Aurelia Butler

Britain’s electricity generators will face pressure from ministers to invest their “extraordinary profits” in new green energy projects, rather than paying out the windfall to shareholders.Some have made huge profits from surging electricity prices that have risen in line with the soaring cost of gas, even if the power they produce comes from renewables or nuclear energy.Chancellor Nadhim Zahawi will on Thursday keep alive the prospect of hitting the generators with a new windfall tax if they do not invest their profits in renewable energy schemes. “It is one of a suite of options,” said one ally of Zahawi. The chancellor has instructed officials to draw up a list of policy alternatives for whoever becomes Tory party leader and therefore UK prime minister on September 5. The chancellor and business secretary Kwasi Kwarteng will meet generators including Centrica, Drax and RWE to discuss the energy crisis, including the sharp jump in household bills.The meeting comes after warnings of a bleak winter for consumers, with average annual gas and electricity bills forecast to hit £4,420 by the spring — more than three times the level at the start of this year. While the government has announced around £15bn in support, including a one-off payment of £400 to every household, the measures were unveiled when bills were expected to reach around £2,800 by October, far lower than current predictions.Pressure is growing for further action to help households as spiralling energy costs risk tipping the wider economy into recession.“The government is in a complete tailspin,” said one industry figure briefed on the planned talks.“There’s a degree of panic. They’re looking at everything and everything is on the table.”No decisions are expected until either Liz Truss or Rishi Sunak is elected leader by Tory party members next month, prompting accusations that the government is sleepwalking into a crisis.Frontrunner Truss has rejected the idea of further windfall taxes on energy companies, saying last month that it would “send the wrong message” to the world.Kwarteng, who is tipped to be chancellor in a Truss government, is also an opponent of windfall taxes, which he argues are a deterrent to investment.Former chancellor Sunak first proposed a possible £3bn-£4bn windfall tax on electricity generators, alongside the new £5bn levy on North Sea oil and gas producers. But Treasury work on the idea stalled because of technical problems in introducing the new levy. Sunak’s allies declined to say whether he still favoured more windfall taxes on the sector.Kwarteng has instead focused on reforming the energy market so that electricity prices more accurately reflect the cost of production. But these reforms, which require legislation, will not take effect before the winter, raising the prospect of electricity companies making huge excess profits at a time of soaring energy bills.Ministers will therefore ask the generators to set out their investment plans and what they can do to help consumers, as well as discussing their likely profits and how they might be distributed to shareholders.

“The government continues to evaluate the extraordinary profits seen in certain parts of the electricity generation sector and the appropriate and proportionate steps to take,” a government spokesman said.The talks are expected to explore the impact of cutting green levies and VAT from existing bills and plans to increase the warm homes discount. The government is also likely to probe the energy companies’ plans in the event a large number of customers refuse to pay their bills this winter. Companies with significant generation capacity, such as France’s EDF — which owns the UK’s remaining nuclear power plants — have earned stronger-than-expected revenues without a significant rise in generation costs.The French state, which already owns 84 per cent of the company, is in the process of fully nationalising EDF and has asked the company to keep increases in French electricity bills to just 4 per cent this year.Centrica, owner of British Gas, has also enjoyed stronger profits in part due to its 20 per cent stake in the UK’s nuclear fleet. More

Liz Truss on Wednesday vowed to do “all that I can” to help households struggling with the cost of living crisis, in a change of tone that her Tory leadership rival Rishi Sunak described as a “major U-turn on the biggest issue facing the country”.The foreign secretary has said she favours tax cuts over “handouts” as the best way to alleviate the inflationary surge and assist people facing soaring energy bills that could top £4,000 per year by next spring.Her critics, led by former chancellor Sunak, claim she is indifferent to the plight of the poor and pensioners, millions of whom do not pay tax. His team called it a “serious political and moral misjudgement”.Martin Lewis, the consumer champion and founder of MoneySavingExpert.com, called for immediate government action to help households with soaring energy bills. “This is a national crisis on the scale that we saw in the pandemic,” he told the BBC.On Wednesday, Truss issued a statement saying: “I understand how difficult the rising cost of living is making life for many and if elected I will do all that I can to help struggling households.”Truss told the Financial Times last week: “Of course I will look at what more can be done. But the way I would do things is in a Conservative way of lowering the tax burden, not giving out handouts.”She insisted on Wednesday that the first “port of call should always be to let people keep more of their money” and that tax cuts for individuals and businesses would help create economic growth.Truss also continued to insist that taxing people more and then handing them back their own money — what her team calls Sunak’s “socialist tax and spend” — is not a Conservative approach.Simon Clarke, a Treasury minister and Truss supporter, said civil servants were working up a series of options to address the energy crisis, which would be presented to the new Tory leader and prime minister on September 5.Neither Truss nor Sunak has outlined how exactly they would address the issue, but the former chancellor has said he would make direct payments worth hundreds of pounds to the poorest households.“It’s all very well offering empty words about ‘Doing all you can’,” said a Sunak campaign spokesman. “Taking action means providing direct support, which Truss has previously dismissed as ‘handouts’.”Sunak told the BBC the next prime minister had “a moral responsibility” to help poorer households through the winter, saying he would rather lose the Tory leadership race than “win on a false promise”.

Last week Truss was forced to quickly abandon a policy to cut public sector pay outside London and south-east England by almost £9bn. “Mistakes like this would cost the Conservative party the next election,” said a Sunak aide.However, Truss is viewed by pollsters and bookmakers as the frontrunner in the Tory leadership contest — which will be decided by Conservative party members in a ballot, with the result announced on September 5.An Ipsos poll found those saying Sunak would make a good prime minister fell from 38 per cent to 32 per cent in the second half of July. Truss’ figure remained stable at 30 per cent. More

Good evening,Fresh data from the world’s two largest economies today provided some hope that the surge in inflation might be slowing. In the US, the consumer price index for July was up 8.5 per cent compared with a year earlier, a smaller than expected rise and down from 9.1 per cent in June, thanks to lower petrol prices.The core CPI measure, stripped of volatile food and energy prices and closely watched by the US Federal Reserve, was up 0.3 per cent compared with 0.7 per cent in June, meaning an unchanged annual rate of growth of 5.9 per cent.Today’s data were warmly received by investors, driving US stock futures and government bonds sharply higher as they bet on the Fed easing up on its aggressive plan for raising interest rates.The new figures also provide a further boost for President Joe Biden after the recent passage of his US climate, tax and healthcare bill.The Inflation Reduction Act, to give it its proper title, is unlikely to make much difference in the short term, but in the medium and long term it should reduce costs by tackling problems such as rising prices for prescription drugs.Earlier in the day, China also reported a lower then expected rise in consumer and producer prices for July as Covid outbreaks and lockdowns hit demand. The country’s CPI reading hit 2.7 per cent owing to rises in the price of pork and fresh vegetables. Although much lower than in other major economies, this was still the nation’s highest level in two years. Producer prices were up 4.2 per cent, also slightly less than forecast.Other countries reporting new data today included Germany, the largest economy in the eurozone, where CPI for July was confirmed at 8.5 per cent on an EU-harmonised basis.Compare global trends with our inflation trackerLatest newsChina says military exercises around Taiwan are completeEU ends enhanced scrutiny of Greek economy after 12 yearsJapan’s prime minister reshuffles cabinetFor up-to-the-minute news updates, visit our live blog.If you’re looking for some good news, please scroll down to the end and enjoy our newest section, designed to lift your spirits in these difficult times.Need to know: the economyFresh forecasts showed that the typical UK household energy bill could hit £4,420 next spring — more than three times the level at the start of 2022. Energy editor David Sheppard explains why the situation in Britain is much worse than in mainland Europe. Would-be prime minister rivals Liz Truss and Rishi Sunak continue to squabble over the best way to help. Could it get any worse? How about winter power cuts?Latest for the UK and EuropeThe UK summer of discontent continues. Royal Mail has warned of “material” losses if upcoming industrial action goes ahead, while union leaders raised the prospect of the first-ever RCN nurses strike.Tenants in London face “increasingly unaffordable” rents as private landlords and agents take advantage of a shortage of properties to demand applicants bid to secure a new home.Cash-strapped Britons are also spending less on food deliveries, evidenced in widening losses at Deliveroo. Overall, UK consumer spending held up in July, according to industry data, but the small rise in sales values masked a much larger drop in volumes when inflation was taken into account.A Europe-wide recession is on the way, but it need be neither deep nor prolonged, writes economics editor Chris Giles. As long as its economies survive the winter, Russia’s energy blackmail will have failed leaving Moscow the loser, he argues. Germany is currently the fulcrum for Russian president Vladimir Putin’s pressure, says Constanze Stelzenmüller of the Brookings Institution.Central Europe’s reliance on Russian oil was highlighted when flows through the Druzhba pipeline were halted because of a row over payments. The situation was resolved when Hungarian energy company MOL paid transit fees to Ukraine on behalf of Russia to restart flows. Payment had been blocked by EU sanctions.The FT editorial board has warned that Turkish president Recep Tayyip Erdoğan’s overtures to Russia could trigger retaliation from the US.Global latestAfter a difficult 18 months, the logistical problems that have dogged the global economy are starting to abate. To take one example: the cost of shipping a container across the world is down 45 per cent from its peak in autumn last year. Congestion at ports is improving, as are delivery times for cargo.Investors believe Pakistan could follow Sri Lanka into default, as it battles surging commodity prices and tighter credit conditions. The country’s debt has been among the worst performing of emerging economies this year.Need to know: businessSome US businesses are angry at the “significant new tax increases and unprecedented government price controls” contained in Biden’s new tax and climate package. On the other hand, Denmark’s Vesta, the world’s largest turbine manufacturer, hailed the new US clean energy subsidies as a game-changer. The package does however fall short of the new OECD standard for a minimum corporate tax rate of 15 per cent: here’s our explainer.Analysts have warned investors not to get too carried away with the recent rebound in Big Tech stocks, arguing that earnings downgrades could be on the way this year and next.Hong-Kong based Lenovo, the world’s largest PC maker, reported the slowest growth in eight quarters, highlighting waning consumer demand for electronic goods. Western companies are ignoring the risk of using Chinese technology in the “internet of things”, according to an industry expert. Taiwanese security officials are trying to force Apple supplier Foxconn to ditch its stake in a Chinese chip company.Robinhood, the retail broking platform that reached dizzy heights during the pandemic, is suffering from a huge “post-Covid hangover” as active users quit. Not just any hangover, mind. As one analyst puts it: It has “woken up in a hotel in Las Vegas, and there is a Bengal tiger in the bathroom”.Asia-focused insurer Prudential said Beijing’s zero-Covid policy had contributed to a 31 per cent fall in new business profits in its Hong Kong division in the first half of the year.US IPO fundraising has dropped 95 per cent compared with this time last year because of falling valuations, economic uncertainty and market turmoil. The situation is reversed in China, where companies have been rushing to raise money before things get too difficult.Venture capital fundraising has similar problems. US totals hit a record high last year, but the good times are now over, explains west coast editor Richard Waters in our Behind the Money podcast. Hotel group IHG raised its dividend, launched a $500mn share buyback and reported profits back above pre-pandemic levels as travel demand rebounded. Hyatt too reported increased revenues, with the widely-used metric of revenue per available room (excluding China) back above pre-pandemic norms.Cathay Pacific was also confident of a lift in demand, even as it reported a $637mn first-half loss. Hong Kong’s flagship carrier operated at 11 per cent of pre-pandemic passenger capacity and 56 per cent of cargo traffic as of June. Tui, Europe’s largest tour operator, said flight disruption had cost it €75mn in the third quarter, pushing it into a loss of €27mn.One area that doesn’t look like it is rebounding any time soon is office property. Shares in IWG, the world’s biggest provider of flexible office space, tumbled after analysts warned that fears of recession would hit demand.The World of WorkWith the “great resignation” still in full swing, work and careers editor Isabel Berwick discusses the do’s and don’ts of leaving an employer in the latest edition of our Working It podcast.The UK’s legion of self-employed workers, an important contributor to the country’s post-crash “jobs miracle”, shows no sign of bouncing back after numbers fell sharply during the pandemic. Whether they do or not depends on how the cost of living crisis plays out, says columnist Sarah O’Connor.Get the latest worldwide picture with our vaccine trackerSome good news . . . The World Wildlife Fund has cheerful news to celebrate the Year of the Tiger: Nepal has successfully doubled its wild tiger population. The WWF says the achievement is a testament to conservation efforts over the past 12 years.A tiger in Bardia National Park, Nepal © Emmanuel Rondeau/WWF-US More

The European Commission is to end its enhanced scrutiny of the Greek economy, marking an end to a debt crisis triggered by the 2008 global financial tumult that almost pushed the country out of the eurozone.In a letter to Greek finance minister Christos Staikouras on Wednesday, EU economy commissioner Paolo Gentiloni said Greece had “delivered on the bulk of the policy commitments” made to the eurogroup of 19 eurozone member states and “achieved effective reform implementation” despite the impact of Covid-19 and the war in Ukraine.Staikouras said on Twitter that the announcement “marks the achievement of a major national goal for Greece”.Following the 2008 financial crash, Greece was plunged into a debt crisis that led to bailouts by the EU and IMF beginning in 2010. Over the decade that followed, the country’s economy shrank by a quarter and the disposable incomes of Greek citizens fell by a third on the back of austerity policies imposed by the so-called “Troika” of institutions that included the commission, the IMF and the European Central Bank.Thousands of young Greeks left the country in search of work as unemployment in the country peaked at 27.8 per cent in 2013 while the government was forced to make drastic cuts to its pensions system and civil service in return for financial aid.The commission, which monitors the budgets of all 27 member states, has been supervising reforms to the Greek economy since the bailout programme was initiated.The stringent terms of the bailout, largely dictated by Germany, almost pushed Greece out of the eurozone in 2015 when the then-prime minister Alexis Tsipras put the conditions to the Greek population in a referendum. Voters rejected the terms of the aid package but Tsipras implemented the reforms regardless.The announcement of the end of the strict monitoring programme comes as the ECB puts in place mechanisms to prevent a second meltdown of the eurozone economy.Last month the ECB raised interest rates for the first time since 2011 and has focused reinvestment of maturing bonds on southern EU countries, including Greece. Following the most recent trip of EU officials to Athens in April, the commission noted that economic growth was forecast to reach 3.5 per cent in 2022 and 3.1 per cent in 2023 despite lingering uncertainty from the pandemic and rising energy costs.It also said there was a “positive surprise” in the government’s primary deficit — the difference between government revenues and spending excluding interest payments — which was 5.5 per cent of gross domestic product in 2021, 2.1 percentage points less than had been expected.The so-called “economic adjustment programme” ended in June 2018 but Brussels has kept Greece’s finances under surveillance since then.

The commission said in a statement that the risk of “spillover effects on the Euro area economy have diminished significantly” and that more detailed monitoring was “no longer justified”. A final tranche of debt relief is due to be paid in November should Greece meet the conditions of a “post-programme surveillance” report. In a letter responding to Gentiloni, Staikouras said Greece had implemented reforms in six key areas — fiscal policies, social welfare, financial stability, labour markets, privatisation and public administration — which had “put in place a solid platform for Greece to achieve sustainable and inclusive long term growth”. More

The writer is a former member of the Monetary Policy Council in Poland. His co-author, Grzegorz Parosa, is head of equities at AXA’s investment arm in Poland and a doctoral student at Stanford UniversityZombie companies — businesses whose operating profits are persistently lower than their interest payments — have something in common with high global inflation. Surprisingly, the root cause of both is the Federal Reserve.How did we find ourselves in a situation where, according to a 2021 report, roughly 10 per cent of public companies in the US are zombies? The 2008 financial crisis scared policymakers. US and European central banks introduced unconventional monetary policies — ultra-low interest rates and large-scale asset purchasing programmes. When Lawrence Summers, former US Treasury secretary, claimed that the “natural” interest rate was negative, and thus conventional policies were ineffective, this was an excuse for monetary policymakers to keep their feet on the accelerator pedal. Focused on boosting demand, policymakers forgot about supply and started zombifying the economy. So how can the Fed change a perfectly sound company into a zombie? It can’t. But it can create an environment where zombification is possible. When interest rates are at zero, creditors are encouraged to renew financing to unproductive companies. When interest payments are low, not much is needed to keep a zombie going. Moreover, weak companies pay slightly higher interest — an important fact for investors desperately hunting returns in an ultra-low-rate environment. It makes sense for creditors, but why do zombie companies not restructure? This is simply unnecessary when rates are low and interest payments pose no threat. Riskier projects usually reap higher profits so limited risk-taking depresses future productivity — but those effects happen beyond the average chief executive’s career horizon. Such behaviour turns healthy companies into zombies and perpetuates existing ones.Creditors and managers are fine with zombies when rates are low. What about shareholders? Our research suggests that by allowing zombies to live, investors may increase their expected returns. As a result, neither creditors, managers, nor owners have any incentive to kill zombies when rates are ultra-low, so once they emerge they keep stumbling along. In countries such as the UK, Belgium, Spain, Greece, Portugal, and Italy, zombie companies control more than 40 per cent of all assets. Why is this a problem? Zombies trap assets and employees, making life harder for start-ups, slowing innovation. Moreover, their existence lowers margins, making investing in healthy competitors less attractive.All these effects directly distort the crucial process of “creative destruction,” defined by Joseph Schumpeter as an innovation mechanism “by which new production units replace outdated ones”. When it fails, resources (capital and people) are inefficiently allocated. This in turn is a significant cause of slowing productivity growth, as observed in western countries over the past two decades. Productivity increases are crucial for economies and explain around 70 per cent of their growth. In Europe, ultra-low interest rates — through zombification and resulting misallocation — lowered productivity, slowing GDP growth by up to three per cent in the years following the financial crash, further denting stagnant European economies. For more than a decade, central banks chased elusive lost demand. By loosening monetary conditions they not only zombified countless companies and slowed output growth, but also precipitated rising inflation. We do not know whether demand was missing, but the proposed remedy certainly hurt supply. It is high time central banks stopped feeding zombies and returned to conventional policies. More