Aurelia Butler

In the past 15 years, the UK’s economy has been buffeted by three huge external shocks — the financial crisis, Covid-19 and now the Russia-Ukraine war — and one domestically generated one, Brexit. We are buffeted by surprises whose implications are unknown, even unknowable.It took a long time, for example, to realise that the financial crisis marked a sharp turning point in trend productivity growth. Yet, as the Resolution Foundation notes in its evaluation of the Spring Statement from Rishi Sunak, chancellor of the exchequer, “labour productivity grew by only 0.4 per cent a year over 2007-19, one of the slowest rates among rich countries, and much slower than the approximately 2 per cent rate in the preceding 12 years”.

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This, in turn, explains the near-stagnation in household real disposable incomes that has preceded the exceptional squeeze expected this year. But why this happened is still unknown. Again, it was predictable that Brexit would make the economy less open to trade. The extent to which it will also end up making the economy permanently less productive is still unknown.Similarly, we know today’s shock has followed on the heels of a large and mostly unexpected post-Covid surge in inflation. We know it will squeeze the real incomes of the less well off particularly brutally. But the full economic ramifications of the war are unclear.

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The Office for Budget Responsibility has, however, made a heroic guess. This helps us to clarify some painful possibilities. The OBR forecasts that this new shock will drive inflation to close to 9 per cent this year, which will be the highest rate in 40 years. Similar surges in inflation are happening in other high-income countries. This increase is driven primarily by higher gas and fuel prices, along with a global rise in the prices of manufactured goods. The OBR also expects that excess demand in the domestic economy will ensure that these increased costs will be passed into consumer prices. But it assumes they will only be partly matched with higher nominal wage growth: in brief, real wages will fall significantly.Crucially, this inflation upsurge is expected to be temporary. The OBR forecasts that inflation will fall sharply next year, as the current high prices become the baseline for future calculations. This outcome depends, however, on the belief that nominal wages will lag well behind inflation. Yet this assumption is made despite confidence that the labour market will stay strong and unemployment low. Furthermore, the bank rate is forecast to peak at below 2 per cent, which implies highly negative real rates, throughout. In sum, we will see a combination of falling real wages with a strong labour market and an expansionary monetary policy. The economy might easily end up far weaker than the OBR envisages. Monetary policy could be far tighter; for example, if inflation did not fall. Alternatively, the squeeze on real incomes might reduce demand and output substantially, without the need for higher interest rates. Either option would mean a far weaker economy. An embargo on gas exports from Russia would make that outcome more likely. The economy would then suffer stagflation.What role should policy and policymakers play in all this? The Bank of England’s job remains what it is meant to be: to get inflation back down to target and so stabilise expectations. It must do so. The chancellor’s job is far more complex. He is right to want to preserve his room for fiscal manoeuvre. But, according to the Resolution Foundation, policy changes so far have offset only one-third of the income shock that would have hit the poorer half of the population in 2022-23. Given what is now happening and the squeezes on real income ahead, he will surely need to cushion the short-term blows on poorer households more effectively than he has so far.Yet a still bigger point can be seen. In tough times, a country needs trusted people in charge. Questions about the prime minister are evident. At the beginning of the pandemic, Sunak and the Treasury responded impressively. Recently, however, notably in his Spring Statement, he has claimed to be cutting taxes when he is raising them (in part by freezing tax thresholds in nominal terms). He has also been substituting bad taxes (national insurance) for better ones (income tax). Sunak, asserts Paul Johnson of the Institute for Fiscal Studies, “has proved to be something of a fiscal illusionist”.Indeed, he has and not just “something” of one. People will notice the extent of the illusions in their pay packets and real disposable incomes. He is burning his credibility. This will be bad for him and bad for the [email protected] Follow Martin Wolf with myFT and on Twitter More

The case for a half-point interest rate increase at the Federal Reserve’s next policy meeting in May has grown, according to Mary Daly, president of the US central bank’s San Francisco branch, in the latest sign that it is readying aggressive moves to root out high inflation. Daly joins an expanding group of Fed officials who have jettisoned a gradual approach to scaling back support for the economy in the aftermath of the pandemic-induced recession. They have embraced a more rapid withdrawal as the labour market has bounded back and price pressures have become far-reaching.Support has coalesced in recent weeks for interest rates to rise to a “neutral” level that neither aids nor constrains growth, and to get there more quickly than initially expected by moving in larger increments than the quarter-point rate increase delivered in March. That entails resurrecting a tool last used more than two decades ago and raising rates by half a percentage point at one or more meetings this year. “The case for 50, barring any negative surprise between now and the next meeting, has grown,” said Daly in an interview with the Financial Times on Friday. “I’m more confident that taking these early adjustments would be appropriate.”Estimating the neutral policy rate to be between 2.3 per cent and 2.5 per cent, and advocating for getting to that level “efficiently” this year, Daly acknowledged that that translates to “multiple” half-point adjustments given the target range of between 0.25 per cent and 0.50 per cent.Following signals from some of the most senior policymakers on the Federal Open Market Committee in recent weeks — including Jay Powell, the chair — Wall Street economists have raised their forecasts for interest rates. They now expect the central bank to follow through with half-point moves in May and June before downshifting to quarter-point rate rises for the four remaining meetings after that.Citigroup thinks the Fed could even go so far as to deliver half-point increases at its next four meetings, taking their cue from several officials who have endorsed moving rates above neutral this year. Most economists expect the Fed to begin shrinking its $9tn balance sheet next month.Daly’s comments follow the release of another strong jobs report that showed 431,000 positions added in March and the unemployment rate dropping to the lowest level since before the pandemic, to 3.6 per cent.

Daly said the latest data fortifies the view that the labour market is “very strong” and “tight to an unsustainable level”.“If you want a job in the United States, you can get one and you can probably get multiple jobs at this point,” she said. “If you’re an employer looking for workers, it’s hard to both hire them and retain them.”While the combination of a labour market that has no “slack” and inflation that is running at the fastest pace in 40 years justifies moving towards neutral, Daly said the Fed would proceed carefully enough to avoid an “unforced error” that destabilises financial markets or the broader economy.Fed officials so far appear confident in their ability to damp demand and tame inflation without causing widespread job losses or a recession. Powell spoke optimistically about achieving this soft landing at his most recent public appearance last month.Daly acknowledged the economy may need to slow considerably in order to bring inflation back in line with the central bank’s 2 per cent target. But she drew a distinction to the 1970s, when then-chair Paul Volcker’s efforts to control surging prices and tether inflation expectations caused a sharp economic contraction.“Our job really is to just bring demand and supply back into balance, and that’s an easier job than trying to reset the inflation anchor to something more consistent with price stability,” she said. “I’m very optimistic that we can avoid a hard landing.” More

America’s biggest solar farm builder has accused Joe Biden of doing more harm to the sector than the Trump administration with a “dysfunctional” climate policy.George Hershman, chief executive of Solv Energy, said a probe launched by the US commerce department this week into whether solar groups are dodging import tariffs threatened to put the breaks on new projects and derail the president’s climate agenda.“The Biden administration, and particularly this commerce [department’s] decision, has done more damage to renewables than the previous administration,” said Hershman, whose company is the top installer of large, or “utility-scale”, solar projects in the US

“At least we knew where that administration [Trump] stood. This administration every day says how much they are in support of renewables but then actively make decisions in opposition.”His comments come after the Department of Commerce on Tuesday agreed to investigate whether solar parts manufacturers were circumventing tariffs on Chinese imports by shifting the final stages of the manufacturing process to Cambodia, Malaysia, Thailand and Vietnam.Analysts estimate about three-quarters of US solar product imports come from these four countries. The probe was requested by a domestic panel maker, California-based Auxin Solar, which argued that Chinese suppliers were guilty of “pervasive backdoor dumping” that was hurting American manufacturers. If the investigation finds the practices amount to circumvention, decade-old tariffs on Chinese imports would be extended to these countries, increasing costs by between 50 and 250 per cent. A final decision is expected early next year but the tariffs would apply retroactively from April. Solar groups said the launch of the probe alone had “chilled” the market, with manufacturers reluctant to ship parts that might later be hit by tariffs.The case highlights a tension between the Biden administration’s priorities on climate and industry. On one hand the White House wants to drive a rapid build out of clean energy infrastructure, but on the other wants to protect domestic manufacturing and employment. “It’s a bit dysfunctional, it’s a bit schizophrenic,” said Hershman. His comments echo those of offshore wind developers, who have voiced concern that forcing the industry to “Buy American” before a domestic supply chain is fully developed will stop it in its tracks.Biden campaigned on an ambitious climate agenda, but the legislation that would have implemented the bulk of it failed to pass muster in Congress. The bill included unprecedented tax incentives for renewable developers and manufacturers. “We will build US manufacturing if we pass this bill, no question. But we’re not going to be pushing major capacity out for two years,” said Hershman. “Right now we need to use the global supply chain that’s in place and then begin the transition to a US supply chain.”Auxin dismissed this, however, arguing US a ramp-up of domestic parts supply was feasible. “The same companies that are saying that there is not sufficient domestic supply are not even attempting to purchase from domestic sources,” said Mamun Rashid, Auxin chief executive. “We have available capacity and with sufficient purchase orders, we can quickly scale up. But we need a fair price that allows us to cover our costs and pay our employees a fair wage.” More

Did Turkish inflation hit a 20-year high in March?Surging global energy prices probably propelled Turkish inflation to its fastest rate in two decades in March, but President Recep Tayyip Erdogan’s fixation on low interest rates means the central bank remains loath to respond with tighter monetary policy.The bank has slashed its benchmark rate by a cumulative 500 basis points since September after Erdogan, a self-described “enemy of interest”, ordered policymakers to lower borrowing rates to fuel economic growth ahead of a 2023 general election. In the months since September’s rate cut, the lira has tumbled 40 per cent against the dollar, setting off an inflation spiral.Economists polled by Reuters expect official data, due April 4, to show that consumer prices rose by an annual 61.6 per cent in March.A sharp rise in commodity prices triggered by Russia’s invasion of Ukraine has only made the pain worse. The state energy importer Botas on Friday raised natural gas prices for households by 35 per cent and for companies by 50 per cent. Turkey imports almost all of the oil and natural gas it consumes.Despite signs that inflation will accelerate further, the central bank has indicated it believes price increases will slow once the crisis in Ukraine is resolved.Some analysts remain cautious. “Turkey was dealing with inflation and a weak currency well before the war, and even if it were to end tomorrow, it will take time for Russia’s sanctions to be lifted and supply chains to return to normal,” said Enver Erkan, chief economist at Tera Securities in Istanbul. Still, the central bank “is avoiding inflation targeting as long it can”, he said. “The government doesn’t want a rate rise a year before elections nor to make any concession on economic growth.”Erdogan has said the tenets of Islam, which prohibits usury, now guide his economic policy and vowed the weaker lira will increase exports, expand manufacturing and create new jobs.Prices last rose this fast in March 2002 just before Erdogan’s Justice and Development party swept to power on a platform of sound economic management.But the pain Turkish households are feeling as groceries, utilities and medicine soar has eroded support for Erdogan’s party to its lowest level since it came to office. Ayla Jean YackleyWhat will the Fed’s minutes say about supersized rate rises?Market participants will be looking to Wednesday’s release of the Federal Reserve’s minutes from its March meeting for clues about how aggressive the central bank is willing to be to curb inflation. Of particular interest will be any discussion about the Fed starting to shrink its $9tn balance sheet, by either allowing its US government debt holdings to mature without replacing them or by actively selling the securities. Fed chair Jay Powell has signalled that the Fed may be prepared to announce a decision about quantitative tightening (QT) as soon as May. One major question to be answered is about the pace of QT — the “caps” on the amount of debt that are allowed to mature each month. While the prospect of QT has been priced in by the market to a degree, discussion about large caps or an otherwise aggressive approach could push Treasuries lower, as the market braces for a fresh wave of supply. The market will also be looking for any signals about the possibility of 0.5 percentage point interest rate rises. The futures market is currently pricing in one supersized rate rise at the Fed’s May meeting, and at least one other this year. What, if anything, the Fed said at its meeting about 0.5 percentage point raises may not change market expectations dramatically. Chair Jay Powell in the days after the March meeting said that if the Fed decided it was appropriate to raise rates by more than a quarter point, it would do so. Following Powell’s remarks, other Fed officials came forward to echo his sentiments. Kate DuguidHas the latest Covid-19 outbreak damped China’s loan growth?Growth in new yuan loans — a measure of the total value of loans given by banks in China to businesses and consumers — slowed by more than expected in February, rising by just Rmb1.23tn compared with economists’ forecasts of Rmb1.49tn. The shortfall has put pressure on authorities to take further action to support the economy.Analysts at BNP Paribas predict that new loans for March will rise to Rmb2.9tn. But with about 120 Chinese cities affected by China’s biggest Covid-19 outbreak since the pandemic began, the figure for March – due out on April 8 – carries a downside risk, said Xingdong Chen, chief China economist at the French bank.“Because between growth and Covid control, local government to me is taking Covid control as a priority,” Chen said. “That is unfortunate.”Chen said that while banks and local authorities had funds to disperse, China’s latest purchasing managers’ index data, which showed a contraction in both the manufacturing and service sectors of the economy for the first time in almost two years on Thursday, suggested that demand for loans may have flagged in March.“[So] local governments are under pressure to speed up ongoing projects and [to find] new projects to start . . . [but] we are not actually too optimistic about this part,” Chen added. Going forward, the question is whether China’s snap lockdowns, including one in the commercial centre of Shanghai, will be enough to quickly bring the outbreaks under control and unleash pent-up demand.“April may be improving because of the sequential, seasonal demand,” said Chen. “[But] the real performance and the more normal performance will wait until May.” William Langley More