Aurelia Butler

WASHINGTON (Reuters) – The International Monetary Fund expects U.S. core inflation to peak in the first quarter, easing to 3.4% by the end of 2022 and dropping to the Federal Reserve’s average target of 2% in 2023, the IMF’s No 2. official told Reuters.First Deputy Managing Director Gita Gopinath said the Euro area would likely see inflation rising for a couple of quarters, but getting close to the European Central Bank’s target of around 2% by the end of the year. More

The Biden administration and Congress need to “get the details right in case they must follow through on the threat of sanctions,” Jake Colvin, president of The National Foreign Trade Council told Reuters. “Those details should include consideration of safe harbors or wind-down periods to enable companies to fulfill existing contracts and obligations, as well as carve-outs for lifesaving medicines and other humanitarian considerations consistent with longstanding U.S. policy.” More

Chip inventory held by manufacturers has plummeted to an average of just five days’ supply, as the global semiconductor shortage continues to wreak havoc on industry, the US Department of Commerce has warned.According to a survey by the department of roughly 150 companies worldwide, manufacturers’ median chip inventory plunged from 40 days supply in 2019 to about five days late last year.US commerce secretary Gina Raimondo on Tuesday warned US companies remain vulnerable to the weakened supply chain, adding that some could be forced to temporarily close and furlough workers in the event of even minor disruptions.“This tells you how fragile this supply chain is,” Raimondo said. “Five days of inventory, no room for error . . . so what does that mean? A Covid outbreak, storm, a natural disaster, political instability, a problem with equipment — really anything that disrupts a facility anywhere in the world — we will feel the ramifications here in the United States.”The global chip shortage was prompted by a surge in demand for consumer electronics during the pandemic, and has been exacerbated in the US by sanctions on major suppliers in China.The crunch has also illustrated the extent to which parts of the US manufacturing base are reliant on other overseas chipmakers such as Taiwan’s TSMC, the world’s largest foundry and a supplier to companies including Apple and Volkswagen.“Right now we make zero leading-edge semiconductor chips in the United States of America,” Raimondo said. “We buy almost all of them from Taiwan. Those are the chips needed in sophisticated military equipment.”Raimondo on Tuesday urged Congress to pass the Chips Act, which would unlock $52bn in subsidies to encourage domestic chip manufacturing in the US. Although the Senate has passed the measure, it has stalled in the House of Representatives.According to the commerce department’s survey, median demand for chips among respondents was as much as 17 per cent higher in 2021 than 2019. Chips based on older technology and those used by companies such carmakers were in particularly short supply.Respondents, who were anonymous, also said that they did not see the chip shortage dissipating in the next six months.The chip crunch has hit carmakers particularly hard since manufacturers diverted supplies during the pandemic towards customers in consumer electronics, which pay more for semiconductors. Several carmakers, including General Motors and Ford, were forced to halt production in US plants last year because they could not buy enough chips.Biden administration officials began pressing semiconductor companies for “more transparency” about their supply chains last September. More

While 2021 was a year of strong economic recovery, that recovery was neither universal nor complete. Unfortunately, prospects for 2022 now look worse than the IMF forecast last October: the main culprits, it argues, being the Omicron Covid-19 variant, supply shortages and unexpectedly high inflation. Downgrades in forecasts are particularly sharp for the US and China. Uncertainties are large, with risks concentrated on the downside. Above all, it is easier to argue that the fund’s base case is too optimistic than pessimistic.These are my conclusions from the IMF’s World Economic Outlook Update. A year ago, the fund forecast global economic growth in 2021 at 5.5 per cent, with growth of high-income countries at 4.3 per cent. It now estimates that global growth last year was 5.9 per cent, with growth in high-income countries at 5.0 per cent. The improvement in emerging and developing countries was far smaller: a year ago, growth in 2021 was forecast at 6.3 per cent, against the 6.5 per cent it now estimates. In general, notes the fund, whether outcomes in 2021 improved over what had been forecast in late 2020 depended on achieving high levels of vaccination: vaccines are as much an economic policy as a health policy. (See charts.)The forecast downgrades for 2022 since October of last year are not dramatic: the world economy is still forecast to grow at an above trend rate of 4.4 per cent, with high-income countries growing at 3.9 per cent and emerging and developing countries 4.8 per cent. The downgrades are by 0.5, 0.6 and 0.3 percentage points respectively. They are particularly sharp for the US, with a growth forecast for 2022 down by 1.2 percentage points to 4 per cent, and China, with a growth forecast reduced by 0.8 percentage points to 4.8 per cent.The principle factors behind the US downgrade are the removal of the Build Back Better fiscal package from the baseline, sharper than expected withdrawal of monetary accommodation and supply shortages. In China, it is disruption caused by a “zero-Covid” policy and stress in the property sector.Far more important than such forecasts are the assumptions on which they rest. The fund assumes, crucially, that the pandemic will be brought under control globally by the end of 2022. This implies that vaccination will be achieved in most countries and that the vaccines will also remain effective. The fund is also still on “team temporary” with respect to high inflation, even though it will be worse and last longer than was earlier expected — by both itself and most forecasters. Yet its story remains one of short-term constraints and well-anchored inflation expectations: the forecast is that inflation in high-income countries will average 3.9 per cent in 2022 before subsiding in 2023. The fund also assumes that China will manage to stabilise its economy successfully.The risks lie on the downside, as the fund also notes. One risk is that Covid is not brought under control. The most urgent task is to make vaccination effective, which is a challenge to scientists, businesses and health systems. It is also crucial to gain and keep public trust.Another risk is that inflation will not be brought under control swiftly or easily. It is indeed easy to point to specific shocks, notably energy prices, as the proximate cause of inflation. In 2021, argues the fund, supply shocks lowered world output by 0.5 percentage points and raised inflation by one percentage point. But there is more to it than that. The data on the US labour market are especially puzzling, since employment and labour force participation are fairly low, while other evidence, notably on labour costs and quit rates, suggests that labour markets are tight.It is reasonable to assume that supply bottlenecks will ease, since high prices are themselves the inducement for greater supply. In the case of energy, prices might remain high but stabilise or even start to fall. Yet, since monetary policy and financial conditions are exceptionally loose by historical standards, substantial tightening might still be needed to stabilise demand. The fund assumes that the US Federal Reserve’s asset purchases will end in March and that there will be “three rate increases in both 2022 and 2023”. That may not be enough, though it might also be too much. Historically disinflation has often led to recessions. One can add that if the inflation overshoot is both large and prolonged, the new doctrine of average inflation targeting will cause a headache. Will the Fed aim for sub-2 per cent inflation, to make up for any overshoot?As the update to the Global Financial Stability Report adds, financial markets show “stretched valuations” — a nice understatement. Monetary policy tightening, possibly at a faster rate and to higher levels than expected, would soon tell us who has been swimming naked in our financial oceans. These financial risks are particularly important for emerging and developing countries. A big question might then be how well we are able to handle financial distress.Beyond this there are evident geopolitical and climate risks. Just look at the Russia-Ukraine imbroglio. One particularly interesting question is how to manage a world in which most countries have decided to live with Covid, while China has decided to suppress it. This suggests a permanent closure of borders to movement of people. This would be a new iron curtain — an iron quarantine.In all, continued recovery is to be expected, albeit at a slower rate than forecast a few months ago. But we have also been reminded of the risks. These are sharply to the downside. Moreover, the “normal” to which we may return is not the old one. The world has [email protected] Follow Martin Wolf with myFT and on Twitter More

UK public borrowing was £12.9bn lower than official forecasts in the financial year to December, leaving the chancellor Rishi Sunak with enough fiscal room to hold off on a rise in national insurance tax planned for April. Public sector net borrowing was estimated to have been £147bn, nearly half of that in the same period the previous year, data from the Office for National Statistics showed on Tuesday. The figure came in £12.9bn under official forecasts by the Office for Budget Responsibility made in October, a similar value to the £12bn tax national insurance rise planned for spring to fund the NHS and social care. “Our forecasts imply the chancellor would have enough fiscal room to cancel the scheduled increase in national insurance contribution on 1 April to cushion the blow for households,” said Bethany Beckett, economist at Capital Economics, a consultancy. “This fiscal room for manoeuvre makes it inevitable that the chancellor will set out a plan to deal with the cost of living crunch,” said James Smith, research director at the Resolution Foundation think-tank. UK prime minister Boris Johnson on Monday repeatedly refused, in a television interview, to confirm the national insurance rise would go ahead in April.On Tuesday, Johnson’s spokesperson, asked whether the NI rise would definitely to ahead, replied there were “no plans” to change the timetable for introducing it, rather than replying simply “yes”.Sunak and Johnson are scheduled in the coming days to hold talks on how to mitigate the cost of living crisis, focused particularly on rising energy bills.The chancellor’s allies insisted there are “no discussions” on postponing the NI rise taking place. Sunak is well aware that if the tax rise is delayed, it will become progressively harder to introduce it as the next general election approaches.Traditionally, chancellors prefer to raise taxes early in a parliament, using any fiscal headroom to cut taxes nearer to an election.Michal Stelmach, senior economist at KPMG UK, noted that the UK is one of only a few countries in Europe that has not introduced any support measures to shield vulnerable groups from higher prices, after inflation rose to a 30-year high in December.

That month, UK borrowing was estimated at £16.8bn — £7.6bn less than in December 2020 when most of the country was under tight pandemic restrictions. Borrowing levels for that month were also lower than the £18.5bn expected by economists polled by Reuters.Meanwhile, central government receipts came to £68.5bn last month, up 10 per cent compared with December 2020, boosted by stronger tax receipts as the economy continued its recovery. Total government spending came to £86.7bn last month, down £1bn from the same month in 2020, reflecting savings of £8.2bn from the pandemic job-retention and self-employment support schemes that ended in October.However, some of the government savings were offset by higher spending on the NHS Test and Trace programme and the cost of Covid vaccines. Interest payments more than doubled to £8.1bn compared with December 2020 owing to high retail price inflation to which some of the government debt is pegged.Sunak said: “Risks to the public finances, including from inflation, make it even more important that we avoid burdening future generations with high debt repayments.” More

The global economic recovery from coronavirus will run into “multiple challenges” this year, the IMF said on Tuesday, warning of lower growth and higher inflation. Significantly downgrading its 2022 forecasts for economic activity in the world’s two largest economies, China and the US, the updated economic forecasts from the fund show it becoming more pessimistic about the scope for a full recovery from the pandemic. The outlook would be even worse, the IMF added, if central banks have to take firmer action to quell inflation or geopolitical tensions in Ukraine intensify. The IMF’s forecast for the global economy is for growth in gross domestic product to slow from 5.9 per cent in 2021 to 4.4 per cent this year, weakening further in 2023 to only 3.8 per cent. The fund has knocked 0.5 percentage points off its growth forecast for 2022 with only a modest bounce back of 0.2 percentage points for 2023. Gita Gopinath, the IMF’s first deputy managing director, said in a blog post that the world economy was grappling with supply disruptions, higher inflation, record debt and uncertainty. “The continuing global recovery faces multiple challenges as the pandemic enters its third year,” she said.“The last two years reaffirm that this crisis and the ongoing recovery is like no other,” Gopinath added. “Policymakers must vigilantly monitor a broad swath of incoming economic data, prepare for contingencies and be ready to communicate and execute policy changes at short notice.”The IMF significantly downgraded its forecast for US economic growth in 2022, from 5.2 per cent in its October outlook to 4 per cent just three months later. It judged that the administration of Joe Biden was no longer likely to pass its Build Back Better legislation.Even with slower growth, the IMF thought the Federal Reserve would need to tighten monetary policy faster than it previously expected.“Everything points in the same direction when it comes to monetary policy, which is the need to cool down the economy to bring down inflation,” said Gopinath in an interview with the Financial Times. Ahead of the Fed’s first monetary policy meeting of the year this week, Gopinath said there was likely to be volatility in markets this year. “This makes the job of the Fed even more important — to very, very clearly communicate how they are reading inflation and how they expect to respond to this over time.”For China, the fund downgraded the 2022 growth outlook from 5.6 per cent to 4.8 per cent on the back of the restrictions needed to continue with its zero-Covid policy and the retrenchment in the property sector. But Gopinath did not think a Chinese slowdown stemming from its property sector would derail the global economy. “China has both the monetary and fiscal space to deal with the macro consequences of something like that, and does have some ability to ensure that there is some orderly restructuring and that it doesn’t spill over to financially viable firms.”The IMF also forecast UK growth to moderate after a strong 2022, with the economy expanding 2.3 per cent in 2023.The eurozone growth outlook was maintained albeit with a weaker recovery forecast, reflecting disruptions from the Omicron wave of Covid-19, followed by faster growth in 2023. For almost all of the world, inflation is now expected to be higher this year, requiring central banks to tighten monetary policy and putting pressure on countries to make sure their levels of borrowing come down as the cost of credit rises. This will put most pressure on emerging and developing economies, the fund said, adding to concerns raised earlier this year by the World Bank. Those with large amounts of foreign currency-denominated debt will be most at risk. Gopinath said the most important economic policy initiative would be “to break the hold of the pandemic”, requiring a larger and more equitable supply of Covid-19 vaccines, tests and therapeutic drugs. This article was updated on January 25 to make clear the UK economy was forecast to grow by 2.3 per cent in 2023 compared with the year before. More