Aurelia Butler

Inflation across the G7 has climbed to multi-decade highs, but whereas in the US or UK that means alarming levels of 8 or 9 per cent, one country stands out as different: in Japan, high inflation means just 2.5 per cent.Furthermore, while the US Federal Reserve and the Bank of England are rushing to raise interest rates, the Bank of Japan says it will keep policy on hold, buying as many bonds as it needs to keep 10-year yields pinned at zero per cent.The divergence illustrates a fundamental difference in Japan’s inflationary psychology after three decades of price stagnation. Even though Japan is heavily exposed to some of the same shocks as other countries — notably the increasing cost of imported commodities — there is almost no pass-through from rising prices to higher wages.On the contrary, said Masamichi Adachi, chief economist at UBS in Tokyo, the deflationary mindset means the pressure tends to go the other way. “In Japan, increases in import prices can lead to deflation. That is why it’s hard to imagine inflation can be sustained in Japan.”In the US and Europe, companies usually respond to a rise in raw material and commodity prices by transferring those costs to consumers. In Japan, however, businesses fear a public backlash if they raise prices, while workers — beaten down by decades of stagnant pay — do not demand the higher wages that would let them afford higher prices in the shops.If companies must pay more for imports but cannot increase their retail prices, they will suffer a squeeze on profits. They often react by seeking to cut wage costs, ultimately creating deflationary and not inflationary pressure.According to government data released on Friday, Japan’s consumer price index was up 2.5 per cent in April compared with a year earlier while core consumer prices, which exclude volatile food prices, rose at the fastest pace in seven years, hitting the Bank of Japan’s target with growth of 2.1 per cent. But stripping out the impact from both food and energy, prices were up just 0.8 per cent from a year earlier.The Bank of Japan, along with most economists, is convinced that underlying demand in the Japanese economy is weak. It, therefore, expects with greater confidence than its counterparts in Europe and North America that the current bout of inflation will be transitory and will fade out once the impact of higher import prices has passed through the system.Several other factors help to explain why Japan’s inflation is lower than in other advanced economies and why analysts think it is less likely to endure.First, a big chunk of the April inflation number reflected the disappearance from annual comparisons of cuts in mobile phone tariffs engineered by the then prime minister Yoshihide Suga last year. That means underlying inflation is less than the numbers suggest.

Second, Japan’s economy has yet to recover to pre-pandemic levels, even though the country has never imposed the strict lockdowns carried out in other parts of the world. While there were fewer restrictions on economic activity, people have continued to take precautionary measures, even after most of the elderly were vaccinated against Covid-19. Japan is still closed to tourists. That has hit consumer spending hard.Third, while weakness in the yen used to provide a big stimulus to the Japanese economy, that effect is more muted than in the past. Big Japanese companies have relocated much of their supply chain to China. Demand for the capital goods Japan does still export has been heavily hit by the weakness of the Chinese economy.“In addition to the rise in commodity prices, the impact of the [Covid] lockdowns in China is serious, so manufacturers may find it difficult to expand revenue this year,” said Kiichi Murashima, Japan economist at Citigroup. “Companies also see the impact of the weaker yen as a temporary windfall and do not want to increase fixed costs [by raising wages].”The BoJ is confident that such inflation as Japan has will subside and it needs to support rather than restrain the economy. “The rise in prices expected in the short run will be driven by energy prices and lack sustainability,” said the bank’s governor Haruhiko Kuroda in a recent speech. “There has been no sharp increase in medium- to long-term inflation expectations.“I would like to re-emphasise that the current situation of Japan’s economy is completely different from the United States and Europe,” he said. More

Global stocks rallied at the end of a turbulent week after China unveiled fresh stimulus measures to fight a growth slowdown in the world’s biggest emerging market. Europe’s regional Stoxx 600 share index rose 1.5 per cent and London’s FTSE 100 gained 1.8 per cent. In Asia, Hong Kong’s Hang Seng index added 3 per cent and Japan’s Nikkei 225 rose 1.3 per cent. The moves came after China cut its benchmark mortgage lending rate by a record amount. Chinese economic activity plunged last month, during stringent coronavirus lockdowns. Goldman Sachs this week cut its China growth forecast for 2022 to 4 per cent, from a previous projection of 4.5 per cent.“Beijing wants to rescue the property markets, which have experienced the worst contraction in many years,” said economists at Nomura. The Japanese bank cautioned that the impact of cutting the five-year loan prime rate from 4.6 per cent to 4.45 per cent would be “limited”, as “the Omicron wave and draconian lockdowns in around 40 cities have significantly limited mobility, employment, income and the confidence of Chinese households”.S&P 500 futures gained 1.3 per cent in European trading on Friday. However, Wall Street equities were still headed towards their longest stretch of weekly losses since the dotcom bubble burst more than 20 years ago and some analysts predicted further falls to come. “Markets are in a slow grind downward,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham. “It’s a combination of fear of a Fed mistake, if they raise rates too quickly, and fear that this inflationary trend is going to eat into spending, which then leads to a reduction in companies’ earnings.”The S&P 500 would have to rally more than 3 per cent on Friday to avoid adding a seventh week to its losing streak. The blue-chip equity barometer has not fallen for such a sustained period since 2001, according to Refinitiv data. Concerns about the global economy have intensified after the US Federal Reserve, the Bank of England and other major central banks raised borrowing costs and signalled more increases to come.Inflation has soared to multi-decade highs in the US and Europe after economies reopened following coronavirus lockdowns and Russia’s invasion of Ukraine disrupted food and fuel supplies. US retailers Walmart and Target this week issued downbeat earnings reports, highlighting how companies and consumers are struggling with rising costs.In bond markets, the yield on the benchmark 10-year US Treasury note was steady at 2.87 per cent, down from a high last week of 3.2 per cent. Treasury yields, which move inversely to prices, have fallen this week as growth jitters drove traders to seek low-risk assets.Major currencies drifted on Friday, with sterling up 0.2 per cent against the dollar to just under $1.25 and the euro 0.1 per cent lower at just below $1.06. More

Nationwide Building Society has warned that rising inflation and shrinking household budgets will hit the economy and house prices in coming months.The warning came as the UK’s largest building society reported on Friday that its annual profits had doubled — for the year to April 4, mortgage growth and higher interest margins pushed pre-tax profits to £1.6bn, up from £790mn the year before.UK chancellor Rishi Sunak said this week that “the next few months will be tough” after UK inflation hit 9 per cent in April, its highest level in over 40 years and more than any other G7 economy.Nationwide chief executive Joe Garner said that while the lender had not yet “seen significantly more people fall into financial difficulty” those “already struggling are finding it even more tough”.“The great injustice of this: the lower your income, the larger proportion is spent on food and fuel. By definition this hits the poorest hardest,” he added. Garner, who will be replaced at the head of the lender by TSB head Debbie Crosbie in June, added that the “cost of living crisis affects every person in a different way”.Gross mortgage lending at Nationwide, which is the second largest home-loan provider in the UK, rose from £29.6bn to £36.5bn. The company’s net interest margin, the difference between the interest it gets on its loans and securities investments and the rate it pays for deposits, rose by five basis points to 1.26 per cent.Rate hikes from the Bank of England have led UK lenders to increase interest rates on mortgages. That, in turn, has led to a surge of mortgage applications as borrowers rush to lock in rates before they get any higher.“The housing market has been remarkably resilient so far this year — it has continued to run above pre-pandemic levels for the first three months,” said Robert Gardner, Nationwide’s chief economist. “But with the pressure expected in coming quarters, it seems logical it will slow.”The building society’s common equity tier 1 ratio, a key benchmark of balance sheet strength, fell to 24.1 per cent, a significant reduction compared with the 36.4 per cent in the previous year but well above regulatory minimums. Nationwide said that this was the result of regulatory changes brought in at the start of the year. More

Joe Biden has decided to water down his Indo-Pacific Economic Framework in an eleventh-hour move to attract more countries to join the deal that he will unveil in Tokyo on Monday.Biden is using his first trip to Asia as US president to launch the IPEF, which is intended to respond to criticism from allies and partners that his strategy in the region has been too focused on security and lacked an economic component. Six people familiar with the situation said the US and other countries had agreed to change the language in the two-page statement that will accompany the unveiling of the IPEF.An early draft obtained by the Financial Times said the countries would “launch negotiations”. But the Biden administration has since agreed to dilute the language to convey that the countries were starting consultations aimed at later negotiations.Several people familiar with the talks said Tokyo had urged Washington to be more flexible to maximise the chances of having a deal that would include more south-east Asian nations.US officials were still negotiating the content of the statement on Thursday as Biden flew on Air Force One to South Korea, the first stop on his five-day, two-country visit to Asia. The National Security Council said the US would launch IPEF with an “initial range of diverse partners” that would show its “far reaching ambition”.“We’re pleased to see the strong interest in IPEF from the region,” said Saloni Sharma, NSC spokesperson, who disputed any characterisation that the vision and substance of the framework had changed after the article was first published. “Countries have different domestic and legal requirements and anyone who has ever negotiated a joint statement would tell you not to focus on a single word but focus on the strong outcomes that it will lead to,” she added. Countries across the Indo-Pacific have spent the past year urging Biden to develop an economic strategy to help counter China, which is rapidly increasing its power and trade presence in the region. Critics have accused Washington of having an “all guns and no butter” strategy, which they said had given China an opportunity to use its economic clout to pressure other countries.The US started talks with Indo-Pacific countries late last year. But Biden’s team struggled early on to convince many south-east Asian nations and India to join. Several of the people familiar with the discussions said some countries were reluctant because they did not see much value for them, particularly since the IPEF will not include access to the US market.The IPEF will contain four pillars that will tackle issues such as infrastructure, supply chain resilience and clean energy. It will also include discussions about creating a digital trade agreement, which Tokyo has urged the US to prioritise. American officials have argued that the IPEF is more suited to the 21st century than traditional trade deals that cut tariffs. They have also made clear that conventional agreements have become politically toxic in US politics, making it difficult to sign deals that grant market access. Japan and other US allies in Asia remain frustrated that then-president Donald Trump withdrew from the Trans-Pacific Partnership, a 12-nation deal, in 2017. But Hillary Clinton, his Democratic opponent in the 2016 election, had also come out against the TPP due to the souring on trade deals among some voters.“The trade-off all along with IPEF has been between inclusiveness and participation — a more demanding launch commitment would mean fewer participants, since the US is not offering to discuss new market access,” said Kurt Tong, a partner at consultancy The Asia Group and a former US ambassador responsible for economic issues.

Tong said the IPEF needed to include a critical mass of south-east Asian and emerging economies to be successful. “There will be lots of critics calling the IPEF a glass-half-full, but really the disappointment is not so much about the IPEF, per se, as about the US’s inability to rejoin TPP,” he said.Wendy Cutler, a former US trade negotiator and now vice-president of the Asia Society Policy Institute, said the IPEF was always going to be a “balancing act”.“The price for attracting more participants in initiatives like these is to be less heavy-handed on substance, inviting others to help shape it,” she said.Myron Brilliant, head of international policy at the US Chamber of Commerce, said the IPEF was “not CPTPP clearly”, referring to the regional trade accord that the US abandoned.“The US business community welcomes the IPEF as it gets us back in the trade game,” he added. “But its impact will be most felt only if countries like Vietnam, Malaysia and Korea sign up for a high standard digital framework.”One additional challenge for the launch of IPEF is that Australia will hold a general election on Saturday. If a new cabinet is not sworn in by Monday, the government will not have a formal mandate to start “negotiations”.Follow Demetri Sevastopulo and Kana Inagaki on Twitter More

China has cut its main mortgage interest rate by the most on record as it seeks to reduce the economic impact of Covid lockdowns and a property sector slowdown.The five-year loan prime rate was lowered from 4.6 per cent to 4.45 per cent on Friday. The reduction in the rate, which is set by a committee of banks and published by the People’s Bank of China, will directly reduce the borrowing costs on outstanding mortgages across the country.A cut was widely anticipated following data this week showing worsening economic conditions across the economy, but the 15 basis point reduction exceeded analyst expectations and was the most since the country’s rate system was reformed in 2019.“The move marks the strongest signal and action to support the property sector in recent years,” analysts at Citi said in a research note.President Xi Jinping, who is this year bidding for an unprecedented third term in power, has intensified the country’s strategy of virus elimination even as the economy has slowed sharply and the real estate sector has fallen into a severe decline.The zero-Covid approach limited case numbers significantly for much of the past two years, but over recent months has struggled to stamp out an outbreak of the highly infectious Omicron variant. The Omicron wave has led to the closure of Shanghai for nearly two months and full or partial lockdowns of hundreds of millions of people across the country.Official data for April released on Monday provided the clearest evidence of a sharp decline in activity stemming from the wave of lockdowns, with retail sales in April falling 11 per cent year on year. Industrial production, a core driver of China’s rebound from the pandemic’s initial shock two years ago, fell 3 per cent — its first decline since early 2020.The measures unveiled on Friday added to a pattern of gradual monetary easing in China, which was already grappling with a debt crisis in its economically critical real estate sector before the latest lockdowns were imposed. Liquidity problems late last year sparked a wave of defaults from developers and a severe slowdown in the property market.The five-year LPR rate is set by banks but is influenced by various PBoC measures. The rate was also cut in January, and the further reduction this week was widely viewed as part of an attempt to support the real estate industry, where sales by floor space plunged 42 per cent in April. Last weekend, the effective benchmark for mortgage lending to first-time buyers was also cut by 20 basis points.The one-year LPR, which is instead mainly used to price corporate loans, remained unchanged at 3.7 per cent.“This is a very targeted approach . . . basically highlighting their desire to support the real estate sector, which is clearly under stress,” said Becky Liu, Head of China Macro Strategy at Standard Chartered, who added that the PboC was guiding the rate lower.

“What has been announced or what has been done has not led to a stabilisation of the real estate sector,” she added.Chaoping Zhu, global market strategist at JPMorgan Asset Management, noted that a recent decline in bank loans highlighted “a lack of confidence among both corporate and household sectors”.The cut to China’s benchmark rate for mortgages delivered a boost to Chinese equities. Hong Kong’s Hang Seng index jumped 2 per cent and the CSI 300 of Shanghai- and Shenzhen-listed stocks rose 1.3 per cent, though both indices were still down by double-digits for the year. More

Richard Thalheimer remembers the last time inflation was proving so challenging to US retailers: it was when he was trying to get The Sharper Image off the ground in the late 1970s and 1980s. In 2006 he left the consumer gadgets chain he founded, selling his stake before its 2008 bankruptcy. Ever since, he has been investing the proceeds of the watches, massage chairs, iPods and Razor scooters he sold, building a portfolio worth up to $350mn with stocks including Amazon, RH and Home Depot. “It’s been so much fun,” he said. “Until this year”. As inflation races at levels last seen four decades ago, the retail sector that made Thalheimer wealthy is now making other investors poorer and stoking recession fears. This week, unexpectedly bad earnings announcements from Walmart and Target, two of its largest constituents, led to their steepest stock market falls since Black Monday in 1987.Days earlier, analysts had been touting such companies as defensive shelters from the storm in tech stocks that had slashed the valuations of companies from Amazon to Netflix. Early this week, Baird named Walmart its top “recessionary playbook” idea. But the shockwaves from Walmart and Target rippled through the wider retail sector and gave market bears a new concern: that inflation may now be biting consumers even before the Federal Reserve starts raising interest rates more aggressively. Retailers were the biggest drivers of a broad market rout on Wednesday that pushed the S&P 500 stock index to its worst one-day fall in almost two years.Until this week, the S&P 500’s consumer staples sub-index, which includes “big box” retailers such as Walmart along with businesses like pharmacies and food manufacturers, was still roughly unchanged for the year. The only other parts of the index that had avoided declines were energy and utility stocks, which had benefited from surging energy prices.By the close of Thursday, however, the sub-index had fallen almost 9 per cent and was on track for its worst week since the start of the coronavirus pandemic in March 2020. The retailers’ earnings flagged up not just one cause for concern, but three: that price increases may have reached the limit of what consumers will tolerate, that retailers are struggling to contain their own costs, and that unpredictable demand and new supply disruptions are forcing them to build up inventories.The first of those three is being most closely watched for its broader economic resonance. “You’ve got a consumer that is starting to pull back,” said Steve Rogers, head of Deloitte’s consumer industry centre, whose surveys suggest that 81 per cent of Americans are concerned about rising prices. Americans’ bank accounts may not have changed dramatically since last year, he said, but headlines about inflation have shaken their confidence. Some are trading down or holding off big purchases as a result, he added, particularly in discretionary categories such as clothing, personal care and home furnishings. Walmart, long seen as a bellwether of the US consumer, noted that high inflation in food prices “pulled more dollars away from [general merchandise] than we expected as customers needed to pay for the inflation in food”. Rogers and others, however, see retailers’ own cost pressures as a clearer driver of their changed fortunes than consumer pullback. At Walmart, for example, US fuel costs last quarter were over $160mn higher than it had expected — more than it could pass through to customers.“We did not anticipate that transportation and freight costs would soar the way they have,” echoed Target’s chief executive Brian Cornell. Higher wages and costs for containers and warehouses are also weighing on retailers’ profit margins.Some of those higher costs stem from the third force at work: a disrupted global supply chain that has left retailers scrambling to secure stock at a moment when demand for it is uncertain. “Their inventories are exploding,” Cathie Wood, chief investment officer at Ark Invest, wrote in a Twitter post on Walmart and Target. The reason for carrying more inventory than usual is that “they lived through the stock-outs of the past two years and know what that cost them”, said Rogers. Walmart chief executive Doug McMillon indicated that some of the build-up was deliberate, saying: “We like the fact that our inventory is up because so much of it is needed to be in stock.” Still, he admitted, “a 32 per cent increase is higher than we want”. Target’s inventories rose even further, up 43 per cent from a year earlier, and it conceded that it had failed to anticipate consumer spending shifts in categories from televisions to toys. “We aren’t where we want to be right now, for sure,” said Target chief operating officer John Mulligan, adding that “slowness in the supply chain” had forced it to carry more stock as a precaution. Wayne Wicker, chief investment officer at pension plan manager MissionSquare Retirement, said it should not be surprising to see signs of consumers reining in some spending, but said this week’s results were nonetheless a “wake-up call” for some investors because many companies had until recently claimed they were handling inflation challenges well.Walmart and Target both provided upbeat forecasts in their previous quarterly update, and did not pre-announce any changes before this week’s reports.“Part of the price decline was reflecting the fact that the management of these large companies didn’t provide any indication that they were going to have such a miss,” Wicker said.For Denise Chisholm, Fidelity’s director of quantitative strategy, this week’s reports did not provide convincing evidence that the economy is in trouble, but they spooked investors who were already nervous after earlier sell-offs. Despite the visceral market reaction to Target’s results, for example, its new lower forecasts would only return profit margins to pre-pandemic levels.“If there’s any differentiating factor compared with [previous bear markets], it has been the strength of earnings, so any kind of concern over earnings gives more volatility from a near-term perspective,” Chisholm said. But, she added, “despite a lot of the concern in the market, it is hard to reach an empirical conclusion that says recession is any more likely given what we’ve seen”.Thalheimer, whose portfolio is down by about $50mn from its peak, thinks markets overreacted this week and is already wondering when it will be time to consider snapping up beaten-down retail stocks. “During most of the big sell-offs of my lifetime — 2009, the [bust following the] dotcom bubble or 1987 — almost every one of these times within two years you [saw] very strong recoveries,” he said. That will happen again, he believes, but with the combined uncertainties around supply chains, the war in Ukraine and historic inflation, “there are going to be some choppy waters ahead”. More

Good morning. By recent market standards, yesterday was a snoozer. But we did notice that existing home sales fell for the third month in a row in April. Higher rates are hitting the economy, fast. Today, we dive into this week’s retail earnings massacre and ask how sticky inflation really is. Email us: [email protected] and [email protected]. Retailer earnings, reconsideredFirst-quarter earnings from two big American retailers scared the daylights out of markets this week. Walmart and Target are down 20 per cent and 29 per cent, respectively, since they reported earnings.These two companies are very important for investors because — as nation-spanning sellers of food, clothes, home goods and much else — they provide a window into the health of the American consumer, who drives the American economy and the world’s. So it is not totally illogical that in the wake of the box stores’ poor results, all sorts of consumer staples companies, usually a safe haven in a storm, took a whipping.But one consistent feature of bear markets is that during them, the news that sparks a brutal sell-off on a given day often turns out, on close examination, not to be particularly significant. A bear market is one that looks for an excuse to go down. Was that the case with this week’s news? What did we really learn from the results?The headline, in both cases, was that while revenue was fine, margins collapsed. In an inflationary environment, one might have expected this. Walmart and Target have to pay more for what they sell. Perhaps they can’t pass on the costs entirely. If so, margins must tighten. And if that is true of these huge, powerful retailers, just imagine what is coming for smaller companies.As it turns out, though, this is not what happened. Or not exactly what happened. The striking number on both balance sheets was inventory levels. At Walmart, sales were up 2 per cent from last year’s first quarter. Inventories were up 32 per cent. That is to say: there was $15bn in extra inventory sitting around at Walmart at the end of the quarter. At Target, it was 4 per cent and 43 per cent — $5bn in extra inventory. And what happens when you’ve ordered several billions worth more stuff than your customers want? You mark prices down to get rid of it all. And down go margins. Here is how one Target exec laid it out: As we developed our plans for the quarter, our task was to anticipate how spending would change under circumstances no one had ever seen before . . . we relied on numerous forecasts and estimates, both internal and external, to help determine our view for the quarter. Despite this careful approach, the mix of actual demand materialized differently than we had anticipated . . . as supply grew and demand shifted away from bigger, bulkier products like furniture, TVs and more, we needed to make difficult trade-off decisions. We could keep this product knowing it would sell over time, or we can make room for fast-growing categories like Food & Beverage, Beauty, and personal care and Household Essentials . . . we chose the latter, leading to incremental markdowns that reduced our gross marginHow did these well-run companies miscalculate their ordering so badly? I put this question to Rahul Sharma of Neev Capital, Unhedged’s retail guru. He noted that during the pandemic both Walmart and Target had used their global muscle to secure products lesser companies simply couldn’t get. They used the coronavirus pandemic as a chance to use their immense scale to take still more share from smaller players. And it worked. But Sharma thinks that both companies got too enthusiastic about this approach, just as the extraordinary demand for goods that characterised the pandemic (especially “bigger, bulkier products like furniture and TVs”) started to fall away.This mistake was compounded by consumers, who are seeing their real incomes eroded by inflation, spending a bit less. Walmart, for example, noted that more customers are shifting to store brands over name brand foods. There was not, however, a sharp drop-off in demand — just a bit of a downshift. The big problem was the inventory mistake. It will be very expensive, but is a one-time event. It does not signal a deep threat to the two companies’ business models. Walmart and Target, who did so well at the beginning of the pandemic, got caught flat-footed by its end. Does this justify a violent sell-off? It does not. Unless, of course, the companies’ stock prices were driven beyond their long-term value by the speculative vapours of a long bull market, and needed an excuse to revert to reality. That’s what happens in bear markets.Maybe inflation is less sticky than we thoughtHere is some conventional wisdom. Inflation started as a one-off shock to pandemic-specific items, particularly durable goods, but has since crept into stickier areas such as shelter and services. And since much of services and shelter inflation depends on wages, it’ll be hard for the Federal Reserve to restore sub-2 per cent inflation without hitting labour markets hard. If they don’t, a wage-price spiral looms. The economist Jason Furman summed it up in a chart we showed you last week:

The standard story is, sadly, pretty accurate. But others are available. I spoke recently with Omair Sharif at Inflation Insights, who thinks core services (that is, excluding food and energy) inflation is less sticky than most expect. He starts by noting how concentrated the recent acceleration in services inflation is. “Acceleration” is important here: inflation rates only increase if price levels are getting hotter, faster. So what caused the core consumer price index to go from 4 per cent late last year to over 6 per cent now? The post-Omicron rebound in transport costs is almost solely to blame. Sharif offers this chart comparing the acceleration in core services this year to the final four months of 2021:

This is likely a one-off price bump that should quickly fade from inflation indices over the next few prints, putting core inflation closer to 4 per cent on an annual basis — hot, but more manageable than what we have now.Getting from 4 to the Fed’s target — 2 per cent — will still require the central bank to deal with shelter inflation, which, mercifully, has barely accelerated (just 1.5 basis points in the chart above). Slowing labour income growth is the main channel to do this. As Rob discussed last week, this is because shelter inflation indices are measures of rents, which in turn are paid with wages. Luckily for the Fed, wage growth is already coming down:None of this means that a soft landing is likely, or that the Fed can easily get inflation back to target. But it does suggest 7-plus per cent CPI is not here to stay. (Ethan Wu)One good readThink China is uninvestable? “My answer to these people is: ‘You guys have to do better research.’” More

The history of humanity is the story of supply chains. Ever since 3,000BC, when Bronze Age cities of the Indus valley traded carnelian beads to Sumer, Omani vases and lapis lazuli from Afghanistan, the growth and development of our world has been carried on the backs, packed on the beasts, hauled on the carts, sailed on the ships and driven in the lorries of traders and travellers who made and make their living transporting goods.Hitch a long-distance lift with a truck, as I did, and you see the world from a startling new angle. Countless freight lorries trundling through every day and night and country are the red blood cells of our planet’s circulation. Yet that circulation has rarely been so erratic. Plunges and surges in demand and oil prices, palpitations in the global pulse caused by Covid-19, war, sanctions, Brexit, extreme weather and container jams have imperilled the system. The disarray is written in gaps on supermarket shelves.Janet Yellen, US Treasury secretary, said recently, “Our supply chains are not secure, and they’re not resilient . . . that’s a threat that needs to be addressed.”In Dorchester in southern England last month, I joined a crucial supply chain, travelling with two lorries carrying aid to refugee children from Ukraine. Our destination was Suceava in Romania, 1,600 miles away, and my preconceptions began collapsing in the first 10 minutes, when it became clear that we would not be using satnavs. Forget the predictability of smoothly plotted routes and timelines. Container ships follow these, as I discovered when I travelled with them. Road haulage is an altogether more idiosyncratic and exciting business.“We’re not going to make it,” said Ian, six days later, on hands-free mobile from his truck. We had followed the blue back of his huge 40-tonne 460hp DAF lorry across Europe to Suceava, guided by memory maps in Ian’s head. I rode in the second lorry with Charlie Bailey, 23, owner of General Haulage of Great Britain, driver of one of his company’s three trucks and employer and student of the 23-year haulage veteran ahead of us, Ian Payne. They were running out of driving time, which is monitored, along with rests, by tachographs in their cabs. Night was falling, we had crossed all of Austria and Hungary the previous day and a fat slice of Romania today. Now we needed parking, food, sleep and, ideally, showers. Ian’s first choice out of reach, we bore on towards his second.

Our mission saw more than 200 volunteers fill boxes with over 10,000 children’s backpacks, stuffed with supplies. But it is all very well for caring people to put together an aid mission to Ukraine. Without two men with Class 1 HGV licences and the kind of travel knowhow that can only be earned, all you get is tonnes of good intentions sitting in a Dorset warehouse.Without the drivers’ knowledge, experience and chutzpah, we would never have made the delivery deadline in Romania. As we snaked thunderously into that first night, dodging checkpoints and weigh bridges, gathering intelligence about queues at Dover and the chaotic ferries (P&O was out of action, due to ships failing inspections), watching for police, tight turns and bad drivers, monitored constantly by tachographs, tracked by hundreds of automated number-plate recognition cameras, I began to understand how resilient and resourceful drivers such as Charlie and Ian are, and how complex and vexing their world. No satnav shows the truth of road haulage.And no computer would design this trading world the way politicians have, with chaotic obstructions caused by Brexit, for example, requiring trucks going into the Republic of Ireland from the UK to present 700 pages of documents that take eight hours to prepare. Ian Payne, a long-distance truck driver for 23 years: ‘We followed his 40-tonne lorry across Europe, guided by memory maps in his head’ © Mary Turner for The Financial TimesArchie Norman, chair of Marks and Spencer, said this week: “Some of the descriptors, particularly of animal products, have to be written in Latin and in a certain typeface.” Every sandwich containing butter, he said, requires an EU vet certificate, which means employing 13 vets and budgeting for 30 per cent more driver time.Six-mile queues at Dover and 18-mile lines at Calais this year were caused by post-Brexit checks, worsened by small numbers of lorries with the wrong paperwork. We can expect more delays in September, when a new security system may require drivers to leave their vehicles for facial or body scans, and more again next year when trucks will be inspected at the new inland border at Sevington, near Ashford, Kent.The metaphor of supply “chains” makes the process sound orderly and smooth, but from the first this journey along them was more like an adventure through a wild ecosystem in which we were a prey, dashing between safe habitats such as lorry parks and filling stations, hunted by authorities, legislation and customs rules that sought to charge, delay or stop us. It was not that the trucks had any deficiency to bother the police or the Driver and Vehicle Standards Agency, which regulates haulage in Britain. It was that many drivers loathe and avoid the DVSA, and checkpoints of all kinds in all countries. “They’re not on your side. They’re out to get you. It’s like they want to punish you for doing your job,” Ian said. “They want to fine you and take your money.”HGV trucks wait to board ferries at the Port of Dover last month © Mary TurnerThe DVSA has a checkpoint on the A243. And so we went via Calais, Bastogne, Luxembourg, Karlsruhe, Munich, Vienna, Budapest and a little place in Romania called Jurca (a single track of crumbling tarmac over a hill, with power lines groping for the wing mirrors) but we will never take the A243 to Leatherhead.By the time we reached Dover, having dodged the lorry stack the police were compiling on the M20 by slipping down the A20, I saw my companions as merchant adventurers, dazzlingly resourceful, swift to improvise, canny and funny as hell. “Don’t start Ian on Covid,” Charlie warned me. “He won’t stop.”Ian and I disagree on Covid, immigration, Brexit, Nigel Farage, history, the shape of Earth and the BBC. On everything that really matters, we agree. I recorded our journey for a Radio 4 documentary, Writing the Road to War. They approved, up to a point. I practised caffeine diplomacy on them at every service station.“Cappuccino with sugar, latte lots of sugar!” I cried. “On the BBC. You’ll be massive fans by the time we get there.”“Never!” Ian retorted, and started on the government-controlled, lying media. He trucked the continent throughout the pandemic without ever filling in passenger locator forms, out-arguing border guards. Charlie, Ian and people like them (there are female HGV drivers — I saw two in 10 days) feel they have no political clout. The transport unions, the Road Haulage Association and their MPs, they say, do not defend or advance their interests. Britain, their favourite country among dozens they travel, offers them dangerously bad food, extortionate and grotty stopping places, avaricious and bullying oversight, low status and zero agency.Ian in his cab. His advice for anyone thinking of becoming a driver: ‘Don’t do it. It’s not worth it’ © Mary TurnerI asked Ian’s advice for anyone thinking of becoming a driver, mindful of post-Brexit shortages of hauliers in 2021, when some supermarkets were offering wages of £56,000.“Don’t do it. It’s not worth it,” he said.The way your money is ripped away from you is part of the problem. A driver actually makes around £700 net, Ian says, in return for 70 hours plus. Amazed at the ways we were taxed and charged during the journey, I pictured camel caravans harried by hyenas. Rest areas, frontiers, motorways and entire nations’ road networks all want paying, constantly. Factor in licences, maintenance, diesel, subscriptions to broker websites where shippers offer loads and rates, plus constant travel expenses, and you have thin margins. Then you get pulled over by the French police. Charlie loves his business and trucking life. He hopes to expand to five lorries. But you should hear him on France and the Gendarmerie. Henry V would blush. If your truck is capable of more than 56 miles an hour, regardless of what speed you are doing, they can fine you.They love to check your tacho. It is almost impossible not to infringe the tacho. You must stop at intervals for minimum times — but suppose there is nowhere to stop, you are on a deadline, under vicious pressure from an employer, cannot afford the fees for that rest area, have run out of driving time and, held up by traffic or roadworks, you are late. You go over your set driving time, the police or an inspector checks your tacho, and you are fined.In Britain you see trucks from eastern Europe on small roads and parked in odd places because many of their drivers are paid less than €100 a day. Do you spend half of that on a rest area? No — you carry and cook your own food, defecate in the undergrowth, go without showers for weeks. Supporting your family, you are away for months, taking loads from wherever you are to wherever they are wanted, against the clock. You become tough and wily.Decades ago Ian was interviewed for a job.“How long can you stay awake?”“Three days?” he said.“You’re no good to me. I don’t need shunters,” came the reply. This was a legendary haulier who sent trucks from England to Kazakhstan, to the Chinese border, to Africa. A nonstop run to Italy or Spain would be nothing then, and barely cause for comment among drivers now, if you could get away with it.“Some drivers took speed [amphetamine],” Ian said. “Not me. There was another trick — down a spoonful of instant coffee and a can of beer. That worked. Apparently.”“Can the tacho be fooled?” I asked Charlie.“Oh there’s endless tricks,” he said. “Magnets by the gearbox: it pulls the pin with the sensor, so the speedometer says you’re doing zero and the tacho thinks you’re stationary. You’d get jail for that.”

From left: Horatio Clare with Ian Payne and Charlie Bailey at the Romanian-Ukrainian border: ‘I came to understand how complex and vexing their world is’

ANPR cameras can be defeated with gaffer tape on the number plates, altering letters and numbers. Although Ian and Charlie are committed to professionalism and probity, we were taking aid to child refugees from Putin’s war, on a deadline, and we knew Austria was closed to freight on Sunday. I had not realised that whole countries regularly ban all lorry movements, but they do. Obstacles were thus overcome with guile and dash. At Dover we ignored a stationary queue of trucks for Irish Ferries, Charlie’s chosen operator. “The DFDS lane is free, look!” he said (we talked cab-to-cab on hands-free mobiles). We zipped down it, Ian close behind, cutting into a space at the kiosk where an immigration officer stamped us out of the UK.Now we took turns nipping into an inching line of lorries (it was the small hours now, but the tacho has a “ferry” setting that allows you to make little shuffles), Charlie holding them back, Ian leapfrogging ahead. It was glorious. They saved half a day. On board, before dawn, exhausted truckers faced a vile insult to fry-ups. The bacon was grey. In a heap of fat and cholesterol, nothing had any taste. Charlie said French ships do a worse version. We slept nine mandatory hours in a lay-by in “the corridor”, the Calais-Dunkirk road, muttering about being held legally responsible for refugees hiding in trucks. (This seems absurd: if customs and police cannot find or stop stowaways, how are drivers supposed to?) Ian and Charlie spoke of drivers’ fears and experiences of violence and intimidation from migrants desperate to cross from Calais to Britain. We were glad to be on the continent, though. “They respect drivers here — the food, the facilities, the way you’re treated, everything is miles better in Europe,” Ian said. An evening meal at La Bonne Table truck stop in Flers-en-Escrebieux, France. Food and facilities in Europe are ‘miles better’ than in Britain, says Ian © GettyBrexit, both men report, has been excellent for UK hauliers, limiting European competition. Charlie has more work than he can cover. As for the paperwork, Charlie said, “If you can’t fill in a few forms, that’s your problem.” He is a paperwork Jedi. CMR forms (international waybills), customs declarations, commodity codes, road tax: Charlie had no language teaching but he rips through customs declarations in Romanian. Communication throughout the journey was a delight. Ian cracked me up apologising, in a German restaurant, for not speaking Dutch.On the Austrian border we bought pre-paid digital boxes that beep when you go under motorway gantries, deducting fees. But there came double beeps — another box on the windscreen was also paying out. “Hide it under your duvet!” Ian urged. Charlie did. The second beeps stopped. We travelled by day. “I do the job because I love it, I want to see countries,” Charlie said. Ian, a gourmet, plans routes to restaurants with parking, ideally with showers, which can be reached by supper time. His cab is spotless, displaying ironed shirts on hangers. Charlie regards restaurants as an indulgence. He carries nuts, grapes and bits of chicken in his fridge, and vodka for sundowners. The DAF cabs are well designed, with microwaves, good mattresses — I slept on the bunk above Charlie’s — excellent seats and wonderful views, including rearward and down, through five mirrors. The men handle their massive vehicles with beautiful skill. You do not do U-turns, you “spin round”. Blind reversing is the hardest move, backing while turning in the direction opposite the driving position, when the mirrors show only the flank of your trailer. They conquered all of Austria and most of Hungary in one shot, with mandatory pauses. I was at two sleeps a day by now, morning and afternoon. They worked through Romania’s network of small roads, concentrating ferociously and crying out with delight at the beauty of villages, blowing their horns at the gestured requests of children by the roadside. We marvelled over the snowy Carpathians, using the retarders and exhaust braking systems rather than the brake pedal; these slow the pistons and the truck without taxing the brake pads. I have rarely laughed so hard or learnt so much as I did on the road to Ukraine. The Romanian horse and cart displaying no lights provoked a comical eruption from Ian. If you should overtake a lorry and then slow down in front of it, being branded “special” is the least of the reactions you should expect. We had vigorously to give one idiot, who cut out of a slip road without looking, heading for Charlie’s drive wheels (the third set from the front), the wristy international sign for offended disapproval. Only Charlie’s explosive reflexes saved idiot, and idiot’s father and son, from horrendous deaths.On the last night we found Ian’s second-choice stop, where a horrid old man tried to rip us off, charging for parking that turned out to be free, and a lovely waitress laughed at our sign language for beef soup. We slept very well. We “tipped” — offloaded — our cargo bang on time. The distribution point was the basement of a psychiatric hospital. Enthusiastic patients formed human chains to unload our boxes, to the delight of Gracie Cooper, publisher at Little Toller Books, Dorset, who organised this Packed with Hope campaign, raising £1.5mn in aid for Ukrainian children.Charlie and Ian were as unfazed by this as by any other unexpected twist in their journeys. Ian took on a load for Syria during the war. Charlie researched loads out of Ukraine — it would be worth the lorries being shot up, they said, for the insurance. They were not entirely joking.After we parted, Charlie took Romanian plywood to Prague, Ian the same to Poland. They would meet in Germany, tip, collect horse bedding, and head home. And now they are out there somewhere, everywhere, always, shouldering the supply chains from which dangle all our lives. They move the world. That the world remains largely unmoved by them does not seem just or right. Without lorry drivers and their predecessors in the story of haulage, our cities, our countries, our horizons and our lives would all be smaller, and much poorer.Horatio Clare is the author of ‘Down to the Sea in Ships: Of Ageless Oceans and Modern Men’Cartography by Chris CampbellFind out about our latest stories first — follow @ftweekend on Twitter More