Aurelia Butler

France hurtled into a new political era on Sunday, when voters returned a national assembly in which no party holds a majority. It was an unexpected rebuff to President Emmanuel Macron who had just won a second term in power. Having just spent a few days in Paris, here are some of my reflections on where the country finds itself — economically and politically.Like everywhere else, the big economic challenge is the cost of living crisis in a situation of slowing growth — indeed, the French economy contracted in the first quarter of this year. Some expect a recession by the end of 2022.If rising prices were behind the government’s disappointing election result, it could be forgiven for feeling undeservedly punished by voters. On some measures the French economy is doing exceedingly well: unemployment is historically low and labour market participation is at a record high. A lot of this should be credited to the labour market policies that were the great achievement of Macron’s first mandate (reforming labour law, boosting apprenticeships for the young, spending on active labour market measures). But the government is a victim of its own success; if the problem of joblessness seems largely solved, voter attention has moved elsewhere.Even the cost of living is going up less in France than in other countries — it had the lowest headline and core rates of consumer price inflation in the eurozone in May (5.8 and 3.4 per cent). This, too, is due to policies — in particular a heavy-handed cap on household energy prices below market level, at a very high cost to the public finances (there is also a fuel discount). I have written before about why a better approach would be to make direct support payments to households that need help, while letting the market price mechanism do its job. To be fair, France does this too (through its chèques énergie) and the temptation to go against the grain of the market is hardly unique to the country. And it is understandable that politicians may choose what works politically over what makes sense economically.Except that, like the success on jobs, the money spent on keeping energy prices low may not have worked politically — at least not enough to deliver a parliamentary majority. (Although it possible Macron’s parliamentary alliance would have done even worse in the election had not enough people recognised its economic achievements.)In any case, a new cost of living package is expected; the government has promised one in the campaign and was scheduled to pass one to extend current support provisions in the next few weeks. That is likely to be the first casualty of a splintered parliament (unless it is Prime Minister Élisabeth Borne, whose longevity in office is now an open question). One French economist remarked to me that you can always get politicians to agree on spending more money. But there is so much acrimony against Macron that even this seems hard.This brings us to the politics proper. It is quite a moment for the Fifth Republic and, in particular, for its majoritarian electoral system. Like the UK’s first-past-the-post, the French system of second-round run-offs has tended to favour the big traditional parties and keep challenger parties out of the legislature. This has produced consistent parliamentary majorities — even if sometimes for the party opposed to the president. The lack of a governing majority has raised the question of whether France is now ungovernable.But both French and outside commentators ought to recognise how much this outcome would be an artifice of an electoral system that generates expectations of absolute majorities — expectations that may be unrealistic in a world where voters do not congregate to two main party groupings. In countries with proportional voting systems, absolute majorities for a single party are unheard of, so coalitions or minority governments are the norm. And in such systems, a result of 38.6 per cent — which is the share Macron’s alliance achieved in the second-round vote — would be a huge victory, especially after five difficult years in power. My own sense is that France has joined the US and the UK in proving how ill-fit majoritarian electoral systems are for the 21st-century political landscape, compared with the proportional systems most of Europe uses.As the president himself said in a speech to the nation on Wednesday night, Germany and Italy routinely operate without absolute majorities. The question is which of these two examples, if any, ends up guiding him and France’s newly elected parliamentary leaders as they chart a course forward: orderly and committed coalition negotiations as in Germany, or successions of weak governments as in Italy (or indeed France’s own 1950s experience with the Fourth Republic)? The signs are not too promising: “I don’t have a German inclination,” huffed the leader of the rightwing Republicans. But at least options such as a national unity government and case-by-case coalition-building are being discussed, and an awareness is developing that winner-takes-all politics can be a liability for the country.There are echoes here of the UK’s unruly parliament between 2017 and 2019, which should make French politicians redouble their efforts at cross-party co-operation. The alternative is, as then in the UK, a snap election. Behind all the manoeuvring hovers Macron’s power to dissolve the national assembly at a time of greatest electoral convenience. That is what Boris Johnson did in December 2019. We know how well that went. France should prefer to use this opportunity to build a more collaborative political culture.Other readablesToday EU leaders are expected to make Ukraine a formal candidate for membership of the bloc. This has depended on France relaxing its resistance to enlargement, which it long saw as being in tension with its aim of making the EU more decisive and forceful. In my FT column this week, I argue that Ukraine shows these goals are not in tension. Quite the opposite: a genuine commitment to getting Ukraine ready for membership is what will most strengthen the EU’s ability to shape the world stage.Robert Armstrong and Ethan Wu have an excellent discussion (in their Unhedged newsletter, which is well worth signing up to) of how much falling stock and crypto prices may reduce US economic activity — as much as 2 per cent in their back-of-the-envelope calculation.Mike Rogers, a former member of the US Congress, calls for a digital Bretton Woods — norms to govern the digital global economy. Without this, he argues, the rules will be shaped by China, whose new electronic currency is designed to unseat the US dollar’s global dominance.The Washington Post explains why, at a time of record-high prices for petrol products, US refineries are closing down. Are there any experts among Free Lunch readers who can tell us what the situation is in the European refinery business? Numbers newsUK inflation hit 9.1 per cent in May year on year. 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European stocks fell on Thursday and regional government bonds rallied, as weaker-than-expected business activity surveys compounded investors’ worries about the pace of global economic growth.The regional Stoxx 600 share index was down 0.7 per cent by late morning, while the FTSE 100 lost 0.4 per cent and Germany’s Dax index fell 1.2 per cent, after the closely watched S&P Global purchasing managers’ indices were below forecasts.The survey on business activity for the eurozone registered a reading of 51.9 for June, lower than consensus estimates of 54 according to a Reuters poll. The S&P Global composite survey for Germany — spanning services and manufacturing — gave a reading of 51.3, against expectations of 53.1. A figure above 50 signifies an improvement on the previous month.“Excluding pandemic lockdown months, June’s slowdown [for the eurozone] was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.In government debt markets, Germany’s 10-year Bund yield fell 0.16 percentage points to 1.46 per cent as investors scooped up the assets typically perceived to be lower risk. The yield on the 10-year US Treasury note, which underpins pricing for debt worldwide, dropped 0.05 percentage points to 3.11 per cent. Bond yields fall as their prices rise.Those moves came as Norges Bank joined the wave of central banks raising interest rates aggressively to tackle inflation, lifting its main lending rate by 0.5 percentage points on Thursday to 1.25 per cent in its first such increase since July 2002. Norway’s rate rise followed on from the US Federal Reserve lifting borrowing costs by 0.75 percentage points last week, its biggest increase since 1994. The Bank of England and the Swiss National Bank also raised rates last week, while the European Central Bank spelt out plans for its first increase in more than a decade next month.Erica Dalstø, chief Norway strategist at Scandinavian bank SEB, said hawkish moves from other central banks had enabled Norges Bank to deviate from its guidance. “It’s obvious that Norges Bank is becoming much more worried about inflation risks to the extent that they are no longer referring to the risk on households.” On Wednesday, Federal Reserve chair Jay Powell had said on the first leg of a two-day congressional testimony that recession is “certainly a possibility”. He told US lawmakers that it was becoming more challenging for the central bank to tackle inflation while maintaining a strong job market. Despite his signals that the US economy remained strong, Powell’s comments led to a dip in US stocks on Wednesday night, with the S&P 500 ending the day down 0.1 per cent. Futures contracts tracking the S&P ticked up 0.1 per cent on Thursday.Brent crude slipped almost 2 per cent lower on Thursday to under $110, having slid as much as 6.6 per cent the previous day. Copper also fell to its lowest price in 16 months, with futures dropping 1.9 per cent to $8,611 in London. The metal is generally seen as a strong indicator of the economic outlook, due to its uses in manufacturing. In Asia, Hong Kong’s Hang Seng share index gained 1.3 per cent, after Chinese state media reports of extended tax exemptions for buyers of electric vehicles buoyed stocks in the sector. Japan’s Topix index was flat. More

Norway has become the latest central bank to surprise markets with a bigger-than-expected rate rise, increasing borrowing costs by 50 basis points as it warned of the possibility of inflation moving even higher.Norges Bank raised interest rates by a half percentage point for the first time in almost two decades on Thursday, leaving benchmark borrowing costs at 1.25 per cent. “Prospects for a more prolonged period of high inflation suggest a faster rise in the policy rate than projected earlier. A faster rate rise now will reduce the risk of inflation remaining high and the need for a sharper tightening of monetary policy further out,” said Ida Wolden Bache, governor of Norges Bank.Most economists had expected a 25 basis point move, making policymakers in Oslo the latest to confound expectations with a bigger rise in borrowing costs to tame surging inflation. The US Federal Reserve raised rates by 75 basis points for the first time since 1994 earlier this month, and had been forecast to raise it by 50 basis points until just days before the meeting. Other central banks from Iceland to India that have resorted to large increases to attempt to tame inflation that is now at multi-decade highs in many economies following sharp rises in the cost of energy and food. In mainland Europe, the Swiss National Bank raised rates unexpectedly and by 50 basis points to minus 0.25 per cent, while the Czech National Bank earlier this week increased borrowing costs by 125 basis points to 7 per cent. However, unlike in most other economies in North America and Europe, Norway’s rate rises are unlikely to raise the prospect of a recession. As western Europe’s leading petroleum producer, Norway is enjoying an economic boom, with the central bank noting that unemployment was at a “very low level” and that there was little spare capacity.That boom meant Norges Bank last year became the first big western central bank to raise rates after the start of the Covid-19 pandemic. Growth is expected to remain strong this year at 3.5 per cent, though this latest estimate from the central bank is lower than forecasts made earlier in 2022. Most economists in Norway had banked on a smaller rise as the country had started its tightening cycle early. As more than 90 per cent of mortgages have floating interest rates, the impact of higher policy rates also has a quicker and more direct impact on the economy than elsewhere.But Norges Bank sounded the alarm over the prospect of even higher inflation and argued that given Norway’s tight labour market unemployment was likely to remain low.“Underlying inflation has picked up quickly and has been higher than projected. With rising wage growth and imported goods inflation, there are prospects that inflation will remain above the target for some time,” it added.Norges Bank said it was likely to raise rates at its next meeting in August and indicated that rates could be 2.25 per cent by the end of the year and 3 per cent by next summer.Economists at Nordea, the Nordic region’s biggest lender, called the increase “somewhat surprising”, and added: “A view for higher inflation for longer is the main reason for this hawkish move from Norges Bank.”Norway is receiving record income from oil and in particular gas as other European countries seek an alternative to Russian petroleum. Its economy also benefits from regular inflows from the world’s largest sovereign wealth fund worth $1.2tn. More

OSLO (Reuters) -Norway’s central bank raised its benchmark interest rate by 50 basis points on Thursday, its largest single hike since 2002 and did not rule out making further increases of this size as the country seeks to control inflation.Norges Bank’s monetary policy committee raised the sight deposit rate to 1.25% from 0.75%, exceeding its own forecast made in March of a hike to 1.0%.”Based on the committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further to 1.5% in August,” Governor Ida Wolden Bache said in a statement.”A faster rate rise now will reduce the risk of inflation remaining high and the need for a sharper tightening of monetary policy further out.”Of the 20 economists polled by Reuters in advance of Thursday’s announcement, 14 had predicted Norges Bank would hike by 25 basis points (bps) while six said a 50 bps increase to 1.25% was the most likely outcome.For the rest of 2022, Norges Bank’s plan is to raise rates by 25 bps at each of its four remaining policy meetings, although raising them in larger increments may also be an option, Bache told a news conference.”I can’t rule out that future rate hikes could be larger than 25 bps,” she said. The Norwegian currency, the crown, rose to 10.46 against the euro at 0925 GMT from 10.51 just before the rate announcement.The central bank predicted the policy rate could rise to 3% by mid-2023, having previously pointed to a rate of 2.5% by the end of that year.”(This) underlines how stressed central banks are over inflation,” tweeted Torbjoern Isaksson, chief analyst at Nordea Markets in Sweden.Capital Economics, which correctly predicted a 50 bps hike ahead of Thursday’s announcement, said it believed the policy rate was unlikely to rise as much as the central bank now plans.”We are sticking to our current forecast of rates topping out at 2.50% next year, in part because Norwegian households are highly sensitive to higher interest rates. But the risks are to the upside,” it wrote.Norges Bank cut its growth forecast for the Norwegian mainland economy, which excludes oil and gas output, to 3.5% for 2022 from 4.1% seen in March.It raised its core inflation forecast for 2022 to 3.2% from 2.5%, and lifted the prediction for 2023 to 3.3% from 2.4% seen three months ago.The central bank targets core inflation of 2.0% over time.Central banks globally are struggling to contain surging prices in the wake of the COVID-19 pandemic and Ukraine war, leading to a 75 basis point U.S. Federal Reserve rate rise last week, a surprise hike by the Swiss National Bank and new policy tools at the ECB. More

LONDON/TOKYO (Reuters) – Manufacturing growth is slowing from Asia to Europe as China’s COVID-19 curbs and Russia’s invasion of Ukraine disrupt supply chains, while the growing risk of a recession in the United States poses a new threat to the global economy.High prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 when the coronavirus pandemic was taking hold, with S&P Global (NYSE:SPGI)’s headline factory Purchasing Managers’ Index (PMI) falling to a near two-year low of 52.0 from 54.6.A Reuters poll had predicted a more modest drop to 53.9 and the index nudged closer to the 50 mark separating growth from contraction.”June’s euro zone PMI surveys showed a further slowdown in the services sector, while output in the manufacturing sector now seems to be falling outright,” said Jack Allen-Reynolds at Capital Economics.”With the price indices remaining extremely strong, the euro zone appears to have entered a period of stagflation.”There is a roughly one in three chance of a recession in the bloc within 12 months, economists in a Reuters poll published earlier on Thursday predicted. They also said inflation – which hit a record high of high of 8.1% last month – was yet to peak. [ECILT/EU]Jerome Powell, chair of the Federal Reserve, said on Wednesday the central bank was not trying to engineer a recession in the United States to stop inflation but was fully committed to bringing prices under control even if doing so risks an economic downturn.He acknowledged a recession was “certainly a possibility”.Inflation continues to run at least three times higher than the Fed’s targeted level of 2% and it is expected to deliver another 75 basis point interest rate hike next month, according to economists polled by Reuters. [ECILT/US]Despite Powell’s comments a few primary dealers have either started predicting a recession as early as this year or have brought forward their recession calls.U.S. investment firm PIMCO warned on Wednesday that central banks tightening monetary policy to fight persistently high inflation raised the recessionary risk.There is a 40% chance of a U.S. recession over the next two years, with a 25% chance of that happening in the coming year, a Reuters poll found earlier this month.”The global macroeconomic outlook has deteriorated materially since end-2021,” said Fitch Ratings, which slashed this year’s global growth outlook to 2.9% in June from 3.5% in March.”Stagflation, which is characterised by persistent high inflation, high unemployment and weak demand, has become the dominant risk theme since late 1Q22 and a plausible potential risk scenario,” it said in a report released this week.A string of recent data globally showed policymakers are walking a tight rope as they try to defuse inflation pressures without tipping their economies into a steep downturn.U.S. retail sales unexpectedly fell in May and existing home sales tumbled to a two-year low, a sign high inflation and rising borrowing costs were starting to hurt demand.Britain’s economy unexpectedly shrank in April, adding to fears of a sharp slowdown as companies complain of rising production costs. Its PMI also showed signs the economy was stalling as high inflation hit new orders and businesses reported levels of concern that normally signal a recession.[L8N2Y94JP]There is a 35% chance of a British recession within 12 months, another Reuters poll showed. [ECILT/GB]In Asia, South Korea’s exports for the first 10 days of June shrank almost 13% year-on-year, underscoring the heightening risk to the region’s export-driven economies.While Chinese exporters enjoyed solid sales in May, helped by easing domestic COVID-19 curbs, many analysts expect a more challenging outlook for the world’s second-biggest economy due to the Ukraine war and rising raw material costs.The au Jibun Bank flash Japan Manufacturing PMI slipped to 52.7 in June from 53.3 in May, marking the slowest expansion since February. More

JAKARTA (Reuters) – Indonesia’s central bank left interest rates at a record low on Thursday, saying it was monitoring risks from rising inflation while downplaying recent pressure on the rupiah currency.Bank Indonesia is expected to raise rates in the third quarter, analysts say, to shore up a weaker rupiah and guard against capital outflows from aggressive U.S. rate hikes.BI kept the benchmark 7-day reverse repurchase rate at 3.50%, as expected by the majority of economists in a Reuters poll. Its two other policy rates were also unchanged. BI remains one of the few major Asian central banks not to have lifted rates from a pandemic record low since inflation has held within its 2%-4% target range. The Philippine central bank hiked rates for a second consecutive policy meeting on Thursday.BI Governor Perry Warjiyo told a news conference he would continue to monitor inflation, including expectations of price pressures and core inflation and take further monetary normalisation measures accordingly.”Even though Bank Indonesia did not raise interest rates, it does not mean this will disturb our external resilience,” Warjiyo said, citing abundant foreign exchange supply from an expected balance of payments surplus and low current account deficit.Inflation may slightly overshoot its target this year to 4.2% by year-end, he reiterated, adding the authorities had been taking rupiah stabilisation measures to contain imported inflation. Headline inflation in May stood at 3.55% on year.The governor also warned of stagflation risks for the global economy, but maintained BI’s 2022 economic growth forecast for Indonesia of 4.5% to 5.3%.Economists in the Reuters poll expect BI’s first rate hike will come in the next quarter.”The central bank acknowledged the risk of inflation breaching the target in the second half of the year and pressure on the currency from global cues, but did not exhibit any urgency to normalise policy,” Radhika Rao, senior economist at DBS Bank in Singapore, said. The rupiah has this month dropped to its weakest since October 2020 amid capital outflows leading up to and after the Federal Reserve raised U.S. rates by three quarters of a percentage point.However, unlike in previous periods of U.S. monetary tightening when Indonesian financial markets were some of the most volatile, the rupiah is now one of emerging Asia’s best performing currencies having fallen by about 4% so far in 2022.Some analysts expect the rupiah to fall further due to BI’s dovish stance.”With the current dynamic expected to remain in place, we expect IDR weakness to continue in the near term until BI finally decides to adjust monetary policy, possibly in the second half of the year,” ING economist Nicholas Mapa said in a note.During the pandemic, BI cut interest rates by a total of 150 basis points and injected billions of dollars into the financial system. It has announced hefty hikes in banks’ reserve requirement ratio in its first move to normalise monetary policy. More

The ‘Notice to Exporters’ listed new measures including prohibitions on the export to Russia of a range of goods and technology, the export of jet fuel, and the export of sterling or EU denominated banknotes. It also said there were new prohibitions on the provision of technical assistance, and financial services, funds, and brokering services relating to iron and steel imports.The notice set out a further list of goods prohibited for export:- internal repression goods and technology- goods and technology relating to chemical and biological weapons- maritime goods and technology- additional oil refining goods and technology- additional critical industry goods and technology More

Investing.com — Norway’s central bank hiked interest rates by 50 basis points on Thursday, becoming the latest global monetary policy maker to move aggressively in a bid to rein in soaring inflation.Norges Bank said the unanimous decision to raise its policy rate to 1.25% from 0.75% came amid worries that prices may continue to rise due in part to tight spare capacity in the Norwegian economy and a weaker local currency.”A faster rate rise now will reduce the risk of inflation remaining high and the need for a sharper tightening of monetary policy further out,” said Norges Bank Governor Ida Wolden Bache in a statement.The central bank added that borrowing costs will “most likely be raised” even further to 1.5% in August. It also revised up its monetary policy forecast, saying it now predicts a potential uptick in interest rates to around 3% by summer 2023.The move comes after a slew of central banks around the world – including the Federal Reserve, Bank of England, and the Swiss National Bank – unveiled rate hikes recently to cool red-hot inflation. Meanwhile, the European Central Bank has also signaled its intention to increase borrowing costs at its July meeting.  More