Aurelia Butler

UK oil and gas producers on Thursday warned Rishi Sunak, the chancellor, that his new windfall tax on their profits could force the cancellation of projects as well as prompt investors to deploy their capital elsewhere.At a meeting with Sunak in Aberdeen, about 20 executives from companies with UK North Sea operations — including Equinor, Harbour Energy, Ithaca Energy and Shell — highlighted negative consequences from the chancellor’s 25 per cent “energy profits levy”.The windfall tax, unveiled by Sunak in May, is meant to partly fund a £15bn support package for UK households struggling with soaring energy bills.Simon Roddy, senior vice-president for Shell’s UK upstream oil and gas business, told Sunak the levy sent a “negative signal” that was undermining investment in British waters, according to people at the meeting. It raises the headline tax rate paid by North Sea oil and gas producers to 65 per cent.An executive from Norwegian state-backed energy company Equinor suggested to Sunak it was questioning whether the UK was a sensible place to invest, said several people at the meeting.Equinor is leading on one of the most eagerly anticipated investments in the UK North Sea, the £4.5bn Rosebank oil and gasfield 130km north-west of the Shetland islands. Equinor said later it was committed to delivering Rosebank and planned to take a final investment decision in the spring of 2023.An executive from London-listed Serica Energy told Sunak the windfall tax would disproportionately harm smaller oil and gas producers compared to their larger rivals, which have big global portfolios of assets.Executives asked for several key commitments from Sunak, including a review of the windfall tax every six months. The levy has a so-called sunset clause that would remove it at the end of 2025.The industry also wants greater clarity on what the trigger might be for the removal of the windfall tax. When Sunak announced the energy profits levy, the Treasury described it as “temporary” and said it would “be phased out when oil and gas prices return to historically more normal levels”.This month he indicated that a retreat in prices to a range of $60-$70 a barrel may be the trigger for the levy’s repeal. Brent crude was trading at $111 a barrel on Thursday.Executives would also like carbon capture and storage projects to be eligible for a new investment allowance that Sunak announced alongside the levy. The allowance is meant to provide incentives for companies to press ahead with schemes to boost UK oil and gas production.But one executive at the meeting with Sunak in Aberdeen said the chancellor “was lacking in answers to the main questions the industry had”.Another person with knowledge of the meeting with the chancellor said: “He found himself on the receiving end of some rather robust feedback.“The relationship between the Treasury and the oil and gas industry might be characterised as several layers of frost.”Deirdre Michie, chief executive of the North Sea trade body Offshore Energies UK, described the meeting with Sunak as “candid” and warned the windfall tax would undermine attempts to attract investment to Britain.Shell, Serica Energy and Harbour Energy declined to comment.

A government spokesperson said its energy security strategy had set out how “North Sea oil and gas are going to be crucial to the UK’s domestic energy supply and security for the foreseeable future — so it is right we continue to encourage investment there”.The spokesperson added that the levy’s investment allowance “means businesses will overall get a 91p tax saving for every £1 they invest — this nearly doubles the tax relief available”. More

The government heads holding a two-day summit in Brussels approved a recommendation from the European Commission to grant the status to Ukraine, according to Charles Michel, who chairs leaders’ meetings. Kyiv, which applied for membership shortly after the Russian invasion in February, will have to meet conditions in the future on issues related to the rule of law, justice and anti-corruption.President Volodymyr Zelenskiy hailed the decision as “a unique and historical moment.” Zelenskiy has spent the past few months pressing for recognition that the country is on a path to a closer relationship with Europe as he seeks moral support in countering Russian aggression. But the membership process can last more than a decade.For the EU, the move opens a new era of eastern expansion that is fraught with risks. Unlike the bloc’s earlier embrace of eastern Europe’s former Communist states, the new applicants all have territorial conflicts within their borders and Russian troops on their land.The leaders also granted Moldova candidate status, and said Georgia could win the same status if it meets certain conditions, Michel said. Commission head Ursula von der Leyen congratulated the leaders of the three nations. “Your countries are part of our European family,” she tweeted.Moscow has intensified pressure on European nations, slashing gas deliveries on its main pipeline to the region. Germany elevated the risk level in its national gas emergency plan to the second-highest “alarm” phase, which tightens monitoring of the market, and reactivates some coal-fired power plants.“Negotiations might be tough and difficult but I would not speculate now decades or years,” Ihor Zhovkva, Zelenskiy’s deputy chief of staff, told Bloomberg Television earlier Thursday. “Much will depend on Ukraine. Definitely much will depend on the victory of Ukraine in the war.” Zhovkva added that the pace of reforms will also be critical. Anti-Corruption ProtestsUkraine featured 122nd among 180 countries in last year’s ranking by the watchdog Transparency International. Ukrainians took to the streets twice, in 2004 and in 2014, to try to force the government to root out corruption. Support among Ukrainians to join the EU jumped to 91% in a March survey by Rating Group, up from 61% in December.The commission has made clear that the accession process will follow the same criteria and rules for all candidates. There’s no existing fast-track path to speed up the membership criteria. Croatia was the last country to join the bloc and its application lasted 10 years before it was formally accepted in 2013.Steps that Kyiv will need to take include implementing legislation on a selection procedure for judges of the Constitutional Court, strengthening the fight against corruption, and ensuring that anti-money laundering legislation is in compliance with the standards of the Financial Action Task Force.The EU’s executive arm has said it will report back on those steps by the end of the year.(Updates with Michel, von der Leyen remarks from second paragraph)©2022 Bloomberg L.P. More

The heads of the French and German central banks have said companies and households increasingly believe prices will continue to soar, raising the chances that inflation in the eurozone’s two largest economies will remain uncomfortably high in the coming years. Businesses and consumers in Germany and France expect inflation to be higher for longer than they did six months ago, according to new research from the Bundesbank and Banque de France, which chiefs Joachim Nagel and François Villeroy de Galhau on Thursday described as “worrying” and “bad news”.Inflation in the eurozone is now 8.1 per cent, the highest since the introduction of the single currency and more than four times the European Central Bank’s 2 per cent target. The jump in inflation expectations in the eurozone’s two biggest economies is a challenge for rate-setters at the ECB as it complicates their push to bring price growth back down to that 2 per cent target. When companies expect inflation to stay higher for longer they are more likely to raise prices while workers are more likely to demand higher wages to offset their loss of purchasing power. This risks creating a 1970s-style wage-price spiral that keeps inflation high.

German households, hit hard by food and energy price increases following Russia’s invasion of Ukraine, now expect inflation in the country to average 5.3 per cent over the next five years, according to a Bundesbank survey. Nagel, who became Bundesbank president in January, said at a joint conference with the Banque de France that the survey highlighted the risk of the ECB responding to soaring prices “too little, too late”. The Banque de France also published data for the first time from a poll of business leaders, which showed that they expect French inflation of 5 per cent a year from now — up from a forecast of 3 per cent at the end of last year. Its governor Villeroy de Galhau said the data had “good news” as well as “bad news”, citing the fact that business leaders expected inflation to average “only” 3 per cent in the next three to five years as evidence of the latter. Companies in Germany expect inflation to average 4.7 per cent over the next five years, up from 3.4 per cent at the start of the year. Nagel said the data was “worrying” as it suggested expectations of future inflation were becoming “less anchored”. The ECB listed inflation expectations rising above its target and wages rising faster than expected as two of the upside risks for price growth after its meeting two weeks ago, when it announced plans to raise interest rates next month for the first time since 2011. Villeroy said he hoped the ECB’s plan would lower inflation expectations. He also distanced himself from the ECB’s aim of raising rates “gradually”, saying he preferred the word “orderly”.Inflation expectations in the two biggest eurozone economies are now approaching those in the US, where households expect price growth of 4.8 per cent in three years’ time, up from 3 per cent two years ago, according to a New York Fed survey. The Federal Reserve, unlike the ECB, has already raised rates aggressively, increasing the federal funds target by 75 basis points to a target range of 1.50 to 1.75 per cent earlier this month. The ECB’s benchmark deposit rate remains at minus 0.5 per cent, though it is likely to rise above zero in September. More

Support among top US Federal Reserve officials is growing for another 0.75 percentage point rate rise at the next policy meeting in July, as the central bank reinforces its commitment to tackling soaring prices.On Thursday, Michelle Bowman became the latest Fed governor to indicate early backing for the move “based on current inflation readings”, adding that additional rate rises of “at least” half a percentage point were likely to be necessary in the next few subsequent meetings “as long as the incoming data support them”.“Depending on how the economy evolves, further increases in the target range for the federal funds rate may be needed,” she said in remarks delivered at an event hosted by the Massachusetts Bankers Association.Bowman joins Fed governor Christopher Waller, who affirmed on Saturday that the central bank was “all-in on re-establishing price stability” and said if the data come in as expected he would support another jumbo rate rise next month.Neel Kashkari, the dovish president of the Minneapolis Fed, has also said such a move may be necessary, but added that it may be “prudent” to downsize to half-point rate rises after July.Mounting support for another aggressive rate adjustment came just days after the Fed implemented the first 0.75 percentage point rate rise since 1994 and signalled its support for significantly more monetary tightening this year. Most officials now expect the federal funds rate to rise to around 3.75 per cent by December, up from the current target range of 1.50 to 1.75 per cent. Bowman said she expected the labour market to remain strong as the Fed raises rates, noting historic demand for workers despite constrained supply, but added that the Fed’s actions “do not come without risk”.“But in my view, our number one responsibility is to reduce inflation,” she said. “Maintaining our commitment to restore price stability is the best course to support a sustainably strong labour market.”Bowman’s comments echoed those of Fed chair Jay Powell as he testified in front of Congress this week.

He told Senate lawmakers that a US recession was “certainly a possibility” as the central bank steps up its efforts to counter soaring prices, but added that failing to tame inflation would “hurt the people we’d like to help, the people in the lower-income spectrum”.At a House of Representatives hearing on Thursday, Powell said the Fed’s commitment to restoring price stability is “unconditional”, suggesting a willingness to stomach job losses and even a recession in order fulfil that goal. More

Pay settlements for UK public sector staff could involve rises of up to 5 per cent this year, according to government insiders, as ministers try to avert widespread strikes by key workers.Amid the escalating cost of living crisis, ministers see it as increasingly untenable to hold down public sector pay deals — notably for nurses and teachers — in the 2 to 3 per cent range they have been targeting. However, the Treasury is refusing to fund more generous wage deals, meaning that Whitehall departments would have to find the money for 5 per cent settlements from within existing budgets. One government aide said the independent pay review bodies — which make recommendations to ministers on pay for teachers and health workers, police and prison staff, civil servants and the armed forces — were expected in the next few weeks to recommend pay rises typically of “one or two percentage points” above the 3 per cent cap, implying awards of 5 per cent in at least some cases. If ministers accept the recommendations, “unless things change then those rises would still have to come from efficiencies rather than the Treasury handing over more funding”, added the aide. Prime minister Boris Johnson and chancellor Rishi Sunak have argued that big pay rises in the public sector would be both unaffordable and inflationary, given the Bank of England’s fears of a so-called wage-price spiral setting in.But one cabinet minister said: “If we don’t push towards 5 per cent on some of these [pay] deals, we risk wave after wave of strikes.”The minister added Downing Street was chiefly concerned about pay rises for nurses and teachers “who are likely to cause the most headaches”. The Treasury said that any public sector pay rises “need to be proportionate and balanced with the need to manage inflationary pressures and public sector finances”. With inflation running at a 40-year high of 9.1 per cent, opinion polls suggest rising public anger at the suggestion by the government that key workers should suffer a big pay squeeze.“Inflation is not being driven by nurses and care workers wanting enough pay to keep food on the table,” said Frances O’Grady, general secretary of the Trades Union Congress.Most UK workers are facing real terms wage cuts this year, with the BoE predicting inflation will reach 11 per cent in October.Public sector staff, however, have already taken a large hit: their wages are on average already some 4.3 per cent lower in real terms than they were in 2010.Latest official data show staff wages have risen just 1.5 per cent in nominal terms over the past year, set against average growth in total pay of 8 per cent for the private sector. Against this backdrop, the biggest UK rail strikes in a generation began on Tuesday when 40,000 members of the RMT trade union walked out over pay, working practices and redundancies. Many are employed by state-owned Network Rail, operator of the infrastructure.Now unions representing teachers, junior doctors and civil servants are preparing to ballot members on possible industrial action if their demands on pay are not met. But despite the risk of widespread industrial action, Sunak is resisting pressure from Whitehall departments to reopen his spending review of last year so as to fund better pay deals.The chancellor last month unveiled £15bn in targeted support to help households with rising living costs, which the Institute for Fiscal Studies think-tank calculates will almost fully offset the impact on the poorest families. But with this support in place, the Treasury is digging in against further demands.Although higher inflation is likely to bolster the government’s tax revenues, Sunak’s allies said there would be no extra funding for Whitehall departments to help them manage wage pressures.

UK chancellor Rishi Sunak’s allies said there would be no extra funding for Whitehall departments to help them manage wage pressures © Reuters

They added departments had “flexibility” in responding to the pay review bodies’ recommendations, and would have to make choices about what to cut if they wanted to pay workers more. In practice, this will force departments to make big compromises in delivery of public services.The Department of Health and Social Care told the NHS pay review body it could afford a headline pay award of up to 3 per cent.Each 1 percentage point increase in pay for the hospital and community health services workforce would cost £900mn — equivalent to the salaries of 16,000 full-time nurses — and would therefore make it harder to tackle treatment backlogs in elective care.The Department for Education has said each 1 percentage point increase in pay for the schools’ workforce would cut £350mn from other spending over the next two years, meaning it would be more difficult for headteachers to hire new staff or help children catch up on lost learning from Covid-19 lockdowns.One government official said that the Treasury was “in denial” about the level of public sector pay settlements that were reasonable.The official also contrasted the situation of key workers with retired people, who should see the basic state pension rise about 10 per cent next April because the increase is linked to inflation. Sunak has made it clear that curbing inflation is not his only motive for resisting more generous pay settlements in the public sector.At a cabinet meeting on Tuesday, he emphasised the government’s responsibility to avoid any action that would “feed into inflationary pressures, or reduce the government’s ability to lower taxes in the future”, said a spokesman.

Sunak is committed to cutting income tax in 2024, although Conservative MPs are calling for faster moves to help with the cost of living crunch.Meanwhile, economists challenged the idea that an intense squeeze on public sector pay was necessary to control inflation.“The Bank of England can deal with inflation,” said Tony Yates, an associate at the Resolution Foundation, another think-tank. “Pay policy should be set according to labour market conditions, that is with regard to recruitment, retention and motivation.”Simon Wren-Lewis, a professor at Oxford university, argued in a blog that because public sector pay rises did not directly feed consumer prices, “in that very simple sense you just cannot get a public sector wage-price spiral”.  More

Recession is an “increasingly palpable risk” for the economy, Citigroup (NYSE:C) analysts wrote in a note on Wednesday, while assessing the likely trajectory for global growth over the next 18 months.”The experience of history indicates that disinflation often carries meaningful costs for growth, and we see the aggregate probability of recession as now approaching 50%,” the analysts said. Barclays (LON:BARC) weighed in on the current economic uncertainty on Thursday, saying it now expects growth of the developed economies to slow to 1% in 2023, and that the euro area could enter a recession from the fourth quarter of this fiscal year. “Meanwhile, the U.S. economy is about to run headfirst into a Fed that seems committed to hiking to far above neutral; the ongoing collapse in new home sales is likely a harbinger of things to come,” the brokerage said.Barclays expects U.S. economic growth to slow to 1.1% in 2023, a stark come down from the 5.7% pace of 2021. Several central banks, including the U.S. Federal Reserve, have aggressively raised borrowing rates as the cost of living reaches record levels. Fed Chair Jerome Powell said on Wednesday the central bank was not trying to trigger recession, but it was committed to bring prices under control.Citigroup said that while recession risks were higher, all three scenarios of a soft landing, higher inflation, and global recession (were) plausible and should remain on the radar, with something closer to a soft landing as a base case. More