Aurelia Butler

Good afternoon. The Britain after Brexit briefing is back for 2022, the year that Brexit may finally really “get done” — or at least the first phase of Brexit.If all goes to plan, this will come in two parts: firstly an agreement in the next two or three months to put the post-Brexit trade rules for Northern Ireland on a politically and economically sustainable footing; secondly the phasing in of full border controls on imported goods from the EU into the UK, of which more in subsequent editions.On the Northern Ireland trade question, after a Christmas and New Year break where I understand officials really did take time off, talks to try and cut a deal with Brussels will begin in earnest in the UK next week. The Irish foreign minister Simon Coveney is also in London tonight in order to lay some of the groundwork.In pondering the challenges of the coming negotiation, it’s worth recalling at the outset that the EU and the UK do already have an agreement which was negotiated in 2019 — the benighted Northern Ireland Protocol. It’s just that the UK government, in retrospect, has declared it to be unsustainable.The original agreement remains the baseline from which the EU measures its concessions and that is likely to be a fundamental source of tension between the two sides as they try to thrash out a compromise. Following the resignation of Lord David Frost, it is now Liz Truss, the foreign secretary, who will negotiate with the EU Brexit commissioner Maros Sefcovic. But while Truss might lighten the tone with her trademark goofy optimism, it doesn’t change the fundamental problems.This remains the fact that Boris Johnson’s decision to leave Northern Ireland in the EU’s single market for goods — necessitating EU-style border checks on goods going from Great Britain to the region — has been honoured in the breach since it came into force in 2020.The deal has never been fully implemented, initially because the EU and the UK agreed ‘grace periods’ to give business time to adapt, but subsequently because the UK has extended those grace periods, first unilaterally and latterly with the grudging connivance of Brussels.The difficulty is that the UK baseline for success is to further reduce that already partially-implemented Irish Sea border, while the EU side still seeks to defend the basic concept of the protocol, which requires goods to conform to EU rules.So while some momentum was built up towards a deal before Christmas by Frost’s decision to soften his demands to remove the European Court of Justice and an acknowledgment that certain controls at the Irish Sea border would be required, the two sides remain some way apart.In October the EU put forward ideas to smooth the border, which Sefcovic claimed will reduce customs checks by 50 per cent and so-called “SPS” checks on plant and animal products by 80 per cent. However, those are not figures that the UK or Northern Ireland industry recognise on the ground.One reason is that the EU might argue that it is reducing SPS checks by “80 per cent” from the original deal — which required the full implementation of export health certificates (for goods going from Dover to Calais) that have never been required.Some EU officials talk about reducing the “intensity” of checks, rather than the “quantum”. So the number of lines in a customs form might shrink by 50 per cent, but you still need the form.That’s fine, but it is the practical impacts, rather than semantic niceties, that will preoccupy Truss as she tries to reach a deal she can sell to restless backbenchers and even, with luck, more moderate Unionists in Northern Ireland.One key bone of contention cited by officials and trade groups is the EU’s offer to create an “express lane” for goods that can be proven to be destined only for consumption in Northern Ireland — but limited only to “primary products originating in the UK”.In practice, say trade groups, that means a GB-based food manufacturer that uses, say, Brazilian beef in a ready meal, must ‘export’ the product into Northern Ireland either via the continental EU or through Dublin. This, they say, is impractical.The EU — recalling the original deal — argues that such a restriction is fundamental to the protocol, and necessary to prevent Northern Ireland becoming a backdoor for non-UK products into the EU single market. It also argues that there is plenty of meat in the single market that can be made into pies for Northern Ireland. Ultimately, this was the deal that Johnson signed, but expect a full-court press from Northern Irish trade groups and the UK this month to try to make the EU side understand the challenges this approach throws up for NI supply chains and the impact it will have on consumer choices and politics in the region.Gaps also remain for goods going in the other direction — from Northern Ireland into Great Britain — where the UK government has promised “unfettered access” for NI businesses to the UK internal market. The difficulty is that under EU rules, goods leaving the EU single market should submit exit declarations. Mindful of the political symbolism of this, the EU agreed in the 2019 deal that this procedure was not necessary for Northern Ireland goods being sent into Great Britain, accepting instead that data from shipping manifests could act as a substitute.But, in its demands to reform the protocol last July, the UK government said the system was “not operable without putting in place burdensome new requirements to collect further information” and requested a new settlement “to definitively eliminate these requirements”.The EU did not address the issue in its suggested package of changes last October, so as things stand, Brussels continues to cling to the original deal. Fixing this will be another key part of negotiations.Resolving gaps on these kinds of issues are core to a workable deal. The UK has accepted that shipping goods from Birmingham to Belfast cannot be exactly the same as sending them from Birmingham to Brighton. The question is how different does it really need to be?With Northern Ireland elections looming in May, the pressure is on to do a deal, not least because the UK government is facing a series of other headwinds — inflation, labour shortages, supply chain issue, rising energy prices — that mean a sizeable chunk of the Cabinet want the Northern Ireland issue put to bed.And Truss, as foreign secretary with one eye on the top job, arguably has a broader appreciation of the UK’s strategic priorities than Frost, while the EU side also points towards the logic of doing a deal. But all politics is ultimately local. Any deal Truss strikes will crystallise a trade border in the Irish Sea that Johnson has always been in denial over. And to sell that back home, Truss will need wins that measure up against the UK’s benchmarks, not the EU’s.Do you work in an industry that has been affected by the UK’s departure from the EU single market and customs union? If so, how is the change hurting — or even benefiting — you and your business? Please keep your feedback coming to [email protected] in numbersLooming over the negotiation is, of course, a deteriorating economic climate which the FT’s annual survey of economists reckons will be exacerbated by Brexit.This is not as simple as pure trade friction, but a combination of added bureaucracy that reduces imports and exports; a less flexible labour market caused by ending free movement; and a less optimistic climate for investment, impeded in part by the fact that the UK is no longer an easy gateway into the EU single market.In the opinion of Paul de Grauwe, professor at the London School of Economics: “Recoveries are driven by optimism about the future . . . Brexit will impose chronic pessimism about the future of the UK economy.”Already business sentiment seems grim. According to December PMI survey data the UK was the only western economy to see falling exports — and a quarter of UK manufacturers cited Brexit as the reason for the fall.And, finally, three unmissable Brexit storiesOne year on, as far as Northern Ireland is concerned, Brexit is nowhere near done, writes Jude Webber from Belfast. As she points out in this excellent piece, the UK region is in a significant election year, with polls showing unionist parties on course to lose their majority for the first time — and among the most pivotal issues in the May 5 elections is Northern Ireland’s post-Brexit trading arrangements.The Tories are wondering what happened to the Brexit they promised, says Robert Shrimsley in his latest column. As he writes: “With personal and corporate tax rises just introduced, ministers pledging not to scale back employment rights and an increasing role for the state, the buccaneering post-Brexit vision of a low-tax, low-regulation UK seems more remote than ever. So long Singapore-on-Thames, hello Sweden.”The government is overhauling England’s agricultural subsidies after Brexit and, over the next two decades, planning to restore land almost twice the area of London to nature. Initial projects will aim to restore 10,000 hectares of wildlife habitat and save carbon emissions equivalent to that of 25,000 cars, while improving the habitat of about half of England’s most threatened species. Find out what they are, and more about the new plans. More

German inflation remained close to multi-decade highs at the end of last year, forcing the government to promise aid for poorer households as energy prices continued to surge at double-digit rates.The annual pace of price growth in Germany was 5.7 per cent in December, according to the harmonised index of consumer prices published on Thursday. That was down slightly from 6 per cent in November, which was the highest level since shortly after the country’s reunification in the early 1990s.German energy prices were 18.3 per cent higher than a year earlier.Christian Lindner, Germany’s finance minister, said the new government was considering providing financial aid to offset rising heating costs for poorer households this winter. “We have to do something,” Lindner told a meeting of his Free Democratic party in Stuttgart. “I promise that, with the means I have available, we will provide such solidarity-based support for the people who are particularly affected.”France, Spain and Italy have already pledged to take similar action. Spiralling prices are a sensitive subject in Germany, whose approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most people’s savings.Economists expect German inflation to fade this year as the effect of the country’s pandemic-driven temporary cut in sales tax disappears from the data. This should automatically knock about 1 percentage point off overall price growth from January, they estimate.“Because many of the special factors and the imbalance between supply and demand should at least weaken in the course of 2022, we expect the inflation rate to decline to a little under 2 per cent by the end of the year,” said Jörg Zeuner, chief economist at Union Investment.However European wholesale natural gas prices almost doubled to record highs in the run-up to Christmas and they jumped again this week after supplies from Russia slowed. Global supply chain bottlenecks have also caused delays and higher costs for manufacturers, pushing up the price of many consumer goods.Record order backlogs at German manufacturers show no signs of easing after new orders outstripped economists’ expectations by rising 3.7 per cent in November, rebounding from a fall in the previous month thanks to higher demand from foreign customers.Improvement in the country’s labour market is likely to add to upward pressure on costs, because of rising shortages of workers and the government’s promise to raise the minimum wage by a quarter to €12 per hour.The German employment agency said this week that job vacancies increased by 213,000 last year to 794,000. The jobs website Indeed said the number of German vacancies it was advertising had risen almost 50 per cent from pre-pandemic levels.“Inflation is unlikely to come down in a straight line from here,” said Carsten Brzeski, head of macro research at ING, pointing out that the price of almost half of the 92 largest components of the German inflation basket rose 4 per cent or more in December — up from only 10 per cent a year ago. Food prices were up 6 per cent, services prices rose 3.1 per cent and rents increased 1.4 per cent. Over the course of past year, German inflation averaged 3.1 per cent, its highest level since 1993 and up from 0.5 per cent in the previous year when the pandemic caused a deep recession. The Bundesbank recently raised its 2022 inflation forecast from 1.8 to 3.6 per cent.Eurozone inflation figures due to be released on Friday are expected to show a dip from 4.9 per cent in November to 4.7 per cent in December. But this is still close to a 13-year high — and more than double the European Central Bank’s 2 per cent target. More

Households in Britain will be hit by a cost of living jump in April larger than anything seen since the 2008-09 financial crisis — and possibly worse than anything seen in a generation, according to experts in household finances.The combination of extreme rises in household gas and electricity bills, likely to be over 50 per cent in April, large national insurance and income tax rises on top of the highest rate of general price increases for a decade will put serious strains on family budgets, with the poorest households hit hardest.Martin Lewis, founder of Money Saving Expert, said the coming gas and electricity price rises were “a nightmare that’ll throw millions into fuel poverty”.Paul Johnson, director of the Institute for Fiscal Studies, said: “The combination of substantial tax increases and big increases in prices, particularly energy prices, will be a larger shock for households on average earnings than anything at least since the financial crisis and possibly for a long time before that.” Coming just weeks before the May local elections, the looming income hit is causing severe political difficulty for Boris Johnson’s government, with Jacob Rees-Mogg, leader of the House of Commons, this week pressing the prime minister to scrap the £12bn planned rise in national insurance bills. But scrapping the rise would only mitigate, not eliminate, the sharp squeeze in household incomes, which has three elements.Energy price risesHouseholds have so far been protected from the increase in wholesale energy prices by the government cap on bills, but this will be lifted in April. Most estimates suggest the cap will need to rise by more than 50 per cent if the government does not intervene to lower the level of bills. Calculations from Investec suggest the price cap will rise by 56 per cent in April, pushing the typical energy bill from £1,277 to just shy of £2,000 per year. This has the largest effect on poorer families because they tend to spend a larger proportion of their income on essentials. Figures from the Office for National Statistics show that 7.1 per cent of spending among the poorest tenth of households goes on electricity and gas compared with 3.9 per cent for the richest tenth of households. The looming rises in energy prices have a huge effect on discretionary spending power, after households have paid their rent or mortgages, food bills and utilities such as water bills. Financial Times calculations show that the rise would reduce family discretionary spending by nearly 7 per cent for the poorest households, nearly 4 per cent for people in the middle of the income scale and 2 per cent for the richest. These sorts of sudden income hits have not been seen in the UK at any time in recent years, leading to what Torsten Bell, chief executive of the Resolution Foundation think-tank, has called “an overnight cost of living catastrophe”.Tax increasesPrice rises will be compounded by two big personal tax increases planned to hit households at exactly the same time in April. First, the rate of employee national insurance will rise by 1.25 percentage points, reducing most pay packets. Employers are unlikely to compensate their staff for this extra tax, and might well limit pay rises because they will face their own 1.25 percentage point increase at the same time. The combined employer and employee tax rises are expected to raise £12.7bn next year, an average hit of a little over £400 for each of the UK’s 29.4m employees. On top of the national insurance rises, all income tax thresholds and allowances are to be frozen, increasing the tax charged when people’s income rises. The Treasury estimated at the time of the March Budget that the threshold freeze would bring in at least £1.6bn in 2022-23. In total, these tax increases will hit higher income households harder, as a greater proportion of them are in work. Cost of living already climbing The energy price rises and tax increases will come at a time when prices are already rising faster than at any time in the past decade. Consumer price inflation stood at 5.1 per cent in November and economists at Goldman Sachs expect prices to be 6.8 per cent higher in April than a year earlier, even if the government offsets the jump in gas and electricity bills. This rise in prices is considerably higher than the increase in average earnings, pensions or the minimum wage, which is scheduled to go up by 6.6 per cent in April. Even before it became clear that prices were likely to rise much faster than wages, the Office for Budget Responsibility, the spending watchdog, was forecasting a squeeze in real incomes this year. The Resolution Foundation now expects the income squeeze to last through 2022 with little prospect of relief in 2023. More

LONDON (Reuters) -The U.S. dollar took a breather in its climb towards a 14-month high on Thursday, after riding the tailwind of minutes from the Federal Reserve’s December policy meeting which bolstered expectations of a U.S. rate hike as early as March.The meeting minutes showed officials had discussed shrinking the Fed’s overall asset holdings as well as raising interest rates sooner than expected to fight inflation.Money markets are now pricing nearly an 80% probability of a U.S. interest rate rise by March and more than 80 basis points of cumulative rate increases in 2022, a huge shift in expectations as only three months ago investors were not expecting the first U.S. rate hike until the summer of 2023.Elsa Lignos, head of FX strategy at RBC Capital Markets said that while rate hike expectations for 2022 have propped up the dollar, the possibility of more rate hikes for 2023 could provide further strength to the currency. “The consensus narrative seems to be the Fed will ‘overtighten’ in 2022 and be forced into slowing down materially in 2023”, she wrote in a note. “We think it’s a repricing higher for 2023 which has the most potential to boost USD this year – and we are watching this as a key driver for the dollar”, she added.At 1220 GMT, the dollar index which measures the greenback against major peers was unchanged on the day at 96.17 after creeping up closer to a 14-month high of 96.93. The greenback nevertheless made substantial gains against some rivals like the Australian dollar which at one point lost more than 1%. The Aussie gradually recouped some losses, stabilising down 0.70% at $0.717. The yen also limited its losses from a high of 116.18 per dollar to 115.84, down 0.23%.Sterling traded down 0.13% at $1.3538, having retreated overnight from the $1.3599 level – its highest in nearly two months – following the Fed minutes. The euro stood broadly unchanged, slightly above the $1.13 mark as it continued to consolidate in the middle of the trading range in which it has sat since mid-November. Cryptocurrencies were among the hardest hit in the overnight market selloff with Bitcoin nursing losses below the $43,000 levels after falling more than 5% overnight. More

(Reuters) – Low interest rates, and strong debt and equity markets that propelled Canadian mergers and acquisitions (M&A) to an all-time high in 2021 would underpin robust dealmaking this year too, M&A bankers said, though another record was unlikely.Pent-up demand for dealmaking from 2020, when the coronavirus pandemic roiled global markets, helped last year’s record activity. But with inflation and supply chain bottlenecks threatening to derail economic recovery, dealmaking could slow down this year, they said.Global M&A also hit a record last year, comfortably erasing the high-water mark that was set nearly 15 years ago, as an abundance of capital and sky-high valuations fuelled frenetic levels of dealmaking.In Canada, over $349 billion worth of M&A deals were announced in 2021, making it the busiest year on record, compared with $148.2 billion in 2020, data from Refinitiv showed.”Looking ahead to 2022, I expect the M&A market to continue to be strong as the fundamental drivers remain in place – low interest rates, and strong debt and equity markets that are rewarding growth,” said Mike Boyd, head of Global M&A at CIBC.Boyd expects the resurgence in activity seen in the commodities sectors to continue.Railroad operator Canadian Pacific (NYSE:CP)’s contentious $27 billion takeover of U.S. railway Kansas City Southern (NYSE:KSU) topped the charts for last year’s biggest deals.Transportation and industrials led the way last year, with energy sector making a strong rebound, helped by recovery in oil and gas prices.With central banks globally focused on taming runaway inflation, interest rates are widely expected to rise this year from record lows that could spook equity markets.”Inflation may be a drag on the M&A market to the extent that it drives up interest rates and/or negatively impacts equity markets,” said Bill Quinn, a director at TD Securities.The fast-spreading Omicron coronavirus variant may also cause some economic uncertainty early in the year, but that should be temporary, Quinn said.Canadian corporations raised $52.4 billion by share sales, the highest since 2016, with Shopify (NYSE:SHOP), Canada’s most valued company, leading the equity issuance chart.BofA Securities Inc, BMO Capital Markets and Morgan Stanley (NYSE:MS) were the top three financial advisors on announced M&A, according to the Refinitiv data. More

LONDON (Reuters) – A deadly uprising in Kazakhstan triggered by a fuel price hike is a powerful reminder of the struggle governments face in trying to limit public subsidies of fossil fuels when expensive energy has stoked inflation.Most countries have measures in place to shield consumers and companies from the full impact of energy costs and to boost domestic fossil fuel industries. Many have a mix of both. But policymakers trying to reduce the fiscal hit from vast subsidy bills on strained public finances as is the case in many emerging markets have to balance the risk of social unrest against the need for reform.”It would have been easier before, when we had lower energy prices, but now that energy prices have surged it is much more difficult,” Mark Mateo at the Organisation for Economic Cooperation and Development (OECD) in Paris said. “One of the effects of this is social unrest, and that has not just happened in Kazakhstan, it has happened in a lot of other places.”Data compiled by the OECD showed governments across 192 countries spent $375 billion on fossil fuel subsidies in 2020 – less than half the amount a decade earlier. The trend has been downward, bar an uptick in 2018, driven chiefly by a rise in oil prices. The reduction in overall subsidy bills masks the importance of fossil fuel subsidies across emerging markets. Wealthier oil-producing nations such as Kuwait, the United Arab Emirates and Saudi Arabia subsidised fossil fuels to the tune of nearly $500 per capita in 2020, data from the International Energy Agency https://www.iea.org/topics/energy-subsidies showed. In terms of percentage of GDP, the hit is harder for less wealthy nations such as Libya at more than 15% of output or Venezuela, Uzbekistan, Algeria or Iran where it amounts to nearly 5% or more. In Kazakhstan, where a New Year’s Day fuel price hike has triggered violent unrest, subsidies account for 2.6% of GDP. Consumer subsidies, favoured in many emerging economies, are a blunt tool intended to protect individuals. The bill for governments is big, the International Monetary Fund has said repeatedly.It also hinders efforts to cut budget deficits and competes with other needs, such as public spending on roads, schools and healthcare, while adding to inequality as richer households benefit disproportionately because they consume more.Nigeria has said it will remove longstanding fuel subsidies by mid-year, replacing it with 5,000 naira ($12.12) monthly payments to the poorest families as a transport subsidy.Energy costs also make up a larger share of inflation baskets in many developing nations compared with developed ones, compounding inflation pressures from food price gains and spurring central banks into rate hikes from Russia to Brazil.”Emerging markets have always been susceptible to seeing a social backlash on the back of rising prices,” said Daniel Moreno head of emerging markets debt at Mirabaud. “Gas, food prices, public transport it can be absolutely anything.”High grain prices are among the factors cited as triggers of the Arab Spring uprising a decade ago.Social unrest over energy prices is not exclusive to emerging economies. A fuel tax increase set off France’s 2018 yellow vest protests, although underlying issues were often deeper rooted and diverse – as they are in Kazakhstan. For oil-producing nations, the financial costs are somewhat offset by the boost to demand, although that is a negative as the world seeks to wean itself off fossil fuel and subsidies are under mounting pressure from public support to combat climate change. The chasm on this issue between emerging and developing nations was apparent at the U.N. climate summit COP26 in November.Fuel subsidies were a major sticking point https://www.reuters.com/business/cop/china-saudi-seek-block-anti-fossil-fuel-language-un-climate-deal-sources-2021-11-12 with large developing nations such as China and Saudi Arabia objecting to wording that requests governments unwind public financial support for oil, gas and coal.Many analysts predict an increase in social unrest as policy makers struggle to navigate.Around the world, riots, general strikes and anti-government demonstrations https://www.reuters.com/world/pandemics-protests-unrest-grips-developing-countries-2021-07-28 have already increased by 244% over the last decade, the 2021 Global Peace Index found. Changing economic conditions in many countries will raise the likelihood of political instability and violent demonstrations, researchers for the index say.In Ecuador, protests sparked by the removal of transport fuel subsidies in 2019 https://www.reuters.com/article/us-ecuador-protests-idUSKBN1WT265 forced the government to re-introduce the support shortly afterwards. Now indigenous groups and unions plan to relaunch last year’s protests against a price increase for Ecuador’s most-used gasoline blend and other reforms promoted by conservative President Guillermo Lasso. Marches are scheduled for Jan. 19. ($1 = 412.5500 naira) More

The tech-heavy Nasdaq plunged more than 3% on Wednesday, its biggest one-day percentage drop since February, while the Dow slipped from an intra-day record high after minutes from the Fed’s December meeting signaled the possibility of sooner-than-expected rate hikes and stimulus withdrawal to curb inflation.So far this week, market participants have rotated out of technology-heavy growth shares into value-oriented and cyclical names such as industrials, energy and materials that stand to benefit the most in a high interest rate environment.The benchmark U.S. 10-year Treasury yield, the benchmark for global borrowing costs, touched its highest level since April 2021. [US/] Shares of major Wall Street lenders were up nearly 1% each in premarket trading. Occidental Petroleum (NYSE:OXY) added 1.9%, leading gains among oil companies.The S&P 500 energy sector has gained 6.6% so far this week, tracking its best weekly performance since late August. At 6:52 a.m. ET, Dow e-minis were up 66 points, or 0.18% and S&P 500 e-minis were down 2.25 points, or 0.05%.Nasdaq 100 e-minis fell 77.25 points, or 0.49%, dragged down by shares of Microsoft Corp (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN), Apple Inc (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) Inc which fell between 0.6% and 1.6%.After a stronger-than-expected ADP private payrolls report on Wednesday, all eyes are on the Labor Department’s more comprehensive and closely watched nonfarm payrolls data for December on Friday.”With the jobs report around the corner, the atmosphere across the board could become tense and nervy as investors adopt a cautious stance,” said Lukman Otunuga, senior research analyst at FXTM.”Should the jobs report exceed market expectations, this is likely to boost confidence in the US economy and reinforce expectations that the Fed will raise interest rates in the Spring.”Readings on initial jobless claims data and ISM non-manufacturing activity are also due later in the day.Netflix Inc (NASDAQ:NFLX) slipped 1.2% after J.P. Morgan cut its price target on the movie streaming platform’s stock. More