Aurelia Butler

The writer is chief executive of the Resolution FoundationThis year is not being kind to the reputation of Britain’s institutions. Two months in, the police are already questioning the country’s elected — and unelected — leaders. But the cost-of-living catastrophe that will dominate 2022 will turn the heat on to our economic institutions. They are unlikely to emerge unscathed.Prices rose 5.5 per cent in the year to January, the biggest rise in 30 years and one emerging with staggering speed (2021 dawned with inflation below 1 per cent). More staggering will be its impact: the Bank of England forecasts 2022 will see the deepest living standards squeeze on record.The challenge this poses to policymakers is the final nail in the coffin of the backslapping consensus of the 2000s: BoE independence had abolished boom and bust, apparently ushering in a “Nice” (non-inflationary, consistently expansionary) economy.The 2008 financial crisis taught us that busts were alive and well, but non-inflationary optimism lived on. Developed economies spent the 2010s wishing they could generate more inflation.But non-inflationary isn’t what you’d call 2022, sparking worries that the Bank’s primary objective is under threat. Meanwhile the Treasury is struggling to help us get through a difficult year in part because of the pandemic’s damage to its own primary objective: the public finances.Wrestling with easing households’ cost-of-living pain and a post-pandemic consolidation is far from easy. Rising inflation is pushing up debt interest costs by around £10bn for the financial year with the (discredited) retail price index, ludicrously still driving the cost of index-linked gilts, up 7.8 per cent in January.Minimising public spending while maximising the universality of support explains Chancellor Rishi Sunak’s inadequate response to April’s £693 rise in energy bills. A £200 bill reduction this year, paid back via higher bills in future, is paired with a £150 council tax rebate for the 80 per cent of households in band A to D properties.Near universal support means far too little for lower-income households, whose energy bills will now take up 10 per cent of their household budgets. The council tax rebate targets payments via 1990s property values, not 2022 incomes, leaving over 600,000 of the poorest third of households in England excluded. In April, benefits, recently cut by £1,000 a year for many, will rise by less than half the rate of inflation.All price rises are harder for poorer households, but this rise will be a disaster because it is so focused on essential products that people have little scope to switch away from. If caviar gets expensive you don’t buy it, but if gas does you buy less of everything else.Hard-nosed Treasury mandarins will rightly note that they cannot prevent globally driven energy prices making the UK poorer. But the chancellor does have choices about who bears the pain and when. As the scale of the living standards hit of 2022 becomes clear I fear he will realise he’s made the wrong ones.The BoE, meanwhile, faces the most difficult period for monetary policy since it was granted independence in 1997. Inflation is well above target and rising. Initially energy cost driven, price rises are now broadening out.High inflation and low unemployment mean interest rates will need to rise, but how far depends on what happens to wages, not global energy prices. Here there is genuine uncertainty. Higher inflation didn’t automatically or swiftly feed through to higher wages during the last inflation spike in the early 2010s, but the labour market is much tighter today.The BoE’s agents suggest a wage surge is coming, leading some to argue big further jumps in rates are needed. But the task is to avoid inflation getting entrenched without derailing the recovery, and there is nothing credibility-enhancing about hiking rates today only to cut them tomorrow. Wage growth in late 2021 was perfectly normal rather than spectacular, while neither advertised salaries or wage settlements indicate that pay is spiralling out of control.The recovery has been faster than expected, but rising inflation has already removed any sense of a boom. Consumer confidence has been falling since August, strengthening the case for gradual rate rises. Since we started inflation targeting there’s never been a year when incomes fell but interest rates ended the year higher than they started.Anyone certain about how 2022 plays out needs a good dose of humility. These are hard questions for economic policymakers. But we should be certain about who faces the hardest questions of all: low and middle-income households.This is what a cost-of-living disaster looks like and our economic institutions will be judged on whether they manage to navigate it successfully. They, and households right across Britain, should buckle up for a bumpy ride. More

The United Arab Emirates and India have signed a free trade deal that is expected to double bilateral non-oil trade to $100bn within five years as the Gulf state ramps up its economic partnership with its second-largest trade partner.The comprehensive economic partnership agreement is expected to boost growth, exports and job creation in both nations, said Thani Al Zeyoudi, the UAE’s minister of state for foreign trade. “It’s a comprehensive win-win,” he told the Financial Times. Nirmala Sitharaman, India’s finance minister, on Thursday described a deal with the UAE as a gateway for trade into the Gulf and Africa. “This is an outcome of several years of engaging,” she said. “The UAE is the threshold of the entire African Union and the Middle East . . . An agreement with the UAE opens the doors for India in these two regions as well.”The UAE expects the deal to add $9bn, or 1.7 per cent, to gross domestic product by 2030. It also forecasts an increase of exports to India by 1.5 per cent, or $7.6bn, and imports to the Gulf state rising by $14.3bn, or 3.8 per cent, by the end of the decade.It also expects the pact to deliver an additional 140,00 skilled jobs into its workforce over the same timeframe. “We will continue to encourage talented people to the UAE and there will be flexibility over visas in priority sectors for people to come and work with us,” said Zeyoudi. The UAE has a population of 10mn, of which about 9mn are expatriates.The elimination of tariffs on key commodities, such as aluminium, copper, steel and various petrochemicals is one benefit of the deal, he said. Overall, about 80 per cent of products and services will have tariffs removed, said Zeyoudi. Anti-dumping measures and rules of origin are also clearly set out in the deal to protect manufacturers, he added. Under the deal, Indian and Emirati businessmen will be able to apply for various government contracts in each country. Finalising a deal with the UAE is a coup for India, which has been on the hunt for bilateral trade agreements since quitting the pan-Asian RCEP agreement over concerns about China’s membership.Free trade deals remain controversial in India, and the country has long sought to guard access to large sections of its economy. But Prime Minister Narendra Modi’s government has in recent months sought to accelerate the completion of trade deals as activity rebounds from the Covid-19 pandemic.India is also close to finalising a pact with Australia, whose trade minister visited New Delhi last week. India started trade talks with the UK last month after a visit by British trade minister Anne-Marie Trevelyan, and last year relaunched EU talks.The UAE sees trade as a central part of its drive to diversify its economy away from oil as it navigates itself out of the pandemic. The Gulf monarchy is targeting a doubling of its overall economy from $381bn to $762bn by 2030. The country is also aiming for comprehensive economic partnerships with Israel and Indonesia within the next couple of months.The UK has opened negotiations with Gulf Cooperation Council countries, but in the event of slow progress with the six-member bloc, the UAE is willing to open bilateral trade talks, officials have said. More

JAKARTA/TOKYO (Reuters) – Russia and China watered down a communique being drafted by heads of the Group of 20 major economies on Friday to remove a reference to “current” geopolitical tensions clouding the global economic outlook, sources at the talks said.The meeting of G20 finance ministers and central bankers took place both virtually and in Jakarta, with a final, English-language communique due to be circulated afterwards.An early draft of the text seen by Reuters already contained no direct reference to the crisis on the Ukraine-Russia border, saying only that the G20 would monitor risks, “including those arising from (current) geopolitical tensions.”Communique-drafters use brackets for language that has not been agreed by all at the table. Sources told Reuters that both Russia and China asked for the word “current” to be removed.Sri Mulyani Indrawati, finance minister of host Indonesia, told local reporters that it had taken time to arrive at the final wording “because of course at the same time in the room were countries involved in the geopolitical tension mentioned.”The most recent English-language draft seen by Reuters read: “We will also continue to monitor major global risks, including from geopolitical tensions that are arising, and macroeconomic and financial vulnerabilities.”That vaguer language contrasts sharply with a warning by finance ministers of the G7 group of large western economies on Monday that Russia would face “massive” economic consequences if it chose to invade Ukraine. Neither Russia nor China are members of the G7.Sri Mulyani said the toughest sticking points involved the reticence of some countries to endorse carbon-pricing as a tool to tackle climate change, and how to help poor countries whose debt burdens have got worse during the coronavirus pandemic.”Here, the process is not completed,” German finance minister Christian Lindner said.Earlier, one source at the talks said China, by far the largest bilateral creditor, had baulked at the idea of accepting outright haircuts on debt.On other subjects, the latest draft of the G20 text pledged to use “all available policy tools to address the impacts of the pandemic,” while warning that future policy space was likely to be “narrower and uneven.”Inflation is currently elevated in many countries due to supply disruptions, a mismatch in supply and demand, as well as rising commodity and energy costs, the draft communique said.”Central banks will act where necessary to ensure price stability in line with their respective mandates, while remaining committed to clear communication of their policy stances,” the draft read.The diverging pace of recovery from the pandemic is complicating the policy path for central banks. Expected steady interest rate hikes by the U.S. Federal Reserve have drawn attention to the potential fallout for emerging markets.While cases of the Omicron variant of COVID-19 are receding in many wealthy countries, they are still rising in many developing nations including host country Indonesia.The draft text also noted agreement to make sure that a landmark deal last year setting a global minimum level of corporate tax could be implemented in 2023. More

The EU is taking China to the World Trade Organization for alleged patent infringements that are costing companies billions of euros, as part of what officials in Brussels claim is a “power grab” by Beijing to set smartphone technology licensing rates.Businesses, including Sweden’s Ericsson, Finland’s Nokia and Sharp of Japan, have lost money after China’s supreme court banned them from protecting their patents by securing licensing deals in foreign courts, the European Commission said.Chinese courts set licence fees at around half the market rate previously agreed between western technology providers and manufacturers such as Oppo, ZTE and Huawei, it added.“It is part of a global power grab by the Chinese government by legal means,” said a European Commission official. “It is a means to push Europe out.”Smartphone makers have agreed global standards for telecommunications networks. In return, technology manufacturers must license their patents to others. If they cannot agree on a price, they go to court to set it. Chinese courts generally set prices at half the level of those in the west, meaning their companies pay less for the technology from overseas providers. In August 2020, China’s Supreme People’s Court decided that Chinese courts can impose “anti-suit injunctions”, which forbid a company taking a case to a court outside the country. Those that do are liable for a €130,000 daily fine and the judgments of courts elsewhere are ignored.The policy of driving down licence costs has been backed by the People’s Congress, China’s national assembly, although it has not been put into legislation, the commission alleged. After Ericsson lost a court case, it said licensing revenues would fall by €100mn-€150mn a quarter. US company InterDigital and EU research institutes such as the Fraunhofer network in Germany, which also license new technologies, have also suffered. Companies used licensing fees to reinvest in research to stay ahead, the commission said.Valdis Dombrovskis, EU trade commissioner, said: “We must protect the EU’s vibrant high-tech industry, an engine for innovation that ensures our leading role in developing future innovative technologies. EU companies have a right to seek justice on fair terms when their technology is used illegally. That is why we are launching WTO consultations today.” The EU believes China’s actions are inconsistent with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (Trips).Huawei declined to comment. The Chinese foreign ministry, ZTE and Oppo did not respond to requests for comment. The US and Japan have also expressed concern and are expected to join the EU’s request for consultations. China has 60 days to respond after which Brussels could ask for a dispute settlement panel to rule on the matter.It is the second case the commission has launched against Beijing at the WTO in a month, after China blocked all imports from Lithuania in a dispute over its relationship with Taiwan. More