Aurelia Butler

A conflict that could develop into Europe’s biggest since the second world war has shattered hopes of a strong global economic recovery from coronavirus at least in the short term.Russia’s invasion of Ukraine on Thursday shook financial markets and the increased geopolitical tensions are set to exacerbate high inflation and supply chain bottlenecks. The direct impacts of lower trade with Russia, economic sanctions levied on Moscow by the US and EU, and financial contagion are likely to be outweighed by the indirect consequences from the effect on business and consumer confidence and commodity markets, economists said.These repercussions could range from relatively limited to extremely serious. If energy prices continued to soar, for example, it could easily tip the global economy into a second recession in three years. Economists said the following issues are the big ones to watch. How bad does the war get?Russian president Vladimir Putin’s desired endgame is unclear. Analysts are considering several scenarios that range from a change of government in Kyiv to a Moscow-friendly regime to a wholesale attempt to redraw the international boundaries of Europe and beyond. Holger Schmieding, chief economist at Berenberg Bank, said the first thing to consider was “how bad does the war get?” — which would determine the likely response in financial and energy markets in the days to come. The wider global response will be just as crucial, said other economists. Tim Ash, economist at BlueBay Asset Management, singled out China, which has signalled its willingness to help Russia manage the financial fallout from its military actions. Beijing’s response would be vital in terms of the wider consequences, which could range from the malign — for example, more tension over its own relationship with Taiwan — to more benign diplomatic outcomes. “Either [China] sees it as an opportunity to go into Taiwan, or as an opportunity to improve relations with the US,” he said. Are markets able to withstand the geopolitical shock?Leading global financial markets were sharply down on Thursday but the outcome could have been more extreme, suggesting they were surprised by Putin’s actions but do not yet think the most severe market shocks, akin to a financial crisis, are likely. This leaves open the possibility that they have further to fall, with consequences for corporate and household wealth, consumption and global confidence. Neil Shearing, chief economist at Capital Economics, noted that, while there was a sell-off in equities, bond yields declined and credit spreads have not widened much, suggesting the market reaction was orderly and not indicative yet of expectations of a wider war across Europe.The avoidance of a market meltdown was not global and many emerging economies were hit with much sharper swings. Kevin Daly, portfolio manager at Aberdeen Asset Management, noted steep sell-offs in Ghana, Turkey, Egypt and Pakistan, citing a flight to safety from financially vulnerable countries.Randy Kroszner, deputy dean at the University of Chicago Booth School of Business and a former Federal Reserve governor, said recession risks would show up in the difference in yields of investment-grade compared with non-investment-grade debt, which had not widened extensively on Thursday. He added that the yields on sovereign debt of countries geographically close to the crisis would offer a good indicator of whether markets began to fear a wider conflict.How badly could confidence be hit?Crucial for the global economy will be whether households and businesses become significantly more cautious, spending less and saving more in response to Russia’s actions. Ian Shepherdson, chief economist at Pantheon Macroeconomics, said slower growth was inevitable. “Consumer sentiment everywhere will weaken further . . . That has to mean slower economic growth than would otherwise have been expected in Europe, the US and most emerging markets,” he added.Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Depending on how long this crisis continues there could be a significant loss of confidence among businesses and consumers.”Economists also warned about the pressures on businesses exposed to supply chains in which Russia plays a crucial but little-known role, such as the production of critical raw materials. The country supplies about 40 per cent of the world’s palladium, a key component of catalytic converters in petrol-powered vehicles as well as electronic devices. How do energy concerns affect the wider inflation picture?Europe is highly dependent on gas from Russia and cannot quickly find alternative supplies if pipelines are cut. With a mild winter coming to an end and storage levels across Europe higher than had been expected by some energy analysts, the issue of gas supplies has become less acute but will return later in the year if the crisis continues.The more immediate concern is the impact of the crisis on the price of oil, gas and other commodities. A sharp rise would add to inflation and hit consumers.“Our modelling suggests that in a worst-case scenario oil prices could rise to $120-140 a barrel,” said Capital Economics’ Shearing. “If sustained through the rest of this year, and we see a corresponding increase in European natural gas prices, that would add about 2 percentage points to advanced economy inflation — more in Europe, less in the US. So that’s an additional squeeze on real incomes.” Pantheon’s Shepherdson said the US would be relatively insulated overall, although the continued rise in prices would hit shale oil and gas producers but hit the pockets of American energy consumers.This may add to pressure on central banks to boost interest rates. Already, the US Federal Reserve last month signalled it would begin raising rates from March to control rampant inflation. Fed chair Jay Powell last month declined to say how many rate rises there would be this year.Krishna Guha, vice-chair of Evercore ISI, said the invasion “complicates the ability of central banks on both sides of the Atlantic to engineer a soft landing from the pandemic inflation surge”, and expected financial markets to scale back their expectations that central banks would raise interest rates.

Video: Russian troops heading ‘at speed’ to Kyiv More

UK savers pulled a record amount of money out of cash Isas in the second half of last year, as low interest rates and mounting living costs dimmed the products’ appeal.Savers took out more than £7bn from cash Isas in the six months to December — the biggest half-year withdrawal since they were launched 23 years ago — according to research published this week by investment broker AJ Bell.“Poor interest rates, the cost of living crunch and the dwindling appeal of cash Isas have all played into these outflows,” said Laura Suter, head of personal finance at AJ Bell. The surge in withdrawals highlights the dilemma facing savers. As the end of the tax year looms, they must choose between holding cash, despite inflation reaching a 30-year high, or investing it in volatile markets.Sarah Coles, senior personal finance analyst at broker Hargreaves Lansdown, said the outflows could partly be explained by the way people use Isas. Typically, they open accounts in March or April, just before or after the start of the new tax year, and withdraw money from them “as they get to expensive times like holidays and Christmas”.The pandemic exacerbated the trend, she added. Millions of people amassed savings during lockdowns, but the reopening of the economy in the second half of 2021 gave them new opportunities to spend.“Wealthier households who are more comfortably off may also be using their spare cash to splurge after two years of the pandemic, booking a pricier holiday or treating their family after so long in various lockdowns,” said AJ Bell’s Suter.The appetite to save nonetheless remains strong, according to the same research, which shows savers put £35.5bn into non-Isa cash accounts over the same period. Persistently low interest rates have blighted demand for cash Isas. This is partly due to “how slow the big banks have been to pass on rate rises into their Isas” in light of spiking inflation, said Coles. Appetite for the products was also blunted by the government’s decision in 2016 to create a personal savings allowance, which meant most savers would pay no tax on interest from their non-Isa cash pots.Interest rates on cash Isas averaged 0.3 per cent at the end of last year, according to AJ Bell’s research, which analysed Bank of England data since 1999, when Isas were launched. This is less than a third of pre-pandemic rates, which averaged at 1.4 per cent in 2019.A saver putting £20,000 into a cash Isa at an interest rate of 0.3 per cent for 10 years would end up with £16,849 in today’s money, assuming an annual 2 per cent rate of inflation. If inflation were 3 per cent over the decade, the purchasing power of the savings pot would fall to £15,211. Official figures put CPI inflation in the 12 months to January at 5.5 per cent. Those with larger sums to invest are more likely to opt for a stocks and shares Isa than keep their money in cash. Last year, transfers from cash to stocks and shares Isas at Hargreaves Lansdown were up 30 per cent from the previous year. “The tipping point comes at around £30,000, when people become more likely to open a stocks and shares Isa,” said Coles.Stock investments are likely to produce a better return, said Andrew Hagger, founder of consumer website Moneycomms.co.uk, but the two Isa products were “like chalk and cheese”.While cash is “very simple with no risk”, stocks and shares Isas are “more medium to long-term products,” said Hagger. And while there are “no charges to worry about” with cash, stocks and shares products can come with fees.Investors considering stocks could also be put off by the recent volatility of the stock market, with tech sell-offs in the US and European equities swinging ahead of Russia’s invasion of Ukraine. According to finance website Moneyfacts, the average stocks and shares Isa returned 6.92 per cent between February 2021 and February 2022, while the average cash Isa returned 0.51 per cent — a record low — over the same period. Higher earners or those with more assets may be able to sit on their savings or invest, but the cost of living crunch means that those earning less are more likely to spend from their cash Isa savings. “Many households will have no spare money each month, or will be dipping into savings” as wages fail to rise by as much as living costs, said Suter. More

BEIJING (Reuters) -Shaken by a liquidity crunch among developers, China’s property market is expected to stay soft in the first half of 2022 before rebounding later in the year as policies aimed at encouraging buyers helps sentiment recover, a Reuters poll showed.Having been a pillar of strength for the world’s second largest economy, the heavily indebted property sector faltered last year as Beijing mounted a deleveraging campaign that caught out several major developers, disrupting project deliveries and chilling buyer sentiment.Aside from struggling with a rapidly cooling property sector, China has also encountered sporadic COVID-19 outbreaks that could deal a blow to factory output and consumption.Average home prices are estimated to fall 1.0% on year in the first half, according a Reuters survey of 17 analysts and economists conducted between Feb. 16-23. The estimate was unchanged from that of a Reuters poll in November.For the full year, home prices are expected to rise 2.0%.”Home prices are likely to rise if curbs are relaxed,” said Li Qilin, chief economist at Hongta Securities, adding the credit environment and regulatory policies on real estate have marginally eased since the beginning of this year.”Property transactions in first- and second-tier cities, supported by their economic and demographic advantages, will be remarkably better than third- and fourth-tier cities.”Authorities have unveiled a slew of measures to boost sales and sentiment, including giving developers easier access to escrowed pre-sale funds, requiring smaller down-payments for first-time home buyers, and allowing commercial banks to lower mortgage rates.Analysts are more upbeat on housing demand and supply than in the last Reuters survey, though they said sentiment has not fully recovered and real estate firms still face financing pressure.For demand, property sales are seen slumping 14.0% in the first half, narrowing from a 16.0% fall in November’s poll. Sales are expected to decline 7.5% for the full year.Many respondents said policies regulating demand, especially genuine demand, will be loosened, but for now sellers were relying on offering discounts.”Home buyers’ confidence has not yet been restored, and discounts are still a key marketing tool,” Huang Yu, vice president of China Index Academy, a Beijing-based property research institute.”First- and second-tier cities will see an increase in the scale of new home transactions, driving a structural rise in nationwide home prices.”China’s housing minister on Thursday pledged to keep the real estate market stable this year and ensure genuine demand for homes is met.Investment by real estate firms is expected to fall 2.0% in the first half and gain 1.5% for the whole year. Reuters previously forecast investment would drop 3.0% in the first half of 2022. Property investment grew 4.4% in 2021, the slowest pace in 17 months, while real estate firms’ sales by area rose 1.9%.”Real estate companies with capital pressure will move cautiously on land purchases and property investment,” said Lu Wenxi, chief analyst with property agency Centaline.Daniel Yao, head of research for China at JLL, a commercial property services provider, expected authorities to issue more loans to property firms for project development and allow them to issue bonds more easily to relieve the liquidity pressure and stabilise the outlook.Among the 17 respondents, 13 said China will delay rolling out a real estate tax pilot given the strain on its economy.(For other stories from the Reuters quarterly housing market polls:) More

(Reuters) – The well-scripted turn by global central banks towards tighter, post-pandemic monetary policy has been thrown into doubt by Russia’s invasion of Ukraine, a geopolitical upheaval likely to be felt differently across the world’s major economic centers.Risks policymakers face globally include a near immediate spike in the price of oil to above $100 dollars a barrel, and longer-term imponderables of what a European land war could do to confidence, investment, trade and the financial system.Central banks had been positioned for a head-on fight against inflation while expecting continued strong economic growth.But now, they may now see growth ebb even as prices continue to surge, a conundrum not easily resolved with standard monetary policy strategies.”For the major advanced economy central banks the intensification of the war now leaves them in a distinctly worse position,” Oxford Economics analysts wrote.”The high starting point for inflation…will make it hard for central banks to ignore the near-term upward forces on inflation. But at the same time, they will be aware that the latest developments increase the risks of very low inflation in late 2023 or 2024 due to a weaker growth outlook.”High inflation in the United States and elsewhere makes it unlikely the Federal Reserve, the European Central Bank, and the Bank of England will fully pause what has been a joint turn towards tighter monetary policy.Indeed less than 24 hours after Russia’s invasion began, Fed Governor Christopher Waller laid out the case for raising U.S. interest rates by a full percentage point by mid-summer.”Of course, it is possible that the state of the world will be different in the wake of the Ukraine attack, and that may mean that a more modest tightening is appropriate, but that remains to be seen,” he said.The Bank of Japan is set to keep monetary policy ultra-loose for the foreseeable future. While an expected rise in fuel would push up inflation closer to its 2% target, concern over the damage to consumption will likely exceed the need to combat inflation with tighter policy, analysts say.”Rising fuel costs would hurt the economy so tightening policy would be difficult. But the hurdle for easing policy is even higher,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “That means the BOJ will maintain the status quo for some time.”INFLATION AGGRAVATORStill, analysts said the new level of uncertainty brought on by Russia’s actions could put policymakers in a more cautious mode, likely to settle at the margins for a bit less policy tightening than a bit more.The Fed would now likely limit itself to a quarter percentage point rate increase at its March meeting, ruling out the half point hike some policymakers have favored, wrote analysts with Evercore ISI.The Bank of England might also pare its next expected increase, and the ECB delay making any firm promises about its tightening plans.The path could be more diverse for central banks in Asia.Singapore’s central bank is likely on track for a policy tightening as it assesses inflationary outcomes in the run-up to its next semi-annual meeting in April, said Selena Ling, an analyst at OCBC Bank.The war in Ukraine will have mixed implications for commodity exporter Australia, prompting its central bank to keep rates steady next week as it scrutinizes the impact of the crisis.”While commodity price impacts are likely to be positive for Australia’s terms of trade, higher petrol prices could weigh on consumer spending, as could a negative wealth shock from falling stockmarkets,” aid Felicity Emmet, a senior economist at ANZ.”We are happy keeping our pick of a September lift-off for rate hikes.”Other central banks, however, may be forced to focus more on downside risks to growth.Nomura analysts said a sustained rise in oil and food prices would hit some Asian economies by weakening their current account and fiscal balances and squeezing growth, with India, Thailand and the Philippines likely the main losers.”Central banks in developed Asia are likely to tighten policies due to the risk of second round effects amidst an already strengthening economy, while central banks in emerging Asia are likely to prioritize still-weak growth,” Nomura analysts wrote in a research note. More

TOKYO (Reuters) – Japan’s industrial output likely fell for a second month in January as the fast spread of the Omicron COVID-19 variant disrupted car production, a Reuters poll showed.While the coronavirus outbreak is on a downtrend, concerns loom for a current-quarter contraction as the Ukraine-Russia crisis fuels fresh uncertainties for the economy reliant on imported energy, raw materials and manufacturing parts.Industrial production likely declined 0.7% in January from the previous month, the median forecast in the poll of 18 economists showed, after a 1.0% fall in December.”The outbreak of COVID-19 Omicron variant since the start of the year forced output cuts to carmakers, which had already suffered from chip and parts shortage,” Shumpei Fujita, an economist at Mitsubishi UFJ (NYSE:MUFG) Research and Consulting, wrote in a note.Major automakers including Toyota Motor (NYSE:TM) Corp and Honda Motor Co Ltd have reduced production in their Japanese plants due to Omicron-related disruptions, such as infected workers and component supply bottlenecks.Japan’s new COVID-19 infections peaked in early February, but deaths are still rising.Meanwhile, retail sales were seen rising 1.4% in January from a year earlier, following a revised 1.2% growth in December, according to the poll.The Ministry of Economy, Trade and Industry will release both industrial production and retail sales data on Feb. 28 at 8:50 a.m. (Feb. 27 at 2350 GMT).Japan’s unemployment rate and jobs-to-applicants ratio likely stayed flat in January from the prior month at 2.7% and 1.16, respectively, the poll also showed. Job figures are due on Mar. 4 at 8:30 a.m. (Mar. 3 at 2330 GMT). More