Aurelia Butler

Senior Conservative MPs have turned on the Bank of England over its handling of inflation, in a rare outbreak of political criticism of the central bank in the way it is doing its core job.Boris Johnson’s party is feeling the political heat as the cost of living crisis intensifies and now some Tory MPs are blaming the BoE, which has been operationally independent for 25 years, for losing its grip on prices.Liam Fox, a former cabinet minister, told the Commons that the BoE had “consistently underestimated the threat” of rising inflation, which the BoE fears could top 10 per cent later this year.“The BoE persisted beyond any rational interpretation of the data to tell us that inflation was transient, then that it would peak at 5 per cent,” he said. Fox said the Commons Treasury select committee should launch an investigation into the central bank’s handling of inflation. His comments reflect growing anger on the Tory benches towards the BoE.One member of the government said that the BoE had “got it completely wrong at every single moment of this crisis” and it should have “obviously” tightened monetary policy sooner.The person added that BoE governor Andrew Bailey said inflation was going to be temporary while “every single fund manager in the City knew that wasn’t true”.Meanwhile, Robert Jenrick, a former Tory Treasury minister, told the FT: “The BoE missed the opportunity to gain control over inflation last year, arguing that it would be modest and transitory when it was clear to many of us that it would be high and longstanding.“We are now in danger of a entering a new inflationary era. Having acted too little, too late, there is a risk of overcompensation if it pursues significant further interest rate raises.”Direct criticism of the BoE in its core mission of inflation control from MPs in the governing party has been almost unheard of in the 25 years since the central bank was given independence to set interest rates. When inflation has been too high or too low, chancellors ranging from Alistair Darling to Rishi Sunak have been studious in accepting the BoE governor’s explanation of what happened and how to get inflation back to the 2 per cent target. In his most recent open letter to Bailey, the chancellor wrote that he agreed with the BoE’s assessment that high inflation was largely the result of global factors and the consequences of the coronavirus pandemic. But there is nervousness inside the BoE that as inflation heads towards double digits with a big leap expected in the April figures, published next week, the heat will be on the BoE as never before. The governor will be grilled by the Treasury committee of the House of Commons next Monday where further tensions between the BoE and MPs are likely to surface. Jagjit Chadha, director of the National Institute of Economic and Social Research, said: “It’s a little bit unfair to blame the BoE for the inflation problems we’re seeing, many of which are the consequence of the necessary stimulus that resulted from the coronavirus pandemic”. But Andy Haldane, BoE chief economist until last year, told LBC this week: “I wish we’d done a little bit more a little bit sooner, to tighten things up, so there wasn’t quite as much money chasing quite as many goods.” The BoE declined to comment. More

The UK is heading for a trade clash with Brussels over plans to bring forward legislation to unilaterally scrap parts of the Brexit deal after talks over Northern Ireland’s trading rules ended in deadlock and recrimination.Liz Truss, UK foreign secretary, said on Thursday that Britain would have “no choice but to act”, but the EU warned that any move would force it to restrict Northern Ireland’s access to the single market for goods.British officials expect Boris Johnson to set out as early as next week plans for a bill to disapply parts of the so-called Northern Ireland protocol the prime minister signed just 18 months ago. Brussels has warned of trade reprisals in the event of Britain rewriting the protocol, raising fears in the UK Treasury that the country could face further economic damage in the midst of a cost of living crisis.After a difficult call with Truss, Maroš Šefčovič, European commission vice-president, said that unilateral UK action was now likely. It would “put a huge question mark over access of Northern Ireland to the single market. This is a very serious issue,” he told a joint assembly of UK and EU parliamentarians in Brussels. Under the terms of the protocol, which was agreed to ensure there was no trade border on the island of Ireland, goods produced in Northern Ireland can enter the EU without checks, which has helped the region’s economy outperform much of the rest of the UK. Johnson was warned when he negotiated the arrangements that they would create political problems in the region, as the protocol creates a trade border in the Irish Sea. Some British suppliers say they can no longer ship popular foodstuffs from Great Britain to Northern Ireland.Commission officials said they had no wish to impose border controls on the island of lreland but had to protect the single market, which allows goods to circulate freely within 27 countries once they have crossed the union’s external border, and Ireland’s place in it. “The last thing we want is for Northern Ireland to lose access to the single market,” one said.Washington has called on both sides to show “leadership” and resolve the issue by negotiation, while Johnson also faces the prospect of months of parliamentary rebellions on the issue.Truss is said by Tory MPs to be embarking on a “charm offensive” with leading UK political figures to explain Britain’s reasons for wanting to rip up parts of the protocol, which only came into effect last year. But resistance in the Commons and, especially, the House of Lords is expected to be fierce. “Some of us will want to underline the damage to Britain’s reputation from taking this step now, in the middle of the most serious conflict in Europe since 1945,” said Lord Peter Ricketts, former UK national security adviser.The UK government has received legal advice that it would be justified in overriding parts of the protocol in order to support the 1998 Good Friday Agreement that brought peace to the region. Truss told Šefčovič that fundamental changes were needed to the trading rules, which are opposed by Northern Ireland’s pro-UK unionist parties. She argued that unless checks on trade from Great Britain to Northern Ireland were greatly reduced, there was no prospect of the main unionist party, the Democratic Unionist party, rejoining the region’s power-sharing executive at Stormont. London believes that reforms to the agreement suggested by the EU in October do not go far enough. But EU member states have insisted they are not prepared to renegotiate an international treaty. “The EU simply expects that international agreement to be honoured and is willing to be extremely flexible in terms of how it is honoured to try to accommodate what are genuine concerns in Northern Ireland from business people and from the unionist community in particular,” Simon Coveney, Ireland’s minister of foreign affairs, told RTE radio on Thursday. Additional reporting by Jude Webber in Belfast More

The UK economic recovery stalled in February and March as inflation surged to its highest level in 30 years, in the worst combination of surging prices and zero growth since the 1970s.The prospect of prolonged stagflation is at odds with Prime Minister Boris Johnson’s claims of a strong economic bounceback from the coronavirus pandemic in the latest figures.Gross domestic product declined 0.1 per cent between February and March, data published by the Office for National Statistics showed on Thursday, below the no change forecast by economists polled by Reuters.It follows zero growth in the previous month, a downward revision from an initial reading of 0.1 per cent expansion.This comes as consumer prices rose at an annual rate of 7 per cent in March, the fastest increase since 1992, according to data released last month.James Smith, research director at the Resolution Foundation think-tank, said: “The economy already appears to be losing momentum as the cost of living crisis intensifies and the risk of stagflation looms.”Over the first quarter as a whole, the UK economy expanded 0.8 per cent over the previous three months, boosted by stronger growth in January. However, that was below analysts’ expectations of 1 per cent and down from the 1.3 per cent increase in the previous quarter.Paul Dales, chief UK economist at consultancy Capital Economics, said some of March’s weaknesses in consumer-facing services, such as retail sales and the hospitality sector, might be because of the cost of living crisis forcing households to cut their spending on non-essential items. “This is particularly ominous when our forecasts imply that the surge in inflation will reduce households’ real incomes the most in the next six months,” he added.Chancellor Rishi Sunak boasted that UK quarterly growth was faster than in the US, Germany and Italy.However, the difference largely reflects the timing of Omicron coronavirus infections and the fact that British households were temporarily shielded from the surge in energy prices in the first quarter by Ofgem’s default tariff cap, which is reset only in April and October. In contrast, consumers in most other countries were hit almost immediately by higher prices.Even with these differences, the UK economy was 0.7 per cent above its level in the last quarter of 2019 before the pandemic, which was marginally stronger than the eurozone’s 0.4 per cent but below France and the US.Speaking at the start of a cabinet meeting in Stoke-on-Trent, Johnson said the economic data was encouraging. “The most extraordinary thing about the way the country came back from the pandemic was the strength of the employment position . . . that is the single most important thing we need to focus on: a strong jobs-led recovery,” he said. “I am encouraged by some of the growth figures I just saw this morning . . . jobs, jobs, jobs is the answer.”Speaking earlier on LBC, the prime minister said growth “will return very strongly in the next couple of years”.This contrasts with warnings from many economists of the growing risks of a recession, defined as two quarters of economic contraction.The Bank of England warned of a recession last week as inflation is set to rise to a 40-year high of about 10 per cent in the autumn, in the wake of ever-increasing energy costs. The central bank forecast that the economy would alternate between near stagnation and contraction over the next two years, with output barely changing by the first quarter of 2024.“It is clear the UK faces a serious fight to avoid recession this year,” said Ed Monk, associate director at investment management company Fidelity International.Samuel Tombs, economist at consultancy Pantheon Macroeconomics, said he expected GDP to contract 0.4 per cent in the second quarter as health spending declines and consumers tighten their belts.The pound, a bellwether of the UK’s relative macroeconomic performance, dropped 0.4 per cent on Thursday morning and continues to trade near pandemic-era lows against the dollar.Despite the weak economic outlook, markets expect the BoE to raise its main interest rate from 1 per cent to 2 per cent by the end of the year.ONS data showed that the UK’s trade deficit for goods and services widened to a record 5.3 per cent of nominal GDP in the first quarter — the largest gap since records began in 1955 — as imports rose 9.3 per cent, largely reflecting higher energy prices, while exports fell 4.9 per cent. The fall in exports was broad-based with contractions in machinery, cars and fuels, as well as financial and business services.The war in Ukraine also resulted in UK goods trade with Russia falling almost 70 per cent in March.Business investment fell 0.5 per cent in the first quarter and was 9.1 per cent below its pre-pandemic level, as well as being 8 per cent below that of the first quarter of 2016 before the Brexit referendum, reflecting high business uncertainty. This is despite the government’s super-deduction policy, a two-year tax break on investment that has been in place since April 2021.Investment matters for productivity growth, which ultimately drives wage growth and standards of living.Sandra Horsfield, economist at Investec, said: “Boosting productivity through higher investment will be a crucial ingredient in containing cost pressures for businesses in light of surging wage bills. So, a further shortfall in this regard is a concerning signal.”A 15.1 per cent drop in car sales contributed to March’s fall in output. However, activity slipped 0.2 per cent across the entire services sector and output fell at the same rate in manufacturing.The contraction in March’s GDP would have been sharper if it was not for an unusually strong 1.7 per cent growth in construction, which the ONS attributed to repair work after February storms. More

This week we released the second instalment of our occasional on-screen spin-off known as Free Lunch on Film. Do watch and share my attempts to explore and test my belief in climate techno-optimism — the view that it is possible to decarbonise the global economy without a radical change in our lifestyles. (And give a thought to all my colleagues and contributors who made the film possible!)In this piece, I want to highlight some simple but powerful observations that play a big role in my thinking about this. Start with the wonderfully clarity-inducing Kaya identity, which simply sets out that total carbon emissions are equal to the multiplication of three or four relevant factors: carbon emissions per dollar of gross domestic product (which is, in turn, the product of carbon emitted per energy unit and energy consumed per dollar of gross domestic product), GDP per capita, and the number of people in the world. The website Our World in Data, from which I have taken the image below, has a good exploration of the actual numbers that go into it.

The Kaya identity shows that reducing emissions arithmetically requires either cutting the carbon intensity of GDP, making the average person poorer, or shrinking the population. In other words: green growth, “degrowth”, or a programme ranging from anti-natalism at best to eugenics at worst. So, taking as given that decarbonisation is necessary, which is it going to be?In practice, decarbonisation will not mean literally zero carbon emissions. The “net” in “net zero” allows for emissions, combined with activities that draw carbon out of the atmosphere in the same amount. Planting more trees can do some of that, and I got my hands dirty planting one in the making of the film. One of my interviewees, the economist Arvind Subramanian, who used to be chief economic adviser to India’s government, emphasised that “negative carbon” technologies will have to be part of the solution. He argued that compared with renewables, we are investing far too little in such technologies, which include carbon storage in underground or subsea reservoirs, and the capture of CO₂ or other greenhouse gases at the point of emissions or directly from the air.Now there is a lot of scepticism that negative carbon captures can amount to very much. But allowing for at least some carbon to be emitted on a “gross” basis, the Kaya identity tells us we may not need to cut carbon intensity, incomes or the population all the way down to zero — just almost all the way down to zero. Good thing too, because cutting either of the latter two literally to zero entails policies and outcomes that hardly bear thinking about and would, in any case. never be accepted.But I do not think population control and degrowth are useful policy strategies even for more modest emissions reduction goals. Reducing the global population by an amount that makes even a dent in the carbon problem would require unacceptable control over people’s lives. As for degrowth, I think it is misguided. First, because letting poor people enjoy economic growth is no danger to the green agenda. Why? Because they emit so little at the moment that they could even engage in “dirty” growth for some time before making much of a difference. I admit I had not realised just how astonishingly unequal carbon emissions are. Diana Ürge-Vorsatz, an environmental scientist and a working group vice-chair at the Intergovernmental Panel on Climate Change, pointed out that the 10 per cent highest-income individuals in the world are responsible for half of the carbon emissions. The reverse is also true: the poorest half of humanity produces only 10 per cent of all global emissions.Sensible degrowth advocates accept this, and suggest it is about rich-country residents (and presumably the rich in poor countries) reducing their consumption. But I find that unconvincing too. One thing is that it will not work unless the cut in material standards is draconian. In my interview with Branko Milanović earlier this year, he pointed out: “People don’t realise that the median income in western countries is at the 91st percentile of the global income, so even if you were to bring everybody in the rich countries to the median, which is actually for 50 per cent of people a loss of income, you would still not solve the problem.” And if you were to curtail the purchasing power of rich-country residents, Subramanian points out that through trade this would hurt poor countries too.Sometimes people speak of degrowth as simply meaning to reduce material consumption — the physical stuff we emit carbon to produce. This can be done by shifting consumption from physical goods to services or simply leisure (working less), and it can be done by systemic change that reduces our material needs. One example is to design houses that need less heating or cities where you do not need cars much. But then we have really moved to talking about cutting the carbon intensity of GDP or income or wealth, not GDP or income or wealth itself. That is to say, green growth.Is green growth realistic? To some extent it is already happening. A number of countries are already “decoupling” growth and emissions — the chart below shows how UK GDP and carbon emissions per capita have been moving in opposite directions. Decoupling is taking place even when accounting for the carbon embodied in production offshored to places such as China. The question is not whether it is possible but whether it can happen fast enough, go far enough, and be done by enough (or all) countries. To form an opinion on this, look at where carbon emissions come from. As the chart below shows, it is mostly from energy use, in particular from industry, buildings and transport. Then comes farming and land use, industrial processes and waste. In the film, we start by looking at transport, and visit Norway to look at the electric vehicle revolution there. The country has the world’s highest penetration of EVs; most new cars sold are electric. As the head of the EV users’ association, Christina Bu, told me, there is nothing natural about a cold country with long distances becoming an EV pioneer. So if Norway can do it — which it has done by taxing conventional cars and rewarding electrical ones — so can everyone else. Here is what everything hinges on. I think what is possible for transport is true for other energy use: you can electrify almost everything, and you can decarbonise that electricity generation. (The challenge here is aviation and to some degree shipping, but even there zero-carbon technology is advancing.) For the remaining sources of emissions, things such as alternative building materials (high-rises made of wood rather than steel and cement) or high-tech agriculture and reforestation are part of the solution. The point is this: the technology exists to decarbonise almost everything our material lifestyles depend on and decarbonisation is therefore compatible with maintaining those lifestyles. Two caveats are in order. The technology to take us to net zero could still deplete other resources (rare earths needed for batteries, for example) or cause other environmental problems. The techno-optimistic argument here is only about net zero carbon. And while it is technologically feasible to decarbonise our lifestyles, it will still be expensive. The International Energy Agency puts the needed annual investment at $4tn, nearly 5 per cent of current global GDP. We will not get there without a carbon tax, which will feel like it deprives us of economic wellbeing. And many carbon-intensive jobs will be lost.But while raising investment must reduce consumption today, it will increase consumption tomorrow (the relevant benchmark is the risk to living standards if global climate change is not reined in). Carbon tax revenues can be redistributed as dividends, benefiting those most in need. And if recent IMF research is right, the job churn is not as bad as it was during deindustrialisation.Above all, all of this is compatible with more and more people enjoying rich-country middle-class lifestyles. It will be difficult to get to net zero, but it will not be painful once there.Other readablesI’m a bit late to it, but my colleagues did a great Big Read on the growing global stagflation fears.The OECD explains how Finland conquered homelessness.I wrote a column arguing that moving ahead with deeper EU integration would inflict a defeat on Russian president Vladimir Putin.An international group of experts have published an excellent white paper on how the EU should place further “smart” sanctions on Russian energy exports.Numbers newsThe US released new inflation numbers yesterday. A tip: high inflation is baked into the year-on-year number because prices rose fast earlier in the year. Month-on-month inflation fell by three-quarters to 0.3 per cent, largely because energy goods prices went down. Service price inflation picked up strongly, however, reflecting the indirect effects of earlier jumps in goods and energy prices.

Video: ‘Net zero won’t change the way we live’ More

Turkish authorities have raised the pressure on the country’s banks to limit corporate clients’ purchases of foreign currency in an effort to halt a renewed slide of the lira.Bankers in Istanbul, Turkey’s financial centre, say that they are facing increased interference from the central bank, with officials probing corporate FX transactions worth as little as $1mn. “Even for $1mn or $2mn, they are calling to check: who is the buyer?” said one senior Turkish banker. “They’re really anxious about the corporate flow.”The interference is the latest unconventional tactic Turkish officials have deployed to steady a currency that has fallen by 45 per cent against the dollar over the past 12 months, sending inflation soaring. With the financial sector under strong political pressure from president Recep Tayyip Erdoğan, bankers say they have little choice but to comply with the demands to seek advance approval from the central bank for big-ticket foreign currency purchases. In some cases, commercial banks have been ordered to refuse to facilitate FX purchases for their clients altogether, especially those worth more than $5mn. While Turkish authorities have repeatedly interfered in the running of banks and corporates in recent years, another banker said that the meddling “has been intensifying” and they were “coming under closer scrutiny”.A person with close links to the Turkish banking sector said the situation has created anxiety in the business community. “This is leading to worries among corporates that they might not be able to buy as much FX as they need.” Businesses need dollars and euros for an array of reasons, from paying for raw materials bought from abroad to serving their large foreign currency debt burden. Turkish authorities, however, have raised concerns that some firms are engaging in speculation against the lira. After four months of relative stability, the currency has lost close to 4 per cent against the dollar since the middle of last week. Foreign currency sales by the central bank and unorthodox policy measures aimed at encouraging savers to park their cash in lira accounts had acted as a sticking plaster during the opening months of 2022. On Monday, the lira fell through the symbolic threshold of TL15 to the dollar, denting public confidence in a currency seen as a barometer of the health of the broader economy. The latest wave of pressure on Turkish companies and banks to limit their foreign exchange transactions comes at a time when liquidity in the country’s currency markets is limited, meaning that relatively small purchases of dollars or euros can have an outsized impact.One of the bankers said officials were “respectful” in their requests and added: “The guys at the central bank know this cannot be a permanent solution.”The central bank declined to comment.

Erdoğan, a life-long opponent of high interest rates, has used a string of unconventional methods to try to stabilise the lira while maintaining ultra-low real borrowing costs as he gears up for presidential and parliamentary elections that must be held before June 2023. With the country’s benchmark lending rate at 14 per cent, the real interest rate stands at minus 56 per cent once annual inflation of 70 per cent is taken into account, creating a strong disincentive for holding lira assets.A widening trade imbalance, fuelled by soaring global energy costs, is another source of weakness and has exacerbated demand for foreign currency. The central bank — long seen as having insufficient foreign exchange reserves — spent around $24bn on defending the lira in the first three months of 2022, according to Haluk Burumcekci, an Istanbul-based analyst. A government savings scheme, unveiled in December, has attracted $55bn by promising to protect individual savers and corporates from foreign currency risk if they switch their money to lira. In January, exporters were told that they must sell 25 per cent of their foreign currency revenues to the central bank — a ratio that was lifted to 40 per cent in [email protected] More

The writer is president of the Peterson Institute for International Economics and a former member of the Bank of England’s Monetary Policy CommitteeSometimes, reality bites. The UK outlook for stagflation of rising prices and slowing economic growth this year and next reflects the realities that Brexit has wrought. Of course, the Covid pandemic, the difficulties of reopening the economy, and now energy and food price surges are not caused by Brexit. But the UK’s vulnerability to those shocks, and therefore the amplification of their inflation impact, is largely due to Britain’s departure from the EU. This is why the Bank of England will end up having to raise interest rates over the next year more than it forecast this month, and even more than markets have already priced in. Given the very hard Brexit, the Bank of England and the UK economy have been dragged part way back to the 1970s. By that, the Bank’s Monetary Policy Committee is no longer able to look past external economic shocks as they did during the 1992 European Exchange Rate Mechanism exit or 2009 sterling depreciation. In these cases, they had the luxury of setting monetary policy solely in terms of hard domestic forecast data. But after Brexit, the MPC would have to worry more about the “spillover” of international events into inflation expectations.This is due to a combination of the UK being a smaller economy on its own, less buffered by its integration in the EU, and an erosion of trust in UK governments to run disciplined economic policies. Hence, any shocks are likely to result in higher and more lasting inflation than they did before Brexit.Additionally, because the UK has waged a trade war on itself, Brexit has a direct effect on inflation. There is a down shift in purchasing power — a one-time but significant move that is taking some years to play out as various aspects are implemented. This takes the form of administrative costs and regulatory barriers as well as tariffs and diminished policy choices. There also has been a reduction in both the level of labour supply and its elasticity with the effective exclusion of European migrant workers. Labour is a differentiated good with no simple substitution when workers in a given industry, skill set or region are no longer available. Critically, this has meant a growing mismatch of available workers to jobs, as well as the perceived bargaining power of domestic workers in certain sectors. The UK avoided the US’s 2021 mistake of distributing too much fiscal stimulus in too brief a period when the economy was recovering but short of labour; if anything, fiscal policy was too austere. The UK, like the EU, also avoided Washington’s error in tying Covid aid to workers laid off or fired, by instead subsidising jobs and furlough schemes. Yet, the UK inflation rate is high, similar to US levels, and has been for some time. It is higher than the rate for the eurozone, even though price rises accelerated across the bloc predominantly as a result of Russia’s war in Ukraine. It is Brexit wot done it. Because of the limitations of today’s UK labour market, the British economy faces much the same worker shortages and wage pressures as the US.UK price rises reflect, in part, the idiosyncrasies of Britain’s natural gas and food markets. However, the lack of sourcing supply options for agricultural labour and fuel made those inflationary effects worse and more persistent. Implementing trade barriers and new standards between the UK and the EU single market only compound the problem.I do not share the MPC’s assessment that the forecast decline in real incomes and the planned monetary tightening will be sufficient to bring inflation back to target within two to three years. Monetary policy has to be exercised because in a small closing economy with an inflationary trend — similar to Britain in the 1970s — inflation does not self-correct with general movements in demand. Wage increases are not keeping up with inflation but this is precisely why monetary policy has to tighten further now, not wait. Preserving the real income for working households is exactly why the Bank should be fulfilling its mandate to maintain stable prices around the 2 per cent target.  More

If the world’s second-largest economy shows any sign of recovery from its Covid-induced slump, Wang Neng should be among the first to know. But so far, he sees few indications of that. Like many small businesses in China, Wang’s cement mixing station in central Henan province has been hit hard by controversial lockdowns in dozens of cities ordered by President Xi Jinping to stamp out outbreaks of the Omicron variant. Two months after Beijing promised vague measures to support the economy through the crisis — and despite Xi’s assurance of an “all out” infrastructure drive — Wang’s business is still struggling. “Looking at cement demand, there are few signs of an infrastructure pick-up,” he says. His station is running at only 20 per cent capacity and he has cut his fee for mixing cement by almost one-quarter from last year. Wang’s business was already feeling pressure thanks to delayed payments from clients under stress further along the industrial chain. Even before the lockdowns hit, China’s economy had been badly affected by Xi’s “rectification” of the highly leveraged property sector, which is estimated to account for about one-third of the country’s economic output. Now, lockdowns imposed to salvage the president’s strict zero-Covid policy are making matters worse.Xi’s administration has been here before. When Covid erupted out of central China in January 2020, Hubei province and its capital, Wuhan, were quickly locked down, with the rest of the country soon following. This time, the Japanese brokerage Nomura estimates that 41 cities with a combined population of 290mn and responsible for about 30 per cent of national economic output were under full or partial lockdowns as of May 10. Some residents in lockdown have been left totally reliant on deliveries of food © Tingshu Wang/ReutersYet there are crucial differences between the successful nationwide clampdowns at the start of the pandemic and the current series of rolling closures.The 2020 measures were a relatively short, sharp shock. They coincided with the annual lunar new year holiday — China’s equivalent of the western Christmas and New Year break — during which many manufacturers routinely close for two or three weeks. After an extended holiday, most of the country reopened within a month. Only Hubei and Wuhan were subjected to longer restrictions, and even these were lifted by late March. The impact on growth mirrored the brevity of the closures, with a 6.9 per cent year-on-year decline in first-quarter economic output, followed by a steadily accelerating recovery for the rest of the year.By contrast, this spring’s lockdowns have been ad hoc and open-ended. They are ultimately controlled by low-level district or neighbourhood officials who respond — often brutally — to sometimes contradictory policy signals from the top of the Chinese Communist party. Policy whiplashAt a May 5 meeting of the party’s most powerful body, the Politburo Standing Committee, Xi reiterated that he would not tolerate any let-up in the effort to eliminate all Covid cases from China. More worryingly for business owners such as Wang, he did so without his previous reassurances to “reconcile zero-Covid with growth” or to “minimise the impact of the pandemic on the economy”.The effects could be severe. While China’s first-quarter data did not capture the worst of this spring’s lockdowns, a portent of things to come could be seen in a 3.5 per cent year-on-year fall in retail sales in March. Trade figures for April showed a marked slowdown in year-on-year export growth — 3.9 per cent compared to almost 15 per cent in March — yet even that was better than expected. Anecdotal evidence and surveys taken ahead of the release of key domestic data such as real estate and infrastructure investment on May 16 suggest a reckoning is coming. April vehicle sales fell 48 per cent year-on-year, according to industry data released on Wednesday.

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“We won the battle to defend Wuhan,” Xi said at the meeting, according to state media. “We will certainly be able to win the battle to defend Shanghai.” Since the start of the pandemic, such martial rhetoric has been a common refrain for Xi, who has embraced the crisis as an opportunity to prove himself a leader in the war on Covid. He added a warning: “Relaxing prevention and control measures will inevitably lead to large-scale infections, serious illnesses and death, and will seriously affect economic and social development.” The admonition was a nod to his administration’s success in limiting official Covid deaths to just a few thousand — the US has suffered nearly 1mn. But it also highlights the government’s failure to vaccinate the elderly and other vulnerable people. A similar omission in Hong Kong led to a catastrophic outbreak there this year in which more than 9,100 people died, most of them elderly and unvaccinated. On May 9, researchers at Fudan University in Shanghai estimated a similar surge across China could kill as many as 1.6mn people in just three months. The highest profile, and most controversial, Chinese lockdown has been the one imposed on all of Shanghai’s 26mn residents since April 1. Within hours of Xi’s comments on Covid control last week, police and enforcement officials in areas of Shanghai were imposing some of their harshest measures to date — including the forced transfer of all residents in a given building to centralised quarantine if even one of them tested positive. Many residents have complained of being unable to receive food deliveries.Viral videos of overzealous enforcement have spread panic across the city. In one of them a police officer tells residents: “You can’t do what you want, like in America. This is China. So listen carefully [and] don’t ask me why, there is no why!”The Forbidden City is shutting indefinitely from Thursday, amid fears that Beijing could be subject to a full lockdown next © Noel Celis/AFP/Getty ImagesEver stricter measures adopted in Beijing over recent weeks have raised fears that the capital city could be subject to a full lockdown next. The main commercial district, Chaoyang, is already effectively closed for business and the Forbidden City is shutting indefinitely on Thursday. According to one popular Chinese Covid tracker service, more than 600 Beijing residential compounds were subject to moderate to severe restrictions on May 8 — up from 239 at the end of April. James Zimmerman, a China lawyer at Perkins Coie who recently underwent a five-week quarantine ordeal to return to Beijing from the US, says 10 of his 30 colleagues in the capital have been caught in random residential lockdowns, with “more expected to get the call to stay at home at any time”.“The uncertainty and unpredictability of the whiplash policy changes is a dismal experience,” he added. “It’s now a cat-and-mouse game to avoid crossing lines into areas on lockdown or near lockdown.” Health vs prosperityThe government finds itself in the difficult position of trying to fight “two battles simultaneously: containing Covid and preventing the deterioration of the economy”, says Chen Long at Plenum, a Beijing-based consultancy. “Officials are told to win both,” he adds, “but the reality is they must prioritise one over the other. Zero-Covid still trumps the economy for now.”This is true even while fears for the economy are being voiced by the premier Li Keqiang or by vice-premier Liu He, Xi’s most-trusted economic adviser who is particularly concerned about the lockdowns’ impact on the property and financial sectors. Last weekend, Li warned that China’s “current employment trends are complex and grim” and called on “all localities” to prioritise protecting jobs to “ensure economic stability”. On Wednesday night, the State Council promised more relief measures for workers and employers, citing the pandemic’s “larger than expected impact” on the economy. But the localised approach to lockdowns makes it difficult for even municipal officials, let alone party leaders in Beijing, to assess their extent and economic impact. One such official in the city of Nanjing, Jiangsu province, who asked not to be identified because he was not authorised to speak to foreign media, voiced his frustration: “The Politburo Standing Committee made it clear last week that fighting Covid was our top priority,” he says. “But we can’t ignore the economy, which is in freefall.”A worker in protective clothing directs occupants of buildings to go for Covid testing in Shanghai. The city’s 26mn residents have been under lockdown since April 1 © Aly Song/ReutersHis dilemma illustrates another difference between these local lockdowns and the national one two years ago. Because of the interconnected nature of China’s sprawling economy, companies in areas subject to moderate or even no controls can still be severely disrupted by the knock-on effects of those elsewhere.The official says his “main job” has become lobbying his counterparts in Shanghai, 270km to the east, to authorise production at suppliers that Nanjing-based manufacturers rely on. “How can large firms operate normally when most of their suppliers are still under lockdown?” he says. “Stimulus won’t work if factories can’t return to normal.”Foreign investors are also caught in the turmoil. Last week 60 per cent of more than 370 respondents to a survey by the EU Chamber of Commerce in China said they were lowering revenue forecasts for the year, while about one-quarter said they would move existing or planned investments out of China.“If the current situation continues, [our members] will increasingly evaluate alternatives to China,” said Joerg Wuttke, the chamber’s president. “A predictable, functioning market is better than one that, despite having high growth potential, is volatile and suffers from supply-chain paralysis.” The limits of stimulusWang’s difficulties in Henan are common across the cement industry. According to a nationwide survey by 100NJZ, a construction industry consultancy, shipments from 506 cement companies fell more than one-third in April.An executive at state-owned Tangshan Jidong Cement Co, one of the largest in the industry, says new projects are not getting off the ground because of a lack of funding for local government financing vehicles, or LGFVs, which are crucial motors for the economy. “Stalled projects are everywhere,” he says.

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Bond issuance by LGFVs was just Rmb758bn ($112bn) over the first four months of this year, down almost 25 per cent from the same period in 2021. Many Chinese banks now prefer to lend to infrastructure projects led by large state-owned enterprises rather than LGFVs, which they see as too risky.They take a similar view of small and medium-sized enterprises in the private sector, which account for half of government tax revenues, 60 per cent of economic output and 80 per cent of employment. In March, researchers at Peking University surveyed more than 16,500 such businesses nationwide. First-quarter revenues were, on average, 73 per cent below the same period in 2019 — nine months before the pandemic hit. Average profit margins were 0.1 per cent, down from 1.8 per cent at the end of last year.

An executive at Bank of China’s branch in Zhengzhou, Henan province, who asked not to be named, explained the problem many lenders face. “The banking regulator asked us to beef up support for the economy by making more loans to LGFVs and SMEs,” he says. “But we will face heavy punishment in the event of defaults.”Such reticence seems widespread. According to a nationwide survey of more than 100 loan officers by Shanghai-based Guosheng Securities, 44 per cent of respondents said their banks wanted to reduce exposure to LGFVs in coming months. About two-thirds said they expected loans for infrastructure and real estate development in the second quarter would either fall or, at best, match first-quarter issuance.

Attitudes such as these frustrate efforts by the State Council and People’s Bank of China to direct more credit to companies by cutting the level of reserves banks must maintain. Michael Pettis, a professor of finance at Peking University, says this kind of targeted easing “doesn’t solve the problem” in a lockdown-afflicted economy. “If you force banks to lend under [such] circumstances, the way they lend is not by satisfying unmet demand but by lowering their lending standards.”Government officials and policy advisers say central bank officials want to boost growth by ensuring “appropriate financing demand” for LGFVs’ investments. But the securities regulator and planning ministry are more cautious. At the end of April the planning ministry issued new restrictions limiting LGFVs’ issuance of dollar-denominated bonds to 40 per cent of net assets.“The authorities are trying to strike a difficult balance between supporting growth and keeping debt pressures from spiralling out of control,” says one Shanghai-based government policy adviser. They have good reason for concern. The total amount of outstanding interest-bearing debt issued by LGFVs is currently double that four years ago, standing at Rmb48tn.

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Another hallmark of Beijing’s Covid stimulus policies, tax cuts, have offered little relief, according to many small business managers. In March, the State Tax Administration said SMEs would be exempt from paying value added tax until the end of the year. But, in practice, a business can only claim VAT relief on a transaction if the client waives its right to a VAT refund — something most are not willing to do.Tax officials argue that the government cannot afford to give relief to both parties. “We can’t allow small firms and their clients to both enjoy tax breaks,” says an official at Beijing’s municipal tax bureau. “That would translate into a big drop in overall tax revenue just as local governments badly need money to fight the virus and finance infrastructure projects.” Despite the intensifying economic pain, few expect Xi to relax his zero-Covid campaign before securing an unprecedented third term in power at a party congress later this year. The strategy “has become a political crusade — a political tool to test the loyalty of officials”, says Henry Gao, a China expert at Singapore Management University. “That’s far more important to Xi than a few more digits of GDP growth.” More

Things have gone from bad to worse on Oleg’s farm in Kherson in southern Ukraine since Russia’s invasion 10 weeks ago. Occupying forces took away some of his grain and stole all the machinery, including trucks, low-loaders and jeeps — which his staff have seen in local towns ferrying Russian army personnel and equipment. They commandeered his house and farm buildings.Oleg — not his real name given the risk of reprisals — doubts whether he will be able to harvest the reduced area of land he has sown this spring. The extra combine harvesters and lorries he normally rents from central Ukraine will be hard, if not impossible, to secure. Two-thirds of his staff have left. Some are afraid of working in the fields when the war is raging nearby. An exploding shell in a sunflower field during the dry summer months could trigger an unstoppable fire.“I did not count the amount of losses,” said Oleg, adding they were only going to get bigger. Ukraine’s government has accused Russia of trying to destroy its agriculture sector by stealing valuable grain stocks and machinery, deliberately bombing farms and warehouses and blockading its Black Sea ports to deprive it of exports earnings and farmers of liquidity. There are multiple examples around the country of grain elevators and warehouses being bombarded. Around Kyiv, Russian forces destroyed distribution centres and warehouses to try to disrupt the provision of food to the capital.But it is the confiscation of grain in territories controlled by Moscow that is the most emotive issue. It has drawn parallels with the Soviet policy of crop confiscations coupled with the confinement of peasants to their villages in the 1930s. Some 4mn people died in the ensuing famine in Ukraine, known as the Holodomor, or death by starvation.After Russia bombed a farm business in Luhansk in eastern Ukraine last month, destroying machinery, buildings and 17,000 tonnes of wheat — a year’s supply for 300,000 people — Serhiy Haidai, the local governor, said on social media that Moscow was seeking “to organise the Holodomor in the Luhansk region, that is without a doubt”.

Ukrainian farmers during the 1930s famine known as the Holodomor, in which about 4mn people died © CPA/Alamy

“The most straightforward conclusion from Russia’s exporting grain from Ukraine is [that] their aim [is] to exacerbate the risk of shortages and hunger in the Ukrainian territories under Russian control,” said Vladyslava Magaletska, former head of Kyiv’s state service for food security.“In addition, Russia may envisage using the stolen grain to blackmail the world, putting global food security at risk.”The confiscations appear to be on an industrial scale. Agriculture minister Mykola Solsky said Russian authorities had seized between 400,000 and 500,000 tonnes of grain from across the territory it has occupied, taking most of it to Crimea. “This is big business, organised at the highest levels. Clearly it is done by uniformed agents and the military of the aggressor country,” Solsky said.Alex Lissitsa, chief executive of IMC, one of Ukraine’s biggest agribusinesses, said grain seizure on this scale must be organised by the Russian authorities because it was not an easy endeavour.Ukrainian defence intelligence said in a recent statement that a “significant part of the grain stolen from Ukraine is on dry cargo ships under the Russian flag in the Mediterranean. The most likely destination is Syria [an ally of Moscow]. From there, grain can be smuggled to other countries in the Middle East.”Solsky said Kyiv was seeking western help to try to stop the shipments.Overall, Ukraine’s government expects 70-80 per cent of farmland to be sown this year despite the problems the war has caused for farmers — from rising prices for fuel and fertilisers to mines and unexploded munitions in their fields and their inability to export stocks of grain by ship. On Lissitsa’s land in northern Ukraine, the grain elevator was hit by Grad rockets at the beginning of Russia’s invasion but miraculously survived. After Moscow’s forces withdrew from the area his farmers were able to sow, despite the shortage of manpower. “I couldn’t believe a month ago we’d be farming here, but we are,” he said.

The picture in the occupied territories in eastern and southern Ukraine is bleaker. In some places, farmers have been banned from working in their fields. Inna Zelena, a Kherson local official who fled when Russia invaded, said some farmers were prevented from growing tall crops, such as corn and sunflowers, which could provide cover for Ukrainian insurgents. She also said local vegetables were being shipped en masse to Crimean stores and markets. Locals in Kherson were meanwhile increasingly reliant on groceries trucked in from the peninsula. “There will be a food crisis,” Zelena predicted.Kherson farmer Oleg said pro-Kremlin local officials appointed by occupying forces were expropriating entire farm holdings. Some 200 large farm businesses — including many owned by US companies — were being listed for “nationalisation” and would probably be transferred to pro-Russian businessmen from the area, he said.“Some powerful pro-government farmers have a very big bonus from Russia today,” he added. More