Aurelia Butler

“We expect the shortage of semiconductors to stabilize throughout the year and towards the second semester they may return to levels that we had prior to the pandemic,” AMIA head Fausto Cuevas said in a press conference.Official data last week showed that Mexico’s auto production and exports fell in January from a year earlier, the seventh straight monthly decline, as COVID-19 pandemic shocks and the semiconductor shortage has hurt the sector.A return to more normal supplies of semiconductors would allow Mexican carmakers to increase use of installed capacity.”It seems to me that every time there’s enough supply (of semiconductors), carmakers recover their previous capacity levels as soon as possible,” Cuevas added.Vehicle production fell 2% in 2021 compared with 2020, the fourth consecutive annual decline, as the semiconductor shortage in recent months prompted automakers in Mexico and the rest of North America to implement rolling shutdowns, curtailing output.AMIA has previously estimated output will not return to pre-pandemic levels until late 2023 or in 2024. More

Market participants were quick to detect a “hawkish pivot” in the European Central Bank’s subtle word changes at its press conference last week. ECB president Christine Lagarde declined to repeat her earlier judgment that an interest rate rise this year was “highly unlikely”. Instead she reported “unanimous concern” among the euro’s monetary policymakers over the latest inflation number, which at 5.1 per cent was higher than they had expected.It was enough to send euro bond markets into a minor tailspin, with a jump in yields that was particularly large in economies with the most debt-laden governments. Taking the changed language as a signal to sell was understandable. Many economic observers take their cue from the increasingly hawkish rhetoric and action of the Federal Reserve and the Bank of England. If those central banks are behind the curve, so, they conclude, is the ECB. Market pricing suggests eurozone policy rates could go up as soon as June.That analysis, however, ignores another part of Lagarde’s message: that the eurozone differs in important ways from both the US and the UK. She is right — and markets would be wise to heed it.Above all, continental Europe has been much more successful in bringing people back into work — probably in large part thanks to the bloc’s better-established furlough schemes — than the US and the UK, where the number of jobs still lags pre-pandemic trends. In aggregate, the monetary union now has more people in work than before the pandemic, and unemployment is the lowest since the euro’s creation. (Nevertheless, there are worrying differences between euro countries — notably, Germany lags behind its peers in recovering pre-pandemic employment rates.)As a result of this lack of labour market scarring, the euro’s interest rate setters see little sign of wage pressures. If anything, Lagarde suggested she would welcome somewhat faster wage growth: “I am not here saying that there should be wage moderation”, she said last Thursday, in sharp contrast with the Bank of England governor’s warning against strengthening wage demands on the same day.That is not the only way the euro area distinguishes itself from economies across the Channel or the Atlantic. The eurozone has not seen anything like America’s enormous shift in consumer spending towards manufactured goods away from services. And while shortages of workers are felt everywhere, the continent does not have to contend with the additional negative labour supply shock the UK has inflicted on itself through Brexit — another point mentioned by Lagarde.It no doubt serves the ECB that markets do some of its work for it: the recent sell-off in effect brings forward some of the tightening that will eventually come. In remarks to the European Parliament this week, however, Lagarde hinted markets may have got carried away.The paradox is that since its strategy review last year, the ECB has had in place a commendably clear — if intricate — set of criteria for when it will tighten. Medium- and long-term inflation expectations very close to the ECB’s target testify to the new framework’s effectiveness.In the short term, however, markets are driven by their second-guessing of how the euro’s central bankers will react to the discomfort of prolonged above-target inflation. Bringing even more focus to the ECB’s criteria could help both markets and central bankers keep their heads cool. More

Qatar Airways has sued Airbus for more than $600 million and is refusing to take delivery of further A350s until its regulator receives a formal analysis of erosion to the painted surface and underlying lightning protection on 21 of the jets.Airbus, which has two completed A350s ready for delivery to Qatar Airways, has said it has provided the necessary information on the problem of surface degradation and that the damage does not amount to a safety issue.The planemaker said in a UK court filing last month that it was declaring Qatar Airways in default on two A350 jets that were completed and ready to be delivered.It also took the unusual step of cancelling an order for 50 A321neo jets on the grounds that the alleged default on the larger planes had triggered a clause allowing it to revoke the order for A321neos, which are in high demand.Qatar Airways last week ordered 25 competing Boeing (NYSE:BA) 737 MAX, plus options for another 25, as well as 34 new 777X freighters during a visit by the Gulf state’s ruling emir to Washington.The airline has denied in legal arguments that it has broken its contract by refusing to take two A350s waiting on the tarmac in Toulouse. It also says Airbus is not entitled to claim a “cross-default” allowing it to cancel the A321neo deal.An Airbus spokesman said on Tuesday the company had “terminated delivery positions for two A350s for Qatar Airways in full compliance with our rights”. Qatar Airways had no immediate comment.Airbus included the cancellations for 50 A321neos and two A350-1000s in a monthly summary for January, pushing it into negative territory with a net total of minus 16 orders for the first month of the year, after receiving 36 new orders.The planemaker delivered 30 airplanes in January. More

Europe has followed the US in setting out plans for a massive increase in semiconductor manufacturing, as Brussels attempts to secure supplies of the chips that drive the global economy. Unveiling a €43bn investment plan, the European Commission said it wanted to use state aid to promote research and production of higher technology chips used in computers, smartphones, vehicles and other products.The coronavirus pandemic had “painfully exposed the vulnerability” of Europe’s supply chains, said commission president Ursula von der Leyen, with production lines for cars and other goods hit by shortages. The Chips Act aims to double the EU’s share of the semiconductor market from 10 to 20 per cent by 2030, which would require quadrupling production.The EU is following plans by President Joe Biden’s US administration for a $52bn package to subsidise semiconductor manufacturing. Other governments are also trying to improve semiconductor supply chains.Under the plan announced on Tuesday, the European Commission and national governments would spend €11bn to build three pilot facilities for any company to use. Member states and businesses were expected to invest a further €32bn by 2030.French industry commissioner Thierry Breton has convinced colleagues to adapt EU state aid rules to allow big subsidies for cutting-edge factories.The Act would require companies receiving subsidies to prioritise European customers in times of supply shortage. The EU could also widen the measure to all businesses if the US or other countries applied such controls. Intel, the US chipmaker, plans to invest €20bn to build two chip fabrication plants, known as fabs, expected to be in Germany, as well as support facilities such as packaging and research, which would require further investment.France, Italy and the Netherlands are also in the running for different activities.Digital Europe, which represents technology companies, said it was “unclear” if all the money for the EU plans would be forthcoming.Cecilia Bonefeld-Dahl, director-general, said: “The EU attracted just 3 per cent of global investment for chip factories in 2020 and a lot of work is needed to push this figure upwards.” Some EU countries fear that bigger states will outbid them for chip investment. It could start a “race to the bottom”, warned one EU diplomat, with pressure to permit such aid in other industries. Acknowledging concerns over a “subsidy race”, Margrethe Vestager, the EU competition commissioner, said the semiconductor industry was a special case. A “rarely used” procedure in the EU’s founding treaty could create a “bespoke approach” for new plants, she said.Large semiconductor plants, or “fabs”, have huge price tags and “would not exist in Europe if we did not do something”, Vestager said.Companies said aid would need to match the 40 per cent of construction costs offered by international competitors such as South Korea.Greg Slater, Intel’s regulatory affairs director, told the Financial Times that state aid to support cutting edge manufacturing was “essential to Europe’s ecosystem”.He said Intel would look closely at the export control proposals.“The devil is in the details. The US has that authority. What really matters is what is defined as a crisis and how far will [Europe] go with that authority. It just depends on how they implement it,” Slater said.Member states and the European parliament must still approve the plans. More

The Bank of England is forecasting the weakest growth of real post-tax labour incomes in more than 70 years, with a fall of 2 per cent this year and a further half a per cent in 2023. This depressing outlook captures the challenges generated by sharply higher import prices and the risks of more generalised inflation. Among leading high-income economies, the UK seems to be particularly hard hit. Inflationary risks seem similar to those in the US. But the UK is also a large net importer of energy, especially gas, as prices have exploded upwards. The government might have hoped that the fading of the pandemic’s clouds would leave a sunlit economy. But, as is their wont, events got in the way. The economy, the people and the government face hard times.The Bank’s Monetary Policy Report, out last week, noted: “Global inflationary pressures have continued to build significantly, largely driven by the sharp increases in energy prices and upward impact of the imbalance between supply of and demand for tradeable goods on their prices. On a UK-weighted basis, four-quarter world export price inflation, including energy, is expected to have risen to around 11 per cent in 2021 Q4.” The UK cannot take back control from the world economy. Remarkably, the US alone generated almost all of the increase in consumption of goods among the group of seven leading economies last year. That then drove the supply bottlenecks.The Bank forecasts peak inflation at 7¼ per cent in April, with three-quarters of the increase between last December and April being due to rising energy and goods prices. But it has a still bigger problem, which is similar to that of the US. The labour market is running hot. Unemployment is already below its equilibrium rate, the Bank believes. Less speculatively, companies report recruitment difficulties and high vacancies. On balance, concludes the report, there is excess demand in the economy, which is not yet the situation in the eurozone.What makes the situation more difficult is that higher prices of imports, especially energy, impose an overall economic loss. As we learned in the 1970s, such losses must be absorbed. If people play a game of pass the parcel, by insisting on higher wages and salaries in order to offset the reduced real incomes, the outcomes would either be a squeeze on profits, which would damage investment, or cause an inflationary spiral, which would damage almost everybody.Andrew Bailey, the BoE governor, duly remarked last week that “we do need to see a moderation of wage rises . . . in order to get through this problem more quickly.” This remark was certainly unpopular and probably useless. But analytically he was right. The more wage earners seek to restore their purchasing power in an economy hit by these externally imposed losses, the higher will be inflation and the more merciless the needed monetary squeeze. Boris Johnson’s desire for a high-wage, high-growth economy is irrelevant. The worry is that the monetary policy needed to curb second-round inflationary risks will end up even more economically damaging than the Bank and indeed almost anybody else now thinks.Yet this is not just about monetary policy. Just as in the US, though in different ways, fiscal policy is also relevant. This is so in two distinct ways. One is that only the government has the means to cushion the badly hit against the losses imposed by higher prices, especially of energy. The second and broader dimension is that the overall fiscal stance will bear on overall demand and so influence what the Bank needs to do.On the former, the government has introduced a broad package of measures, concentrated on alleviating rising energy costs, with £9bn (0.4 per cent of gross domestic product) spent next year. The measures consist of a £200 discount on all electricity bills from October, which would cost £5.5bn. Yet this is to last just a year and subsequently must be repaid. If energy prices remain high, many people are likely to struggle and even fall deeply into debt. A further £150 of support will go to households in the bottom four council tax bands, at a cost of £3.5bn. According to the Resolution Foundation, even after the £200 rebate, the annualised increase in energy prices (after the jump in the price cap in April) will be 39 per cent.This package is ill targeted. Much of the benefit will go to people who do not need the money and significant numbers of poorer people will fail to receive it, partly because council tax is out of date, being based on the 1991 value of properties. Overall, the burden on the poor will still remain the heaviest because they spend the highest proportion of their incomes on energy. (See charts).Meanwhile, the planned increase in national insurance contributions, supposedly to pay for additional spending on health and social care, is set to go ahead. I have argued before that both the tax itself and the social care policy it finances are indefensible. As important today is the fact that this increase in taxation will be added to the impact of higher prices of energy and other goods and services. An optimist might argue that this combination of hits to demand will at least allow monetary tightening to be significantly smaller than it would otherwise have needed to be. A pessimist might respond that such a multiple whammy will make workers even more determined to recoup their lost real incomes via higher wages.High inflation, sharp rises in energy costs and a weakening economy are now with us. The foolish tax rise on the way will make it worse. The Bank forecasts growth of 1¼ per cent next year and 1 per cent in 2024. The government hoped for better. No such luck. Unhappy times are here [email protected] More

Somers Forge, a manufacturer of bespoke steel parts for the aerospace, automotive and nuclear industries based in the English midlands, has operated a US sales office for more than 30 years. In April, the branch will close, a victim of tariffs on steel imports introduced in 2018 ago on national security grounds by then president Donald Trump. “We’ve held on and held on with the hope that our government would succeed in revoking them [the tariffs],” said Tammy Inglis, finance director at Somers Forge, one of Britain’s biggest forgings specialists. “We are now into our fourth year and with all the added manufacturing costs, in particular the high energy costs, we can’t subsidise the branch any more. It’s not sustainable.”Under the terms of the tariffs, US importers can apply for exemptions on certain products if they cannot be sourced domestically but Somers Forge is among dozens of small and medium-sized UK specialists that have been hit. Trade body UK Steel estimates that exports to the US have fallen from 351,000 tonnes in 2017 to just over 190,000 in 2020.

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The US and the EU last October agreed to suspend the tariffs — 25 per cent on steel and 10 per cent on aluminium to manufacturers from the bloc — from January 1 but the UK government failed to secure a matching breakthrough. The UK industry was already at a competitive disadvantage to European peers because of higher energy costs, an issue that has become even more critical amid the recent surge in wholesale gas and electricity prices. Somers Forge is among companies that have raised concerns with the government over costs. Japan on Monday reached a similar deal with the US, with Washington announcing that it would suspend the 25 per cent levy on imports up to a certain quantity. The agreement does not cover aluminium.The Financial Times reported in December that the US was delaying a deal with Britain because of concerns over London’s threats to change post-Brexit trading rules in Northern Ireland. Talks between the UK and the US on the issue restarted last month but for Somers Forge a deal, even if it comes this month, will be too late to reverse the decision to close its Michigan-based site.Tammy Inglis: ‘We’ve held on and held on with the hope that our government would succeed in revoking them [the tariffs]’ © Somers ForgeBright Steels, a family-run company in Yorkshire that makes steel bars for use in precision engineering applications, exports between 50 and 60 per cent of its output, including to the US. Philip Jackson, managing director, said the company had lost business to EU rivals as well as domestic American producers as a result of the tariffs. He said he remained hopeful that if a deal was struck soon the company could yet recover some of that volume.James Brand, managing director of foundries at United Cast Bar, a cast iron specialist that operates a foundry in Chesterfield, decided last year to launch a new size range at its site in Spain in order to avoid the 25 per cent levy. “We heard a trade agreement was getting closer between the US and the EU so decided to make that size range in Spain,” he said. “It is business lost from the UK.” Brand said that if a deal could be done quickly, then the company might be able to bring some of what was moved to Spain to the UK. “Britain is being left behind and strung along,” said John Healey, a Yorkshire-based Labour MP who has campaigned extensively on behalf of the industry. “People have a right to expect better from the government. Incompetent ministers are leaving steelmakers to pay the price, and the UK is continuing to lose out on the big US market.”Gareth Stace, director-general of UK Steel, warned that the lifting of the tariffs was “essential to the ability of the UK steel sector to compete in this important market and recover lost sales”. While US customers had been “reasonably successful” in securing exemptions to allow them to continue to import some UK steel tariff free, Stace added that “even this could be under threat if those customers, tired of waiting for a UK deal, determine that sourcing from the EU reduces administration and increases certainty for them”. Britain’s largest producers warn of lost business opportunities as a result of the tariffs. The need for exclusions for individual products and customers means “we are very limited in our competitiveness towards existing customers and offerings towards new business opportunities”, said Tata Steel.The tariffs are an added burden that manufacturers could do without at a time when soaring wholesale electricity and gas prices have already eroded profit margins. Although most companies have long-term contracts in place, many worry that a sustained increase in prices could undermine companies’ competitiveness. The government has so far stopped short of helping energy intensive users. UCB’s Brand said he expected his energy bills to jump from 10-12 per cent of operating costs last year to 20 per cent by this autumn. The company is trying to pass on some of the extra expenditure but “this ultimately means higher prices for the consumers”.

Somers Forge has been hit hard by US steel tariffs, as well as rising energy costs © Matt Holmes/Visual 8

At Somers Forge, Inglis said the company typically buys energy in advance for 18 months to two years. The hedging helped to insulate the business from last year’s peaks but the outlook for this year is less certain as Inglis has only locked in 25 per cent of the company’s needs from March onwards. “We are getting more and more exposed.”The Department for International Trade said talks with the US had started and its focus was on “reaching a speedy resolution that lifts these tariffs promptly and clears the way for our thriving trading relationship to grow”. More

France’s trade deficit in goods widened to a record €84.7bn last year, creating what its finance minister Bruno Le Maire called “a black mark” over the economy.The 31 per cent increase in the country’s trade deficit in goods came as its economy rebounded strongly from the fallout of the coronavirus pandemic, with annual growth of 7 per cent last year.Soaring energy prices last year boosted the value of French goods imports to 3 per cent above 2019 levels — before the Covid-19 crisis disrupted global trade. Meanwhile, the country’s manufacturers lost market share in exports, leaving them 2 per cent below pre-crisis levels, according to French customs.Goods exports from France’s main EU trading partners were between 3 and 9 per cent above pre-pandemic levels, customs said in a statement, adding: “France’s loss of market share, almost uninterrupted since 2010, will continue in 2021.”Le Maire said the figures highlighted “the industrial weakening over the past 30 years”. Emmanuel Macron’s government had been tackling the problem by “creating a more favourable tax environment, by lowering production taxes, by training and qualifying employees for new industrial professions”, he added.“There is no other solution to restore France’s external trade balance than to reindustrialise our country massively and quickly,” Le Maire told France Inter radio.

Haulage trucks disembark from a cargo ship at Cherbourg. France’s trade surplus in goods with the UK shrank last year to €7.6bn, down 40% from 2019 © Cyril Marcilhacy/Bloomberg

In contrast, the country’s trade balance for services improved to a record surplus of €36.2bn, meaning that overall foreign trade still provided a slight boost to the economy last year.Franck Riester, trade minister, said it was “important to look at the full picture of our commercial activity”. He added that “strong export sectors are still below their 2019 level”. These include aerospace manufacturing, which stands at 57 per cent of pre-pandemic exports. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said large parts of French manufacturing were in “sectors that were doing quite poorly due to overcapacity before the pandemic and are still struggling to rebound from the crisis”, such as aerospace and car making.

Other key French industries suffered setbacks last year, after Australia cancelled a A$90bn ($64bn) submarine contract with defence contractor Naval Group, and pharmaceutical group Sanofi halted development of its Covid vaccine based on messenger RNA technology.France’s trade surplus in goods with the UK shrank last year to €7.6bn, down 40 per cent from 2019 before the pandemic and Brexit disrupted cross-Channel commerce. Its deficit in goods trade with China has widened by 27 per cent to €34.6bn since 2019.Vistesen said: “Part of this could be a eurozone-wide phenomenon, as the bloc’s trade deficit with China has been widening in recent years.”The French central bank said the country’s overall current account deficit — including both goods and services — was €25.8bn last year, down from €43.7bn in 2020, but significantly higher than the €7.1bn in 2019.Riester said continued rises in energy prices were likely to mean that the country’s trade deficit would remain elevated this year. BNP Paribas forecast the French trade deficit in goods would rise to €100bn this year. More

The amount has doubled compared to 2020 to equal “2.7% of Greece’s GDP (gross domestic product),” the Vice-President of EIB Christian Kettel Thomsen told a virtual ceremony alongside senior Greek finance ministry officials in Athens.EIB offered 2.7 billion euros in guarantees, through European Guarantee Fund, to help companies affected by the coronavirus-related lockdowns secure loans from the country’s four largest lenders Alpha Bank, Eurobank, National Bank and Piraeus Bank.Those guarantees will mobilize more than 6 billion euros in investments in tourism, green energy and digital economy, Greek Finance Minister Christos Staikouras said.EIB is also planning to manage 5 billion euros of funds that Greece is due to receive from the European Union’s pandemic recovery fund in coming years.Athens is due to get 19.4 billion euros in grants and 12.7 billion euros in cheap loans from the fund in coming years, an equivalent of about 16% of its gross domestic product.Its conservative government plans to use the funds to make Greece’s economy greener and push its digital transformation.($1 = 0.8768 euros) More