Aurelia Butler

Inflation in Germany has surged to its highest level since 1992, increasing the pressure on the European Central Bank to explain why it thinks it would be premature to tighten its ultra-loose monetary policy.German inflation rose 6 per cent in November from a year earlier, as measured by the harmonised index of consumer prices. The increase exceeded the expectations of most economists. German inflation was last this high shortly after the country’s reunification three decades ago. Spiralling prices are a sensitive subject in a country where people’s approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most people’s savings. However, the ECB has tried to calm anxiety about rising prices by saying many one-off causes of inflation such as soaring energy prices and supply chain bottlenecks will fade next year.Isabel Schnabel, an ECB executive board member, said in a televised interview with Germany’s ZDF on Monday that “November will prove to be the peak” for inflation in the country. She said German inflation had averaged 2 per cent over the past two years, having fallen sharply when the pandemic hit in 2020, before a sharp rise in 2021. “There is no evidence to suggest that inflation is spiralling out of control,” she added.Eurozone inflation data is due to be released on Tuesday and is expected to hit 4.4 per cent this month, the biggest rise in 13 years and more than double the ECB’s 2 per cent target. There are several factors indicating German inflation will fade next year. One is that the rebound in prices from last year’s temporary cut in sales tax will drop out of the inflation data by January. Restrictions announced this month to contain a record surge in coronavirus cases could also cool consumer spending and prices.“There is little doubt that inflation will fall next year: the only debate is how far and how fast,” said Andrew Kenningham, an economist at Capital Economics.The main drivers of German inflation in November were energy prices, which increased 22 per cent from a year earlier. That helped to push overall goods prices up by 5.2 per cent. Food prices rose 4.5 per cent, services prices increased 2.8 and rents rose 1.4 per cent.Part of the increase to the harmonised index of consumer prices came from changes to the weighting of items in the basket, which reflected unusual spending patterns during the pandemic.Germany is not alone in confronting soaring inflation. Spanish consumer prices rose 5.6 per cent this month, according to data released on Monday — also the fastest pace since 1992. Prices in Belgium also rose 5.6 per cent this month.Prices are rising even faster in the US, where they increased 6.3 per cent in October from a year ago, the biggest jump for three decades. The Federal Reserve has responded by starting to wind down its bond-buying programme in a move widely seen as a precursor to the US raising interest rates next year. However the ECB has pushed back against investors’ bets that it will raise rates in 2022. Christine Lagarde, president of the ECB, said last week that it would be “wrong” to tighten monetary policy in response to the current surge in inflation, predicting that price pressures would fade by the time such measures took effect 18 months later.“We would cause unemployment and high adjustment costs and would nonetheless not have countered the current high level of inflation,” Lagarde told the Frankfurter Allgemeine Zeitung newspaper. “I would find that wrong.” More

Economists generally expect the world economy to weather any fresh wave of coronavirus infections caused by the Omicron variant relatively easily, even if the latest version of the virus has clouded the economic outlook with uncertainty.A central reason for their relatively optimistic initial assessment is the growing ability of economies to adapt to past Covid-19 restrictions, alongside the rollout of vaccine programmes. Any new wave of the virus was therefore also unlikely to curb the rise in inflation, the economists said, although it would raise doubts among central bankers about the wisdom of tightening monetary policy early. Among the large range of analysts who published notes and forecasts on Monday morning — be they from investment banks or consultancies — all stressed the uncertainty generated by the Omicron variant’s ability to evade existing vaccines, cause severe disease and spread faster than the Delta variant.At the same time, though, few thought there was a need to rip up their current economic projections. Paul Donovan, chief economist at UBS Global Wealth Management, said that travel and tourism might be hard-hit in some places, but this was generally quite a small part of overall economic activity. The Omicron variant was “unlikely to change the broader economic narrative at this stage”, he added. Holger Schmieding, chief economist of Berenberg Bank, said: “From wave to wave, the economic damage has lessened.” He pointed to the contrast between the first and second European waves of Covid-19: while the first knocked 15 per cent off eurozone economic activity in the second quarter of 2020, general adaptation to living with the virus led to only a 0.7 per cent drop in gross domestic product in the more severe second wave in early 2021. Furthermore, even if the Omicron variant has greater resistance to current vaccines, the prevailing view is that inoculation against it will help to reduce the economic impact.

Daniele Antonucci, chief economist at Quintet Private Bank, said: “The developed world can now count on high vaccination rates, has ramped up its capacity to develop and produce vaccines, and has shown it can adjust working patterns fairly flexibly and adapt more generally.” Most economists believed that any slowdown in economic activity was also unlikely to curb the recent surge in inflation, particularly in goods where demand has outstripped global supplies that have been riven by disruptions. Neil Shearing, chief economist of Capital Economics, said: “A virus-related surge in goods spending, or port closures, would exacerbate existing supply strains and add upward pressure to goods inflation.”“It’s not clear it’s [the Omicron variant] disinflationary,” said Jordan Rochester, a foreign exchange strategist at Nomura in London.While accepting there is huge uncertainty, Goldman Sachs economists produced four possible scenarios for any coming Omicron wave, including one that is a false alarm and the new variant proves no more infectious than Delta. Its main downside scenario suggested there would be only a small economic hit from the virus in 2022, because the impact of each subsequent lockdown in the past had been weaker. These restrictions would lower global growth significantly in the first quarter, until new vaccines arrived and brought with them a robust recovery. Over the year as a whole, Daan Struyven, senior global economist at Goldman Sachs, said global growth would drop from 4.6 per cent in 2022 to 4.2 per cent. However, there would be a corresponding increase in 2023 growth as recovery took hold again. In its most severe downside scenario, disease severity and immunity against hospitalisations were substantially worse than that for the Delta variant. But, Struyven added, there was also a positive scenario in which the severity of infection was lower and the global economy could “normalise”. The uncertainty is likely to encourage central banks, particularly at the Federal Reserve and the Bank of England, to stay their hand and wait a little longer before deciding whether to tighten monetary policy, either by slowing the tapering of asset purchases in the US or delaying interest rate rises in the UK.In a note on Friday, Citi’s European economists wrote that the new uncertainty would be “a major alert” for central banks and that “the recovery path may not be as straightforward as originally thought”. More

The EU wants to mobilise up to €300bn of spending on infrastructure and other projects for a Global Gateway plan to respond to China’s influential Belt and Road Initiative. The European Commission’s draft proposals, seen by the Financial Times, suggest that the EU’s ambitions will rely heavily on leveraging private sector spending as well as public investment, while co-opting spending from EU member states.The €300bn, to be invested by 2027, would include resources from the EU, member states, European financial institutions and national development banks. It would also “seek to mobilise private sector finance and expertise and support access to sustainable finance”, according to the document. The commission will set out the plans on Wednesday.Western nations are seeking to bolster their involvement in projects in developing countries and counter the BRI, under which Beijing has extended its reach and influence globally.The Global Gateway project is not explicitly pitched as an alternative to China’s projects, but the draft stresses it will provide a “values-based” option and an “ethical approach”.“By offering a positive choice for global infrastructure development, Global Gateway will invest in international stability and co-operation and demonstrate how democratic values offer certainty and fairness, sustainability for partners, and long-term benefits for people around the world,” the draft document says.The BRI has become an important strategic tool for Beijing since its launch in 2013, as dozens of countries sign up to China-backed projects such as railways, bridges and ports. This and similar initiatives have raised concerns in European capitals that the EU is far behind when it comes to developing nation infrastructure. However, some BRI recipient countries have complained that the initiative’s debt terms are onerous and some projects have deficient environmental or building standards.The EU programme would prioritise investment in digitalisation, health, climate, energy and transport as well as education and research.The draft says the EU plans to boost its budget spending on infrastructure outside the bloc, but the plans also hinge on the use of “innovative financial instruments to crowd-in private capital”, including guarantees to cut the risks of private sector investments.About €135bn of investments will be enabled by guarantees from the EU’s new European Fund for Sustainable Development Plus programme. The Luxembourg-based European Investment Bank would also be involved. Grant financing of up to €18bn will come from other EU programmes. Half of the targeted spending of up to €300bn will come from European financial and development finance institutions, according to the draft.The EU plan is designed to dovetail with work endorsed by the G7 summit held in the UK this year, including US president Joe Biden’s Build Back Better World. More

Globally, international tourist arrivals rose 58% between July and September compared with the same period in 2020, the U.N. World Tourism Organisation barometer said. That was still 64% below the same period in 2019, before the pandemic.In Europe, international tourist arrivals were just 53% down from the 2019 summer season. “The uplift in demand was driven by increased traveller confidence amid rapid progress on vaccinations and the easing of entry restrictions in many destinations,” the report said. “In Europe, the EU Digital Covid Certificate has helped facilitate free movement within the European Union, releasing large-pent up demand after many months of restricted travel.”In the first nine months of the year, arrivals were still 76% below pre-pandemic levels across the world. The Americas recorded the strongest results between January-September, with arrivals up 1% compared with 2020 – still 65% below 2019 levels.The different paces in recovery across the world were due to “varying degrees of mobility restrictions, vaccination rates and traveller confidence,” the report said. More