Aurelia Butler

The surge in commodity prices that followed Russia’s invasion of Ukraine will worsen the squeeze on UK living costs and reduce growth, economists have warned, as the Bank of England prepares its latest assessment of the economy.Oil, gas and wheat prices have risen sharply since late February, raising UK consumer prices and pointing to a higher peak in inflation this spring followed by a period of sustained high price rises. With forecasting groups, such as Goldman Sachs, now expecting inflation to peak above 9 per cent, the even higher prices will exacerbate the largest expected squeeze on household disposable incomes for 30 years, potentially slowing economic growth to a crawl. Thomas Pugh, economist at financial services company RSM UK, said that “once we factor in the impact of higher gas prices, tighter financial conditions and lower business and consumer confidence, we think that UK GDP growth [this year] could be between 0.75 and 1 percentage point lower than it otherwise would have been”. While Andrew Goodwin, chief UK economist at Oxford Economics, cut his forecast for UK GDP growth by a smaller 0.1 percentage points for 2022, he shaved more off his 2023 forecast to reflect the likely further rise in gas and electricity prices this autumn. But due to the uncertainty around the conflict in Ukraine, few economists are confident in their predictions, and most are continuously revising their outlooks. “The longer the war lasts, and the bigger the sanctions on Russia are, the greater the hit to UK activity will be,” warned Sandra Horsfield, economist at Investec.The big revisions in forecasts comes even though the UK has few direct economic links with Russia’s economy. Less than 4 per cent of the Britain’s gas supply is from Russia, a lower proportion than other major EU countries. Russia accounts for only 1.3 per cent of UK goods trade and 0.7 per cent of its foreign investment. Just $3bn, or 0.1 per cent, of the UK banking system’s foreign claims are tied up in Russian banks, limiting any likely financial fallout if Russian banks defaulted in the weeks ahead. However, the UK buys energy and commodities in international markets, where prices are soaring. “The main impact on the UK economy of Russia’s invasion of Ukraine is likely to be energy prices staying higher for longer,” said Goodwin. Yael Selfin, chief UK economist at KPMG, noted that it is not only energy prices that are rising because of the conflict. “Food prices are also likely to be affected,” she said, adding that the higher price of wheat alone could add 0.7 percentage points to inflation based on current levels. The rising cost of fertilisers is also increasing food prices. Before the war in Ukraine began, the Bank of England forecast that inflation would peak at 7 per cent in April, but since last week most economists have revised their predictions up. Financial markets now expect RPI inflation — which runs about 1 percentage point higher than CPI inflation — to average at more than 5 per cent over the next five years. Stephen Ball, economist at Goldman Sachs, predicts that the peak in headline inflation will shift from April to October, when he forecasts it will rise to 9.5 per cent, and remain above 7 per cent until next spring. Tentatively predicting another 55 per cent increase in energy bills this autumn, Ball said “the peak in headline inflation shifts from April to October”.This rise “will exacerbate the cost-of-living crisis by reducing households’ real incomes”, warned Paul Dales, chief UK economist at Capital Economics. Even before the war, the Bank of England had forecast the largest squeeze on living standards in three decades in 2022. Although households have much stronger finances on average than after the financial crisis because they could not spend as much as normal during the pandemic, Ana Boata, economist at Allianz Research, said this would not protect the wider economy from a sharp slowdown. She noted that excess savings accumulated through the pandemic “will not be enough to absorb the income squeeze from higher energy bills”.Economists had expected consumer spending to be the main driver of growth this year as the UK rebounded from the pandemic, but hopes of unusually rapid consumption growth are falling. The British Chambers of Commerce, a business organisation, revised its consumer spending growth forecast to 4.4 per cent in 2022, down from its previous December forecast of 6.9 per cent.

It also sharply downgraded business investment growth to 3.5 per cent this year and warned that the risks of recession were now rising. “Russia’s invasion of Ukraine could drive a renewed economic downturn if it stalls activity by triggering a sustained dislocation of supply chains or a more significant inflationary surge,” warned Suren Thiru, head of economics at the British Chambers of Commerce.The deterioration in the outlook might also mean that “instead of labour market tightness as is currently the case, the UK could experience job losses”, said Horsfield. More

From rationed sunflower oil in Spanish supermarkets to pricier sushi in Japan, the war in Ukraine is rippling across global dining tables. Russia and Ukraine exports account for 12 per cent of total calories traded in the world, according to the International Food Policy Research Institute. North Africa and the Middle East rely on these countries for half their cereal.The immediate consequence is higher food bills. Producers such as Nestlé, Mondelez and Danone — which just this week reset margins lower — were already dealing with inflated input costs. Unilever, prewar, reckoned these would add €3.6bn to its €23bn bill. Some are preparing the ground for a rare fourth session of negotiations with retailers: tough price-setting talks that, in normal years, are completed in a couple of rounds.That assumes they can procure goods in the first place. Anecdotally, some small flour mills and other processors, finding themselves unable to replenish depleted inventories, began triggering force majeure clauses this week. More could follow. Nor is it just exported goods. About a quarter of Europe’s supply of key nutrients such as nitrogen and phosphate used in fertilisers comes from Russia, Belarus and Ukraine. That stands to have an impact on future domestic European crops too.Longer term, disruptions to supply could trigger a rewriting of agricultural rules. As with energy, there will be renewed efforts in substitution and procurement — likely meaning more focus on self-sufficiency. The UK produces about 60 per cent of domestic food consumption by economic value, part of which is exported. As with gas, some of these efforts dovetail with existing policy campaigns, such as a move towards more organic farming. But others are contradictory. European policy moves towards greening, such as dedicating a portion of arable land to non-productive elements, may be unwound if the focus reverts to self-sufficiency.Bigger risks are in store for emerging markets, where food is a bigger component of spending and — in cases such as Egypt or Indonesia — reliance on Russia and Ukraine is greater. History shows there are few more potent sparks for social uprisings than empty tables. More

China will double the permitted trading range between its currency and Russia’s rouble to help bolster trade between the two countries as the Russian economy reels from western sanctions imposed after its invasion of Ukraine.The China Foreign Exchange Trade System (CFETS) announced on Thursday that “in accordance with the requirements of market development” it would widen the daily trading band for the renminbi’s exchange rate with the rouble, allowing the currency cross to trade 10 per cent in either direction of a daily midpoint set by China’s central bank, up from 5 per cent previously.CFETS said the new trading band would be implemented from Friday, “with the approval of the People’s Bank of China and the State Administration of Foreign Exchange”.China has refrained from hitting Russia with sanctions even as western countries enacted a flurry of economic punishments for Moscow’s invasion of Ukraine. Russia is a key supplier of oil and natural gas for Beijing and the two have made substantial efforts to de-dollarise bilateral trade in the years since sanctions were first imposed on Russia over its annexation of Crimea in 2014.Analysts said the trading band change was a practical response to support trade between China and Russia in light of the recent volatility of the rouble, which has sunk roughly 36 per cent this year against both the US dollar and the renminbi. By comparison, China’s currency has remained steady at around Rmb6.3 against the greenback.“This will facilitate trade and improve market liquidity” for the renminbi-rouble exchange rate, said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank. “From a market maker’s perspective, if they had kept the 5 per cent band it would be very difficult to price [the exchange rate].”The renminbi’s relative resilience throughout the Ukraine crisis has fuelled talk that the currency could become a haven, as well as speculation that Beijing could utilise its yuan-based international payments system to help cushion the blow from sanctions that have rocked Russia’s economy.Among the most severe measures levied by western countries so far is the ejection of most major Russian financial institutions from Swift, the global payments system. Payment networks Visa, Mastercard and American Express have also announced plans to suspend operations in Russia.

Following the latest sanctions being imposed, Chinese state media has highlighted the opportunity for the country to boost the use of its own cross-border payments system meant to rival Swift. Russian banks have floated the possibility of issuing co-badged cards linked to both Russia’s Mir and China’s UnionPay international payments systems.One China economist at a European bank in Hong Kong said the trading band change would make the exchange rate more flexible and allow institutions in China that paid for oil from Russia using roubles to convert the currency into renminbi at a more favourable rate.“Five per cent is actually a reasonable range, but of course if you’re talking about [emerging markets] countries that have a crisis . . . there’s a definite need to widen it,” the economist said. More

(Reuters) – Gold bounced above the $2,000 an ounce level on Thursday following a sharp correction in the last session as a lack of progress with the Russia-Ukraine talks re-ignited a shift into safe-haven assets. Spot gold rose 0.7% to $2,004.89 per ounce by 1203 GMT after tumbling as much as 3% on Wednesday. U.S. gold futures were up 1.2% to $2,011.00. “Gold bulls have shown little qualm in catapulting prices higher on signs the Ukraine crisis could drastically worsen the global economic outlook,” Han Tan, chief market analyst at Exinity said. A rush to safe-haven assets earlier this week due to the Ukraine crisis powered gold prices to near record levels hit in August 2020. “The safe-haven allure for gold is maintained despite the markets assimilation with commodity supply shocks and will be a driving force for bullion as the war in Ukraine persists,” DailyFX analyst Warren Venketas wrote in a note. A rebound in equities wilted as analysts warned of further pain for stocks with no immediate end in sight to the war in Ukraine. Investors are also keeping an eye on February U.S. consumer price index data which is due later in the day, against the backdrop of surging oil prices and ahead of the Federal Reserve’s next policy statement on March 16. Palladium, used by automakers in catalytic converters to curb emissions, was up 0.2% to $2,944.25 per ounce. The metal hit a record high of $3,440.76 on Monday, driven by fears of supply disruptions from top producer Russia. The palladium market “should continue to price-in a supply risk premium in the short-term,” ANZ analysts wrote in a note. Spot silver rose 0.7% to $25.92 per ounce, while platinum added 1.7% to $1,094.31. More