Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Turkey’s new central bank chief said some of President Recep Tayyip Erdoğan’s policies were complicating the task of controlling stubbornly high inflation as he vowed to take further action if needed to restore price stability.Fatih Karahan was making his first public appearance as head of the central bank less than a week after replacing Hafize Gaye Erkan. She resigned last Friday, blaming a smear campaign against her in the domestic media. The new bank chief said annual inflation was expected to fall to 36 per cent by the end of 2024, from nearly 65 per cent last month, but he also warned that Erdoğan’s big increase in the minimum wage, which took effect in January, had exceeded the central bank’s targets.Karahan added that the 49 per cent minimum wage boost was among the factors that had led to a nearly 7 per cent increase in consumer prices between December and January. He said he expected that the series of sharp interest rate rises pushed through by the central bank since June, which have brought the benchmark one-week repo rate from 8.5 per cent to 45 per cent, would be sufficient in achieving its inflation targets, but that “we stand ready” to act if there is any deterioration in the outlook. Inflation expectations, wage and tax policy and companies’ price-setting activities will all factor into whether the central bank must raise rates further, he said.Karahan’s commitment to continuing the tight monetary policy of his predecessor has been welcomed by investors, who applauded the sharp increase in borrowing costs during Erkan’s eight-month tenure as governor. The interest rate rises are a key pillar of a new economic programme that kicked off after Erdoğan’s re-election in May. The Turkish president, a longtime opponent of high borrowing costs, has thus far backed his economic team’s move towards higher interest rates. But economists have long warned that Erdoğan may unleash fresh stimulus measures ahead of key local elections scheduled for late March. Karahan said on Thursday that while inflation was likely to accelerate during the first half of this year, the central bank expected to make significant progress in the next months and years. He said the bank expected inflation to fall to 14 per cent by the end of next year and reach single digits in 2026.He also said that despite the setback in inflation in January, there were indications that tight monetary policy was slowing consumer demand, which had been one of the key drivers of runaway inflation in recent years. For example, Karahan said price inflation for cars, long-lasting consumer goods and appliances had begun easing in recent months. Karahan acknowledged, however, that the central bank’s main task was to reset consumers’ inflation expectations. In recent years, consumers have rushed to buy goods immediately rather than delay purchases over fears that prices will always be much higher tomorrow. Karahan, a former New York Federal Reserve economist, served as deputy to Erkan, who was appointed as the bank’s first female chief last year. His elevation to the job means Erdoğan has now hired six central bank chiefs in five years. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.“No eternal allies and no perpetual enemies, just eternal and perpetual interests” is a foreign policy maxim that’s been worn to cliché from repeated use. But its lesson endures even in a time of heightened strategic rivalry where the US in particular is attempting to build a geopolitical camp.It’s now widely acknowledged that many low- and middle-income countries are transactional rather than ideological, recognising neither allies nor enemies but only business partners.This is a tendency for which the US might now be grateful. It finds itself the target of fierce international criticism, particularly among developing economies, for aligning itself with Israel during the bombing of Gaza. Even India, diplomatically close to Israel and which at one point tried to ban pro-Palestine demonstrations, supported December’s UN resolution calling for an immediate humanitarian ceasefire.There’s a belief that America’s credibility in something called the “liberal international order” will also be damaged and that with it, the global trading system will be fragmented and politicised. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.But the US’s previous history of facing international opprobrium, together with Russia’s recent experience after the Ukraine invasion, suggests that, even in these supposedly geopoliticised days, countries are quite capable of compartmentalising their economic interests and their foreign policy stances.Ironically, Russia’s Ukraine invasion should give the US some comfort. The action was condemned by a solid majority of states at the UN. But most developing countries declined to follow the US’s perceived logical conclusion of imposing economic sanctions. Russia has evaded oil and grain blockades with some ease by trading with India, China and other middle-income economies.Emerging markets are already practised in riding two horses, albeit economic rivals rather than (thus far) actual military combatants. The US is trying to unpick China from its supply chains and deprive it of sensitive technology. But some supposed US allies or near-allies like Mexico and Vietnam have seen this rather as an opportunity to interpose themselves in the supply chain rather than choosing one power over another.Somewhat more distant history also suggests countries can walk politics and chew trade at the same time. Twenty years ago the US’s international standing also plummeted — including among some of its leading European Nato allies — when George W Bush’s administration unleashed chaos by leading an invasion of Iraq in 2003 looking for non-existent weapons of mass destruction.Yet the US, impatient with slow-moving multilateral trade talks, shortly afterwards embarked on a successful string of preferential trade deals. In 2004 it signed a bilateral agreement with Morocco, despite public approval of the US in the north African country having fallen from 77 per cent of respondents in 2000 to 27 per cent in mid-2003.In 2007, with its international reputation still in the basement in Europe and elsewhere, the Bush administration launched the Transatlantic Economic Council with the EU, which became the Transatlantic Trade and Investment Partnership. (TTIP ultimately failed, but under a different president and after the US’s global standing had recovered.) In 2008 the Bush administration also brokered the creation of the Trans-Pacific Partnership, bringing together 11 countries, including some emerging markets.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.At present, a good test of whether the US is too toxic to play a leading role in trade diplomacy is the stance of Indonesia, a country always careful about taking geopolitical sides. Joko Widodo, its president, mindful that Indonesia is the most populous Muslim nation on Earth, made some waves during a visit to the White House in November by calling on Joe Biden to support a ceasefire in Gaza.At the same time, Indonesia elevated its engagement with the US to a “comprehensive strategic partnership” and has been actively engaged as a member of the Biden administration’s Indo-Pacific Economic Framework (IPEF), its trade initiative in the region. The fate of that agreement shows the US’s real weakness in the trading system. A few days after the meeting with Widodo, Biden put what was already a weak agreement into limbo because of the toxicity of anything that looks like a trade deal to certain parts of the Democratic party and Congress.Observers and officials say that many Asia-Pacific nations have been crying out for years for US engagement in trade in the region to counterbalance China, and would almost certainly respond positively to substantive new initiatives despite Gaza. Washington’s weakness in trade diplomacy — also reflected in the World Trade Organization, where it is single-handedly preventing the institution’s dispute settlement system from working properly — is a discrete issue, not unavoidable collateral damage from its foreign policy.There is no single “international order”, liberal or otherwise, that necessarily aligns geopolitical power with economics and trade. The real threat to Washington’s economic leadership lies in its domestic scepticism of liberalisation and the institutions that might deliver it. The US can be a closer trading partner with countries whether they regard it as a political ally or not. Its isolation in trade diplomacy is its own [email protected] More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a senior fellow and director of the Africa programme at the Carnegie Endowment for International PeaceIt is often said that Africa does not matter to America. Unlike China, the US does not pursue a policy of exporting surplus industrial capacity to low-income regions of the world. Accounting for less than 2 per cent of US global commerce, Africa remains more the target of aid programming than an economic priority for Washington. This is the context in which to consider the future of the US trade programme, the African Growth and Opportunity Act. Agoa provides duty-free access to the US market for exports across 1,800 product lines from eligible African countries. It is meant to help increase trade and investment with the continent, promote sustainable economic growth and encourage the rule of law and market-oriented reforms. Because the programme expires in 2025, there are discussions under way as to whether it should be reauthorised or left to quietly die. The idea of allowing Agoa to expire is not as unpopular as one might think. Since the programme’s launch in 2000, Africa’s minuscule share of US global trade has barely budged. The aggregate US-Africa trade volume reached a peak of $142bn in 2008 and has been declining since, falling to $72bn in 2022. Given this trend, some argue that Agoa should be replaced by a few bilateral trade agreements with countries such as Kenya and South Africa.But to do that would be a strategic blunder. In an era of renewed great power competition, a revitalised US-Africa trade relationship will be crucial. For some time, China has been steadily expanding its commercial engagement with Africa, becoming the continent’s largest bilateral trade partner in 2009. However, Africa has a significant trade deficit with China (it stood at roughly $47bn in 2022). Since it is aimed specifically at increasing African exports to the American market, Agoa hands the US a latent advantage in its competition with China, given its potential for helping African countries reduce pressures on their foreign exchange supplies and government budgets. Agoa is the most politically acceptable policy lever the US has to provide a competitive edge over China on the continent. The current aversion of significant numbers of both Democrats and Republicans to free trade means there is no appetite for negotiating new deals with any region of the world. Donald Trump’s “America First” approach led to the US abandoning the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which would have created the world’s largest free trade area. The Biden administration has shown similar protectionist instincts, with national security adviser Jake Sullivan distancing the US from the “international economic project of the 1990s” of reducing tariffs. In this context, Agoa is the best bet for strengthening trade relations between the US and Africa. However, for it to succeed in this geopolitically fraught era, Agoa must be recast to advance American strategic interests in synergy with African development priorities. First, a key objective of reauthorisation should be the diversification of US sources of “critical” minerals supplies. Agoa can be a tool for expanding the existing minerals trade between the US and Africa by encouraging investment from G7 countries in the refining and processing that African countries require before export of critical minerals for final use in battery packs and solar panels.Second, Agoa should have a narrower focus on achieving specific geostrategic commercial goals rather than a wide array of governance-related objectives. Consider that since 2021, the Biden administration has expelled a record eight African countries from Agoa for governance challenges, while human rights infractions in countries such as India and Saudi Arabia have not elicited a punitive response. The Treasury department’s Office of Foreign Assets Control is the best vehicle for imposing sanctions on perpetrators of electoral or human rights abuses, rather than suspending Agoa privileges, which cripples nascent export-oriented industries, as in the case of Ethiopia recently. Finally, Agoa should be rebranded. I propose changing its name to the Strategic Economic Partnership with Africa, or the Step with Africa Act, to convey the shift from a quasi-aid instrument to a strategic trade partnership fit for today’s geopolitical realities. Like the rebranding of Nafta as the US-Mexico-Canada Agreement, “Step with Africa” could galvanise powerful new supporters to ensure the US does not abandon its trade relationship with Africa. More

The poor will always be with us, it is said. But then so will the rich — or will they? Should they? Not necessarily, if a glance at the shelves at your local bookshop is anything to go by. Three new titles on the place of the rich in society show that the question has always been controversial, but is especially so today amid rapid increases in the fortunes of the super-rich and accelerating inequality. That publishers sense a market in books that aim to expose and even abolish extreme wealth indicates that the super-rich may want to pay attention. The two “abolition” books are Limitarianism by Ingrid Robeyns, a philosopher at Utrecht University, and Enough by Luke Hildyard, director of the High Pay Centre, a UK think-tank. They cover much the same ground and make similar, often familiar, arguments, although the Robeyns book has more of the leftist academic to it; Hildyard’s is more of the leftist activist. Enough has the snappier title and the snappier argument. Hildyard is, however, less dogmatic than his subtitle suggests. He is not really in the abolition business. His approach is a pragmatic focus on how much better and fairer our economy would be if fewer resources were controlled by the super-rich. Robeyns wants to claim more than this. Her book aims to defend an ethical and political principle. The “limitarianism” of the title says that it is ethically wrong for anyone to be — and be able to be — very rich and that society needs to be organised around this principle as a “regulative ideal”. Unlike Hildyard’s dry-but-effective focus on policy details, Robeyns’s book is a critique of the psychological make-up of a society obsessed with accumulation and where not enough of us “see ourselves as activists, organisers, debaters, engaged as neighbours or members of political book clubs, and so on”. She cites studies showing a broad social consensus around the amounts people identify as the threshold of being “rich”, or having “enough”, although it naturally varies between countries and should be taken as a ballpark figure. In her own Dutch context, she takes about €1mn wealth level (twice the price of the average London flat) as the ethical limit we should personally be satisfied with, and €10mn as the political limit policies should prevent anyone from exceeding. (These are high levels of wealth. In the UK, a couple owning £2mn would just enter the top 5 per cent of households by wealth; £10mn would put them well into the top 1 per cent.)Paradoxically, this holistic approach leaves her unwilling to commit to an actual policy of a 100 per cent tax rate above certain levels of income or wealth — which I had naively thought was what “limitarianism” entailed. Much of the book instead advocates the more nebulous goal of “dismantling neoliberal ideology”. On the whole, both books boil down to the same idea: that the super-rich are a waste of space, and that our societies would be much better off if no one could get more than moderately wealthy. Both authors mobilise a barrage of data about just how grotesque wealth distributions are — such as the fact that in rich countries the top 10 per cent of the population own 50-70 per cent of all the wealth. These facts are well-known but bear repeating. So does the observation that the tax systems of rich countries have, during the past 40 years, become more favourable to capital income relative to work, and overall less onerous and more easily avoidable for the richest.A demonstration in Paris last year protested against pension reforms and called for better working conditions More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Ever come up against an unreliable shower tap? Turn slightly and it becomes too hot. Twist back and it takes ages to cool down. Well, that is the analogy Milton Friedman is said to have used to explain the difficulties of using the tools of monetary policy, which have “long and variable” lags, to target inflation.But we seem to have forgotten Friedman’s warnings — that monetary policy is a blunt tool. First, the era of low inflation from the mid-1980s until the global financial crisis enhanced the credibility of central banks but perhaps also exaggerated their power. Second, after the crash, economies became more dependent on rate-setters given the only limited fiscal stimulus. Programmes and tools such as quantitative easing, yield curve control and forward guidance were introduced. This raised central banks’ influence on markets.Today, central bank whispering is a full-time occupation. The regularity of committee meetings has fused with high-frequency trading, the 24-hour news cycle and social media. “Interest rates change daily, partly in anticipation of what central banks will do next. This transfers wealth across financial markets,” said Ricardo Reis, a professor at the London School of Economics. “It creates an obsession with monetary policy — even though the small daily moves in rates have a negligible impact on inflation.”Inflation would indeed be higher today had central banks not raised rates. But this latest inflationary episode was driven by supply shocks, which interest rates cannot directly and rapidly remedy. Central bankers made mistakes early in this cycle, but the expectations on them were too high to begin with.Monetary policy impacts demand in an imprecise manner. A change in bank rate or balance sheet operation influences financial market prices. That then has a knock-on impact on the cost of credit to the real economy. But the mechanism is rarely smooth and varies depending on the macro context. This rate cycle has highlighted that.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.First, the rise of fixed-rate loans — and pandemic savings — have stunted the impact of rate rises. In the UK, the share of floating-rate mortgages fell from 70 per cent to 15 per cent in the decade to 2022, according to Capital Economics. In America, 30-year fixed mortgages have long been common, but the share of adjustable rate new mortgages has dropped sharply since the 1980s. Floating-rate US corporate bond issuance has also dropped from about 30 per cent prior to the financial crisis in 2007-08, to about 15 per cent now, Capital Economics adds. Second, the Phillips curve relationship — that lower inflation and high unemployment accompany each other — has also not been reliable in this cycle. The post-pandemic jobs market has been unusual due to a combination of falling participation rates, shifting work preferences, and labour hoarding. This could explain job market resilience in the face of higher rates. Third, market expectations have added complexity. Goldman Sachs’ US Financial Conditions index — a gauge of financial market tightness — has loosened back to summer 2023 levels. The notion that the US Federal Reserve had reached its peak rate led to a rally in equity and bond markets. This impacts real economic activity too, with priced-in rate cuts supporting a recovery in housing markets.These factors have reduced the potency of monetary policy in this cycle, and could persist. The upshot is that rates need to go higher to deliver a given economic impact, and its lags — often estimated between 18-24 months — take longer. Sanjay Raja, chief UK economist at Deutsche Bank, says this creates more volatility and the risk of errors. “We estimate that only 70 per cent of [UK] rate hikes have filtered through to the economy,” he said. Raja thinks the Bank of England’s Monetary Policy Committee “runs the risk of overtightening”.Another lesson is that the effectiveness of monetary policy also depends on the structural economic drivers around it. After all, the era of benign inflation before the financial crisis was bolstered by elastic production and energy supplies. Looking ahead, using rates with unreliable lags to influence demand is a recipe for volatility, as supply shocks from regionalisation, geopolitics and less supportive demographics continue — unless there are offsetting productivity gains.As Friedman noted, depending on monetary policy is bound to aggravate rather than ameliorate the economic cycle. Fiscal and supply-side policy must get greater emphasis in the price stability debate. After all, a faulty faucet is even more useless if the plumbing has gone awry. More

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UNITED NATIONS (Reuters) – United Nations sanctions monitors are investigating dozens of suspected cyberattacks by North Korea that raked in $3 billion to help it further develop its nuclear weapons program, according to excerpts of an unpublished U.N. report reviewed by Reuters. “The Democratic People’s Republic of Korea (DPRK) continued to flout Security Council sanctions,” a panel of independent sanctions monitors reported to a Security Council committee, using North Korea’s formal name.”It further developed nuclear weapons and produced nuclear fissile materials, although its last known nuclear test took place in 2017,” wrote the monitors, who also said Pyongyang had continued ballistic missile launches, put a satellite into orbit and added a “tactical nuclear attack submarine” to its arsenal.North Korea has long been banned from conducting nuclear tests and ballistic missile launches by the 15-member Security Council. Since 2006, it has been subject to U.N. sanctions, which the council has repeatedly strengthened to try and cut off funding for its weapons of mass destruction (WMD) development. “The panel is investigating 58 suspected DPRK cyberattacks on cryptocurrency-related companies between 2017 and 2023, valued at approximately $3 billion, which reportedly help fund DPRK’s WMD development,” the monitors wrote. North Korea’s mission to the United Nations in New York did not immediately respond to a request for comment on the report by the sanctions monitors. Pyongyang has previously denied allegations of hacking or other cyberattacks. The U.N. report is due to be released publicly later this month or early next month, diplomats said.North Korean hacking groups subordinate to the Reconnaissance General Bureau (RGB) – Pyongyang’s primary foreign intelligence agency – reportedly continued with a high number of cyber attacks, the sanctions monitors said. “Trends include DPRK targeting of defense companies and supply chains, and increasingly sharing infrastructure and tools,” according to the monitors, who report twice a year to the 15-member Security Council.LUXURY GOODSAny further action against North Korea by the council is unlikely as it had been deadlocked for several years on the issue. China and Russia instead want the sanctions to be eased to convince Pyongyang to return to denuclearization talks. Moscow and Pyongyang also vowed last year to deepen military relations. The U.S. has accused North Korea of supplying weapons to Russia for its war in Ukraine, which North Korea and Russia have denied.”The panel is investigating reports from Member States about supplies by DPRK of conventional arms and munitions in contravention of sanctions,” the sanctions monitors wrote. The isolated Asian nation imposed a strict lockdown amid the coronavirus pandemic that slashed its trade and aid access, but it slowly began to re-emerge last year. “Trade continues to recover. The 2023 overall recorded trade volume surpassed the total for 2022, accompanied by the reappearance of a large variety of foreign consumer goods, some of which could be classified as luxury items,” the sanctions monitors wrote. The sale or transfer of luxury items to North Korea has long been banned by the Security Council. Under U.N. sanctions imposed in 2017, all countries were also required to repatriate North Koreans working abroad to stop them earning foreign currency for North Korean leader Kim Jong Un’s government.”The panel investigated reports of numerous DPRK nationals working overseas earning income in violation of sanctions, including in the information technology, restaurant, and construction sectors,” the sanctions monitors wrote. They also said North Korea continues to access the international financial system and engage in illicit financial operations in violation of U.N. Security Council resolutions. More

Yi Huiman was replaced as chairman of the China Securities Regulatory Commission, the CSRC, with Wu Qing, who has led the Shanghai Stock Exchange and served as a key deputy in Shanghai’s municipal government. While no reason was given for Yi’s removal, it came after China’s stock market hit a five-year low on Monday and investors scrambled to cut their losses. Analysts and investors said the departure was a sign that policymakers were stepping up efforts to shore up battered Chinese markets.So far, market-focused support moves such as restrictions on short-selling or reductions in trading costs, as well as government statements promising support, have helped stabilise but not reverse a rout. The benchmark Shanghai Composite rose off Monday’s five-year low, up 1.4% on Wednesday, while the blue-chip CSI 300 Index added 1%. The indexes were still down roughly 5% and 2.6% respectively this year, however, having fallen 13% and just over 15% over the last six months. In contrast, broader world stocks have rallied.PROPERTY CRISISChinese markets have been roiled by near constant turmoil since 2019, highlighted by the recent liquidation of indebted developer China Evergrande (HK:3333) as a property crisis weighs on consumer sentiment and hampers a rebound from the COVID-19 pandemic. “There is something more going on here than just a kind of a post-speculative episode, which may take actual policies to stop,” said George Magnus, research associate at Oxford University’s China Centre. “The market can certainly bounce but I doubt very much it would be durable.”It wasn’t the first time China has fired a CSRC chairman during a market rout, analysts said, seeing Wednesday’s move as part of a drive to stabilise market sentiment. “The China Securities Regulatory Commission has already been acting to try and shore up markets with curbs on short-selling, but this change at the top may be a signal that it is expected to go further,” said Lindsay (NYSE:LNN) James, investment strategist at Quilter Investors in London. While noting Wu’s background as a securities regulator – previous CSRC chairmen have mostly been bankers – investors stressed that more needed to be done to ease market concerns. LONG ROAD AHEADThe International Monetary Fund last week revised up China’s 2024 growth estimate by 0.4 percentage points to 4.6% on increased government spending, though it was still slower than last year’s 5.2% expansion.It said China could recover faster than expected if Beijing made additional property sector reforms, such as restructuring insolvent property developers, or spent more than anticipated to boost consumer confidence. Geoffrey Yu, senior EMEA markets strategist at BNY Mellon (NYSE:BK), said the firm wanted to see fiscal as well as structural measures, especially support for households, which he said could be announced at March’s National People’s Congress – China’s annual parliament. “We emphasize support for the households is essential for sentiment and this requires a broad-based effort from various layers of government.” Such has been the sell-off in Chinese assets, however, that some investors note the country’s economic trajectory was better than current market valuations suggest.China saw a $6.3 billion inflow into stocks in the week to Jan. 31, a BofA report citing data from EPFR said on Friday, following a nearly $12 billion inflow the previous week that was the most since 2015, as government efforts helped stabilise sentiment. Yet the road to attract funds back is long, given more than $80 billion of outflows from China portfolios last year, according to Institute of International Finance estimates.”On any measure, sentiment towards China is incredibly bearish at present,” Iain Cunningham, head of multi-asset growth at asset manager Ninety One, said in a note on Wednesday.”We continue to see opportunities in businesses with structural tailwinds that have been performing well, and growing, in recent years, but trade at sale prices. The long-term outlook is more benign than current fears imply.” More