Aurelia Butler

The European Central Bank is using its pandemic-era bond-buying programme to shield highly indebted eurozone countries from the effects of its decision to unwind stimulus programmes in its bid to fight inflation.The central bank concluded net purchases under its pandemic emergency purchase programme in March, but is focusing reinvestments of maturing bonds on the bloc’s more financially fragile members. Between June and July, the ECB injected €17bn into Italian, Spanish and Greek markets, while allowing its portfolio of German, Dutch and French debt to fall by €18bn, according to Financial Times calculations based on the central bank’s data. “The deviation now is very large,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, about the ECB’s reinvestments. “It looks like the ECB has been very active by reinvesting almost all the proceeds from core countries into peripheral countries.”The reinvestments highlight the ECB’s eagerness to keep a lid on borrowing costs for countries such as Italy and prevent a eurozone debt meltdown as it pulls back from the accommodative monetary policy that has supported the bloc since the debt crisis a decade ago. It comes after the ECB last month raised interest rates for the first time since 2011 after making the decision to conclude the PEPP programme, and a longer-running bond-buying scheme called the asset purchase programme. Sven Jari Stehn, chief European economist at Goldman Sachs, said the “extent of the flexibility that has been utilised” in reinvesting proceeds of bonds that were part of the PEPP programme was “somewhat more than people had expected”.ECB policymakers and investors are worried that tighter monetary policy will widen the gulf between the region’s strongest and weakest economies — so-called fragmentation risk. These fears pushed wider the difference between Italian and benchmark German 10-year bond yields to as much as 2.4 percentage points in June, a level last seen during the market tumult in the early days of the pandemic in 2020. The spread has since narrowed to about 2.1 percentage points after the ECB committed to pushing back against fragmentation. The ECB last month said flexibility in deploying PEPP reinvestments would be the “first line of defence” in its attempt to keep a lid on so-called spreads. “I think it’s a good thing for them to be bold . . . it’s good for markets to see they’re putting their money where their mouth is,” said Ducrozet, adding that “the clear message is that they’re using this flexibility almost to the max that they could”.The central bank also last month put in place a new transmission protection instrument that can be used in case PEPP reinvestments fail to keep spreads under control. The tool allows the ECB to buy the bonds of any country it deems as facing market pressures outside the economic outlook, at unlimited scale. Investors have been watching Italian spreads cautiously to see when the ECB may step in, with many deeming 2.5 percentage points an important mark.While the ECB is yet to use the new tool, its use of PEPP reinvestments shows how eager policymakers are to keep spreads under control. Jari Stehn said this was “an activation of the first line of defence against fragmentation risk but still means that it’s an open question whether and when the TPI is activated”. More

Government plans to axe up to 91,000 civil servants over three years will require deep cuts to public services and cost at least £1bn in redundancy payments, according to a Whitehall review.Boris Johnson in May unveiled plans for the near 20 per cent reduction in headcount, and in June said he could “prune” back the civil service to 2016 levels “without harming” frontline servicesHowever, government insiders said a review by Steve Barclay, his former chief of staff, had found otherwise. They added that the Barclay review had led the Treasury to “go cold” on Johnson’s plans after the emergence of the full upfront cost and impact on public services. But foreign secretary Liz Truss, the frontrunner to replace Johnson in September as Tory leader and prime minister, is backing proposals to cut civil service costs. She has vowed to wage “a war on Whitehall waste”.

One Whitehall insider who has worked on the plans to cut 91,000 civil servants said that it had become clear that Johnson had made his announcement — which was greeted with enthusiasm on the rightwing of the Conservative party — without fully thinking through the implications. “You can only deliver 91,000 cuts by actual cuts to major frontline services,” added the insider. “There’s no way you can get to that number through efficiency savings or reductions in HQ staff.”One government insider said the proposals to axe 91,000 civil servants would involve “serious cuts” to staff at HM Revenue and Customs, Border Force and prisons. “And you couldn’t protect jobs outside London,” added the insider.Although estimates were not finalised, another Whitehall insider said a figure of £2bn had been discussed as a working assumption on the cost of compulsory redundancy payments.Truss’ campaign team endorsed the government plan to cut 91,000 civil servants last week — after being forced into a U-turn on proposals to introduce regional pay scales in the public sector to save an estimated £8.8bn a year. Brandon Lewis, the former Northern Ireland secretary who is backing Truss to be the next Tory leader, told the BBC the ditched policy on regional pay boards was part of a “wider package around dealing with waste in Whitehall”.Citing Johnson’s target to cut 91,000 officials, which would return the civil service to the historically low levels of 2016 that followed six years of reductions under the then prime minister David Cameron, Lewis said: “We’ve got to get back to those levels.” The proposed cuts are meant to save £3.5bn a year.

The government currently employs 475,000 civil servants compared with a low point of 384,000 in 2016. The biggest growth in officials has come at the Ministry of Justice, the Home Office and the Department of Work and Pensions.The demands on Whitehall have increased in recent years, partly because of the coronavirus pandemic but also because of government policies such as recruiting 20,000 police officers.The UK’s departure from the EU has required the expansion of the Department of International Trade to negotiate trade deals, while Britain’s post-Brexit immigration regime has increased demands on immigration and Border Force staff.The Cabinet Office said: “As people across the country are facing huge living costs, the public rightly expect their government to lead by example and to be run as efficiently as possible.”It added it was too early to speculate on how the reductions in headcount would be made, but that a range of options included not filling vacancies as civil servants move to the private sector or retire. Consultations with trade unions were continuing, said the Cabinet Office. More

Liz Truss, the Tory leadership favourite, is under pressure to promise more help for poor households facing a crushing cost of living crisis this autumn, after expressing her preference for tax cuts over “handouts”.Both Truss, foreign secretary, and her rival Rishi Sunak, the former chancellor, have been urged to explain how they would help households through the worst income squeeze in over 60 years and a “financial time-bomb” that is primed to detonate in the autumn.But Truss, the frontrunner to be Britain’s next prime minister, is under most pressure after telling the Financial Times last week that she would “look at what more can be done” but adding: “The way I would do things is in a Conservative way of lowering the tax burden, not giving out handouts.”Her ally Penny Mordaunt told Sky News on Sunday that Truss’s comments had been “misinterpreted” and that Truss would look at a range of measures to help poor households, alongside plans to reverse a £13bn national insurance increase. “She’s not ruled out all future help,” she said. Truss said she would scrap the 1.25 percentage point NI rate rise — introduced by Sunak — in an emergency Budget expected in September. She wrote in the Sunday Telegraph: “We would be able to put more money back in the pockets of hard-working people without delay.” But Sunak’s allies claimed it would take several months to implement the technical measures needed to make the change, leaving many households facing a cash crunch when a new energy price cap — possibly topping £4,000 — is applied in October.The former chancellor’s team also say that the cut in NI rates would not help the poorest and most of the benefits would accrue to higher earners. “Her tax cut won’t touch the sides for most families who will need the most help,” said one Sunak ally.Rishi Sunak campaigning in Edinburgh to be Conservative leader and the next prime minister © PASunak’s team said a person working full time on the national minimum wage would save £59 a year, while a person on median earnings of £26,000 would save £170. A person earning £100,000 would save over £1,000.Oliver Dowden, former cabinet minister and a Sunak supporter, said Truss’s tax cuts were “not fit to deal with the scale of the challenge that we are facing”. Mordaunt insisted that Truss had never excluded coming up with a much wider package of support.Meanwhile Sunak said he would “go further” than the £1,200 he had already earmarked for vulnerable households as chancellor once it was clear how high domestic fuel bills would rise; but he was criticised for failing to give more detail.The former chancellor has promised to cut an average of £160 off bills by temporarily scrapping VAT. But that is far smaller than the £2,000 by which the price cap of £1,971 set in April by the energy regulator could rise in October.Gordon Brown, former Labour prime minister, said Boris Johnson should convene a meeting with Truss and Sunak to deliver an emergency Budget now. “The reality is grim and undeniable: a financial time-bomb will explode for families in October,” he wrote in the Observer.He added: “There is nothing moral about indifferent leaders condemning millions of vulnerable and blameless children and pensioners to a winter of dire poverty.”Torsten Bell, director of the Resolution Foundation think-tank, said: “Cuts to income taxes will make little or no difference to lower-income households, so whoever becomes prime minister will have to [offer] direct help through the benefits system or directly through lower bills.” More

Did the UK economy shrink in the second quarter?The UK economy is expected to contract marginally in the second quarter as it heads for a recession of a scale not seen since the 1990s later this year.Economists polled by Reuters forecast a report on Friday to show output contracted 0.2 per cent between the first and the second quarter. Gross domestic product is forecast to have shrunk by 1.3 per cent between May and June, affected by the Jubilee extra bank holiday and partially reversing May’s expansion.This follows growth of 0.8 per cent in the first quarter with the slowdown reflecting the impact of the hit to households’ finances from surging energy prices.Last week, the Bank of England downgraded its UK economic forecast as it increased interest rates by the largest margin in nearly 30 years. After some growth in the third quarter, the bank said that the UK is projected to enter recession from the fourth quarter of this year and to continue to contract until the end of 2023. After that, growth is expected to be “very weak by historical standards,” the Bank said. This is a significant downward revision from the May assessment, following the new surge in gas prices that reflected the protracted war in Ukraine and cuts in gas supply to Europe.“The big picture though is that the economy is still on track to be smaller in 2025 than it was in 2019, before the pandemic,” said Thomas Pugh, economist at the consultancy RSM UK. “The much weaker economy is likely to create more unemployment.” Valentina Romei Is US core CPI being overlooked?Headline inflation captures the highly visible food and petrol categories that sting consumers’ pocketbooks when prices soar, but the US core consumer price index — which excludes those volatile categories — is expected to outpace the headline number in July, and may continue to in months to come.Economists polled by Reuters expect US headline inflation to increase 0.2 per cent month over month from June to July, while core CPI is expected to rise 0.5 per cent. The report is due out on Wednesday. Derek Holt, head of capital markets economics at Scotiabank, sees core CPI as the figure that may more clearly show how persistent inflation is in the US. He said that the US might have already reached peak inflation in terms of food and fuel, but expects price growth for durable goods and some services to continue rising.“We’re still in the phase that gets a reopening effect on the more volatile high contact, service prices where people are getting out and about in the summer and travelling more,” he said.Property and vehicle prices, for example, could continue to rise as food and fuel prices plateau, especially after Opec+ last week agreed to a slight production increase and Ukraine and Russia agreed a deal that allows Ukraine to export its grain into a supply-constrained market.But heightened tensions between China and Taiwan could disrupt the island’s dominant semiconductor industry and send ripples through the global economy.“A disruption to Taiwan would strike to the heart of many manufactured durable and big-ticket items and grind a lot of supply chains to a bigger halt,” Holt said, with the caveat that he does not expect that kind of eruption. Jaren KerrWill eurozone industrial production stall?The eurozone is set for a deceleration in economic activity as rising interest rates and surging food and fuel prices caused by Russia’s war in Ukraine push the region towards recession. Eurozone industrial production data for June is set to be released on Friday and will show the impact of soaring energy prices and prolonged supply chain disruption on industrial output. The May figure beat analysts’ expectations, with industrial production rising 0.8 per cent on a month-over-month basis, but analysts are now expecting it to flatline in June.“Activity in the euro area is deteriorating in a broad-based fashion, across sectors and countries,” said Barclays analysts, who expect the bloc to fall into recession by the end of the year. German manufacturing orders fell in June as the eurozone’s largest economy grappled with supply chain issues and interruptions stemming from the Ukraine war. Analysts and economists broadly expect the region to slip into recession, as business and industrial activity declines and consumer spending slows, squeezed by the cost of living and energy price crisis. Nikou Asgari More

The Isle of Sheppey on the Thames estuary is ranked among the most deprived areas of Britain and like millions of people living on low incomes, its residents are grappling with the rising cost of food and fuel. All are bracing themselves for even harder times this winter.In a pub car park on the island early one morning last week, a small group of locals stood clutching shopping bags, awaiting the arrival of the “Sheppey Support Bus”, a mobile community supermarket that offers surplus food and free fruit and vegetables for a £3.50-a-week subscription fee.“It’s a bit of a lifesaver,” said David Fuller, 66, who lives on a monthly pension of less than £1,000. “Everything has gone up — food, gas, electric bills — but pay has stayed the same. Three years ago I didn’t need somewhere like this, but now I do.”It is an increasingly familiar tale as food bank usage shoots up across the UK. But the sponsors’ logos on the side of the double-decker Sheppey Support Bus tell a less well-understood story about how the charitable and voluntary sector is now an integral part of the UK’s social safety net.David Fuller lives on a monthly pension of less than £1,000. ‘It’s a bit of a lifesaver,’ he says of the Sheppey mobile community supermarket © Anna Gordon/FTAfter a decade of austerity that saw local government funds cut by a third in real terms and the value of many welfare benefits falling to a “historic low” according to the Joseph Rowntree Foundation, charities are playing an increasing role in helping people to make ends meet.But the charitable top-up comes only in areas like Sheppey that are fortunate enough to have a volunteer network. Too many others are getting left behind, warn experts in the voluntary sector, and the outlook is bleak with the Bank of England forecasting a protracted recession and the worst squeeze on living standards in 60 years.The Sheppey Support Bus was the creation of the Oasis Charitable Trust, which runs a local academy school. The trust pulled together a network of backers to provide the service, including charities such as the Salvation Army and Feeding Britain, supermarket chain Wm Morrison from the private sector and local parish and borough councils.Lynne Clifton, the Salvation Army officer on Sheppey, said the bus also looks to provide wraparound services, including debt counselling, help with literacy, and mental health services.“Recently a regular came in, and I could tell she didn’t look her usual self,” she said. “When we had a word she burst into tears, and took out a huge gas bill for £2,000. We were able to help with meter reading and dealing with her energy company.”Lynne Clifton of the Salvation Army said the bus also offers services such as debt counselling © Anna Gordon/FTEveryone involved in the Sheppey Support Bus enthusiastically lauds its work helping families that can no longer cope, often after getting deeper into debt as a result of the Covid-19 pandemic.But experts warn that relying on the voluntary sector to pick up the pieces risks overstretching it and entrenching deep-seated inequality across the UK.Maddy Desforges, chief executive of the National Association for Voluntary and Community Action, whose members support about 200,000 local charities and voluntary groups nationwide, said the sector was now increasingly “backfilling” for the state.“The state is relying on volunteers in a way I don’t think is helpful,” she said. “So of course, during the pandemic volunteers stepped in, but one of my worries is that the state is now turning to volunteers to shore up services.”

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The first challenge of relying on charity to fill gaps left by the government is that the same cost of living crisis that is heaping demand on the sector is also crimping its ability to raise funds. Charities are also buffeted by the same economic headwinds as businesses: rising energy bills, tight labour markets and inflation eating away at the real value of donations.Analysis by Pro Bono Economics, a think-tank that supports charities, showed that even before the current crisis, the sector was becoming increasingly reliant on public fundraising as the value of government contracts fell.And the cost of living crunch is already affecting donations, which totalled £10.7bn last year. A regular survey by the Charities Aid Foundation found that in the first quarter of 2022, 4.9mn fewer people had donated over the past 12 months, compared with before the pandemic.But experts warn that the more fundamental issue about increased reliance on charities for social provision is that it risks entrenching inequality because many of the poorest areas nationwide are least well supported by charities.Parliamentary research looking at England’s 225 most “left behind” neighbourhoods found that people in those areas received, on average, £7.77 in national charitable grant funding per head, well below the national average of £12.23. Half received less than £5.

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“We know the charitable sector is much stronger in richer areas,” said Lord Gus O’Donnell, a former cabinet secretary and chair of Pro Bono Economics. “In poorer places the chances of having community help through the charitable sector is much weaker, and the amount of giving is lower, so you’re in a vicious circle, reinforcing inequality.” Desforges is equally concerned. “You’re relying on those people who are already living difficult lives, so it’s almost the opposite of levelling up,” she said, referring to Boris Johnson’s flagship policy to reduce regional inequalities.The outgoing prime minister was driven in part by a sharp shift in the number of seats to his Conservative party from Labour in the poorest parts of the UK at the 2019 general election.Johnson has sought to capitalise on the community spirit which came to the fore during the pandemic. He commissioned a report from the Conservative MP Danny Kruger on how charities might help with levelling up. But as the UK awaits a new prime minister next month, there is broad scepticism in the sector about the government’s commitment to reducing inequalities. The government said it recognised the regional inequalities, which was why it was “pressing full steam” ahead with its levelling up agenda while offering a £37bn package of emergency support to households to tackle immediate cost of living issues.“By investing in the areas that need it most, improving schools, supporting regeneration and generating higher paid jobs we will improve the lives of the poorest in areas across the UK,” it added.However Kruger said the next prime minister urgently needed to tackle the issue more aggressively, perhaps by using some of the almost £1bn of dormant assets in the UK financial system to endow a community wealth fund. “Fixing this is about money and power: money for social infrastructure and power for local places,” he added.Will Tanner, director of Onward, an influential centre-right think-tank that has helped to shape the levelling up agenda, said empowering local volunteers was crucial because they were often better at delivering services people needed than central or local government.“While we should worry about the distribution of that support, that isn’t an argument for not encouraging such activity where it is present,” he said. “The question is, ‘Can it be seeded and encouraged in areas where it is currently lacking?’”Steve Chalke, founder of the Oasis Trust, agreed but said the government should recognise that to promote more collaborations like that on Sheppey it needed to work with charities in a more equal partnership. “We need a new civil contract between government and the voluntary sector; one built on respect and trust rather than servitude,” he added.

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Another example of grassroots empowerment can be found in Northwood, the most deprived part of Kirkby, a satellite town of Liverpool. The area is one of the 150 poorest parts of the UK, which were selected to receive £1mn each over 10 years as part of a £200mn National Lottery-funded initiative called Big Local.In Kirkby the money funded Northwood Together, a community project that has supported everything from a “pop-up” second-hand clothes shop to food drop-ins and cooking classes.Lisa Cover, community development manager, said the pandemic had hit the poorest families hardest because many relied on the grey economy or part-time jobs that were not covered by government job support schemes.The group’s food drop-in, which is supported by donations from the local Morrisons and Liverpool football club, is open all day. And — unlike some local government services — it comes with no strings attached.“We started to get a lot of discreet inquiries, saying ‘Do you have to be on benefits to come?’ and we explain ‘No, just come on down’,” said Cover. “It’s often working people you see now that aren’t coping.”A group of Northwood Together board members, who are all local people, said the Big Local scheme had been invaluable for families on the edge of destitution who are now dreading the coming winter, with average annual fuel bills predicted to exceed £4,000 early next year.Ally Middleton, board chair, said government support of up to £1,200 for the poorest families with their energy bills “won’t feel like it touches the sides” for households that were already in debt.She added that many children were going hungry at holiday times without school dinners. She recalled one boy who attended an event and after eating his hot dog quietly came up and asked if he could take something for his brother who was at home, and hungry too.As in Sheppey, the team of volunteers in Northwood are full of enthusiasm for what they have achieved, while recognising it is made necessary because of a wage and welfare system that leaves too many people, including some of those in work, falling through the cracks.“It may only be a sticking plaster but at least we’re stopping people bleeding out,” said Middleton. More

Isabel da Costa, a restaurant manager in São Paulo, is conflicted about the state of the Brazilian economy. On one hand, she says she sees a strong bounceback from the coronavirus pandemic, with new bars and businesses popping up across the city. On the other, she says, soaring levels of inflation have undercut any sense that life is improving for the average citizen: “People are coming back. New bars and restaurants are opening and the public is starting to consume again. But inflation is a huge problem. Everything is too expensive.” As the country gears up for elections in October, the economy is dominating the national debate. In surveys, voters have repeatedly ranked economic issues as the most important, above crime and corruption, which figured prominently in previous elections. Rightwing president Jair Bolsonaro will be hoping that recent economic data will boost his chances, say analysts. Driven by a strong rebound in the services sector, Brazil’s economy is now forecast to grow by 1.7 per cent this year, a substantial improvement from as recently as January when prominent banks predicted a recession. Spurred by the full reopening following Covid-19 restrictions, unemployment has fallen below double digits for the first time since January 2016, and services sector activity has reached its highest level since 2015, according to government data.Yet at 11.4 per cent annually, inflation remains high. Despite largely successful government efforts to tamp down the cost of fuel through tax cuts, food prices have also continued to rise, hurting the tens of millions of poor Brazilians who struggle to put food on the table. The price of carrots and potatoes has risen about 70 per cent, while milk has increased more than 30 per cent in the past 12 months.“There’s a phenomenon today, which is more jobs but lower income, with salaries corroded by inflation,” said Sérgio Vale, chief economist at MB Associados.According to da Costa: “When you add in gas, electricity, rent, everything you need to have for a business, it ends up being very difficult.”Bolsonaro has recognised the importance of giving citizens a boost. Last month, his government passed a BRL41bn ($7.7bn) spending package, which will increase monthly cash payments to Brazil’s poorest by 50 per cent to 600 reais until the end of the year, in addition to creating fuel subsidies for truck and taxi drivers.But the president still faces an uphill battle to win re-election. A study from Datafolha showed him trailing his main rival, leftwing former leader Luiz Inácio Lula da Silva, by 18 percentage points. Other polls in recent weeks showed the former army captain appearing to narrow the gap to less than 10 percentage points.“It is a fact that a country that is doing well economically tends to re-elect its presidents. The recent economic indicators can help Bolsonaro, but it’s hard to say whether they will be enough to change enough minds to give him a victory,” said Felipe Nunes, founder of pollster Quaest. Elected in 2018 as a populist outsider, Bolsonaro’s first term was pockmarked by controversy, notably his perceived mishandling of the pandemic. His rejection rate is 53 per cent among voters.Armando Castelar, an economist at the Brazilian Institute of Economics, believes the improving economy and government spending package will make “the election more disputed than polls suggest”.“The economy in 2022 is shaping to be better than feared. The unemployment rate is falling surprisingly fast and a lot of this has to do with the recovery of services, which has been the last sector to recover after the pandemic,” he said.Service sector activity — which accounts for more than 60 per cent of gross domestic product — expanded by 9.4 per cent this year up to May, fuelled by a rebound in transport, tourism and restaurants, according to official government statistics. Brazil also received a boost from high commodity prices as a result of the war in Ukraine, while tightening monetary policy weighed less on growth than expected, Castelar added. Overall inflation appears to have peaked, although the continued rise in food prices means poorer Brazilians have yet to feel the effects, said Vale.The brighter outlook for Latin America’s largest economy will vindicate finance minister Paulo Guedes, who last year dismissed forecasts of a recession by local banks and predicted Brazil would grow 2.1 per cent this year.“Of course [the banks] are wrong. Either they are wrong or they are militant politically. They are trying to affect the election,” Guedes told the Financial Times in November last year.“It is more likely that Brazil has some growth and resilient inflation [in 2022] than lower inflation and no growth,” he said at the time.Camila Abdelmalack, an economist with Veedha Investimentos, pointed to effective government efforts to stimulate growth — including allowing employees to withdraw cash from a mandatory redundancy fund — even before the recent spending package was passed. “These policies gave a boost to the population’s income and will help to produce some economic growth,” she said.

For Paulo Alberto Seibel, a 58-year-old businessman who runs a booming brick factory in the interior of coastal state Espírito Santo, Bolsonaro deserves credit for the improving economy.“They say that the country isn’t growing,” he said. “Well, we can’t manufacture enough.”Despite being a diehard supporter of the president, however, he cannot ignore the pinch from inflation: “If diesel was a bit cheaper, things would be even better still.”Additional reporting by Carolina Ingizza More