Economy

CHANCAY, Peru (Reuters) – In September, a group of Brazilian farmers and officials arrived in the Peruvian fishing town of Chancay. The draw: a new Chinese mega port rising on the Pacific coast, promising to turbo charge South America’s trade ties with China.The $3.5 billion deep water port, set to start operations late this year, will provide China with a direct gateway to the resource-rich region. Over the last ten years, Beijing has unseated the United States as the largest trade partner for South America, devouring its soy, corn and copper.The port, majority-owned by Chinese state-owned firm Cosco Shipping, will be the first controlled by China in South America. It will able to accommodate the largest cargo ships, which can head directly to Asia, cutting the journey time by two weeks for some exporters.Beijing and Lima hope Chancay will become a regional hub, both for copper exports from the Andean nation as well as soy from western Brazil, which currently travels through the Panama Canal or skirts the Atlantic before steaming to China.”The Chancay mega port aims to turn Peru into a strategic commercial and port hub between South America and Asia,” Peru’s trade minister Juan Mathews Salazar told Reuters.Part of China’s decade-old ‘Belt and Road’ drive, the new port embodies the challenge facing the United States and Europe as they look to counter Beijing’s rising influence in Latin America. China’s trade muscle has helped it win allies and gain leverage in political forums, finance and technology.Full construction started in 2018 at Chancay, some 80 kilometers (50 miles) north of Lima. Workers are now laying thousands of piles and breakwaters; work signs are written in white-on-red Chinese characters.The first phase of Chancay is set be completed in November 2024. Chinese President Xi Jinping, expected in Peru for an Asia-Pacific Economic Cooperation (APEC) summit that month, could inaugurate the port, a diplomatic source in Lima said.China’s embassy in Lima did not respond to Reuters queries. “It’s part of China’s new Silk Road,” said Mario de las Casas, corporate affairs manager for Cosco Shipping, which holds a 60% stake in the port. The remainder is controlled by local miner Volcan, in which Glencore (OTC:GLNCY) owns a stake.Jose Adriano da Silva, a farming entrepreneur from Brazil’s western Acre state who visited the port, said the project would accelerate regional development. He said talks between Peruvian and Brazilian officials were underway to resolve overland transport challenges.Peru’s government is planning an exclusive economic zone near the port and Cosco wants to build an industrial hub near Chancay to process raw materials that could include grains and meat from Brazil before shipping them to Asia.Brazil’s ambassador in Peru, Clemente Baena Soares, said there were plans for meetings between officials early this year to seek to resolve logistical, sanitary and bureaucratic hurdles at the border so Brazilian trucks can more easily reach the port.”It’s an opportunity for grain and meat production – especially from Rondonia, Acre, Mato Grosso and Amazonas – to go to Asia through the port of Chancay,” said Soares, who also visited Chancay in September, naming four states in western Brazil.”(Brazilian businesses) are delighted with the possibility of not using the Panama Canal to take their goods to Asia.”He added there would need to be investment in an existing road known as the Interoceanic Highway – which runs from further south in Peru across the Andes to Brazil – to improve transport routes. A long-discussed rail link remained in the study phase, he said. STARK TRANSFORMATIONChina overtook the United States on trade in South and Central America under former President Donald Trump, despite his administration warning the region about the dangers of getting too close to Beijing. Under President Joe Biden the gap has widened despite attempts to reverse it.U.S. officials are now taking a different tack, arguing that the United States offers the region other things beyond trade, including investment in high-tech industries.”I think using the metric of trade to evaluate the influence of China is not an accurate way,” Juan Gonzalez, a White House adviser and the National Security Council’s Western Hemisphere senior director, told Reuters in Buenos Aires.”We’re confident in our ability to compete with China,” he added, urging regional governments to ensure there were no “political strings attached” to trade with Beijing.Beijing says its trade and investment in Latin America is a win-win for both sides. Some 150 countries have signed on to the Belt and Road with China, including 22 in Latin America.The change over ten years is stark.A decade ago, Peru, the world’s no. 2 copper producer, traded slightly more with the United States than China. Now, China has a more than $10 billion lead in bilateral trade, the latest annual data show.That trend is playing out around the region.Reuters interviewed two dozen officials, business leaders and trade experts, along with an analysis of ten years of trade data, revealing how China’s infrastructure spending is cementing its role as the key trade and investment partner for South America, defying an economic slowdown at home and U.S. warnings about debt trap diplomacy.Part of the shift is pragmatic. Fast-growing China needs the copper and lithium from South America’s Andes, along with the corn and soy from the plains of Argentina and Brazil.But its widening trade lead – some $100 billion around South America in the most recent annual data – brings extra clout.Beijing has in the last year upgraded ties with Uruguay and Colombia to “strategic partnerships” – the latter a U.S. ally.Argentina’s President Javier Milei, once highly critical of China, has softened his stance since taking office last month, reflecting Beijing’s importance to the crisis-hit economy.It is the top buyer of Argentina’s soy and beef and has an $18 billion currency swap line with the country – which Argentina’s cash-strapped government has tapped to pay its debt, including with the International Monetary Fund (IMF).”The last thing our dear Argentine friends need in these challenging times is to lose the support of an important partner like China,” the Chinese ambassador in Colombia wrote on social media platform X following Milei’s inauguration.’POINT OF LEVERAGE’Peru’s trade with China doubled in the last decade to $33 billion in 2022, driven by rising copper exports, even as its commerce flatlined with the United States. China has invested some $24 billion in Peruvian mines, the power grid, transportation and hydro-electric power generation over the same period.Exports to China grew 9.3% in the first eleven months of last year, government data show, faster than the 5.3% growth of exports to the United States. Peru has a $9.4 billion trade surplus with China and a $1.3 billion deficit the United States.Peru’s President Dina Boluarte met China’s Xi in November at the Asia-Pacific Economic Cooperation (APEC) forum in San Francisco. They discussed the Chancay port, which Boluarte said was a “significant boost to free trade and new Chinese investments.”That came after an awkward on-the-move parlay in Washington with Biden, which was not given full bilateral meeting status.”China is taking advantage of our absence and that’s a real problem,” said Eric Farnsworth, a former White House adviser and State Department official, who is now a Latin America expert at the Council of the Americas and Americas Society.He said the port bolstered China’s powerful position in Peru and created a “point of leverage” in the region.Two regional diplomats said it also reflected a more muscular and ambitious China, often backed by deep pockets: a far cry from a wave of Chinese immigration to Peru two centuries ago when migrants came as cotton workers or to set up ‘chifas’ – Chinese food outlets.”Now business executives or bankers come, with big projects tucked under their belts,” said Juan Carlos Capuñay, Peru’s former ambassador to China.’NEW BATTLE GROUND FOR MINERALS’ China hasn’t had things all its own way. Its Belt and Road has faced pushback in Asia and Europe – Italy recently pulled out of the initiative – while bad debts owed to China have ballooned. In Latin America, projects from Argentina to Venezuela have faced hold-ups.Diplomats and trade experts also cautioned that the Chancay port would only be successful if regional infrastructure including roads and railways improved to enable goods to get there, including grains from Brazil.Currently, the Interocean Highway – a little-used road corridor of some 2,600 kilometers (1,616 miles) in five sections, built more than a decade ago – links the Pacific Coast in the south of Peru to Brazil’s state of Acre.”The issue today is a lack of regional connections, which is very complex for the success of the project,” said Fernando Reyes Matta, former Chilean ambassador to China.Nonetheless, several of the people said China’s rise in South America was solidifying despite these headwinds, with the region desperate for financing and foreign currency.A senior European diplomat based in South America said the big gap in infrastructure funding in the region made it hard for the United States to “strong arm” local governments to turn down Chinese money. Meanwhile, global interest had grown in South America’s resources such as lithium, copper and grains.”Latin America has become a new battle ground for those minerals between the United States, Europe and China,” he said. More

The Group’s renewable energy arm, Adani Green Energy (AGEL), is set to invest in two pumped storage projects at Koyabestagudem (850 MW) and Nacharam (500 MW). These projects are part of a larger green energy initiative that the Group is undertaking as the world transitions towards more sustainable energy solutions. AGEL has also unveiled plans for a renewable energy-backed data center project, investing Rs 5,000 crore ($666M). This initiative is expected to create approximately 600 jobs through partnerships with local MSMEs/startups.In addition to these investments, AdaniConneX, another subsidiary of the Adani Group, will be establishing a data center project, further underlining the Group’s commitment to the tech sector.The Adani Group’s investment spree in Telangana also extends to the defense sector. Adani Defence Systems has committed Rs 1,000 crores ($133M) to establish an ecosystem at Aerospace Park focused on counter-drone and missile system development. This move signifies the Group’s diversification and interest in contributing to the strategic sectors of the Indian economy while providing jobs for over 1,000 people.Moreover, Ambuja Cements plans to inject Rs 1,400 crore ($186M) into a new cement grinding unit. This unit, which will have a capacity of 6 million tonnes per annum (MTPA), is expected to support the growing infrastructure needs of the region and employ over 4,000 individuals.Today’s updates clarify that Telangana secured investments from the Adani Group totaling Rs 12,400 crore ($1.6B) across four sectors to promote sustainable economic development. The investments are split with Rs 5,000 crore going towards a renewable energy-backed data center project, another Rs 5,000 crore for two pumped storage projects, Rs 1,000 crore for the establishment of counter-drone and missile system facilities at Adani Aerospace Park, and Rs 1,400 crore from Ambuja Cements for a new cement plant. These investments are expected to generate significant job opportunities and bolster the local economy.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayTo bring home the enormity of the task of addressing climate change, I often think about the following. Humanity has only changed the main source of energy powering societies and economies a handful of times in our history, and each energy revolution has been, well, just that. But never before has the change taken place as a result of a conscious, collective decision that this is what we should do, with intentional policies to make it happen, rather than as simply the effect of scientific discoveries and technological breakthroughs (eg the internal combustion engine). But that is the case for the shift we are trying to make from a fossil fuel-powered economy and society to one running fully on renewable electricity.It’s best not to dwell too long on this fact as it makes the challenge look even more forbidding. Most climate-related news seems to be that we are failing and running out of time, because both the economic transformation and political change we need are far too slow. So today let me bring at least one case for optimism — which focuses on the good news inherent in what many regard as economic threats from China.Shouldn’t Beijing want to push others to decarbonise more?The overall prospects for the Chinese economy remain clouded. Free Lunch has long held the view that getting back to sustained strong growth any time soon will require forceful balance sheet restructuring, although for now, Chinese authorities seem determined to repeat the mistakes western countries usually make after real estate crashes. (Its demography doesn’t look too hot either.) But there can be no doubting how Beijing’s currently favoured sectors — green tech and renewable energy infrastructure — are raging ahead. The fast-expanding capacity in electric vehicle manufacturing has caught everyone’s attention, especially as Chinese-made EVs are now starting to enter the EU market in earnest. (If you missed it, make sure you read my colleagues’ Big Read on the Chinese EV industry from two weeks ago.) And that follows China’s previous effort to dominate global production of photovoltaics and other renewable energy equipment.What is perhaps less appreciated is how much difference this is making to the decarbonisation agenda — in China and the world as a whole. The International Energy Agency estimates that China more than doubled its solar generation capacity and added two-thirds to its wind generation capacity in 2023. Our sister FT newsletter Energy Source (sign up here!), discussing the IEA’s latest report, highlighted these key points about China: “The country deployed as much solar capacity last year as the entire world did in 2022 and is expected to add nearly four times more than the EU and five times more than the US from 2023-28 . . . Two-thirds of global wind manufacturing expansions planned for 2025 will occur in China, primarily for its domestic market.”There is evidence — reported by my colleague Edward White at the start of the year — that China’s economic and political structure of centralised (indeed dictatorial) political power and an economy dominated by state-owned enterprises have been used to good effect to shift the country into the green tech future. Renewables have reached 50 per cent of power generation capacity, and transport is rapidly being electrified. The much-decried “overcapacity” in both sectors suggests China’s decarbonisation drive could accelerate some more. All of this is, of course, a bit speculative. But for what they are worth, these speculations suggest several policy-relevant predictions that are rather striking. One is that the attention — and subsidies! — Beijing has been lavishing on renewables and green tech will have their greatest impact not on competing markets such as the EU, but on China itself. Sooner than being flooded with Chinese EVs, the EU could see itself overtaken as the world’s fastest-decarbonising region by a China flush with EVs on its own roads and solar and wind farms in its own fields. Add in the huge capacity in battery manufacturing, and you can see the prospect for an unprecedented use of electricity storage to manage short-term intermittency in renewables. So amid the hand-wringing that China keeps building new coal plants, leave some room for the possibility that it could also quickly be making them obsolete.Another is that this reinforces western climate policies often criticised as aggressive and protectionist by China and others, above all the EU’s Carbon Border Adjustment Mechanism. This carbon tariff, the FT’s excellent reporting shows, is making Chinese producers of the affected sectors work hard to reduce their carbon footprint so as not to be locked out of European markets. Here are two important observations about that. The huge resources Beijing has sunk into green tech should make it a lot easier for its companies to adapt to policies such as CBAM. Meanwhile, on the EU side, the fact that the policy works — both in protecting green EU industry from being undercut by dirty competitors and in encouraging decarbonisation efforts elsewhere — will make it easier to expand CBAM to downstream products. The political and economic logic for this to happen is after all undeniable: it doesn’t do to protect green but expensive steelmaking while ignoring that carmakers, say, still face being undercut by producers using cheap and dirty steel.The third potential consequence would be the most monumental change of all. If China does indeed accelerate and, as a result, finds itself moving towards the front of the race towards net zero, how will that affect its stance in global climate politics? Add in the increasing likelihood that it will find not just that it can decarbonise at ever lower cost, but that others’ efforts to decarbonise will sustain huge and growing markets for products that it excels in manufacturing. It seems inevitable that Beijing will sooner or later find that it is in China’s interest to raise the pressure on the rest of the world to decarbonise faster — which means taking the lead in global climate politics instead of its current foot-dragging role. For the sake of the world, it had better be sooner. And for the sake of western policy planners, they had better assume it will be.Other readablesThe time to consider a grand bargain in the next EU budget is now, I argue in my latest FT column. Vienna’s housing policy is increasingly looked to as an example for how to have enough affordable housing. Last weekend, the FT’s House & Home section looked at its subsidised co-generational housing projects. Donald Trump has been charged under the same laws that were written to combat the Ku Klux Klan — that is just one of the many illuminations provided by Sidney Blumenthal’s essay.The pressure group Patriotic Millionaires has polled dollar millionaires from around G20 countries — and a majority of them support wealth taxes on the rich. Numbers newsRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.China’s lenders were once considered some of the country’s safest investments. The relatively stable returns on offer from investing in shares of the largest state-owned banks came with the added benefit of fat dividends. Those days may be numbered.There are two big risks. The first is well known: China’s continuing property crisis. The second less so: Russia. After the invasion of Ukraine, a wave of sanctions from countries including the US left Russia heavily dependent on China — one of the few country’s left that would buy Russian coal. It became crucial in providing its ostracised neighbour with financial services.After Russia’s central bank lost access to a big chunk of international reserves the renminbi offered one of its few remaining options. The absence of Visa, Mastercard and American Express, which suspended operations in Russia in 2022, meant China’s UnionPay was the only service left. This meant that the renminbi’s portion of global payments surged to 4.6 per cent in November, according to Swift data, surpassing the Japanese yen. That makes it the fourth most active currency in the world.Chinese lenders had distanced themselves from big Russian clients in 2022, when international sanctions first kicked in. Nonetheless, their exposure to Russia’s banking sector has increased, having already quadrupled in the 14 months to the end of March last year. For China’s smaller banks, this business would have been a welcome source of additional revenue. It increasingly doesn’t look worthwhile for bigger lenders. US laws and enforcement policies require foreign financial institutions that engage in US dollar transactions to comply with sanctions, or face steep penalties. In the worst case, there is the threat of restrictions on all sources of US dollar liquidity. At the end of last year, the US granted the Treasury new authority to penalise foreign lenders doing business with certain Russian sectors, even where there is no US connection to the transaction — so-called “secondary sanctions”. 0.4xChinese banks’ price to tangible book ratio is among the lowest in the regionThose penalties would far outweigh the small boost to sales Russian clients mean for the largest banks, such as Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China.The rising risk of US sanctions is another challenge for a sector already struggling with supporting the local property market, as the largest lenders are called on by Beijing to bail out indebted developers. Chinese banks’ price to tangible book value ratio, at just 0.4 times, is among the lowest in the region.As state-owned banks, the downside risk from those requests is not something they can avoid. But exposure to Russia is one that they can.Lex is the FT’s flagship daily investment column. If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline More

The country, which is operating under a caretaker government, secured a $3 billion loan programme with IMF in July that helped pull the cash-strapped nation back from the brink of a sovereign debt default. However, the programme was a nine-month standby arrangement, set to expire this spring. “The IMF will have to decide whether to pull the plug on Pakistan or not, and by that I mean it will have to decide about its assessment of debt sustainability,” said Reza Baqir, head of sovereign advisory services at Alvarez & Marsal.The Fund labelled Pakistan’s debt as sustainable, but also emphasised the significant and pronounced risks said Baqir, who negotiated Pakistan’s 2019 IMF programme and also worked at the Washington-based lender for almost two decades.”That’s almost like having it both ways,” he said, adding investors would be watching whether the Fund would continue to label the debt as sustainable or whether it would offer its support on a debt restructuring as part of a new programme should Pakistan’s authorities chose to go down that route.The country’s public external debt stood at just under $100 billion by end-September 2023, according to central bank data, with China and its lenders being the single largest creditor to the country.Pakistan’s shorter-dated bonds are trading at 96 cents, fairly close to par, though longer-dated ones maturing after 2030 stand at just over 60 cents, well below the 70 cent threshold below which debt is seen as distressed. On Thursday, the bonds suffered sharp falls after Pakistan conducted strikes inside Iran amid rising tensions with its neighbour. Pakistan would also be a potential candidate for a “debt-for-nature”-style debt swap said Baqir, pointing to deadly 2022 floods that affected more than 33 million people.Debt-for-nature swaps – where countries introduce eco-policies in return for having their debt cut, are growing in popularity after successful recent deals in places such as Belize and Ecuador’s Galapagos (NASDAQ:GLPG) Islands.Eugenio Alarcon, who recently joined Alvarez & Marsal responsible for Latin America & the Caribbean, said “countries have seen the benefits of these type of transactions because they can take a huge reduction in the stock of debt.” More

1. Futures inch marginally higherU.S. stock futures hovered mostly above the flatline on Thursday, pointing to a quiet start for equities after they slipped in the previous session.By 05:00 ET (10:00 GMT), the Dow futures contract was mostly unchanged, S&P 500 futures had added 5 points or 0.1%, and Nasdaq 100 futures ticked up by 59 points or 0.4%.The main indices on Wall Street fell on Wednesday, dragged lower by economic data which cooled bets that the Federal Reserve will soon begin to bring interest rates down from more than two-decade highs. Stronger-than-anticipated December retail sales figures suggested that American consumer health remains resilient despite recently elevated inflation and borrowing costs — a prospect that could persuade Fed officials not to rush into imminent cuts.Rate-sensitive momentum stocks retreated, weighing on the Nasdaq Composite in particular. The tech-heavy index shed 0.6%, while the benchmark S&P 500 dropped by 0.6% and 30-stock Dow Jones Industrial Average declined 0.3%.2. Housing starts, Philly Fed data aheadFed policymakers and traders will have the chance to parse through further economic data on Thursday, as they search for more clues about the trajectory of price growth and broader activity.Housing starts, a measure of new residential construction, are expected have increased by 1.426 million in December, down slightly from 1.560 million in the prior month. A key gauge of demand in the crucial U.S. real estate sector, housing starts can also provide investors some insight into consumer appetite for riskier big-ticket purchases.Markets will be keeping an eye as well on the release of an index from the Philadelphia Federal Reserve that is generally considered to be a strong indicator of the state of the American manufacturing industry.Meanwhile, Atlanta Fed President Raphael Bostic is due to make remarks in which he may discuss his outlook for interest rates. Earlier this month, Bostic said inflation now seems to be “on a path” to the Fed’s stated 2% target, adding that he is “comfortable” with the central bank’s “restrictive” policy stance.3. Google’s Pichai warns of more job cuts – The VergeGoogle Chief Executive Sundar Pichai has warned employees that the search giant will further reduce headcount, according to a report in The Verge that cited an internal memo.Pichai argued in the memo that the cuts are needed to help simplify operations and increase velocity in some areas, the report said.However, he reportedly claimed that the role eliminations will not be as large as they were last year and will not touch every team. Alphabet-owned Google said last week that it would be laying off hundreds of employees at multiple divisions, including its Voice Assistant unit and its hardware business overseeing gadgets like Nest and Fitbit.Job cuts have hit companies across multiple industries in recent months, reflecting a push by many firms to rein in costs and focus spending on developing artificial intelligence software.4. TSMC fourth-quarter profit falls, but tops estimatesTaiwan Semiconductor Corp (TW:2330) logged a smaller-than-estimated decline in its fourth-quarter profit as revenue was buoyed by increased sales of its most advanced chips.The world’s largest contract semiconductor manufacturer forecast slightly weaker performance in the first quarter of 2024, but said that chip demand in the coming year will be bolstered by soaring enthusiasm around artificial intelligence.”We expect 2024 to be a healthy growth year for TSMC, supported by […] robust AI-related demand. AI models need to be supported by more powerful semiconductor hardware […] thus the value of TSMC’s technology position is increasing,” CEO C.C. Wei said in a post-earnings call.Profit for the three months to Dec. 31 fell to T$238.7 billion ($7.6 billion) from T$295.9 billion a year ago. On a per-share basis, income fell to T$9.21, but still beat Investing.com estimates of T$8.67.5. Crude boosted by OPEC outlook, U.S. output dipOil prices rose Thursday, boosted by a bullish OPEC demand outlook and a disruption to U.S. crude production caused by a cold snap in parts of the country.By 05:00 ET, the U.S. crude futures traded 0.8% higher at $73.02 a barrel, while the Brent contract climbed 0.5% to $78.28 per barrel.In a monthly report, oil group OPEC said it anticipates crude demand will remain relatively robust over the next two years. Harsh winter conditions in the U.S. state of North Dakota also led oil output there to fall by 650,000 to 700,000 barrels per day, less than half its typical production.Additionally, Pakistan has launched retaliatory missile strikes into Iran, responding to strikes carried out by Iran inside Pakistani territory. The violence exacerbated fears of an expanding conflict in the Middle East, a development that could dent crude supplies.But price gains were capped for now by an unexpected build in U.S. crude stockpiles and challenging recovery conditions in China. More

FRANKFURT (Reuters) – Workers in Europe are hoping this year’s pay round will help restore incomes eroded by higher prices, but the expected boost to their purchasing power could hamper the European Central Bank’s efforts to bring inflation back to target.The ECB has singled out wages as the single biggest risk to its 1-1/2 year crusade against inflation. It expects salary growth across the euro zone of 4.6% this year, far more than the 3% pace it considers consistent with inflation at its 2% target. Higher wage settlements would be a risk to interest-rate cuts that financial markets are betting will start in April. “We see a path to 3% (wage growth) but it will be a bumpy road,” Reamonn Lydon, an economist at the Central Bank of Ireland and one of the minds behind the popular Indeed Wage Tracker, said in an interview. Pay hikes increase costs for firms and boost household income, both factors that might push up prices and require the ECB to keep rates high. Unions see a combination of gradually cooling inflation, low unemployment and fat corporate profit margins as their best and possibly last shot this economic cycle at restoring workers’ living standards.And after seeing their real wages drop by roughly 5% in 2022-23 – and decades in which labour has lost its leverage – wage-earners are ready to fight. U.S. giants Tesla (NASDAQ:TSLA) and Amazon (NASDAQ:AMZN) are among companies already grappling with strikes in Europe.Unlike in the United States, there is no real-time wage data for the 20-country euro zone.But the Indeed Wage Tracker, which measures salaries advertised on that website, is closely watched by the ECB as an indicator of future trends. It ticked higher in December – to 3.8% from 3.7% – although that was well below a peak of 5.2% recorded in October 2022, when inflation was at its peak. Lydon and Indeed’s Pawel Adrjan said December’s increase was probably driven by new wage deals, an effect they saw continuing in early 2024 as more agreements are struck and minimum wage increases kick in. DEALSAmong recent settlements, wages rose by 4.5% for employees at Spanish stores of and IKEA, 5.0% at French energy major TotalEnergies (EPA:TTEF) and 6.6% for Dutch rail workers. French Uber (NYSE:UBER) drivers’ minimum hourly rate rose 17.6%. Minimum wages were meanwhile lifted by 3.4% in Germany, 3.8% in the Netherlands and 5.0% in Spain.”Everything points to a return to real wage growth,” said Martin Hoepner, a professor at the Max-Planck-Institut for the study of society in Cologne, Germany. Emboldened by worker shortages that have only started easing, labour unions hope to reverse a trend of falling membership that accelerated with globalisation in the 1990s.Employees at French state-owned power group EDF (EPA:EDF) are demanding a 6% wage increase or they will go on strike while some German rail workers turned down an 11% rise, spread over time, because they wanted a shorter working week.Some Amazon workers in Spain staged walkouts during the crucial holiday season and Tesla has faced blockades in Nordic countries aimed at making it sign a collective bargaining agreement in Sweden.”At the moment the economic conditions are obviously conducive to strengthening the unions’ bargaining position,” Torsten Mueller, a researcher at the trade union institute, said. But Lucio Baccaro, also a professor at the Max Planck Institute, said such “wage militancy” could backfire if it caused the ECB to keep interest rates higher to curb demand.”If a wage-price spiral is triggered, or if the central bank fears that it is, it will intervene to cool off the economy,” he said. Baccaro advocated smaller but tax-free, one-off increases like those deployed by Germany, which are set to expire at the end of this year, adding they could be financed by taxes on excess corporate profits.So far there are few signs of a wage-price spiral, as ECB policymaker Mario Centeno pointed out. And most economists expect companies to absorb the higher wage costs this time – not least because of the overall stagnant outlook for the European economy.”Given that aggregate demand is more depressed now than in 2022-2023 also due to the rate hikes, firms might be more willing to allow this to happen to boost sales,” said Mattias Vermeiren, a professor at Ghent University.But the latest wage settlements have strengthened investors’ confidence that higher wage growth is here to stay. With rising trade protectionism reducing companies’ access to cheaper labour markets, that points to higher inflation and rates.”Labour is taking a greater share of the pie again,” Janus Henderson’s European equities portfolio manager Tom O’Hara said. “Labour and, related to that, deglobalisation are two of the strongest reasons why we think inflation persists in a way that means rates can’t just pivot back to zero.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.When it comes to giving pirates a hard time to keep the arteries of global trade flowing, the US is definitely your go-to country. For decades, America’s navy has patrolled the world’s shipping lanes to deter maritime marauders, a job deserving great credit.The Houthis, whose attacks on container ships and US navy vessels in the Red Sea have severely limited commercial traffic through the Suez Canal, are a much tougher challenge. The current situation underlines that the US’s most critical work protecting supply chains is in hard-edged geopolitical and military situations. But its motives are more strategic than economic, which can make its actions only ambiguously useful — and subject to political shifts.For a country that ostensibly cares little about the multilateral system — it hasn’t even ratified the UN’s Law of the Sea treaty — the US certainly provides some vital global public goods to defend it. The Center for Global Development think-tank says the US spends 0.21 per cent of gross national income on patrolling shipping lanes, three times higher than the UK in second place. True, in some pirate-infested regions like the seas off Somalia it has been joined by other dozens of other countries — including in the EU, which in 2008 launched Atalanta, its first-ever collective naval operation. Somali pirate attacks, of which there were once hundreds a year, have been virtually eliminated.But it’s relatively easy to assemble a posse to pursue criminals. Even the geopolitically fractured EU can unite behind a dislike of marine brigands; even Hungary’s disruptive prime minister Viktor Orbán isn’t actually pro-pirate.And the US actually provides the most benefit to the trading system where it’s dealing with state antagonists, such as China over Taiwan and Russia over Ukraine. Pirates off Somalia and in the Malacca Strait are a nuisance, but China invading Taiwan would play utter havoc by breaking the global semiconductor industry apart. The integrity and internal politics of the EU, never mind its ambitions to spread its single market eastward, would be plunged into turmoil by a destabilising conflict involving a hostile force along its eastern border.In these situations, the US is frequently an indispensable power but isn’t involved mainly to reap direct economic benefits. Washington has an interest in a united and prosperous Europe, but the marginal benefits to the US economy of pushing back Vladimir Putin hardly justify its sustained support to Ukraine. And Washington has backed Taiwan for decades, well before (with US help) it built a vital role in the electronics and semiconductor supply chain. US foreign policy may coincidentally be good for global trade in these cases, but it’s not necessarily by design.This brings us to events in the Red Sea. The Houthis are not a bunch of scruffy thieves in motorboats. They’re ideologically-motivated militants with land bases backed by a powerful state, Iran. They can inflict damage remotely through missiles and drones and are prepared to take heavy losses themselves.Their attacks are dealing a serious blow to global trade by reducing Suez Canal traffic, and few countries inside or outside the region are fans of them. But there’s a sense that the Houthis probably wouldn’t be attacking ships had the US not provided such support to Israel during its assault on Gaza. As such, given the widespread international condemnation of Israel’s tactics, the US has relatively few reliable allies prepared to join a shooting war. The US’s initial strikes on the Houthis also involved the UK, plus non-operational support from some longstanding allies, Australia, Canada and the Netherlands. But Bahrain was the sole contributor from the Middle East. The EU and other European countries say they will help, but mainly with support and escort operations.China and India, which both have a clear commercial interest in keeping the canal open, are not militarily involved. It’s Egypt above all which is suffering — its revenues from canal transit fees, a major source of foreign exchange, are down 40 per cent this year. But it daren’t publicly join an offensive against militants who declare support for the Palestinian cause. In other words, the US military is trying to keep a trade route open, but it’s motivated more by geopolitics than by direct economic interest — US trade relies more on the Panama Canal than on Suez — and its gang of allies is accordingly limited.Such motives are, worryingly, also affected by political changes in Washington. Protecting Europe from Russia and backing Taiwan against China have been consensus US policy for decades. But, as with so many security issues, another presidential term for Donald Trump might see this change.Trump has said he will withhold US backing for Ukraine, a move which will undoubtedly embolden China. And his isolationist instincts plus resentment at Taiwan supposedly taking semiconductor business from the US might encourage him to withdraw US support for Taipei.This could be catastrophic for the trading system, even more so than Trump’s protectionism. It shows the risk of having global trade underpinned by the US, which has a foreign policy only intermittently aligned with commercial interests. But with no other major trading or military power seemingly willing or able to take on its role in protecting vulnerable points in the global economy, that’s the risk the world is [email protected] More