Aurelia Butler

Bailey, who has been accused by some investors of sending a wrong signal about the likelihood of a BoE rate hike earlier this month, told an event organised by the Cambridge Union that guidance was still a relatively new tool for central banks.”Obviously, in a world which is much more uncertain as to whether things will happen, then it’s much more hazardous to give that guidance,” he said. The BoE shocked financial markets on Nov. 4 when it kept Bank Rate on hold at its coronavirus pandemic low of 0.1%. Investors had read remarks made by Bailey in October as a signal that rates would rise at the BoE’s November meeting.Bailey has said he was never explicit about when rates might rise and his comments on the need for action were conditional on risks to expectations about inflation which the central bank believes will approach 5% in the second quarter of 2022.Speaking at Thursday’s event, Bailey said it had been relevant to state the BoE would not allow those inflation expectations to get out of control. “That’s not so much forward guidance as a reminder of where we are,” he said.Bailey also said the difference between providing commentary on the state of the economy and what the central bank is likely to do with borrowing costs was hard to define. “The boundary between a commentary and guidance is quite murky, actually, when you think about the words we use,” he said.The BoE’s December monetary policy decision is due to be announced on Dec. 16. More

The slogan ‘Get Brexit Done’ was a powerful vote-winner in 2019 because it promised closure to the public after three long years of acrimonious and exhausting national feuding. Those three words — and the related promise to ‘Unleash Britain’s Potential’ — were on the front cover of the Tory party manifesto, featuring a picture of Boris Johnson giving the nation a thumbs up. The message was clear: time to move onwards and upwards.But this week, as we approach the end of the first year of the UK’s life outside the EU single market, it has been hard to find much sense of the post-Brexit momentum that was promised two years ago.The Northern Ireland situation has come off the boil, but based on this week’s headlines is likely to remain a source of simmering tensions well into next year. The trade secretary Anne-Marie Trevelyan said it was “absolutely not” the government’s intention to trigger Article 16 before Christmas, and Maros Sefcovic, the EU’s Brexit negotiator, wearily confirmed talks are now likely to drag on into 2022.This is clearly better than a full-blown bust up, but as Lord David Frost has frequently himself said, resolving the disagreements over Northern Ireland is a necessary precursor to normalising relations with the EU. That still feels a long way off.And if proof were needed of the extent to which the Northern Ireland Protocol has infected EU-UK relations, it was evidenced by Germany’s new government coalition agreement specifically referencing the need to ensure “full compliance” from the UK with agreements it had signed.But there was also a much longer-term warning from Frost about the government’s determination not to dilute its Brexit vision. This is despite pressure from companies facing the problems caused by erecting high levels of non-tariff barriers with the advanced economy trading bloc on Britain’s doorstep.The barriers are high. The talk of a ‘zero tariff, zero quota’ free trade agreement may have conjured the notion of ‘free-flowing’ trade, but the reality (as this excellent and readable paper by Catherine Barnard and Emilija Leinarte of Cambridge university law faculty explains) is much closer to “WTO rules” or “no deal” than was popularly understood. As they observe, the Trade and Cooperation Agreement (TCA) is spectacularly unambitious. It contains almost nothing on services, mutual recognition of each others’ standards, mobility provisions for young people and skilled workers, or an agreement on agrifood products that create a fair proportion of headaches at the border.“The result is that the TCA offers little more in terms of eliminating technical barriers to trade than the parties would have been subject to under the WTO rules in case of a ‘no deal’ situation,” they write. This always was a big step for any government to take — the Office for Budget Responsibility continues to forecast that Brexit will cause a 4 per cent long-term hit to UK gross domestic product (twice that of the pandemic) — but forecasts are only forecasts, so in the meantime the government will continue to conjure a more optimistic vision for the future.In his speech to the Margaret Thatcher Conference on Trade this week Frost insisted the UK was right to reject a softer version of Brexit that left the UK “more closely in the EU’s orbit”. He then appeared to squash hopes some in the business world harbour that a resolution in Northern Ireland could kick start a process of addressing some of the deficiencies in the UK Trade and Cooperation Agreement. “As far as I can tell, many people . . . would like to inch us back to that situation over time. That can’t be right,” he said.So there will be no backsliding on Brexit. Instead Frost promised to focus on domestic innovation, a more enabling regulatory environment, and forging global trade deals while also, in his own words, overcoming “the forces of entropy, of laziness, of vested interest”.Recalling Margaret Thatcher’s vision of “a do-it-yourself nation, a get-up-and-go Britain”, Frost said the UK appeared to have lost that spirit during the days of EU membership. But, he said: “Brexit is bringing it back”. This is a seductive narrative for Brexiters. It was one, interestingly, that Johnson reverted to during his infamous ‘Peppa Pig’ speech to the CBI which opened with a paean of praise to the “kitchen appliance and hairdryer makers” who were asked to try to reinvent medical ventilators in the “dark days” of the pandemic. And yet in reality, the scheme was far better at delivering quick headlines than it was ventilators.At ground level, the regulatory autonomy and can-do spirit that Frost and Johnson extol in their speeches gets a much more mixed reception from business, as previous editions of Britain after Brexit have explored, from chemical manufacturers to medical device makers. This week it was the building industry (key to delivering the net zero and levelling-up agendas) which wrote to warn the government over the consequences of its plans to introduce the UKCA quality mark to duplicate the EU’s CE mark. As Peter Caplehorn, chief executive of the Construction Products Association, said, lack of UK bodies able to test for the UK standards (in windows, glass, sealants etc) meant that companies were spending millions in the short term but in the long term “our concern is UKCA will stifle innovation, reduce product ranges and [put] upward pressure on costs over time”.The drinks industry also wrote in to warn that labour and truck driver shortages, driven in part by Brexit, were pushing up delivery times fivefold from three to 15 days, and urged the government to extend its Christmas visa scheme to allow in more lorry drivers. Perhaps in the mind of the government these complaints — usually batted away as a necessary part of “taking back control” — are simply those of “vested interests”, or too granular to bother with.But for businesses on the ground, particularly small businesses with tight margins and limited personnel, the ‘can-do spirit’ that Frost says Brexit is revitalising, is having to expend a lot of its energy battling supply-side headwinds that are, at the very least, not helped by a decision to erect maximum barriers with the EU.It is to be expected that politicians campaign on vision rather than reality, but come the next general election Boris Johnson (or whomever) will still need voters to feel that this government did indeed work to “Unleash Britain’s Potential”, rather than stifle it. Brexit in numbersThe Johnson government — and Frost again in his speech to the Thatcher conference — has consistently pointed to the value of recovering control over international trade policy as a key benefit of Brexit.This is the case despite the fact that, as was pointed out at an international trade select committee hearing this week, the long term upsides to UK GDP of doing trade deals are tiny. In the case of New Zealand and Australia estimates come in at around 0.01 or 0.02 per cent by the government’s own estimates.Those gains clearly do little to offset the negative hit from erecting such substantial trade barriers with Europe — even if the OBR forecast of a long-run hit of 4 per cent turns out to be overstated.One way of trying to screen out the effects of Covid-19 and other factors is to measure UK trade against a ‘doppelgänger’ UK that had not exited the EU, built around modelling the trade performance of other advanced economies such as the US, Germany, Greece, New Zealand and Sweden.This is what has generated the above chart from John Springford at the Centre for European Reform (CER) whose work was referenced by the OBR in its October update.Here he shares the latest iteration of the model for Britain after Brexit readers. It found that in September 2021, leaving the EU’s single market and customs union had reduced goods trade between the UK and the world by £8.5bn or 11.2 per cent. Monthly trade data is quite volatile, but since May 2021 the model has shown a hit to UK trade of between 11 and 16 per cent, which is similar to pre-Brexit forecasts from the OBR and the Theresa May government. Springford says that translating that ‘hit’ to trade into precise estimates of impact on GDP per capita (a key measure of living standards) is an imprecise science. The forecasts range from 2 to 9 per cent reduction in GDP compared to a UK that stayed in the EU. Before the pandemic, the CER estimated that the effects of depreciation of sterling and foregone consumption and investment had reduced GDP by 1 to 3 per cent. Add the effect of reduced trade after a single market exit on top of that figure and, Springford says, there is “good reason to fear” that the OBR estimate of a 4-5 per cent smaller economy is “about right”. Until now, these economic consequences have been largely met with a shrug by voters who were indeed relieved to have “got Brexit done” and then been consumed by dealing with the pandemic. It is also true that since no one lives in Springford’s “doppelgänger” UK most people don’t miss the economy they could, theoretically, have enjoyed.Regardless of whether anyone connects economic issues with Brexit, Springford reckons that a 4-5 per cent is “a big deal” that has already hit tax revenues, causing chancellor Rishi Sunak to raise taxes more than he otherwise would.Whether or not voters attribute weaker economic performance to Brexit policy, the risk for this government is that a prolonged squeeze on living standards (driven in part by its choices on Brexit) will ultimately land at the PM’s door.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] finally, four unmissable storiesBrexit may not seem to have caused the City of London a serious injury, but, Helen Thomas argues, it has led to a slow bleed. While early predictions of hundreds of thousands of job losses have proved overblown, change is happening, she says. And there are worrying times ahead.Whatever happened to Michel Barnier? In his latest column, Gideon Rachman investigates why the former EU commissioner has had a curious change of direction Barnier is now running for the presidency of France, but what does his story tell us about European politics?As you will have seen above, this week I wrote about how the UK construction industry has warned that a new post-Brexit UKCA safety and quality mark could cause shortages of key building products and materials, as well as damage the government’s levelling up agenda. Find out more about their concerns, and the letter they wrote to business secretary Kwasi Kwarteng.Germany has a new government and Valentina Pop, editor of our Europe Express newsletter, has been delving into the new 178-page German coalition agreement. She explains why it’s more evolution than revolution. You can sign up for Europe Express here. More

The world is experiencing a dramatic bout of inflation. Except for the places where it is not. Sharp price rises in the US and UK — where the headline consumer price index is up by 6 per cent and 4 per cent, respectively — have raised fears of a disastrous mistake by central banks and a return to the chronic inflation of the 1970s. But across much of Asia, price rises are subdued. That divergence holds lessons for economic policy, now and in the future.In China, the consumer price index is up by 1.5 per cent compared with a year ago, while in Japan, as usual, inflation is roughly zero. In Australia, the headline CPI may be up by 3 per cent, but underlying inflation of 2.1 per cent is towards the bottom of the central bank’s target range. Only two big emerging markets in Asia have inflation running above 5 per cent — Sri Lanka and Pakistan — compared with many in Europe and South America. Seen from Tokyo, Beijing or Jakarta, the global surge in inflation does not look global at all.This is true even though Asia imports a lot of energy and has suffered the same jump in prices for oil, gas, coal and other commodities as everywhere else in the world. The reason Asia’s inflation is mild and not severe comes down to one simple factor: it handled the Covid-19 pandemic better than the rest of the world. Across most of the region, countries managed to avoid compulsory lockdowns altogether (South Korea); limit them in scope and duration (China and Taiwan); or delay such measures until deep into 2021 when vaccines were becoming available (New Zealand).

The consequences of this relative success are now playing out in several ways. On the demand side of the economy, Asia experienced fewer of the dramatic swings in consumption from services to goods and back again that marked the experience of the US and Europe, as they went into lockdown and came back out again. If you were never locked up at home, you never felt the need to buy a treadmill, a new television and enough lumber to deck the back yard. If you could keep up regular haircuts, dental checks and drinks with friends, meanwhile, you had no need to rush out to the hairdresser, the dentist and the nearest bar when the economy reopened.Asians have also, by and large, been more cautious than Europeans or Americans when their economies do open up. In Japan, for example, elderly households account for almost 40 per cent of consumption, as Bank of Japan governor Haruhiko Kuroda noted in a recent speech. But even though Japan’s retirees are now largely vaccinated, their consumption of services has not yet returned to normal, let alone exhibited a post-pandemic boom.Smaller swings in demand meant less pressure for supply to respond. But the Covid-19 pandemic has also illustrated the consequences of Asia’s global manufacturing dominance. Since the region makes most of the world’s stuff, it can more easily keep itself well supplied.Gareth Leather and Mark Williams at Capital Economics discuss some of these factors in a recent note. For example, whereas the cost of shipping a container from China to Europe has risen fivefold since Covid hit, the cost of shipping it within Asia has only doubled. When Covid prompted factory closures, Asian companies had a greater choice of alternative suppliers within the region, meaning less disruption to supply. In the automobile sector, South Korea and China were able to make sure that domestic producers had priority access to scarce semiconductors. There is double-digit inflation for automobiles in the US. In East Asia, prices have barely risen.One of the biggest differences between Asia and the US is labour supply. When Covid hit, many workers in the US were laid off, resigned from their job to care for children affected by school closures, or else chose to quit to avoid catching the virus. The result has been a lasting hit to labour supply. That is pushing up wages in the US and UK — a big reason for concern about inflation.There is little sign of a similar wage acceleration in Asia. The avoidance of lockdown — or the use of wage subsidies to keep workers in their jobs through the worst of it — made the whole event less traumatic. In Australia and New Zealand, participation in the labour force has been near record levels. “Labour hoarding,” Kuroda said, “has enabled Japanese firms to maintain capacity to swiftly increase supply even when demand has risen due to the resumption of economic activity.”Without immediate inflation to worry about, Asia’s central banks can nurse the economic recovery. Those raising interest rates, such as New Zealand and South Korea, have done so either because the economy is at full employment and they fear it will overheat, or because of concerns about financial stability. The Reserve Bank of Australia has said confidently it does not expect to raise interest rates in 2022. The Bank of Japan, as usual, does not expect to raise interest rates any time in the foreseeable future.For central banks in Europe and the Americas, Asia’s experience adds weight to the view that their high inflation was caused by disruption from the pandemic. That disruption should abate. But western central banks cannot be as sanguine as their Asian counterparts: if wages accelerate, then transitory pressures on inflation will become persistent. Differing choices in the handling of Covid-19 had many consequences. Those for inflation are now becoming [email protected] More

European Central Bank policymakers expect the central bank to raise its short-term inflation forecasts next month as uncertainty persists about how quickly it will need to respond to surging prices.The ECB has consistently underestimated how fast eurozone inflation would rise this year as the economy rebounded from the coronavirus pandemic. Members of the central bank’s governing council said they expected it to raise its 2022 forecast again in December, according to the minutes of its October meeting, published on Thursday.But council members agreed there was “elevated” uncertainty over the outlook for price growth in 2023 and 2024, which is one of the main yardsticks that the central bank will use to calibrate bond purchases and interest rates next year. They believe this means they should maintain “optionality” on their future bond purchases for as long as possible, so they can respond if inflation either drops back below their target or stays above.“While an increase in the upside risks to inflation had to be acknowledged, it was deemed important for the governing council to avoid an overreaction as well as unwarranted inaction, and to keep sufficient optionality in calibrating its monetary policy measures to address all inflation scenarios that might unfold,” it said.Eurozone inflation hit a 13-year high of 4.1 per cent in October, well above the ECB’s 2 per cent target, prompting some investors to bet that the ECB would raise rates next year. But the ECB council agreed last month that many of the factors driving inflation higher this year — including soaring energy prices and supply chain bottlenecks — were likely to fade next year, albeit more slowly than it recently predicted.“Members widely agreed on the expected hump-shaped pattern in the shorter-term inflation outlook,” it said.The ECB is increasingly diverging from other major central banks, such as the US Federal Reserve and Bank of England, which have responded to the recent surge in inflation by promising to tighten policy.December’s ECB meeting is being keenly anticipated by investors. Most expect the central bank to decide that its €1.85tn bond-buying programme, which it launched last year in response to the pandemic, will stop new purchases in March 2022.However, the central bank is widely expected to step up its longer-standing asset purchase programme to soften the impact of the cut to its stimulus.Some more conservative council members have argued that the ECB should be prepared to halt its purchases of new bonds quite quickly next year if inflation does not fall as expected.

However, others have urged patience, pointing out that there have been few signs of wage increases spiralling upwards.Council members concluded last month that they “had to be patient in the light of the elevated uncertainty,” the ECB said. “It was seen as important that the governing council should keep sufficient optionality to allow for future monetary policy actions.”Jacob Nell, head of European economics at Morgan Stanley, said the minutes, combined with the risks from recent coronavirus lockdowns in several European countries, indicated the ECB was likely to opt for “a smooth reduction in purchases, and maintaining optionality” at its December meeting.Fabio Balboni, senior economist at HSBC, said: “With widening divisions within the governing council and huge uncertainties about the medium-term inflation outlook it might be difficult for the ECB to commit to further support for a long period of time.” More

The number released on Thursday by official statistics agency INEGI was an adjustment from previously published preliminary data that showed a smaller 0.2% contraction in the quarter. A Reuters poll forecast the final data would show activity shrinking 0.3%. Global supply chain disruptions have weighed heavily on a recovery in manufacturing, notably in carmaking https://www.reuters.com/business/autos-transportation/mexicos-auto-heartland-workers-struggle-chip-shortage-bites-2021-11-24, while service sector activity slowed during the summer from a resurgence in the coronavirus.”Going forward, supply-chain frictions, cost-push pressures, lingering policy uncertainty, and weak business confidence are likely to weigh on the broad industrial sector,” Goldman Sachs (NYSE:GS)’ Alberto Ramos said in a research note.Secondary activity, which includes factories, rose 0.3%, less than the 0.7% print in preliminary data. Tertiary activity, which includes services and transport, contracted nearly 1%, the INEGI data showed https://www.inegi.org.mx/app/saladeprensa/noticia.html?id=6949. However, Ramos predicted a recovery in coming quarters. President Andres Manuel Lopez Obrador, asked about the negative data, said Mexico would still hit the government’s 6% growth target this year.He highlighted the 4.5% year-on-year growth number INEGI reported on Thursday for the quarter.BANK WOESThe deeper dent to growth could quieten calls for the Banco de Mexico, the country’s central bank, to move more quickly to control inflation with a bigger interest rate increase at its next policy meeting in December.Mexico’s central bank has a single mandate, to fight inflation, but often mentions economic growth in its policy meeting notes. The bank is also grappling with uncertainty about its next governor after Lopez Obrador ditched his first pick and chose instead a lesser-known economist https://www.reuters.com/markets/currencies/leadership-shake-up-test-mexican-central-bank-inflation-soars-2021-11-24.Lopez Obrador on Thursday defended the proposal, calling Victoria Rodriguez, a deputy finance minister, an honest and responsible professional who meets requirements for the post.Banxico has slowly but steadily tightened rates in recent months in a so-far unsuccessful fight against the pace of price rises, which hit a 20-year record in the first half of November.Mexico’s peso is another consideration for the bank and on Wednesday was at its weakest against the dollar since February. More

The Social Democrats, the Greens and the Free Democrats have struck a deal that will see Social Democrat Olaf Scholz replace conservative Angela Merkel as chancellor after 16 years. Bundesbank President Jens Weidmann steps down on Dec. 31, five years before the official end of his second term, after 10 years of largely fruitless opposition to the European Central Bank’s easy-money policies.Below is a list of potential candidates to take over from him:ISABEL SCHNABELSchnabel is a member of the European Central Bank’s Executive Board, which would make a switch to the Bundesbank unprecedented.In her first two years as an ECB board member, Schnabel has broken the mould of German opposition to bond purchases and negative interest rates and has defended the ECB from critics in her native country.She has recently struck a hawkish note by saying inflation might turn out to be higher than the ECB currently expects. JOACHIM NAGELNagel is a Social Democrat who worked at the Bundesbank for 17 years, rising through the ranks to become a board member before stepping down in 2016.At the German central bank he was responsible for markets and information technology and would not routinely comment on monetary policy.He is currently the deputy head of the banking department of the Bank for International Settlements, which he joined in 2020 after a four-year spell at German state bank KfW.He holds a degree in economics.MARKUS BRUNNERMEIERThe Princeton professor is perhaps the most international candidate on the list, having done most of his research and teaching in Britain and the United States.He has co-authored scholarly papers with the ECB’s chief economist Philip Lane, including one that championed the creation of a “synthetic” safe asset for the euro zone and got a cold reception from the Bundesbank.In a 2017 book, “The Euro and the Battle of Ideas”, Brunnermeier and co-authors said the bloc’s core problem resided in a conflict between Germany’s focus on rules and France’s preference for flexibility, and called for the creation of a fully fledged banking union.JAKOB VON WEIZSAECKERWeizsaecker has been the chief economist of the German Ministry of Finance under Scholz.He was a member of the European Parliament for the Social Democrats between 2014 and 2019, sitting on the Committee on Economic and Monetary Affairs.A prominent member of an aristocratic family, he is a pro-European who is well regarded by the German centre-right.JOERG KUKIESAs Germany’s deputy finance minister, Kukies has been Scholz’s right-hand man.He has a PhD in finance from the University of Chicago and worked for Goldman Sachs (NYSE:GS) for 17 years before joining the government in 2018. He was criticised for his role in the Wirecard https://www.reuters.com/article/us-germany-wirecard-inquiry-insight-idUSKBN2B811A scandal, for sending Scholz a nine-page memo in which he played down concerns about the payment company and outlined a plan to rescue it with funds from state bank KfW. MARCEL FRATZSCHERFratzscher is the most “dovish” candidate on the list, having backed the ECB’s ultra-loose monetary policy and called for more fiscal spending in Germany.He has told Handelsblatt the current inflation rate is “nothing to worry about” and that the ECB should not raise rates in response.A former European Central Bank economist, he teaches macroeconomics and finance at Berlin’s Humboldt University and runs the DIW Berlin think-tank.CLAUDIA BUCHBuch has been the Bundesbank’s vice-president since 2014 after a two-year stint on the German Council of Economic Experts. The 55-year old former university professor accompanies Weidmann to meetings of the ECB’s Governing Council.But she has largely steered clear of the monetary policy debate in public, focusing instead on issues relating to financial stability.JENS ULBRICHThe Bundesbank’s chief economist has worked for the German central bank since 2005 after a five-year stint as the general secretary of the German Council of Economic Experts. The 52-year-old economist is active on Twitter (NYSE:TWTR) but has not expressed views about monetary policy in public, mainly explaining the ECB’s decisions and commenting on the economic outlook. More