Aurelia Butler

Will the Federal Reserve speed up its ‘tapering’ of bond purchases? When US policymakers convene on Tuesday, they are set to discuss how quickly they may need to scale back the central bank’s asset-purchase programme in order to give them the flexibility to raise interest rates next year. Just last month, the Federal Reserve announced it would reduce its $120bn bond-buying programme at a pace of $15bn per month. That suggested the stimulus would cease by the end of June. A string of recent economic reports showing a tightening labour market and mounting evidence that inflationary pressures are broadening and becoming more persistent has prompted a pivot from Jay Powell and other senior officials. During congressional hearings earlier this month, the Fed chair signalled his support for wrapping up the so-called taper “perhaps a few months sooner” than initially planned. Market expectations immediately adjusted, with investors pricing in the first interest rate increase in June, with at least one more slated for later in the year. More than half of the 48 economists who participated in a recent survey conducted by the Financial Times and the Initiative on Global Markets at the University of Chicago Booth School of Business said it was “somewhat” or “very” likely the Fed would stop adding to the size of its balance sheet by the end of March. That may allow for a rate increase as early as the first quarter, which 10 per cent of the respondents thought plausible. The majority, however, say the Fed will move in the following quarter.The two-day meeting, which will conclude with a press conference on Wednesday, will be accompanied by a new set of economic projections as well as an updated “dot plot” of individual interest rate projections.September’s edition, which was the last time the dot plot was published, showed officials evenly split on the prospects of a 2022 rate increase, with at least three slated for 2023 and another three for 2024. Economists this time expect multiple adjustments to be pencilled in for next year and subsequent periods. Colby SmithWill Omicron keep the Bank of England on hold?Investors have dialled back their bets on the Bank of England raising rates this month as the spread of the Omicron coronavirus variant muddies the outlook for the domestic economy. Markets are pricing a roughly one-in-three chance the bank on Thursday will announce an increase in borrowing costs to 0.25 per cent from the current record low of 0.1 per cent. Those odds stood at around 75 per cent in late November before the new variant emerged.Michael Saunders — one of two BoE rate-setters to back a rise in November — said earlier this month there could be “advantages” to waiting to see how Omicron affects the economy before tightening monetary policy.The impact is likely to be relatively small, shaving 0.1 percentage points off growth in the current quarter, according to economists at Goldman Sachs, who added that the labour market and wage growth remained strong. The BoE will instead be focused on “risk management” and so is likely to keep rates on hold, they said. Still, data released on Friday showed the UK economy barely grew in October as supply chain disruption hit manufacturing and construction, while the expansion of the services sector slowed.“This remains a close call,” Goldman said in a note. “We expect the [BoE] to signal that this is only a short delay to gather more information on Omicron, and indicate that a hike remains appropriate in coming months.”Markets are currently fully pricing in lift-off at the next BoE meeting in February. If the Bank stays put on Thursday it will come as less of a surprise than its November meeting, when policymakers confounded investor expectations of a rate rise, sending sterling tumbling. Tommy StubbingtonWill the ECB raise its forecast for price growth?Christine Lagarde will this week kick off the process of withdrawing the massive monetary stimulus launched by the European Central Bank to shield the economy from the fallout of the pandemic last year. Having bought €2.2tn of mostly government bonds and given a similar amount of ultra-cheap loans to banks since the virus struck, the ECB president has a long way to go to normalise monetary policy.Lagarde will almost certainly start by announcing on Thursday that the €1.85tn Pandemic Emergency Purchase Programme — the bank’s flagship response to the crisis — will stop net purchases in March, as she already signalled in October.The key question for investors is how many bonds the ECB will commit to buying after March. Most analysts expect it to reduce the “cliff edge” in its bond-buying after March by ramping up an older quantitative easing scheme, which is still hoovering up €20bn of assets a month. It could do this by increasing monthly purchases under the older Asset Purchase Programme to about €40bn or by adding an extra “envelope” of several hundred billion euros to spend over the rest of the year. “I think they are going to try and engineer a dovish transition,” said Peter Goves, European interest rate strategist at MFS Investment Management.After eurozone inflation shot up faster than expected to hit 4.9 per cent in November, the highest level since the single currency was launched more than 20 years ago, the ECB is also expected to raise its forecast for price growth to exceed its 2 per cent target both this year and next year. It will be the first time this has happened in a decade.But it is also likely to forecast that inflation will drop back below its target in 2023 and 2024, albeit narrowly, justifying its decision to maintain a sizeable stimulus for most of next year. Martin Arnold More

BRUSSELS (Reuters) – The EU’s Justice Commissioner received “brutal” treatment last month in Warsaw, a member of his delegation said, during talks aimed at defusing a dispute over the independence of Poland’s judiciary that is blocking billions of euros in economic aid.In a carefully staged media appearance, Polish Justice Minister Zbigniew Ziobro presented Didier Reynders with pictures of a Warsaw ruined in World War Two, suggesting that Europe has a long history of treating Poland unfairly.Poland’s combative stance at the meeting dashed hopes for an entente that might help unlock 36 billion euros in post-pandemic recovery stimulus to Warsaw, sources told Reuters.”After the visit, the team was a bit down. It’s a difficult situation,” the delegation member told Reuters. “It’s a bit depressing.”A source close to Ziobro said Reynders was “evidently shocked” at Warsaw’s position.”Positions have not come closer,” said the person, adding that any hope in Brussels that Poland would give way at the meeting proved wrong.The bloc accuses Poland’s ruling Law and Justice party (PiS) of political meddling in the judicial system in violation of EU law and says it must scrap a disciplinary system for judges that the European Court of Justice (ECJ) has already struck down.Warsaw says its shake-up of the judiciary is needed to increase efficiency and rid it of communist-era vestiges.That row is part of a much wider clash over democratic standards that also includes women’s rights and media freedoms.Despite these disputes, PiS retains solid backing in Poland where it has boosted welfare spending since coming to power in 2015. Its nationalist, eurosceptic rhetoric goes down well with working and lower middle class Poles outside the big cities.It remains unclear when and how Warsaw might change its Disciplinary Chamber at Poland’s Supreme Court in a way that would satisfy the executive European Commission in Brussels and allow for disbursement of the COVID recovery funds.MONEY”The strongest argument the EU has (in the disputes) is the massive pile of money (Commission President Ursula) von der Leyen is sitting on and won’t release until this moves,” said the delegation member.Asked for comment on the situation, the Polish government’s information office did not address the disciplinary chamber issue but said Warsaw’s talks with the Commission were bringing closer a compromise that would allow the disbursement of money.Reynders said after his Warsaw visit that he had received no answer to his queries about how Poland planned to comply with the ECJ ruling against the disciplinary chamber. The Commission said talks with Warsaw were continuing.Since Reynders’ visit, two other events have further eroded prospects for a swift resolution of the standoff.Firstly, Germany, Europe’s most powerful country, has a new ruling coalition that has signalled a harder line over democratic backsliding in the EU than former centre-right chancellor Angela Merkel.A first test of that new line will come on Sunday when Merkel’s Social Democrat successor, Olaf Scholz, visits Warsaw.Secondly, a legal opinion issued by an advocate-general at the ECJ has all but scuppered efforts by Poland and Hungary to block a new tool aimed at cutting cash for states that violate the EU’s democratic rules.As well as the COVID recovery funds, Poland also risks losing money earmarked for it under the EU’s 2021-27 shared 1.1 trillion euro budget.For now, a senior member of the EU’s executive said last week that Poland would not receive the grants and cheap loans now rolling into most other EU countries to help them recover from the pandemic, unless it changed tack.”It is unlikely that we can finalise this work (on approving Poland’s national recovery plan and disbursing the funds) this year,” EU Commission Vice President Valdis Dombrovskis said. More

Last year, as Covid-19 first swept across Europe, a French textiles company tweeted it would start making surgical masks. Within hours, the ministry of health asked how many it could produce; two days later, Les Tissages de Charlieu had made 100,000 masks for French hospitals and public workers.“Our aim was to onshore a very simple, basic commodity — to prove that it can be done,” said Antoine Saint-Pierre, co-director of the company that is based in Charlieu, a textiles town for more than 500 years. The firm has now also begun making millions of tote shopping bags, generating one-fifth of the emissions of those imported from China, according to the company.Supply chain disruptions wrought by the pandemic have made “national economic resilience” and “reshoring” of critical manufactured goods — be they vaccines, semiconductors or protective equipment and textiles — industrial policy buzzwords across the western world. But that is especially so in France, where the return of manufacturing production and jobs from overseas has become a hot-button issue ahead of next year’s presidential election.Candidates across the political spectrum have vied to convince voters of their vision of how to reverse the country’s industrial decline, which has seen industry’s contribution to the French economy halve between 1970 and 2020 to 11 per cent. Meanwhile, the government of President Emmanuel Macron, who has long believed Europe should reclaim its economic sovereignty, points proudly to the €830m it has handed out to companies since 2020 to support reshoring projects. A Les Tissages de Charlieu bag © Les Tissages de Charlieu“We provided a boost during the crisis to ensure that manufacturers did not stop investing. It was our obsession, and it worked really well,” industry minister Agnès Pannier-Runacher told the Financial Times. She added that over 10,000 industrial companies got financial support from France’s EU recovery package, with more than 620 specifically being helped to reshore their activities.Yet economists question whether such a wide range of cash injections is the right way to reboot domestic manufacturing. They may bolster small companies such as Les Tissages de Charlieu, but can they change France’s industrial fabric? The textiles industry provides a vivid example of the issues at stake, as well as some of the reasons why economists are sceptical.Central to France’s industrial revolution, the sector was savaged in the late 20th century by the offshoring of production to Asia and eastern Europe, where costs are lower and regulations less stringent. Nowadays, 90 per cent of textiles and clothes bought in France are made abroad, according to 2015 data from Insee. Ethically minded consumers also have limited visibility into factory working conditions or the origins of raw materials.That changed somewhat during the pandemic, as textile imports fell. With the over €1m of state aid that Les Tissages de Charlieu received to help it make tote bags, the company is now also more than doubling its workforce to 180 people — equivalent to 10 per cent of Charlieu’s population. Its tote bags are greener too.The state has shown a “very good commitment” to onshoring, Saint-Pierre said. “There has been a real shift in the government’s speech and actions.” However, whether reshoring textiles production can reverse French industrial decline is a moot point, economists argue.‘Reshoring’ is often a “polite word for protectionism”, Isabelle Mejean, an economist at Sciences Po, said. “It is not clear precisely what it means,” she added, even if it is often presented as being able to “solve everything”, be that more economic sovereignty, jobs or resilience to climate change. Mejean and Xavier Jaravel, a fellow member of France’s Council of Economic Analysis which provides the government with independent advice, recommended in April the government would do a better job of boosting French industry and protecting supply chains if it prioritised “vulnerable inputs with high technological content”. They warned that “imperfectly targeted industrial policies would be costly for consumers, without fundamentally enhancing [economic] resilience” and cited priority sectors such as aeronautics, electronics and chemicals. Textiles came a distant second last, before “others”. Even so, Pannier-Runacher defended Macron’s industrial record. Leaving aside the effectiveness of France’s recovery plan, which will take time to come through, she pointed to a net increase in industrial jobs between 2017 and 2019, when the pandemic reversed the trend.“We have created the conditions to improve France’s competitiveness,” she said.Yet while surveys show that France’s business climate has become more attractive thanks to corporate tax cuts and labour market reforms introduced by Macron, manufacturing remains depressed and the trade deficit in industrial products has continued to grow.Patrick Artus, chief economist at Natixis, argues that France needs to benchmark itself against Germany, which has kept the more lucrative parts of its industrial power base onshore, including its Mittelstand businesses, car manufacturing and research and development initiatives.Rather than just offering cash handouts, France specifically needs to further reduce business taxes that are €50bn higher than Germany per year, improve technical skills, and put more public money at risk when financing innovation and high technology start-ups.“You can engage in pretty aggressive offshoring and still protect domestic industry,” agreed Gilles Moec, chief economist at insurer Axa. “As a free-trader, I don’t think we should give up the good fight that in general international trade is good, and is defined by specialisation. You will not do everything better at home.”Back in Charlieu, Saint-Pierre half agrees. He believes it would be “crazy to say all production should come back to France”. But he also argues that many manufacturing processes can be reshored, creating thousands of jobs while also cutting the environmental impact of production. “We don’t have to de-globalise, we just need to find an equilibrium,” he said.Additional reporting by Eir Nolsoe More