank chooses, QT seems set to attract far more attention in the months to come. And it won’t be like “watching paint dry”. More

The EU’s Brexit chief said he could reduce physical customs checks across the Irish Sea to just a few lorries a day, as he expressed hope that new British prime minister Liz Truss was ready to do a deal over post-Brexit trading arrangements in Northern Ireland. Maroš Šefčovič said the trade border would be “invisible” under European Commission plans — provided the UK gave EU officials real-time data on trade movements. “If the data are downloaded into the system, when the goods are put on the ferry from Britain . . . I believe that we can remotely process them while sailing to Northern Ireland,” he told the Financial Times in an interview. Physical checks would be made only “when there is reasonable suspicion of . . . illegal trade smuggling, illegal drugs or dangerous toys or poisoned food” — typically a “couple of lorries a day”.He said there was almost no difference between the UK demand for “no checks” and the EU’s offer of “minimum checks, done in an invisible manner”.The UK agreed that Northern Ireland would remain in the EU single market for goods when it left the EU, to avoid a border on the island of Ireland.This requires goods leaving Great Britain for Northern Ireland to have customs declarations while food and animals are subject to health checks. Truss has said this is an unacceptable interference in the UK’s domestic market. Unionists in Northern Ireland say it has eroded their ties to the UK and the stand-off has led to political paralysis in the region. The Democratic Unionist party, the largest unionist force in the region, has refused to enter the devolved assembly in Belfast until the Northern Ireland protocol is scrapped.Nationalist Sinn Féin, which wants Northern Ireland to join the Irish Republic, supports the protocol. Under the current rules, fresh elections to the assembly must be called if the deadlock is not broken by October 28. Jeffrey Donaldson, DUP leader, told the FT “there is the prospect of renewed negotiations”. “I think that would require a change of stance from the EU. They need to recognise that if we are to arrive at a solution it requires them to accept, and respect, the integrity of the UK, its internal market and Northern Ireland’s place within it.”Talks between Brussels and London fizzled out in February. Šefčovič said he was willing to restart but only based on the proposals he made last October to cut checks. Šefčovič said he was “encouraged” by Truss’s statement on Wednesday that she wanted a negotiated settlement. “We stand ready to work in an open and constructive and intensive way.“I also would prefer to work around the tight deadlines because I am fully aware of the dates which will be coming by the end of October [for elections].”He also pointed out that next April marked 25 years of the Good Friday Agreement, which ended decades of civil strife and established the power-sharing devolved government.“If the first 25 years were about peace, I think that the next 25 years should be about peace and prosperity for Northern Ireland,” he said. Access to the UK and EU single market gives businesses there a unique advantage.

Šefčovič said he was working with the US, which helped broker the Good Friday Agreement, to bring potential investors to Northern Ireland next year to show the benefits of the protocol.“They would definitely welcome certainty, predictability and the fact that they would be manufacturing or distributing the goods for 500mn quite wealthy customers.” The Biden administration last week warned Truss not to undo the protocol.Truss said she was willing to negotiate but only if the EU gave in to all UK demands. She has introduced legislation to override the protocol and effectively end checks on goods the UK deems are destined only for Northern Ireland. That has led to seven legal actions by the EU against London for failing to enforce the protocol and share data. It has also held up a British application to remain in the EU’s Horizon scientific research programme. “We need to see that the most important agreements are now respected before we start to negotiate another one,” Šefčovič said.He also said the UK needed to guarantee funding for Horizon. London has started a complaint under the post-Brexit trade agreement between the two sides about being excluded from the programme.Šefčovič added that he could quickly resolve another dispute around a 25 per cent EU duty charged on British steel sent to Northern Ireland. This is because tariff-free import quotas to the EU have been exhausted. He said he had asked for details of what products have historically been sent to Northern Ireland, where from and in what quantities. “It could be resolved very, very quickly if we get the input from our UK counterparts.”Additional reporting by Jude Webber in Belfast

Video: Is the Northern Ireland Protocol bill a breach of international law? More