Aurelia Butler

The writer is head of macro research at the BlackRock Investment InstituteEurope is changing its rule book. The European Central Bank presented a new monetary policy strategy last autumn and is putting it to the test this year.That comes as discussions about reforming Europe’s fiscal framework are getting under way under the French EU presidency. Changes are needed. Disbursements from the Next Generation EU economic recovery programme and suspended rules on deficits have allowed the fiscal stance of the bloc to be smoothly recalibrated this year to support spending. But the reapplication of the EU’s deficit rules under Stability and Growth Pact again next year would reintroduce excessively tight fiscal policy. This would raise questions about the level of stimulus that can be provided by the ECB.Despite its new framework, the ECB is struggling to navigate the post-pandemic restart. The surge in inflation has sparked lively discussions about the need for a policy adjustment by the central bank. While the US Federal Reserve will raise rates soon and start whittling down its balance sheet later this year, the ECB has ruled out increasing rates this year and instead plans to provide further stimulus through its quantitative easing programme of asset buying. The minutes of the December meeting show increasing disagreement on the governing council though and next week’s ECB meeting will be closely watched for changes in the guidance.Parallels have been drawn with the measures taken by the Bundesbank in the early 1990s, when Europe last experienced inflation this high. Such comparisons overlook that the inflation drivers are completely different today. Instead of exuberant demand in the wake of German reunification, today’s inflation is mostly due to supply constraints amid the post-pandemic activity restart.The pandemic is likely to have increased the European labour market mismatch between job openings and job applicants in terms of locations or qualifications. Yet any resulting wage increases are part of the adjustment process in a market economy, and not necessarily signs of a wage-price spiral being set in motion.Exactly how long the current inflation surge will last is difficult to predict, especially in the light of rising geopolitical risks concerning the Russia-Ukraine conflict. Fortunately, the ins and outs of the near-term inflation dynamics are not the key point in the policy debate. What matters is the fact that euro area inflation dynamics are driven by shifts on the supply of goods and services. Clearly, tighter monetary policy by the ECB would not resolve supply-side bottlenecks in, say, the German car industry. Instead, the ECB’s policy should support the required reallocation of resources by explicitly accepting inflation overshoots.This notion goes beyond the pandemic: it also applies to the transition to net zero. Decarbonising the European economy requires big shifts in resources towards low carbon sectors. In addition, it requires massive public investment spending.

Plans submitted for Next Generation EU funding show that measures to help the bloc meet its object of becoming carbon-neutral by 2050 are above-target, but they still fall short of the required spending. Early action is crucial. Only an orderly climate transition makes climate-related supply shifts predictable and spreads them over a long period, thus limiting the inflation impact. While energy prices could continue to cause upward pressure on inflation, as ECB executive board member Isabel Schnabel recently highlighted, staff projections still put medium-term inflation close to, but below, 2 per cent. And with inflation expectations remaining anchored below, the ECB can afford to look past energy price spikes. As the ECB debates policy normalisation, governments are discussing potential reforms to Europe’s fiscal rules. For the ECB, memories still linger of the 2011 policy error raising rates on the back of rebounding energy prices. The same is true for the self-defeating fiscal austerity around the same time that materially slowed the European recovery from the global financial crisis.One way to reflect the secular decline in interest rates would be to raise debt limits, as Klaus Regling, head of the European Stability Mechanism, has proposed. Another way would be to extend the timeframe over which countries are expected to converge to the Growth and Stability pact rules. The Next Generation EU programme is an important step towards a collective fiscal response. But European governments cannot afford to stand still on national fiscal policies either.  More

SINGAPORE (Reuters) -Atar Sandler arrived in Singapore in 2019, seizing the opportunity to live in a buzzing global city that is also a convenient base to jet off to more exotic locales nearby. But after two years of mask-wearing, socialising in small groups and travel restrictions to combat the COVID-19 pandemic, the Israeli human resources professional packed her bags for New York with her husband and children this month. “It’s been like this for so long. And it doesn’t feel like anything’s going to change here,” said Sandler. “Life is very, very easy here. (But) is it worth it to live such a convenient life without being able to see family, friends, without being able to travel?”Risk-averse Singapore is trying to balance its approach to living with COVID – aiming to protect people in the densely populated island from the disease while reopening its economy and borders to maintain its reputation as a hub for capital and talent. Companies and expatriate professionals have long been drawn to the business-friendly country, one of the safest places in the world with a high quality of living, political stability, a skilled workforce, ease of travel and low taxes. But COVID has prompted soul-searching among many relatively affluent expats in Singapore, where foreigners workers make up a fifth of the 5.5 million population. Some compare its strict COVID rules with more freedom back home or bemoan the inability to travel freely to visit family, while others joined the “great resignation” wave seen around the world.For Sandler, it was “devastating” that giving birth to her daughter in the middle of the outbreak meant her family did not meet her second child for a year.Singapore has continued to attract new investment and foreign talent during the pandemic, but a drop in foreigners sent its population down by the most since 1950 – 4.1% lower year-on-year as of June 2021.That is mostly due to fewer numbers of lower-wage workers, typically employed in construction and marine services. But even the number of employment passholders, or professionals earning at least S$4,500 ($3,350) monthly, fell nearly 14% from 193,700 in December 2019 to 166,900 in June 2021. Expatriate life is, by nature, transient and many left because companies cut costs and jobs. As foreign workers departed, border restrictions meant businesses were unable to bring in replacements from overseas easily.But for Filipina Nessa Santos, who worked in the city-state for a decade, and her British husband, the pandemic was the push they needed to move from Singapore, a tiny urban island with no hinterland, to the English countryside with their children.”Even though our jobs were good, it was also very stressful and very demanding,” said Santos. “We didn’t want that kind of lifestyle anymore.” And Chris Anderson, who moved to Singapore in 2019 from Hong Kong, has returned home to the United States to join a tech start-up. He was perturbed by rules last year that restricted foreigners from returning https://www.reuters.com/world/asia-pacific/expats-wait-anxiously-singapore-weighs-covid-19-reopening-2021-08-05 to the city-state despite being residents.”You leave the country, you’re not a priority to get back in… that’s always at the back of your mind,” Anderson said. TRICKLE FROM HONG KONGStill, Singapore has been making it easier for travellers to enter and is looking more attractive to expatriates living in rival financial centre Hong Kong https://www.reuters.com/markets/europe/hong-kongs-financial-sector-faces-talent-crunch-expats-head-exit-2022-01-23, which has far stiffer rules due to its zero-COVID strategy.There has been a “trickle” of movement from Hong Kong https://www.ft.com/content/a2f645e8-d093-4d93-94fb-23f3cb690bd7 into Singapore, said Lee Quane, regional director at relocation firm ECA International. He expects expatriate outflows from Singapore to outpace inflows through 2022, citing tighter foreign worker policies and wariness over potential curbs https://www.reuters.com/world/asia-pacific/singapore-freeze-new-ticket-sales-quarantine-free-travel-2021-12-22 due to virus variants.The net decline in the non-resident workforce slowed in 2021, with a small net gain in November, the manpower ministry said in a written response to parliamentary questions last week.Barring unforeseen circumstances, the government, which has stressed the importance of staying open, expects “to hold the course” of calibrated easing in border restrictions.”The government works hard to ensure that businesses and individuals continue to choose Singapore because of our openness, rule of law, and consistency in policies,” it said. Companies continue to bring in key talent and receive approvals for work passes, according to Hsien-Hsien Lei, the CEO of the American Chamber of Commerce in Singapore. “Sure, things aren’t perfect. But, Singapore, from a relative point of view is a great place to live and do business,” said Lei.($1 = 1.3433 Singapore dollars) More

SAN FRANCISCO (Reuters) – Tesla (NASDAQ:TSLA) Inc on Wednesday forecast vehicle deliveries would comfortably grow by more than 50% year-over-year in 2022 despite persistent supply chain issues that it expects to be alleviated only next year.The upbeat outlook from CEO Elon Musk came after the world’s most valuable automaker posted record quarterly revenue that beat Wall Street expectations.But the cautious note about supply chain woes showed that even Tesla cannot avoid the shortages that were pitfalls for many larger automakers last year. Shares fell 0.8% after hours. Tesla, which produced a few cars at its Berlin and Texas factories last year, said scaling up production there would depend on supply chain headwinds and the successful introduction of new technologies. Musk said that Tesla would not roll out new models this year but hopefully would launch its Cybertruck, Semi and Roadster next year. Tesla said it is not currently working on a $25,000 model that Musk promised in 2020 would launch in three years.Revenue rose to $17.72 billion in the fourth quarter, above analyst estimates for $16.57 billion, according to IBES data from Refinitiv.Tesla has fared better than most automakers in managing supply chain issues by using less scarce chips and quickly re-writing software. The automaker last quarter handed over a record number of vehicles to customers despite supply chain headwinds. “We still expect to be partly or primarily chip limited this year,” Musk said during a conference call, saying that chip limitations should be alleviated next year. He said Tesla’s volume growth would comfortably exceed 50% from last year, meaning that Tesla expects to deliver more than 1.4 million vehicles this year.Tesla said the goal would be achievable even with current factories at Fremont, California, and Shanghai. Tesla said its Texas factory will this quarter deliver its first vehicles equipped with its next-generation 4680 batteries made in California as planned. Musk said he expected Tesla’s vehicles to achieve full self-driving capability this year. Currently humans are required to sit behind the wheel to drive the car if needed.”I would be shocked if we do not achieve full self-driving, safer-than-human this year,” he said. The number of full self-driving beta vehicles in the United States increased to nearly 60,000, up from a few thousand at the end of September. Tesla has been testing the improved version of its automated driving software on public roads, but it has said the features do not make the cars autonomous.Tesla’s $4.09 billion in adjusted earnings before interest, tax, depreciation and amortization (EBITDA) beat the consensus estimate of $3.89 billion, according to Refinitiv. That appeared to qualify Musk for an additional options payout under his 2018 compensation package.Quarterly profits took a $340 million hit from payroll taxes related to Musk exercising options related to his 2012 compensation package. The profits also reflected rising raw material, commodity and logistics costs and expenses related to warranties and recalls. Tesla is recalling more than 475,000 of its Model 3 and Model S electric cars to address rearview camera and trunk issues that increase the risk of crashing. More

LONDON (Reuters) – London remains the top global financial centre, according to a study from its own financial district, but is outgunned by New York and Singapore in access to talent, while Paris is adding competition from the European Union.The study from the City of London Corporation selected seven centres that feature in other research on financial hubs, such as Z/Yen, which consistently puts New York in the top spot and London second.The study, which added Paris this year, looked at five areas like digital skills, regulation and talent. While London remains top overall from last year, New York is only slightly behind and closing the gap, followed by Singapore, Frankfurt, Paris, Hong Kong and Tokyo. (Graphic on, City of London Graphic: https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwxmndpo/City%20of%20London%20Competitiveness%20Graphic.PNG) New York remains by far the biggest financial centre, while London lags Singapore in resilient business infrastructure, access to talent and skills, and a friendly regulatory and legal environment.”UK policymakers need to guarantee that its businesses continue to enjoy unrivalled access to the best of global talent,” the study said.”Withdrawal from the EU, the end of freedom of movement and the introduction of a new immigration system have damaged perceptions of the UK as an attractive business environment for international talent in recent years.”Total tax for UK-based financial services firms, in particular banks, is also relatively high, it said. The finance ministry is reviewing https://www.reuters.com/business/finance/britain-review-surcharge-bank-profits-2021-03-03 some of the taxes.Britain’s finance ministry has proposed that the Bank of England has a formal remit to “facilitate” London’s competitiveness.A year since Britain left the EU’s orbit, leaving the financial sector largely cut off from the bloc, there are no signs of a “Brexit dividend” in looser regulation, though listing rules have been eased to help London catch up with New York in IPOs. More

Sri Lanka is negotiating debt relief with international bondholders and is weighing an approach to the IMF, its finance minister said, as the country struggles with a foreign reserve crisis that has left it close to default.Basil Rajapaksa told the Financial Times in an interview that the government was “negotiating with everybody” and “trying all our options” to avoid default and alleviate the economic crisis.“We have [international sovereign bonds] which we have to repay back, so we are negotiating with them. Then we have creditors and we have to service their debt, so whether we can have an adjustment or some type of thing,” he said. Rajapaksa added that the government would “think about a programme with the IMF . . . All those discussions are going as well.”Many investors think Sri Lanka will become the latest to default on its sovereign debt during the pandemic, after the likes of Belize, Zambia and Ecuador. The country has almost $7bn in debt payments due this year but less than $3bn of foreign reserves.Some Sri Lankan officials have insisted that the country can avoid this fate by boosting foreign currency reserves through tourism and exports while securing additional assistance from China and India, two of its largest benefactors. The central bank governor this week told CNBC that “we don’t need relief” from the IMF.Rajapaksa insisted the government could manage but was preparing for contingencies. “I know it’s very difficult because we have to pay this year $6.9bn and, additional to that, we have to find money for medicine, raw material, fuel, all these things,” he said.Basil Rajapaksa, centre, insists the country can manage despite dwindling foreign currency reserves © Eranga Jayawardena/APThe lack of foreign currency reserves has caused power cuts and shortages of imports, including fuel and milk powder, which have exacerbated double-digit inflation.More than a third of Sri Lanka’s debts are owed to international bondholders and the country last week repaid a $500m bond. Another $1bn is due in July but Dimantha Mathew, head of research at First Capital brokerage in Colombo, said the country might have already run out of foreign currency by then.Its long-dated dollar bonds are trading at less than half their face value, suggesting foreign fund managers are speculating on how much they might get back in a restructuring rather than expecting to be repaid in full.Asked if he was negotiating a restructuring with bondholders, Rajapaksa replied it was “something like that”. “Obviously you can understand what we want and you can understand what the bondholders would like to have,” he added.Sri Lanka has also turned to India and China for help. New Delhi has provided nearly $1bn in relief and is negotiating to provide further assistance. Beijing last month provided a renminbi currency swap worth $1.5bn, although analysts said it was unlikely this could be used to pay the dollar-denominated debt. President Gotabaya Rajapaksa, the finance minister’s brother, has also asked China to restructure its loans, which have swelled to more than 10 per cent of Sri Lanka’s foreign debt burden. Many say Chinese credit has exacerbated the crisis by being used for large but unnecessary infrastructure projects with little return.

Sri Lanka has previously entered 16 relief programmes with the IMF and, even before the pandemic, investors were becoming wary of its growing debt pile and meagre tax revenues. These were further eroded when the Rajapaksa government slashed value added tax and other levies in 2019, leading to a cascade of credit ratings downgrades to junk levels.Sri Lanka has been locked out of debt markets while the pandemic-induced collapse in tourism and remittances caused dollar inflows to drop dramatically.“Maybe with this Indian financing they can kick the can down the road a little longer,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management, which holds some Sri Lankan dollar bonds. “But even if they repay in July, this is just delaying the inevitable.” More

BOSTON (Reuters) -Billionaire investor William Ackman has built a new stake in streaming service Netflix Inc (NASDAQ:NFLX) worth more than $1 billion since its stock price tumbled starting last Thursday.Ackman told investors that his hedge fund, Pershing Square Capital Management, started buying on Friday and now owns more than 3.1 million shares in Netflix, making Pershing Square a top 20 shareholder.In a letter to his clients, Ackman praised the company’s “best-in-class management team” and on Twitter (NYSE:TWTR) the manager said he has long admired Netflix CEO Reed Hastings and the “remarkable company he and his team have built.”Netflix shares climbed as much as 5% in after-hours trading. They had tumbled more than 30% in the last five days, a much steeper swoom than the broader market. After the market closed last Thursday, Netflix forecast weak subscriber growth. Ackman, whose firm invests $22.5 billion, wrote that he had been analyzing Netflix at the same time he was investing in Universal Music Group (AS:UMG) and was ready to buy when Netflix’ “stock price declined sharply last Friday.””Now with both UMG and Netflix, we are all-in on streaming as we love the business models, the industry contexts, and the management teams leading these remarkable organizations.”To raise the cash to make the Netflix purchase, Ackman said the firm unwound a big piece of its interest rate hedge which generated profits of $1.25 billion.He said that if he had not sold the hedge, his performance would have been better. His Pershing Square Holdings lost 13.8% in the first three weeks January, the worst start to a year for the manager in years.Last year Ackman posted a gain of 26.9% after the fund surged 70.2% in 2020.Ackman said Netflix benefits from highly recurring revenues, adding the company has pricing power and delivers industry-leading content.Pershing Square traditionally holds only a small number of investments which currently include Lowe’s (NYSE:LOW), Chipotle Mexican Grill (NYSE:CMG), and Dominos Pizza Inc. He said these companies are high quality businesses that can withstand inflationary pressures because they are able price their products to preserve profits. Netflix’ stock price surged during the pandemic as live performances were shut down and movie theaters were largely off limits.The company has been a favorite with prominent investors before. Roughly a decade ago Carl Icahn, an activist investor like Ackman, took a 10% position in Netflix and thought the company might need to sell itself to a technology company as its shares were undervalued. Ackman, who has pushed other companies to perform better, appears to be approaching this investment as a friendly investor. “We are delighted that the market has presented us with this opportunity,” he wrote on Twitter. More

Tesla warned that constraints in its supply chain would weigh on the electric carmaker’s results “through 2022” as it reported a record net profit of $2.3bn in the fourth quarter of 2021. The quarterly figures demonstrated that the electric vehicle pioneer led by Elon Musk had deftly navigated the supply chain congestion and chip shortages that have plagued the rest of the car industry. But on Wednesday, Tesla said in an earnings announcement that its factories “have been running below capacity for several quarters as [the] supply chain became the main limiting factor”, a trend “likely to continue through 2022”. Tesla’s shares immediately dropped more than 5 per cent but later traded 1.5 per cent higher in after-hours trading as Musk, chief executive, spoke on an investor call. Despite supply chain woes, Musk said Tesla’s volume growth this year should be “comfortably above 50 per cent”. Last year, Tesla delivered 936,222 vehicles, an annual gain of 87 per cent. Musk also pledged to “solve” full self-driving technology in 2022 — a claim he has made in prior years without success. Industry experts were sceptical that Tesla could achieve its self-driving ambitions, but that has not stopped the company from selling its driver-assist features for $10,000.Over the long term, Musk said full self-driving features would become a core part of Tesla’s profitability, turning cars from depreciating assets in to products that increase in value over time as owners can lease them out to earn revenue.“I would be shocked if we do not achieve full self-driving safer than a human this year,” Musk said. Tesla’s net quarterly profit of $2.3bn was 760 per cent higher than a year earlier, but was nevertheless below the $2.55bn expected by Wall Street. The company has recorded 10 straight quarters of net profits. For all of 2021, it recorded $5.5bn in net profit, up 665 per cent from 2020. Fourth-quarter revenue jumped 65 per cent from the same period a year before to $17.7bn, well above forecasts of $16.6bn.Fans of the company seeking updates on the upcoming Cybertruck, Semi and Roadster vehicles left the earnings call disappointed, as Musk confirmed “we will not be introducing new vehicle models this year — that would not make any sense”.

He explained that efforts to introduce vehicles would cause total output to decline and the focus in 2022 would be on scaling up operations.When asked about the potential for a Tesla at a price of $25,000, Musk demurred. “We’re not currently working on a $25,000 car,” he said. “At some point . . . but it’s the wrong question. What overwhelmingly matters is, when is the car autonomous?”Despite recent supply chain headwinds, the company called 2021 a “breakthrough year”, adding that its operating margin of 14.7 per cent was better than all volume carmakers, “demonstrating that [electric vehicles] can be more profitable than combustion engine vehicles”. Shares of the company, now headquartered in Austin, Texas after a move from California, had slipped 22 per cent this year before Wednesday’s results were released, pulling its market capitalisation down to $934bn.

Video: Cars, companies, countries: the race to go electric More

Rishi Sunak’s latest Budget has contributed to a rise in inflation and there is a risk that current government policy could generate a wage price spiral, according to an influential all-party group of MPs. In its report on the October Budget, the Treasury committee also warned that the tax burden would be higher at the next election than at the last, even if the chancellor offered some sweeteners before people go to the polls. At a time of rapidly rising energy, food and petrol prices, the accusation by a committee dominated by Conservative MPs that the government’s actions have worsened the UK’s cost of living crisis will be uncomfortable reading for the chancellor. The committee noted that Sunak’s plan for a rise in national insurance contributions from April to clear an NHS treatment backlog and fund social care reforms would raise costs for employers because half of the tax increase is paid by companies, putting pressure on them to increase prices. A number of Conservative ministers have called on Sunak to delay or cut the increase. Jacob Rees-Mogg, leader of the House of Commons, and Lord David Frost, former Brexit secretary, have spoken out against it, while Kwasi Kwarteng, the business secretary, has criticised the plan. However, the chancellor’s allies insist there are no discussions over delaying to the rise. The committee also found that “the large fiscal loosening” in the Budget, with more generous than expected increases in public spending, would also push up prices.Not reserving their criticism for the chancellor, the MPs also warned Boris Johnson that his calls for higher wages were dangerous and bad economic policy. Mel Stride, chair of the committee, said: “While the prime minister’s ambition to promote high wage growth is worthy, focusing on increasing wages without improving productivity is likely to be inflationary and risks contributing to a wage price spiral.”Higher inflation will raise the cost of servicing government debt, both because it directly increased payments on bonds linked to price rises and because it increases the likelihood the Bank of England will raise interest rates. The committee acknowledged that Sunak had shown he was “alert to the fiscal risks of higher inflation and interest rates becoming entrenched” and it urged the Treasury to “keep these risks at the forefront of their thinking when designing policies at future fiscal events”.Higher inflation does not always hurt the public finances and can lead to lower borrowing if wages or profits rise sufficiently to bring in more tax revenues than expected. But the committee said the years ahead were likely to be difficult for the public finances with little scope for large tax giveaways before the next election, even if the public finances continue to improve. With the tax burden in this parliament already set to rise to levels not seen before in peacetime, with increases in national insurance, income tax and corporation tax, the MPs said pre-election tax cuts signalled by Sunak would not reverse the action already taken. The committee said: “It already appears to be a significant challenge for the tax burden, as a percentage of GDP, to be lower at the end of this parliament than at the beginning, because the chancellor’s tax rises have already been announced, and his fiscal headroom to reduce them is small.”Additional reporting by George Parker More