Aurelia Butler

The writer is vice-chair of BlackRock and formerly chaired the governing board of the Swiss National BankPost-pandemic inflation in major developed economies has reached levels we have not had to wrestle with in two generations. Unsurprisingly, this has led to widespread calls for central banks to tighten monetary policy aggressively. Financial markets have quickly repriced their monetary policy outlook and markets now expect at least seven incremental rate rises before the end of 2023. The debate about how “transitory” inflation would end up being missed the point. The root cause of this rise is more important. Unlike at any time in the past 40 years, the post-pandemic inflation surge is not principally being driven by excessive demand but by limits on supply capacity, as recent research by the BlackRock Investment Institute shows.Think of inflation as the noise from the economic engine. In the past, it was caused by the engine revving too fast. Today and for the foreseeable future, it is principally a result of supply-side constraints causing the engine persistently to misfire. This misfiring occurs at two levels: first, there are economy-wide constraints. In the restart of activity after lockdowns it proved harder to bring supply capacity on stream than for demand to restart. Even more important has been a second sort of misfiring: supply capacity was in the wrong place. The pandemic caused a sudden, sharp shift in consumer spending away from services towards goods. Capacity — people and capital — cannot be expected to switch sectors so quickly. The result? Bottlenecks in goods-producing sectors as supply struggled to keep pace, but spare capacity in service industries. The constraints on goods supply spark higher prices and while prices may fall in sectors that are suffering, they are typically stickier on the way down. This drives inflation higher even though the economy overall has yet to fully recover. The US economy finds itself caught in exactly this dynamic. The Covid-19 shock and subsequent economic restart brought on supply constraints of a magnitude greater than for decades. Inflation has risen to levels not seen since 1982. Yet, far from running hot overall, the economy has not even reached its estimated potential level of output and employment. We therefore find ourselves in a fundamentally different situation from the one Paul Volcker faced when he became chair of the US Federal Reserve in 1979. Then, the economy was running hot and the aim was to drive inflation that had become embedded out of the system. But this is not a Volcker moment. The old playbook doesn’t apply: today, we are in an era of severe supply constraints even as economies are below their potential. This changes everything from a macro perspective. When inflation is driven by demand, judicious policy can in principle stabilise both inflation and growth. This is not possible in a world where inflation is the result of supply constraints. Heightened macro volatility becomes inevitable. Central banks have either to accept higher inflation or be prepared literally to destroy demand across the whole economy to ease supply constraints in one part of it. The long-run historical relationship between unemployment and inflation suggests that if central banks had sought to keep inflation close to their target of about 2 per cent amid the supply constraints experienced in this restart, it would have meant driving the unemployment rate up to double-digit levels. To minimise growth volatility, central banks will rightly want to live with supply-driven inflation while long-run inflation expectations stay anchored. In fact, recent research suggests that they shouldn’t try to squeeze inflation caused by shifts in demand at all. Inflation helps to smooth the adjustment to big shifts in patterns of demand. Needless to say, central banks should take their foot off the gas this year by removing the extremely accommodating stance of monetary policy and return rates to a more neutral setting. The resumption of activity — unlike a normal recovery — doesn’t require stimulus to be maintained. But what they should not do at this juncture is slam on the policy brakes, deliberately to destroy activity. This is precisely the reason why the current monetary policy response to higher inflation has been more muted than in the past. It will probably remain so despite the current excitement about an accelerated pace of policy normalisation. The best approach now is not to destroy jobs and growth with monetary policy, but for economies to reopen as public health concerns ease, returning the mix of spending to normal. This will ease today’s acute inflation pressures.  More

The US dollar surged to its highest level in nearly 18 months on Thursday as currency traders reacted to Federal Reserve chair Jay Powell’s refusal to rule out an aggressive series of interest rate rises this year.Powell said on Wednesday the US central bank would be “humble and nimble” in deciding how quickly to tighten monetary policy in the face of soaring inflation, a phrase interpreted by investors as leaving the door open to a faster pace of rate increases than previously anticipated. The dollar rose 0.6 per cent against a basket of rival currencies, eclipsing a recent high in November and reaching a level not seen since July 2020.The gains came as markets priced in five quarter-point rate rises from the Fed by the end of this year, widening the gap in rate expectations between the Fed and other big economies, and boosting the dollar.“There was no mention from Powell of how gradual rate increases will be,” said Francesco Pesole, a foreign exchange strategist at ING. “That leaves a lot of room for speculation, and the market is speculating that the pace of hikes is going to be aggressive.”Analysts at BNP Paribas are expecting six rate rises this year following the more hawkish message from the Fed chair. “We read Powell’s comment that this cycle is different from the previous one as an indication that the Fed’s bias is for a steeper tightening than the markets and we had envisaged,” said Luigi Speranza, the bank’s chief global economist.Although markets are beginning to price in rate rises from the European Central Bank this year, investors may be getting ahead of themselves given the weaker state of labour markets in the euro area, according to George Saravelos, Deutsche Bank’s global head of currency research.“Yes, European wage growth may rise and the ECB may lift-off over the next two years,” he said. “But the pressure and urgency to do so in Europe is completely different [compared to the US].” The euro fell to an 18-month low of $1.124 on Thursday, and Saravelos expects it to sink below $1.10.Wednesday’s Fed meeting also poured fuel on a debt sell-off that has rocked markets so far this year, leaving global bonds on course for their worst month since September. The Bloomberg global aggregate total return index is down 1.6 per cent in January.Two-year US government bonds, which are highly sensitive to rate expectations, on Wednesday suffered their biggest one-day fall since the global market ructions of March 2020 The selling spread into other key bond markets, pushing German 10-year yields to just below zero, a level they topped earlier this month for the first time in nearly three years.Following the latest jolt from the Fed, some investors were braced for further pain.“Based on what Powell said yesterday, there is a reasonable probability of seven rate hikes this year, one at each meeting,” said Nick Chatters, investment manager at Aegon Asset Management. “This could cause investors to fall off chairs.” More

The EU has launched a case against China at the World Trade Organization over its de facto ban on exports from Lithuania in a dispute over Taiwan, adding to tensions between two of the world’s biggest economies.Brussels said China had blocked imports from Lithuania and other EU member states since December if they had Lithuanian content in their products.“These actions, which appear to be discriminatory and illegal under WTO rules, are harming exporters both in Lithuania and elsewhere in the EU,” the European Commission stated. Valdis Dombrovskis, the trade commissioner, said: “The EU is determined to act as one and act fast against measures in breach of WTO rules which threaten the integrity of our single market. We are in parallel pursuing our diplomatic efforts to de-escalate the situation.”Dombrovskis told reporters the EU would drop the case if China ended its measures.Gabrielius Landsbergis, Lithuania’s foreign minister, welcomed the decision and the solidarity shown by other EU countries. “This step is a clear message to China that the EU will not tolerate politically motivated acts of economic coercion,” he said.Landsbergis added that Lithuania wanted to de-escalate the situation but needed to protect both its interests and those of its companies and foreign investors.The dispute began after Vilnius permitted a Taiwan representative office to open. Beijing considers the island part of its territory and acts against those who recognise its existence formally. Other EU states host Taipei representative offices, using the name of the Taiwanese capital to avoid disputes with China. Beijing stripped diplomats from the Baltic country of their diplomatic status and blocked imports. The commission said it had evidence that Beijing had refused to clear Lithuanian goods through customs and rejected import applications from the country. It also said China pressured EU companies to remove Lithuanian parts from their supply chains. Officials said China blamed a “technical glitch” for the fact that customs software rejected requests. Taiwan has been buying many of the goods turned away by China and set up a $200m investment fund for Lithuania. Lithuanian exports to China fell by 91 per cent in December 2021 compared with the previous year. Taipei pledged to give Lithuania and the EU its full support. “We firmly believe that any behaviour that violates international norms will be condemned and corrected,” said Joanne Ou, a Taiwan foreign ministry spokesperson. Beijing lambasted the EU’s actions, saying the issue was a bilateral one. “The problem between China and Lithuania is a political problem, not an economic problem. The problem between China and Lithuania is the result of Lithuania’s treachery and damage to China’s interests,” said Zhao Lijian, a spokesperson for China’s foreign ministry.The EU has few legal tools with which to hit back at China. It has proposed an anti-coercion instrument that would allow the commission to take urgent tit-for-tat measures such as an import ban. Dombrovskis urged member states and the European Parliament to approve the tool as soon as possible.

Consultations at the WTO will last for 60 days, after which the EU can ask for an adjudication panel that will take at least six months to reach a verdict but could allow Brussels to impose retaliatory tariffs. If the decision goes against China, it can forestall punishment by appealing. The WTO’s appellate body is not functioning but members, including the EU and China, have set up a parallel system.The EU expects China to abide by any final ruling and end the ban. Support for the WTO complaint among member states was unanimous, officials said. But several countries believe Vilnius has needlessly provoked China. Germany is particularly anxious to preserve access to the lucrative Chinese market. “There is a modus operandi on Taiwanese representations in the EU. Lithuania did not consult with any member state before it took this decision and now requires unconditional solidarity from EU member states,” said one EU diplomat. He warned that the bloc should not allow relations with China to be driven by “ad hoc events”.Dombrovskis said he hoped the dispute would not damage wider co-operation on issues such as climate change. “We aim to deepen and strengthen our relationship with China.”Additional reporting by Emma Zhou in Beijing More

Everything is being digitised, and our monetary and payments systems are no exceptions. Regular readers will know that official ecash, or central bank digital currencies (CBDCs), is one of our favourite topics — complicated enough to require unpacking, rapidly evolving, and with the potential to radically transform how our economies work.So let us highlight a recent flurry of developments. A new CBDC has appeared, with Cambodia following The Bahamas in issuing official electronic currency. And the imminent Winter Olympics has long been expected to be where China would showcase the digital renminbi it has been trialling.In advanced countries, inquiries into CBDCs by official bodies are coming thick and fast. A few weeks ago, the UK House of Lords published a report. Then the Federal Reserve issued a discussion paper on the pros and cons of a digital currency. And two experts, Markus Brunnermeier and Jean-Pierre Landau, have just written a report on a digital euro for the European parliament. The Bank for International Settlements, an intellectual leader in the area, does not let it go long between each speech or article about it, most recently by its general manager Agustín Carstens on digital currencies and the “soul of money”.Anyone interested should take a look at all these reports because they illustrate very well the range of attitudes to CBDCs. The Lords report exemplifies the instinctive scepticism of many: it dismissively suggests CBDCs are a “solution in search of a problem”. The Fed comes across as painfully open-minded — forced not to fall too far behind other central banks’ explorations but rather wishing the challenge to go away. The BIS and the digital euro report represent the vanguard of official thinking, in that they are converging on a view that CBDCs are a necessary response to an inevitable digitisation of money.I expect everyone to arrive there in the end. There are many possible answers to the Lords’ stated inability to identify the problem CBDCs are supposed to solve. Everyone agrees cross-border transfers such as remittances are far too expensive, for example, and that CBDCs could help remedy this. Most see that innovation is happening fast in payments services, and that in the absence of an official digital currency, a private one could supplant not just official money but commercial bank deposits. It was, after all, the prospect of a “Facebook coin” that spooked central bankers into studying CBDC in earnest. Brunnermeier and Landau put it most clearly: “The main rationale for developing a digital euro is therefore to preserve the role of public money in a digital economy.”This recognition has been growing in official circles — especially in emerging economies, as former Indian central bank chief Duvvuri Subbarao points out — but it comes grudgingly. It has typically been matched with an immediate presumption that private financial actors can meet the challenges at least as well as central banks. And that is quickly followed by the question of what it will do to the private financial sector if central banks come in to provide a digital currency.That, it seems to me, is the main cause for hesitation among policymakers. The worry is that an easily accessible CBDC would be so attractive that customers would prefer it to bank deposits, whether for transaction money or as a safe store of value, and thereby destroy the business model of commercial banks: to fund loans with deposits, backing our main form of transaction money with ultimately illiquid investments.But there are problems with this argument — beyond the bizarre notion that the attractiveness of a product is a reason to ban it. One is that, as all the central bank reports acknowledge, there are ways to design CBDCs that defang them as threats to private banks. Another is that even if CBDCs are more attractive than bank deposits, the interest rate on digital cash could be set so low (even negative) to keep funding costs for banks as low as before.But the most profound problem is the fundamental premise that our current private bank-driven monetary system is something worth preserving, and that threats against it have to be resisted or disarmed. We should at least dare to ask the question whether a disintermediation of private banks by CBDC may not be a risk to mitigate, but rather the most important answer to the Lords’ haughty question of what a CBDC is supposed to achieve.Think about it. Most of the money in circulation today is in the form of bank deposits — that is to say, private commercial banks’ debts to their customers. The fact that all governments feel they have to guarantee a large portion of those private liabilities is a first hint at how strange this is actually is. Stranger still is how the total amount of such money is determined. Deposit money is created when a (private) bank issues a loan, when it credits the borrower with a deposit in an account in return for a promise to repay. That is to say, banks do not lend out money that a customer deposits with them; they simply create new deposit money when making a new loan and cancel existing money when loans are paid back. (The Bank of England Quarterly Bulletin carried a great explainer a few years back.) The upshot is that the total size of the broad money supply in our economies is an uncoordinated byproduct of commercial banks’ decisions about how to issue and allocate credit. Now, the quantity of money in circulation, and above all how fast that quantity swells or shrinks, clearly has some impact on economic activity (otherwise why would central banks try to manage monetary conditions at all?). Yet there is absolutely no reason to think that what is individually optimal for private banks in their decisions about lending should ever coincide with the overall quantity of money that makes the economy the most productive and the safest it can be. In fact, it’s even worse. The way the quantity of money is expanded or contracted by private banks is destabilising. That is because when money growth is fast, economic growth tends to be fast too, and the resulting optimism and high returns encourage banks to lend and hence create even more money. Conversely, when people default on their loans or pay them down, jobs are lost and growth slumps, giving banks fewer reasons to lend.What CBDCs could do is to separate the processes that determine the total amount of money in circulation from the processes that allocate credit. In such a system, banks would have to do what we tend to naively think (before we read the BoE explainer linked to above) that they are already doing: bidding for customers to deposit their existing money balances with them, and putting those balances to good use by lending them on to borrowers they have identified as creditworthy. All the while, democratically controlled policymakers would directly determine the total amount of money in circulation, without getting involved in credit allocation. Put that way, disintermediation begins to sound like quite a good thing. Other readablesThe Federal Reserve’s press conference this week makes some market observers expect a faster tightening of US monetary policy.Yet new economic research offers a novel argument to keep monetary policy loose in an “unbalanced global recovery” like the one we have today. Luca Fornaro and Federica Romei point out that while central banks face the full costs of domestic inflation from stimulus, the benefits spill over across borders — by stimulating the production of goods whose short supply are driving global inflationary pressures.Numbers newsThe IMF has downgraded its growth forecasts. Martin Wolf dissects the analysis. More

US economic growth is expected to have accelerated in the final quarter of 2021, boosted by consumer spending and business investment, before disruptions from the Omicron coronavirus variant became widespread. Economists forecast a 5.5 per cent advance in US gross domestic product on an annualised basis in the fourth quarter, according to Reuters, up from 2.3 per cent in the third quarter. GDP is expected to have risen 1.3 per cent compared with the previous quarter, based on a measure used by other major economies. The US commerce department is scheduled to release the report at 8:30am Eastern time on Thursday.Despite disappointing December retail sales data, consumer spending is expected to be a major contributor to economic growth, as Americans did their holiday shopping early amid concerns that supply chain snarls could lead to bare store shelves. “A lot of that is tied to the environment we saw at the end of last year, with household balance sheets in a good position overall, rising wages and rising employment,” said Oren Klachkin, lead economist at Oxford Economics. Business investment and inventories are also expected to have supported growth at the end of last year as companies replenished their stockpiles, although supply chain disruptions and rampant inflation have been an obstacle to the recovery. Economists have cautioned that the wave of Covid-19 infections sparked by Omicron will deliver a sharp but shortlived hit to economic activity at the start of 2022. Americans cut back on dining out and air travel, while plans for workers to return to their offices were delayed, which affected spending in commercial areas. The IMF this week cautioned that the global economic recovery from the pandemic will face multiple hurdles. It slashed its forecast for US economic growth this year to 4 per cent, down from 5.2 per cent in its October outlook. Federal Reserve chair Jay Powell on Wednesday said he expects some softening in the economy from the Omicron wave that began to ripple across the US in late December, but that the effects would be temporary. The Fed has looked past Omicron concerns and signalled its intention to raise interest rates in March as it pushes ahead with plans to tighten monetary policy and quash stubbornly high inflation. With markets pencilling in four rate rises and balance sheet run-off this year, concerns have grown that aggressive tightening could take some steam out of the economy. But James Knightley, chief international economist at ING, said “it could actually boost confidence in that they are getting a grip as inflation is a real concern for households and businesses”. More

Jay Powell had always said that if inflation was in danger of spiralling out of control, the Federal Reserve would be willing to bring out the hammer to knock prices down. On Wednesday, in his most hawkish press conference since the start of the pandemic, the chair of the Fed gave the clearest signal yet that such a moment was fast approaching. “Powell essentially said to the markets and the economy, ‘put on your seatbelt, we are getting ready to take off’,” said Nathan Sheets, global chief economist at Citigroup and a former under-secretary at the US Treasury. “If inflation doesn’t fall as they expect, the Fed is prepared to be vigorous.” The Fed’s drive towards tighter policy was apparent not just from what Powell said about the path forward for monetary policy, but also what he refused to divulge about the US central bank’s plans for interest rates later this year.“Powell was distinctly not willing to rule out more frequent [or] larger rate hikes,” Sheets said. Powell made clear that the first increase to the main policy rate since 2018 was all but certain to be implemented at the next meeting in March. But he was opaque about what would happen after that point and left the door open to much more forceful action to cool the US economy.Despite being given multiple opportunities to reiterate the Federal Open Market Committee’s preference for a “gradual” approach to raising rates — which he spoke of as recently as last month’s meeting — Powell repeatedly dodged questions about the central bank’s thinking now that inflation appears to be persistent. In place of “gradual” was another watchword, “nimble”, which traders interpreted as a newfound willingness to entertain a much more aggressive tightening cycle.When asked whether the Fed would consider raising interest rates at each subsequent policy meeting this year, which would result in seven increases in 2022, he simply said no decision had yet been made. He also declined to rule out the possibility that the Fed would raise rates by half a percentage point at one of its forthcoming meetings, double its typical quarter-point cadence. The central bank has not implemented a 0.5 per cent increase for more than two decades. US stock markets balked at the Fed chair’s hawkish stance. The sell-off in the S&P 500 ranked among the worst performances for the benchmark stock index during a post-meeting press conference from Powell, according to research firm Bespoke Investment Group.A 2.2 per cent advance unwound as Powell fielded questions from journalists, with the S&P 500 closing in the red.Bespoke noted that the only time markets sold off more while Powell was on his feet at a press conference was in December 2018, when the chair unnerved markets as he forged ahead with tighter policy in the middle of then-president Donald Trump’s trade wars.Ellen Zentner, chief US economist at Morgan Stanley, said that by being “deliberately vague”, Powell was keeping all of the Fed’s policy options open at a time when the economic outlook was historically difficult to assess. Whether that means “front-loaded” interest rate rises from March or increases spread more evenly over the year is not yet clear, but markets are now primed for a variety of scenarios.“The boilerplate approach from the Fed is to maintain maximum flexibility,” Zentner said, noting that Powell’s “hawkish colours” showed through on Wednesday. “The economy can throw us for a loop at any given time, so you can’t really message about a path for policy because it is highly uncertain given the outlook itself is highly uncertain.”Yvette Klevan, a fixed-income portfolio manager at Lazard Asset Management, said: “Powell definitely turned the dial up a little bit in terms of conveying a more hawkish narrative.” She suggested a half-a-percentage point increase in March might be “excessive” but that it was “not totally out of the question” given Powell’s refusal to rule out such a move and the fact that forthcoming data could confirm just how hot the US economy is.Powell pointed out that the US economy was much stronger than in 2015, when the Fed last embarked on a rate-rising cycle. Back then, the central bank adopted a cautious approach to tightening policy. But Powell’s remarks on Wednesday drove home the fact that the central bank could move more quickly this time round to bring rates back from near-zero to 2.5 per cent — the level that a majority of officials think will be sufficient to constrain economic activity.

Joe Davis, chief global economist at Vanguard, reckons the policy rate will eventually have to rise to 3 per cent — well above market expectations — to damp demand. Powell’s argument that there was “quite a bit of room to raise interest rates without threatening the labour market” further cemented expectations of a more aggressive approach. So did his remark that he believed the US had reached full employment.Analysts at Deutsche Bank now see five interest rate increases this year, with the first three occurring by the June meeting. They forecast the Fed will begin shrinking its almost $9tn balance sheet in July, with additional details about the speed of that effort being unveiled in May.Powell seemed unfazed when asked about the impact of the Fed’s newfound hawkishness on US markets, which have whipsawed this year as traders position themselves for higher rates. “Financial conditions are reflecting in advance the decisions that we make,” he said. “Monetary policy works significantly through expectations.” For Michael Feroli, the top Fed watcher at JPMorgan, Powell’s new approach could be summed up like this: “No more Mr Nice Guy.”Additional reporting by Eric Platt in New York More

Three months ago, Apple’s chief executive Tim Cook blamed “supply constraints” and a crisis in obtaining high-end chips to build devices for a $6bn revenue hit.And yet, the iPhone maker’s rapid growth has continued unabated. Earlier this month, it became the first company to achieve a market capitalisation of $3tn — a landmark moment, even if Apple’s shares have dropped back since. As the Silicon Valley giant prepares to report its latest earnings statement on Thursday, Apple is again expected to deliver its biggest quarterly revenues and profit. But while the coronavirus pandemic has boosted demand for devices such as Macs and iPads, it has also helped trigger a global supply chain crisis that holds back even greater financial growth at the world’s biggest listed company.During his last earnings call in October, Cook said “the impact from supply constraints will be larger during the December quarter” — a line interpreted to mean upwards of $10bn. Apple is battling with the same problem that has shaken global industries from petrochemicals suppliers to consumer brands. Travel restrictions and shipping bottlenecks have disrupted “just in time” supply chains designed around keeping company inventories to a minimum, while using short-term, flexible contracts that can be adjusted quickly to changes in demand.Still, consensus estimates among analysts suggest Apple’s revenues are set to rise 6.5 per cent to $119bn in the last three months of 2021, a typically bumper time that covers the holiday period, with iPhone sales expected to account for $67.4bn. Net profits are expected to be up 8 per cent to $31.1bn, which would be a record quarter for any company. Pervinder Johar, chief executive of Blume Global, a platform for end-to-end supply chain visibility, said companies such as Apple face two central problems: logistics delays that have not improved in recent months, and a semiconductor shortage that will take months, if not years, to resolve.The US Department of Commerce this week urged Congress to consider federal aid to chipmakers. It found demand for chips has increased 17 per cent in 2021 compared to two years earlier. However, supply has not kept up with this growing demand. Johar said the perception that Apple is prioritised by top chip suppliers, such as Taiwan’s TSMC, does not take into account the fierce competition for components from the likes of Dell and HP, as well cloud computing giants Microsoft, Amazon and Alphabet which power huge data centres.“These are all trillion dollar companies competing with each other for supply,” said Johar, who used to run global supply chain systems at HP.“So Apple might be a $3tn client, but the components that go into servers are higher-quality and higher-priced components than the things that go into consumer devices.”Electric carmaker Tesla, whose own navigation of the chip shortage has been lauded in recent months, on Wednesday warned its factories were likely to run below capacity “through 2022” because of supply constraints.Alan Day, founder of State of Flux, a London-based procurement consultancy, added that Apple being a famous brand has only “limited merit” when it comes to securing the components it needs.“The Apple brand certainly gets people dancing,” he said, but manufacturers a few tiers down the supply chain will not know they are feeding Apple. “The biggest things that can hit them and where they potentially have little control is on their suppliers’ suppliers,” he said, citing unpredictable problems such as the “availability of the workforce, as people go down with Covid.”Since Cook made his projection that supply chain issues will cause a drag on revenues, the situation has failed to improve, said Bindiya Vakil, chief executive of Resilinc, a California-based group that tracks more than 3m components to provide supply chain mapping services.Vakil added the Omicron coronavirus variant has merely added to posing new risks alongside Russia-Ukraine tensions, port delays, the upcoming Chinese new year and the Winter Olympics in Beijing. “The only thing that’s a relief is that the holiday period is over,” she said.In the past quarter, Resilinc flagged to its clients 1,915 supply chain issues for the high-tech industry, ranging from mine shutdowns, legal action and factory fires. Such issues have increased 53 per cent from the same period a year earlier and are well above a five-year average of 397 incidents. Analysts at Raymond James said supply chain constraints for Apple included camera modules and Texas Instruments-made power components. They also note that iPad supply was “purposely constrained . . . to preserve components for iPhone”.Yet, Apple’s problems related to hardware shortages are offset by its fast-growing services business. The unit, with gross margins above 70 per cent, has more than 745m customers for games, media, iCloud storage and warranty support. In the fiscal year that ended in September the services unit booked $68.4bn of revenue, with analysts projecting 19 per cent growth in the quarter ended in December.Wedbush, an investment bank bullish on Apple, believes the services unit could be valued at $1.5tn — half its peak valuation earlier this month, before the stock fell 12 per cent.“Apple will very likely still report a monster quarter, blowing past its previous quarterly revenue record set [last year],” said Neil Cybart, independent analyst at Above Avalon who is projecting $127bn in revenue. “However, reported results could have been even stronger.” More

Germany’s former economy minister Peter Altmaier promised it would act as the “economic locomotive” that pulled the world out of its Covid-19 crisis — but instead the country now looks more like Europe’s laggard.For a while, Germany was a pillar of relative resilience, its economy shrinking less than most of Europe in 2020. However, for the past year other countries have been rebounding faster and even Italy is expected to regain pre-pandemic levels of gross domestic product before Germany, which is teetering on the brink of a winter recession.“Germany had a very good first half of the crisis, but in 2021 things reversed,” said Gilles Moec, chief economist at French insurer Axa, adding that weaknesses in the economy were evident “before the pandemic when Germany was already underperforming”.Much of the recent underperformance of Europe’s largest economy stems from its greater exposure to global supply chain bottlenecks that have hit manufacturing, as well as a weaker recovery in household spending, economists said. The country’s place near the foot of the European growth table was confirmed this month when its Federal Statistical Office estimated that national output grew 2.7 per cent last year — less than half the expected French and Italian rates and well below the 5.1 per cent growth forecast for the eurozone overall. When quarterly GDP figures are published for Germany and France on Friday, they are set to underscore the diverging performance of the eurozone’s two largest economies. Analysts expect the German economy to even shrink slightly in the final three months of 2021 compared with the previous quarter, while France is expected to grow by 0.5 per cent. This week the IMF blamed “supply disruptions” for downgrading its 2022 German growth forecast from 4.6 per cent to 3.8 per cent.The stiffening headwinds underline the challenges confronting Chancellor Olaf Scholz’s coalition government, especially as it plans to squeeze public spending next year when Germany’s constitutional debt brake comes back into force.Robert Habeck, economy minister, said on Wednesday that “the consequences of the corona pandemic are still being felt and a number of companies are struggling with them”. But despite these “major challenges” he expected the economy to rebound with growth of 3.6 per cent this year.While most economists agree on the sources of Germany’s recent weakness, there is less consensus on whether the country is likely to catch up quickly or remain in the doldrums for a prolonged period. The answer is likely to hinge on how long supply snarl-ups continue to leave manufacturers short of many materials from semiconductors to lithium — preventing them from fulfilling record order books. “Germany is an open and trade-integrated economy so it is more affected by the supply problems that have been created by the pandemic,” said Salomon Fiedler, an economist at investment bank Berenberg.One of the hardest hit areas has been Germany’s carmaking industry, in which domestic production slumped 12 per cent last year to 3.1m vehicles — down more than 50 per cent from pre-pandemic levels in 2019. Overall industrial production in Germany was still 7 per cent below pre-crisis levels in November, while in France it was down 5 per cent and in Italy, the eurozone’s third-biggest economy, it was even up slightly.Marco Valli, chief European economist at UniCredit in Milan, said Germany was held back by its greater reliance on making vehicles, machinery and equipment. “The pandemic has provided a boost for consumer goods and this is much higher for both France and Italy,” he said.Economists said Germany’s underperformance in 2021 was also related to a shortfall in household spending, which was still 2 per cent below pre-pandemic levels in the third quarter of last year, while French household spending was down less than 1 per cent.“France has had a stronger recovery of private consumption,” said Katharina Utermöhl, senior economist at German insurer Allianz. “While Germany’s fiscal response was larger, the fear factor among people has been greater.”Germany has struggled to vaccinate people as fast as its neighbours, with 72.7 per cent of its citizens fully vaccinated, compared with more than 75 per cent in France and Italy. Because unvaccinated people face rising Covid-19 restrictions, this is likely to further restrict Germany’s consumer recovery.Labour shortages are another constraint. Detlef Scheele, head of the Federal Employment Agency, has estimated the country needs to bring in 400,000 skilled foreign workers a year — far more than it has done recently — to offset the impact of its ageing workforce.Germany is also likely to be hit by the slowdown in China, its second-largest export market after the US. “If the market on which Germany has been betting for many years is disappointing then, as an export machine, you have a problem,” said Axa’s Moec. Joachim Lang, director-general of Germany’s BDI business lobby group, said the spread of the Omicron coronavirus variant will cause further disruption to factory production in China and other Asian countries that “threatens to affect supply chains again this year”. Nonetheless, most economists still expect Germany to start regaining lost ground once supply bottlenecks ease and coronavirus restrictions are lifted. With a final fiscal stimulus this year — financed by issuing as much as €100bn of extra debt and €7.4bn from the EU recovery fund — the country “could go from one extreme to the other: from recession to growth champion,” said Carsten Brzeski, an economist at Dutch bank ING.There were early signs of optimism in IHS Markit’s latest purchasing managers’ index survey of German businesses on Monday, which reported its highest level since September and “tentative signs of easing” in supply chain problems. UniCredit’s Valli predicted Germany’s economy would lag behind France and Italy again this year — before outstripping them with growth of 3.8 per cent in 2023. “We expect supply bottlenecks to have faded in 2023 and then we expect the German economy to catch up,” he said. More