Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Christine Lagarde has said the European Central Bank is likely to discuss speeding up the shrinkage of its balance sheet by ending the last of its bond purchases earlier than planned.The ECB president’s comments at a hearing in the European parliament on Monday are the clearest sign to date that the bank is preparing to further tighten monetary policy — beyond its earlier interest rate rises — by reducing the amount of bonds it plans to buy next year.Several of the more hawkish members of the ECB have been calling for these reinvestments to end, saying the extra monetary stimulus is inconsistent with efforts to tame inflation by raising rates. They also point out that the pandemic crisis that initially justified the purchases has clearly ended. The ECB stopped much of its bond-buying last year. But it is still reinvesting the proceeds of maturing securities in the €1.7tn portfolio it started buying in response to the pandemic and has set out plans to continue doing so until at least the end of next year.“This is a matter which will come probably for discussion and consideration within the governing council in the not too distant future and we will re-examine possibly this proposal,” Lagarde told MEPs.However, the reinvestments in the pandemic emergency purchase portfolio (PEPP) are useful for the ECB because it has the flexibility to skew them towards the debt of any particular country suffering a widening of its borrowing costs compared with others. Some of the more dovish policymakers have argued against abandoning this “first line of defence” against financial fragmentation at a time when investors are becoming increasingly nervous about stagnant growth and high debt levels in many European countries, such as Italy.The ECB’s overall bond holdings represent about 30 per cent of all eligible debt in the eurozone. It has already ended reinvestments in its €3tn asset purchase programme — a separate pool of assets it started buying in 2015. Lagarde said this so-called quantitative tightening had led to its balance sheet shrinking by €23bn a month on average this year. Francesco Maria Di Bella, a fixed-income analyst at Italian bank UniCredit, estimated the ECB would buy bonds worth €180bn next year as part of its planned PEPP reinvestments.While falling government deficits in many countries are expected to reduce the supply of bonds being sold next year, the “net supply that has to be absorbed by markets is set to rise due to the ECB’s quantitative tightening”, he said in a note to clients. “The picture could become more challenging if the ECB decides to start to run off of its PEPP portfolio.”Most analysts expect the ECB to stagger the reduction of its PEPP reinvestments rather than halting them abruptly, to avoid spooking investors. Jens Eisenschmidt, chief European economist at Morgan Stanley, has forecast the ECB will cut PEPP reinvestments by half for six months in April before ending them completely in October. He calculated this would shrink the central bank’s bond portfolio by €87bn by the end of next year and €258bn by the end of 2025.The total balance sheet of the ECB and the national central banks that make up the Eurosystem has shrunk from almost €9tn to €7tn since last year, largely due to the repayment of cheap loans extended to banks in the pandemic. However, at more than 60 per cent of eurozone gross domestic product, the ECB has a bigger relative balance sheet than either the US Federal Reserve or the Bank of England, both of which have already completely stopped bond purchases. More

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This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every MondayWelcome to Trade Secrets. The big COP climate change conference starts in Dubai on Thursday. Along with it comes the familiar (and well-justified) concern that trade and aid, which ought to be helping in the drive to reduce emissions, aren’t well co-ordinated with climate policy. Today’s newsletter assesses that and particularly the way the EU’s environmental trade tools may inadvertently be hurting low-income countries. Charted waters focuses on the limited impact of the Israel-Hamas conflict, as seen in the currency markets.Get in touch. Email me at [email protected] sprouts more red tape for farmersThe two tribes of trade and climate policymakers have never connected properly. They have different vocabularies, principles, treaties and institutions. Even with the future of the planet at stake, this isn’t changing fast enough. Optimists say this COP is the first to feature a “trade day” of dedicated discussions and a “trade house pavilion” where wonks can hang out and talk about local content requirements for electric vehicle production and other such riveting matters. But proper environmental negotiations barely exist at the World Trade Organization or anywhere else, so it’s hard to see how these discussions will feed into a binding multilateral or plurilateral process.Enter, with a reasonably convincing air of regret at being forced down this unilateral (sorry, “autonomous”) route, the EU. Brussels has a new array of green trade measures, principally the carbon border adjustment mechanism (CBAM) and a deforestation initiative banning products from recently cleared land.Those instruments are causing serious alarm among low-income countries. Particular cases such as the likely impact of CBAM on Mozambique, a least-developed country (LDC) with heavy carbon emissions from its aluminium smelters, are now well known, though that’s not to say the EU actually has a plan for softening the blow. It has decided not to exempt LDCs from CBAM using the WTO’s so-called enabling clause, and though it talks about aid helping countries adjust, no one’s ever really managed to make development assistance cohere with trade. Certainly, the EU aid operation isn’t the nimblest.In any case, a far broader problem is that even countries that objectively meet the criteria still have to compete with the European Commission’s formidable red tape manufacturing industry. Jodie Keane of the UK Overseas Development Institute think-tank (see a good ODI seminar on the issue here) calls this part of the “green squeeze”.The deforestation initiative, for example, requires geolocation satellite imagery to prove products aren’t grown or raised on deforested land, and the produce to be tracked through the supply chain. A group of 17 low and middle-income countries including Brazil, Indonesia, Nigeria and Mexico complained to the EU in September (see the following clip) that compliance was too complicated and their own measurement and certification schemes were ignored. As I’ve written before, detailed compliance is one thing if you’re a highly mechanised agribusiness giant; it’s quite another if you’re one of the millions of Indonesian palm-oil smallholder growers. As for CBAM, the EU demands emissions be assessed by one of two EU-approved methods: even the US, let alone less advanced economies, has different ways of measuring them.It’s probably not helped that the commission’s globally focused trade directorate hasn’t been in the lead on creating either instrument. CBAM is led by the tax directorate, and deforestation by the environment directorate, both of which are less used to designing systems for non-EU countries to use.The next couple of years will be crucial. Companies importing into the EU are already having to start reporting carbon emissions ahead of CBAM duties first being levied in 2026. The deforestation ban. which has big potential fines for transgressors, starts coming in at the end of 2024. There will be fierce agitation from producers abroad to tweak the schemes and potentially WTO cases that might loosen the restrictions. The EU’s not going to give way on the principle here, but there’s a lot to be gained from lobbying it hard on the process.Food miles: a bad idea returnsRest assured, though: in the absence of precision-targeted data-informed green trade policy, there’s always the knee jerk version instead. It’s with sadness I observe the comeback of a persistent, bad idea in development economics, “food miles”. Bans on airfreighted food in particular are spreading, as ESG virtue-signalling claims more victims.Assuming the carbon footprint of food is closely proportional to the literal distance from farm to fork, or even whether it’s carried by air, is a bad idea that clobbers low-income countries.What you eat (meat bad, grains and veg good) and how it’s raised or grown (roses in the Kenyan sun rather than in heated Dutch greenhouses) can matter more than where it’s from or how it got there. (See a video I did on this a few years ago). Average versus marginal calculations can really matter: the famous east African flower and fruit exports traditionally fill up otherwise fairly empty air cargo compartments returning to Europe anyway, sub-Saharan Africa being a net importer of manufactures. But still, an airfreight ban is an easy idea for consumers to grasp. Along with equally clumsy ideas such as a blanket ban on palm oil, no matter how it’s harvested, it looks good and sounds decisive. Now, it’s true that some recent research across the whole food system suggests the cost of transporting it was a lot more carbon-intensive than previously thought. But that’s an argument for doing precise calculations product by product, not banning airlifted food because it sounds like you’re getting tough on climate change.Charted watersFurther evidence that, with the Hamas attacks and Israeli response in Gaza having as yet failed to trigger wider instability in the region, the local and global impact on growth and trade is likely to be muted. The Israeli shekel fell sharply after the Hamas assault on October 7, causing the central bank to intervene to support the exchange rate, but has now strengthened above the pre-attack level.Trade linksResearch from the Peterson Institute think-tank suggests that foreign businesses are increasing the long-awaited process of selling their investments in China and taking the money out of the country.More well-judged transatlantic stalling for time as the EU and US, who are already spinning out talks on their steel dispute for another couple of years, are planning to delay December’s planned bilateral Trade and Technology Council into 2024. Anything to avoid public dust-ups with a US election coming up.China resumed exports, albeit at a low level, of gallium and germanium, two metals whose sales abroad it banned in August. The price of the commodities barely moved despite the export bans, suggesting China’s ability to exert leverage through its control of mineral supply is limited.Speaking of minerals, the whole scramble-for-lithium (and indeed other critical minerals) thing could diminish before long as the Swedish start-up Northvolt makes a breakthrough on developing a sodium ion battery. Bad news for China and Chile, good news for most other countries.Speaking of minerals again, an interesting big piece from the FT on how the extractives multinational Anglo American is hoping to conquer the world fertiliser market with polyhalite, a substance it mines from deep under Yorkshire in northern England.Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youEurope Express — Your essential guide to what matters in Europe today. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More

WASHINGTON (Reuters) – Electric vehicles are a “hoax,” they do not work, and they are strengthening China’s economy at the expense of American jobs.     Those are among the criticisms that contenders for the 2024 Republican presidential nomination, including former President Donald Trump and Florida Governor Ron DeSantis, have leveled on the campaign trail in recent weeks.     But while EVs have emerged as a common foe for Republicans seeking the country’s top job, they are increasingly a source of tax revenue and employment in the states that will determine the winner of the 2024 presidential election.      That has created a potential opportunity that President Joe Biden and some Democratic congressional candidates are seeking to exploit to win support before next November’s vote, according to 25 Democratic and Republican strategists, local officials, labor leaders and a review of campaign literature.There have been roughly $128 billion in investments in domestic EV and battery manufacturing announced since the 2022 passage of the Inflation Reduction Act, or IRA. That law, supported by Biden and congressional Democrats, created tax credits to boost domestic EV manufacturing. Of that investment, $48 billion  – or one third – has taken place in Georgia, Arizona, Nevada and Michigan, according to an analysis done by advocacy group Climate Power at Reuters’ request. Those four states, along with Wisconsin, Pennsylvania and North Carolina, are the arguably the most competitive in the country.(GRAPHIC: )In those seven states combined, Trump holds a 41% to 35% lead over Biden, meaning the race is extremely tight when the credibility interval is considered, according to a September Reuters/Ipsos poll. About 24% of respondents said they were not sure how they would vote or planned to vote for someone else. Other surveys have indicated a dead heat in some of those states, meaning both Democrats and Republicans will be attuned to any angle that could give them even a slight advantage.Mike Morey, a partner at public affairs and political consulting firm SKDK, said EV investments promoted by the Biden administration could make a significant difference.”It’s pretty hard to ignore. We’re talking about billions of dollars (in investments),” he said.The key for Democrats, he said, will be focusing on how Democratic legislation has created jobs, not on EVs themselves.”You just need to sell jobs to independents and the rest of the country,” he said. “The point is that they’re manufacturing jobs, whether they be baskets or batteries.”Trump leads the race for the Republican 2024 nomination by a wide margin. Biden has touted the IRA in recent television ads and has visited a pair of manufacturing facilities since August that build EVs and charging stations.Clean Energy for America, an advocacy group close to Democrats, is running ads in Michigan, Georgia and North Carolina featuring workers talking about the benefits of the IRA, said its executive director, Andrew Reagan. Kirsten Engel, a Democratic candidate in a sun-baked southern Arizona district laced with EV facilities, said she planned to frequently discuss how Democratic legislation has attracted EV jobs to the region, and that it had already come up in initial conversations with voters.”It’s a top issue in the campaign,” she said.”BIG BLUE PLASMA BEAM”Since 2015, EV and battery supply chain investments in America have topped $165 billion, most of it occurring in the first year of the IRA, according to the Environmental Defense Fund and consulting firm WSP. The IRA affords a tax credit to purchasers of EVs assembled in North America, while also incentivizing clean energy projects, like solar and wind farms – part of the Biden administration’s broader strategy to fight climate change.Cheap land, low power prices, local tax incentives and solid infrastructure lured many of these projects to states that, out of happenstance, are political battlegrounds.More recently, high interest rates have dampened demand for EVs, prompting some manufacturers to scale back expansion plans. But domestic EV sales remain relatively strong, topping 300,000 units for the first time in the third quarter. EVs are expected to make up nearly 50% of car sales in America by 2030, according to an analysis by the non-profit RMI.In some communities where EV manufacturing has made an impact, it can be difficult to find a Republican who speaks ill of the industry’s local growth, even if they are wary of the underlying technology.”I don’t know if I’ll go around on a lithium battery, so if I’m in a wreck I burn in a big blue plasma beam,” said Jesse Williams, the head of the Republican Party in Decatur County, Georgia.Still, he supports an $800 million EV battery plant under construction in his community – and has no problem with tax credits that help bring the plant to what he describes as a “low-income” area.On the presidential campaign trail, Republicans have struck a different tone. They have made clear they see IRA subsidies as government overreach, while expressing concern that minerals vital for EV manufacturing, like graphite and manganese, often originate in China.Trump and other Republicans, who tend to back traditional energy sources like oil and coal along with gasoline-powered cars and trucks, have also appealed to the anxieties of the United Auto Workers union. Many UAW members are wary of EVs as they require less labor to assemble than combustion engine vehicles. While the UAW is strong in Michigan, the union is weaker in the South and Southwest.”Joe Biden’s electric vehicle obsession helps China, hurts American consumers and families, and is a pathetic non-solution to skyrocketing gas prices under his watch,” said Anna Kelly, press secretary for the Republican National Committee.A Trump spokesperson pointed Reuters to a recent policy announcement in which the former president said EV manufacturing would harm workers. “What’s happening to our auto workers is an absolute disgrace and an outrage beyond belief,” Trump said.The DeSantis campaign did not respond to a request for comment, though he has been consistently critical of EVs.”Why would you want to knowingly make this country more dependent on what goes on in China?” DeSantis said in July.Biden’s campaign pointed Reuters to a statement from Kevin Munoz, a campaign spokesman, who said Trump’s plan would mean more Chinese EV manufacturing jobs and fewer American jobs.”Simply put: Trump had the United States losing the EV race to China and if he had his way, the jobs of the future would be going to China,” Munoz said.Some elected Republicans at the state level are approaching EVs with decidedly more nuance, which can complicate Democrats’ messaging efforts.Brian Kemp, the Republican governor of Georgia and a Trump adversary, opposes the IRA. But he has touted state-level tax credits that have brought EV manufacturers in-state, and has said he wants Georgia to be the “electric mobility capital” of America.That means Democrats will need to work hard to illustrate the role their legislation played in EV development in the state, said Wendy Davis, a Democrat from Rome, Georgia, who has held multiple local positions.Engel, the Democratic congressional candidate in Arizona, is facing off against Republican Representative Juan Ciscomani in 2024. Ciscomani has been the target of attack ads in recent months related to his opposition to the IRA, paid for by Climate Power and the League of Conservation Voters.Still, Ciscomani, who did not respond to comment requests, has generally welcomed individual EV projects, and toured a local EV plant in August.”We will be talking about my opponent’s votes against these investments,” Engel said. More

The cabinet will also try to present a 2024 budget by the end of the year, the spokesperson said, adding that if this did not work out, the plan was to agree a budget in January.The cabinet would base its reasoning for a renewed suspension of the country’s debt brake on 2022 reasoning, the spokesperson added, speaking at a regular press conference in Berlin.Chancellor Olaf Scholz’s government was forced to freeze most new spending commitments after the constitutional court blocked plans to repurpose unused pandemic funds towards green projects and industry subsidies, wiping billions from the federal budget. More

WASHINGTON (Reuters) – Economists who have studied employment during the recovery from the coronavirus pandemic agree that Black, Hispanic, and less-educated workers saw outsized gains relative to whites or college degree holders whose fortunes typically outpace others.But as the demand for workers begins to ease, they are also hoping the U.S. may break the historic pattern where the burden of rising joblessness falls most heavily on those same groups.After an initial half-percentage-point rise in the unemployment rate from the historically low 3.4% in April, there is reason for optimism, but also a dose of developing concern, said William M. Rodgers III, vice president and director of the Institute for Economic Equity at the St. Louis Federal Reserve.So far, he said at a Boston Fed labor market conference earlier this month, measures like the employment-to-population ratio largely have not behaved differently for key racial groups, for women versus men, or among those with different education levels.Through what he calls the current “tight labor market recovery period,” beginning in March 2022 and coinciding with both the start of Fed interest rate increases and a run of below-4% unemployment, less advantaged groups have held onto employment gains made during the pandemic recovery.The employment-to-population ratios for Black men and Black women, for example, remained on average higher from March 2022 through September 2023 than they were before the health crisis. The employment-to-population ratio for those aged 25 and over without a high school diploma has trended higher in recent months even as it has flatlined for those with more education. For younger workers, however, and particularly for younger Blacks not enrolled in school, job outcomes have begun to worsen in what Rodgers said is a possible sign that whatever benefits the current tight labor market has provided to those at the margins of the economy, they may not be permanent.For most segments of the population “we’re not seeing an appreciable increase in their jobless rates, which is good news” as job openings fall and the demand for workers cools, Rodgers said. But the “sobering news,” he added, was a recent rise in joblessness for younger people.Rodgers is not alone in his concern. Torsten Slok, chief economist at Apollo Global Management (NYSE:APO), said the jump in the unemployment rate for 16- to 19-year olds, from 9.2% in April to 13.2% in October, warranted a close watch as “a leading indicator of broader labor market weakness.”REAL WAGE GROWTHFaced with the worst breakout of inflation in 40 years, the Fed raised interest rates aggressively from March 2022 through this past July and now seems to have reached the peak of its tightening cycle.Throughout that process, policymakers have hoped to engineer a return from the fast pace of price increases to the Fed’s 2% inflation target while leaving the employment gains of recent years intact. Fed Chair Jerome Powell has often pointed to 2019, the year just before the pandemic, as a sweet spot for the U.S. economy, with the unemployment rate steadily below 4%, inflation remaining low, wage gains flowing to less well-paid workers, and a narrowing of the longstanding unemployment wedge between whites and racial and ethnic minorities.The performance of the economy during that period led many Fed officials to revise their thinking about how low the unemployment rate might fall without posing a risk of wages rising so fast they triggered broader inflation. Research has since tended to suggest that there may be untapped pools of labor that only become available when the job market is tight – an argument for keeping monetary policy looser than not.In the face of a marked slowdown in inflation, the Fed will see in the coming months whether it has in fact pulled off an elusive “soft landing,” and in particular whether the experience of the pandemic – when enormous fiscal stimulus was followed by a massive reshuffling of the job market – has done anything to change the basic distribution of jobs, income and opportunity across the economy.A study by the JPMorgan Chase (NYSE:JPM) Institute released earlier this month, for example, found that median income gains for Blacks and Hispanics had outpaced inflation even during the breakout price increases of the pandemic era, with inflation-adjusted incomes higher through August than at the end of 2019. Inflation-adjusted incomes for whites and Asians, by contrast, were slightly lower.Workers in the bottom pay quartile also saw median “real” income gains of 6% since 2019, more than the rest of the income distribution.Despite inflation “we still see real wage growth, and it’s higher for Black and Hispanic families,” said the institute’s president, Chris Wheat, adding that the difference may be driven by things like the change in the occupational and wage mix during the pandemic, when in-person services required higher wages to lure people back to work, and an increase in workers’ bargaining power in general.’REMARKABLY EQUITABLE’Findings like that have given some hope that the gains can persist this time, rather than be lost under the last-hired-first-fired dynamic that typically occurs, Cecilia Rouse, the former head of the Council of Economic Advisers under President Joe Biden and incoming president of the Brookings Institution think tank, said at this month’s Boston Fed conference.The labor market recovery so far has been “remarkably equitable,” she said. But the next few months may be telling. After surging at the start of the pandemic for example, the gap between the unemployment rate for whites and Blacks fell quickly as the economy reopened and hit a record low of 1.6 percentage points in April.It has since risen to 2.3 points, and the percentage rise in the number of Blacks who are unemployed has been nearly double that of whites. Pandemic-era programs threw a safety net under many families, and the tight job market that has since developed helped many get a foothold, Rouse said.”Will this last and what’s to come?” she said. “You can already see that we’re losing a little bit of ground.” More

Deutsche Bank analysts predict that these changes will lead the Monetary Policy Committee (MPC) to revise its government spending projections upwards for 2024, which could result in an improved growth forecast for that year. This comes against a backdrop of near-zero growth expectations set by the Bank of England over a two-year period.The Office for Budget Responsibility (OBR) offers a more optimistic outlook, projecting growth rates of 0.7% and 1.4% over the coming years. The OBR also estimates that Chancellor Hunt’s policies will provide a notable long-term output boost of 0.3%, a significant figure given the current challenges in accelerating UK growth rates. This enhancement was underscored by Richard Hughes, who acknowledged the difficulties in boosting the country’s economic expansion.However, these fiscal changes have raised concerns about inflation, leading analysts from Capital Economics to suggest that interest rate cuts by the Bank of England might be delayed until late 2024. This adjustment in expectations marks a shift from earlier predictions of rate cuts in the first half of 2024, as indicated in the Bank’s February forecast. The current interest rate stands at 5.25%, with the timing of any reductions now uncertain due to these inflationary pressures.In summary, Chancellor Hunt’s £18 billion fiscal package aimed at tax relief could potentially lead to an uplift in UK economic growth forecasts for 2024, despite ongoing concerns about inflation and interest rate adjustments.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

A team of IMF experts arrived in Islamabad today, embarking on formal discussions with Pakistani officials. The consultations are centered on strategies to incorporate high-income earners into the tax net and separate tax administration from policy-making processes. The IMF’s push for a higher tax-to-GDP ratio is driving these reforms.The FBR, with guidance from the IMF, is working on a Compliance Improvement Plan slated for completion by March next year. This plan includes the use of third-party data and the development of analytical tools, such as a Risk Register Report that was finalized last December. These initiatives aim to leverage financial and national identity databases to increase the number of taxpayers to a targeted 6.5 million by June 2024.On December 7, the IMF Executive Board is expected to approve a staff-level agreement that could lead to a disbursement of $700 million to Pakistan. This sum would be part of a larger program aiming at disbursing approximately $1.9 billion cumulatively.The joint efforts between the IMF and the FBR are set to draft amendments that will add one million new taxpayers, raising the total to six million in anticipation of the next fiscal budget. These measures are indicative of Pakistan’s commitment to reforming its tax system and ensuring sustainable economic growth.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More