Aurelia Butler

(Reuters) – Britain’s business minister Kwasi Kwarteng believes Liz Truss will make it her aim to get to 2.5% trend growth, if appointed as the prime minister, he wrote in Financial Times on Sunday.Truss, who is the front-runner to become the next prime minister, will be “fiscally responsible” and will work to reduce the debt-to-GDP ratio over time, he added. (https://on.ft.com/3TGUYbE) More

Wall Street’s lurch into the red late on Friday sets a negative tone for the open in Asia on Monday, a stark reminder that investors are still far more inclined to sell into pockets of strength in riskier assets right now than push them higher.August purchasing managers index (PMI) reports on Monday from Australia, Japan, China and India could deepen or alleviate the general sense of gloom, but the U.S. close last week suggests any relief might be fleeting.U.S. markets are closed for the Labor Day holiday so liquidity will be lighter than normal, while European markets will digest the news that Russia scrapped a Saturday deadline to resume flows via a major gas supply route to Germany.The impact of Europe’s energy crisis on global financial markets cannot be ignored.It wasn’t meant to be like this after Friday’s non-farm payrolls report painted a “Goldilocks” scenario of the U.S. jobs market for the Fed – slowing but still solid job growth, and cooling inflationary pressures from slowing earnings growth. But stocks failed to hold onto the early gains, despite the pullback in bond yields, implied interest rates, and the dollar. (GRAPHIC-U.S.-Japan 2-year yield spread: https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgnwqdpb/USJP.png) The dollar will bear close monitoring, having hit a 24-year high on Friday against the yen above 140.00 yen. Japan’s Finance Minister Shunichi Suzuki said G7 financial leaders did not discuss FX on Friday, but insisted that sharp moves in exchange rates are undesirable.Meanwhile, U.S.-China tensions continue to taint regional sentiment. The State Department on Friday announced a potential $1.1 billion sale of military equipment to Taiwan, a measure that the Chinese Embassy in Washington said “severely jeopardizes China-U.S. relations and peace and stability across the Taiwan Strait.”All in all, a challenging environment for Asian markets on Monday.Key developments that should provide more direction to markets on Monday: Australia services, composite PMIs (Aug, final)Japan services, composite PMIs (Aug, final)China Caixin services PMI (Aug)India services PMI (Aug)South Korea FX reserves (Aug) More

The International Monetary Fund (IMF) on Thursday approved a $1.3 billion, 38-month loan programme, a step taken after its main creditors China and France agreed in July to negotiate to restructure the southern African country’s debt. “The bonds fall due (but) we will not pay on this basis. Let’s talk. Let’s agree on new terms before we can start servicing,” Musokotwane told local news channel ZNBC in an interview. The negotiations with private creditors are likely to be tough but Zambia has the support of the international community, the minister said.Zambia became the first African country to default in the pandemic era in 2020, struggling with debt that reached 120% of its gross domestic product.Besides the $750 million euro bond, Zambia has a $1 billion euro bond due in 2024 and another $1.25 billion euro bond due for repayment in 2027.Musokotwane said the government had agreed with the IMF to put in place measures to ensure Zambia will not fall back into unsustainable debt. More

FRANKFURT/BRUSSELS (Reuters) -The European Union is preparing an emergency plan to separate power prices from the soaring cost of gas – as well as longer-term reforms aimed at ensuring electricity prices reflect cheaper renewable energy.Energy ministers from EU countries will meet on Sept. 9 to discuss how to ease the burden of soaring energy prices https://www.reuters.com/business/energy/eu-sets-sights-energy-market-reform-prices-soar-2022-08-30 on businesses and households as a matter or urgency.European power costs have surged in the last year, driven by record gas prices as Russia curbed supply to Europe. European governments have accused Moscow of using energy as blackmail, in retaliation for western support for Ukraine after Russia’s invasion. Russian gas giant Gazprom (MCX:GAZP) says it is a reliable supplier and has blamed cuts in flows on technical issues.Changing the 27-country EU’s energy systems may be complex and lengthy, as the cross-border trading of energy commodities among the bloc’s members has taken two decades to emerge and solidify. But policymakers are racing to find a short-term solution. Here’s why Europe is considering energy market reforms, and what they could entail.WHY IS THE ELECTRICITY PRICE LINKED TO GAS?In the EU energy system, the wholesale electricity price is set by the last power plant needed to meet overall demand. Wind farms, nuclear, coal and gas plants and all other generators bid into the power market, with the cheapest sources coming in first, followed by pricier sources like gas. Gas plants often set the price in this system.The idea is that because all generators sell their power at the same price, the cheaper renewables generators end up with a bigger profit margin – a stimulus that incentivises more investment in the renewable generation Europe needs to reach climate change goals.But countries including Spain have said the system is unfair, as it results in cheap renewable energy being sold to consumers for the same price as costlier fossil fuel-based power.Gas prices have soared as Russia has cut the volumes it sends to Europe. Gas prices are determined by global competition for the fuel, and European buyers are competing with firms in other countries to snap up non-Russian gas.The effect has been to drive up the price of producing power from gas in Europe, resulting in higher overall power prices.”The current market design offers Russia, for example, a virtual field of action for destructive market manipulation,” Nina Scheer, parliamentary energy spokeswoman of the Social Democrats, the leading party in the Berlin coalition, wrote in the Handelsblatt business daily on Aug. 30.Other factors boosting power prices include problems with French nuclear plants https://www.reuters.com/world/france-braces-uncertain-winter-nuclear-power-shortage-looms-2022-08-30 and severe drought in Europe that hampered hydropower output and affected coal deliveries. Germany’s benchmark power contract for 2023 on Monday hit 1,050 euros a megawatt hour (MWh), 14 times the level a year ago.HOW COULD THE EU CHANGE ENERGY PRICES?EU Commission chief Ursula von der Leyen said on Aug. 29 that the EU needed to decouple the price of gas and power, without giving further details.The Czech Republic https://www.reuters.com/business/energy/high-energy-prices-should-be-tackled-european-level-czech-leader-says-2022-08-29, which holds the EU’s rotating presidency, is rallying support for a cap on the price of gas used to generate electricity. The idea of capping gas or power prices has long had support from Spain, Belgium and others, and now initially reluctant Austria and Germany. France is among the states in favour of action to separate the price of electricity from the price of gas. One option, proposed by Italian Prime Minister Mario Draghi, would be for EU countries to agree a cap on the price of gas imported from Russia. Critics say that would risk Russia completely cutting off Europe’s gas supply in retaliation.Another option could be for governments to cap the gas price, and pay gas companies the difference between the capped price and the higher market price. Countries, including Germany and the Netherlands, previously opposed that since it would effectively subsidise fossil fuel generation with public funds that they said would be better spent on the shift to cheaper clean energy. Other options could include restricting financial speculators’ participation in gas markets, or setting up a parallel market for gas-fuelled power, separate to the existing electricity market.WHAT ARE THE POTENTIAL DOWNSIDES?High gas prices provide a financial incentive for industries and households to reduce their gas consumption – a behavioural change governments are trying to encourage to ensure there is enough fuel to get through winter. Capping the gas price would limit that incentive, and critics say it could even encourage more gas use when governments need to be rolling out policies to reduce consumption.Some analysts have suggested targeted financial support for low-income households and businesses hit hardest by the soaring prices would be a better option than a hasty market overhaul.Other questions remain about how governments could cap the cost of gas-fuelled power in a way that did not encourage gas plant owners to produce less power when countries urgently need it. More

Workers should blow the whistle on bosses who are encouraging them to quit retirement plans to save companies money, the Pension Regulator has said. The watchdog’s intervention comes after the Trades Union Congress, the UK’s main movement for organised labour, last week said more of its members were leaving their pension schemes to cope with the intensifying cost of living crisis. The regulator said employers that sought to induce staff to opt out of their pension plan risked enforcement action and fines, and that employees should sound the alarm if this was happening. It added that companies could not “encourage their staff to reduce their contributions below the statutory minimum or opt out. It can only be the saver’s decision”.The intervention comes as businesses across the UK are also facing unprecedented financial strain from soaring energy bills, and demands for inflation-matching pay rises. Official guidance states that an inducement is any action taken by the employer, the sole or main purpose of which is to attempt to induce a jobholder to opt out or cease active membership of a qualifying scheme.More than 10mn UK employees are enrolled into company pension plans, and businesses have since 2012 been obliged to automatically enrol eligible staff into a qualifying scheme. Under this model, employers pay at least 3 per cent of a worker’s pensionable salary into the retirement plan, with the worker contributing at least 5 per cent. If an auto-enrolled employee reduced their monthly contributions to less than the minimum 5 per cent, they could continue saving but their employer would not be obliged to maintain its contribution,The regulator said that even in “difficult times”, it was important for people to keep up their pension contributions “whenever they are able to, as stopping contributions could have a serious impact on their retirement living standards”. “While staff can ask to opt out, we are calling on employers to do the right thing and encourage them to seek impartial advice . . . before making any decisions. “Anyone who is concerned their employer is encouraging them to opt out of their pension should contact our whistleblowing service,” it addedThe consultancy Barnett Waddingham last month estimated that more than 1mn workers were looking to reduce their pension contributions to help pay for soaring living costs. Unions have been on the alert following high-profile inducement cases, such as when an NHS trust was in 2016 referred to the regulator after it offered newly qualified nurses more pay if they opted out of their NHS pension. “The law is clear, and any worker who is concerned about this should speak to their union,” said Jack Jones, pensions policy officer at the TUC. Matthew Percival, changing workforce director at the CBI, the business group, said: “To be clear, employer induced opt-outs are illegal. The regulator is right to highlight the potential sanctions for firms taking such action.” More

CERNOBBIO, Italy (Reuters) – Italy cannot afford weeks of political inertia after an election this month, business chiefs said, adding that sky-high energy prices are already forcing more and more firms to curtail production.Gathered on the shores of Lake Como for the annual Ambrosetti Forum this weekend, business owners lashed out at politicians for ousting Prime Minister Mario Draghi in the midst of an energy crisis in Europe.”Before the new government’s ministers get their bearings it’ll be Christmas, but we face problems that need tackling in days, not weeks,” said Armando De Nigris, chairman of the balsamic vinegar maker of the same name. Record gas prices have more than doubled the cost of condensing the grapes that go into the 35 million bottles of balsamic vinegar De Nigris produces every year.”We risk producing something that we won’t be able to sell in six months’ time because we can’t pass on the price increases,” he said.A centre-right bloc is on course for a clear victory in the Sept. 25 election but government formation is a notoriously slow process in Italy. Industry lobby Confindustria last week warned Italy faced “an economic earthquake” due to higher energy prices and called for support from the caretaker administration led by Draghi, a former chief of the European Central Bank.Italy has already earmarked over 50 billion euros this year to try to soften the impact of higher energy costs for firms and households and more help is expected this week.RECOVERY FUNDS AT RISK?Riccardo Illy, chairman of the Polo del Gusto food group that owns French tea brand Damman Freres and chocolate label Domori, feared Italy will miss out on some of the promised EU funds for its post-COVID recovery.”Draghi could have continued till the end of his mandate … whoever comes next will make us lose billions of euros,” he said. Italy is in line for some 200 billion euros but the funds are conditional on it implementing a series of reforms.Reliance on Russian gas and a large manufacturing sector made up predominantly of small businesses render the Italian economy particularly vulnerable to the energy crisis.Since the Ukraine conflict started in February, many companies in energy-intensive sectors such as steel, glass, ceramics and paper have been forced to curtail production because production costs were too high.”When the next (economy) minister sets out to solve our problems – and we can only hope he’s the best of ministers – it may be too late,” said Romano Pezzotti, who runs metals recycling business Fersovere near the northern city of Bergamo.”After making the big mistake of toppling the government during the worst crisis of the past century … politicians will need to again turn to somebody capable of solving the country’s problems,” he added.The energy crisis casts the longest shadow.”We all know what needs to be done,” said Matteo Tiraboschi, executive chairman of premium brakes maker Brembo, a larger business listed on the Milan stock market.”The energy bill in Italy has virtually doubled.” More

Desperate times call for desperate measures. The UK has rightly supported Ukraine’s cause in its war with Vladimir Putin’s Russia. Today’s soaring gas prices are as much a weapon in Putin’s fight as missiles directed at Ukraine and, like them, they will kill. It would be a crime and a folly to let the domestic costs of the war fall disproportionately on the least well off. Solidarity in sharing these burdens is obligatory. So, too, is willingness to shed shibboleths. In wartime, markets are not sacrosanct. Price controls, even rationing, must be on the table.The price of natural gas is nearly 5 times what it was a year ago. The result is a distributional shock, a terms of trade shock (since the UK is a big net importer of gas), an overall price shock, with inflation likely to hit 20 per cent, and a contractionary shock to gross domestic product.

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The distributional shock is the most important. According to ING, even with the measures already taken by the government, the cost of energy could rise from 12 per cent of household disposable income for the lowest decile in 2021 to 41 per cent between October 2022 and September 2023. Even at the sixth decile it could go from 4 to 14 per cent of disposable income. This would be a massive (and massively unequal) squeeze on people’s real incomes. According to the Resolution Foundation, the UK is set to experience the largest two-year decline in median non-pensioner real disposable income after housing costs in 100 years.It is evident that losses to less well off households on this scale would be morally and politically unbearable. So, too, would be the costs to businesses and the likely reductions in spending and gross domestic product. Something has to be done and it has to be massive, given the scale of this shock. So what should it be?

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There exists a standard, professionally approved package. It is, as IMF staff have recently repeated, to allow price signals to operate freely and target the vulnerable. That approach would surely be better than the regressive tax cuts discussed in the Tory leadership contest. But this is one of those situations in which a difference of degree is a difference in kind. A rise in prices that is manageable by most of the population is one thing. A rise in prices that imposes such big costs on almost everyone, while giving huge windfalls to a few producers, is something else altogether.These price rises are unnecessarily and unsustainably large. It is also hard to target assistance, without creating a cliff edge between those who are helped and those who are not. Not least, it is very difficult to target the help in ways that allow for differences in household circumstances. None of this matters all that much if the price rises were smaller. But these ones are too large. The country cannot permit many millions to do without the energy they need, especially in winter.So, what is to be done? Torsten Bell has argued in the FT that we need to cap energy prices at below the current market rates. I agree. Indeed, we need to do this, while also simultaneously targeting assistance at the most vulnerable, since it is certainly sensible, in terms of incentives and limiting the fiscal costs, to allow a significant, albeit constrained, rise in prices.The UK has the substantial advantage that it is not overwhelmingly dependent on foreign sources of gas. On the contrary, almost half of total supply comes from the UK continental shelf. Furthermore, only 44 per cent of electricity is generated by gas, with another 43 per cent coming from “zero-carbon” sources (nuclear and renewables).

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So, while imported gas is a big tail, there is no reason at all why it should wag the energy dog. As an emergency measure, the government can and should impose price controls on domestic gas producers and generators of nuclear and renewable electricity. These prices should be substantially higher than prewar, but not at today’s “Putin levels”. The government should also subsidise the price of gas imports to these controlled levels. These controls (and subsidies) should end when prices of imports fall back, as they surely will.The government will also need to fund the envisaged subsidies and targeted assistance to the vulnerable. Again, as in wartime, this should be done through additional borrowing and taxes on the well off justified as a special and temporary “solidarity levy”. This will not go down well with many members of the Conservative party. Yet the new prime minister needs to remember that this electorate need never again be their concern. The nation as a whole definitely is. This is war. The government must act. Tinkering is not enough. Go big. Be [email protected] Follow Martin Wolf with myFT and on Twitter More