Economy

Dan Davies is a managing director at Frontline Analysts, a research firm. He is the author of Lying For Money and is also available on Substack.Could it be . . . could it possibly be the case that a huge amount of economic punditry, comment and even policy was based on a simple data problem? Well yes, obviously, that happens all the time. Now it appears that “expansionary bankruptcy” might be on a factual footing almost as weak as “expansionary austerity”: a new study by the European Systemic Risk Board casts significant doubt on whether so-called zombie companies are anything like as great a threat to the economy as was previously feared.What is a zombie company? It’s annoyingly difficult to define in rigorous terms, so we’ll come back to that question. The underlying idea, though, is that it’s a lousy company that in some sense ought to have gone bankrupt, but which is continuing to pay wages and suppliers by taking out soft loans from an equally lousy bank that doesn’t want to admit that its client is bust. It’s often assumed that there are lots of these dysfunctional bank/corporate relationships in Japan and Europe, and that as well as being an aesthetic offence against the values of creative destruction, they have a sclerotic effect on the economy as a whole. Various research papers over the years appear to have found that when you have lots of zombies hanging around, more vital and efficient companies are starved of funding.This is, of course, a wholly different phenomenon from a lousy company which should never have existed in the first place but which is able to continue funding its losses by taking successive equity injections from venture capital firms who don’t want to admit that their investment is bust. That’s not a zombie, requires no investigation and certainly doesn’t have any crowding-out effects. Please don’t raise that question again.All previous work, however, has been carried out using aggregate measures of one kind or another, correlating the prevalence of zombies in an industry with various measures of output and inferring causation. The ESRB team, however, have access to AnaCredit, the analytical credit data set of the ECB. This is a map equal in size to the territory — it includes literally every business loan in the euro area since 2018 that was over €25,000 in size. When combined with an equally huge database of company accounts, it’s possible to see whether zombies do actually get special treatment.It turns out that they don’t. In general, zombie firms pay more for their credit than healthy companies, and are less likely to have new loans extended. Banks with a lot of zombie customers don’t seem to reduce their lending to healthy firms, and if anything they tend to reduce their pricing to their decent customers. If there is any negative effect of “zombification”, it has to work through much more circuitous channels; the zombies don’t starve healthy firms of finance.Or alternatively, there might not be any effect to measure. In an Appendix, the authors find that in any given year, there’s only about a 30 per cent chance that a company identified as a zombie on their criteria will still be considered a zombie next year — more than two-thirds of them either recover or go bust in the next twelve months. This is because the ESRB team has used a quite restrictive definition based on negative return on assets (unprofitability), negative change in fixed assets (to screen out growth companies and startups) and ebitda/financial debt less than 5 per cent (to pick up financial distress). Other studies, using different measures have much higher persistency rates.And this underlines the whole problem here — what you get out of the data is determined to a great extent by what you went looking for. Working with aggregate statistics is the professional deformation of empirical economics — like a geologist working with seismics, you have information that’s collected at a much lower resolution than the structure of the thing you’re hoping to understand, so you have to impose a theoretical framework on the data to draw a picture. That’s all fine, unless you forget you’re doing so, or get confused about whether the conclusions are coming from the data or from the framework you imposed.The idea that it’s a good thing for the economy when a company goes bankrupt is attractive to some economists for theoretical reasons. It’s true in some circumstances and, because it’s got that attractive whiff of brimstone, policymakers can feel like they’re being tough and taking the decisions that softie politicians don’t have the guts for. But there’s an alternative theory — that insolvency is bad, and that productive enterprises ought to be given as much of a chance as possible before winding them up — which is also true in some circumstances. The American economy, with a very borrower-friendly bankruptcy code, does well out of a system which closes down companies quickly, but that doesn’t necessarily mean that copying US foreclosure practices will get you US outcomes.And just as JK Galbraith defined the “acceptable rate of unemployment” as the rate that’s acceptable to those who have jobs, economists working for finance ministries and central banks don’t necessarily have as much skin in the game as you’d like when deciding what’s a temporarily troubled company and what’s a sclerotic basket case that needs to be taken to pieces for spare parts. If troubled European borrowers don’t affect credit availability for their healthy competitors, and have a better-than-even chance of recovering themselves, then there’s a disconcerting probability that what we’re looking at is not a zombie apocalypse, but rather a bunch of excitable policymakers who want to go round bashing their neighbours’ brains in with a shovel. More

The survey by Genial/Quaest showed that 53% of market players now think Brazil’s economy will improve in the next 12 months, up from just 13% in a May poll, while those who believe conditions will get worse plunged to 21% from 61%.The shift in opinion among a group that has typically been wary of the leftist president comes as the Lula administration secured support in Congress for bills seen as key to its plans to boost growth.Those include proposed tax reform, changes to tax trial rules and a new fiscal framework aimed at controlling explosive public debt growth.”This improvement has been driven by the work of Finance Minister Fernando Haddad,” Quaest director Felipe Nunes said. “Haddad’s performance has managed to convince markets the country’s economic policy is heading in the right direction.”While Lula’s own approval ratings continue to stutter, Haddad’s approval among market players jumped to 65% from 26%, with those who consider his work to be negative dropping to 11% from 37%.Markets were happy with the government’s decision to keep its 2026 inflation target at 3% while tweaking the time frame to assess its fulfillment, the poll showed. They also approve of central bank Governor Roberto Campos Neto’s performance.The growing optimism about Lula’s economic management is bad news for former President Jair Bolsonaro, who enjoyed support among some of Brazil’s finiancial elite. Bolsonaro is now barred from running for public office until 2030, leaving his former right-wing coalition scrambling for a new political vision. Quaest polled 94 fund managers, economists and analysts working for 67 different firms in Sao Paulo and Rio de Janeiro between July 6 and 10. More

(Reuters) -Inflation is slowing rapidly enough to allow the Federal Reserve to stop tightening U.S. monetary policy after what is still widely expected to be an interest-rate hike at its meeting in two weeks’ time, traders bet on Wednesday. Implied yields on futures tied to the U.S. central bank’s policy rate fell after a Labor Department report showed consumer prices last month rose 3.0% from a year earlier, a big step down from its 4.0% pace in May.Underlying inflation, whose persistence has been particularly worrying to Fed policymakers, eased more than expected to 4.8%. With that core inflation figure still more than twice the Fed’s 2% target, traders continue to overwhelmingly expect policymakers to increase the benchmark rate a quarter point, to a 5.25%-5.5% range, at their July 25-26 meeting. But they now see little more than a one-in-four chance of another rate hike before year’s end, down from a more than one-in-three chance seen before the report, futures prices show.”Clearly inflation is heading in the right direction, and this is showing that they’ve made significant progress in their battle to tamp it down,” said Art Hogan, chief market strategist at B Riley Wealth in Boston. “Even if they raise rates at the end of this month, that may likely be the last time.” More

Inflation fell to its lowest annual rate in more than two years during June, the product both of some deceleration in costs and easy comparisons against a time when price increases were running at a more than 40-year high.
The consumer price index increased 3% from a year ago, which is the lowest level since March 2021. On a monthly basis, the index, which measures a broad swath of prices for goods and services, rose 0.2%.

That compared to Dow Jones estimates for respective increases of 3.1% and 0.3%.

Stripping out volatile food and energy prices, core CPI rose 4.8% from a year ago and 0.2% on a monthly basis. Consensus estimates expected respective increases of 5% and 0.3%.
In sum, the numbers could give the Federal Reserve some breathing room as it looks to bring down inflation that was running around a 9% annual rate at this time in 2022, the highest since November 1981.
“There has been significant progress made on the inflation front, and today’s report confirmed that while most of the country is dealing with hotter temperatures outside, inflation is finally cooling,” said George Mateyo, chief investment officer at Key Private Bank. “The Fed will embrace this report as validation that their policies are having the desired effect – inflation has fallen while growth has not yet stalled.”
However, central bank policymakers tend to look more at core inflation, which is still running well above the Fed’s 2% annual target. Mateyo said the report is unlikely to stop the central bank from raising rates again later this month.

Fed officials expect the inflation rate to continue falling, particularly as costs ease for shelter, which makes up about one-third of the weighting in the CPI. However, the shelter index rose 0.4% last month and was up 7.8% on an annual basis. That monthly gain accounted for about 70% of the increase in headline CPI, the Bureau of Labor Statistics said.
“Housing costs, which account for a large share of the inflation picture, are not coming down meaningfully,” said Lisa Sturtevant, chief economist at Bright MLS. “Because rates had been pushed so low by the Fed during the pandemic and then increased so quickly, the Federal Reserve’s rate increases not only reduced housing demand — as intended — but also severely limited supply by locking homeowners into homes they would have otherwise listed for sale.”
Wall Street reacted positively to the report, with futures tied to the Dow Jones Industrial Average up nearly 200 points. Treasury yields were down across the board.
Traders are still pricing in a strong possibility that the Fed will enact a quarter percentage point rate hike when it meets July 25-26. However, market pricing is pointing towards that being the last increase as officials pause to allow the series of hikes to work their way through the economy.
The muted increase for the headline CPI came even though energy prices increased 0.6% for the month. However, the energy index decreased 16.7% from a year ago, a time when gasoline prices at the pump were running around $5 a gallon.
Food prices increased just 0.1% on the month while used vehicle prices, a primary source for the inflation surge in the early part of 2022, declined 0.5%.
Airline fares fell 3% on the month and now are down 8.1% on an annual basis.
The easing in the CPI helped boost worker paychecks: Real average hourly earnings, adjusted for inflation rose 0.2% from May to June and increased 1.2% on a year-over-year basis. During the inflation surge that peaked last June, worker wages had run consistently behind the cost of living increases.
This is breaking news. Please check back here for updates. More

WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen’s trip to China has raised hopes in Beijing that Trump-era tariffs on Chinese imports may be eased as she tries to smooth relations between the two nations, but strong anti-China sentiment in the U.S. may make that impossible.Trade and political analysts in Washington say that even though cutting some of the “Section 301” tariffs would help U.S. companies and consumers, as well as Chinese exporters, doing so would expose Biden to a buzz-saw of Republican criticism at a dangerous time. “The political calculus is pretty clear,” said Harry Broadman, a former White House, World Bank and U.S. trade official who is now a managing director with Berkeley Research Group. “That would be red meat for the opposition.” Looking soft on China could cost Biden the 2024 presidential election, he said, adding that anti-China sentiment in the U.S. in recent years is the highest he’s ever seen, fueled by former President Donald Trump’s China policies. HIGH HOPES IN CHINA Yellen discussed trade irritants and other policy differences with China’s top economic officials and Premier Li Qiang for a marathon 10 hours over two days last week — meetings that she said put U.S.-China ties “on surer footing.” U.S. tariffs and high technology export controls to Beijing’s new anti-espionage law that threatens the activities of U.S. companies in China were among the topics, the U.S. Treasury said. Yellen said nothing publicly to indicate that the U.S. was poised to ease tariffs, but commentators in China were hopeful, amid a U.S. Trade Representative review.In a statement on Monday, China’s Finance Ministry called for the U.S. to cancel punitive tariffs, roll back export curbs and end import bans from Xinjiang province. “Yellen has a say in the next phase of the U.S.’s four-year tariff review,” said Hong Hao, chief executive of Grow Investment Group in Hong Kong. “While U.S might continue its technological curbs on China, a reduction or exemption of non-core tariffs against China is possible.”China’s state-run Global Times, normally a harsh U.S. critic, called Yellen a “professional and pragmatic” official who could influence the Biden administration to take such steps to improve the economic relationship. Yellen last year advocated eliminating some duties on “non-strategic” goods as a way to ease some specific costs amid high inflation.But U.S. political pressure to raise China tariffs is growing, said Chad Bown, a trade economist with the Peterson Institute of International Economics who has researched them extensively.”There is no political appetite to reduce tariffs on China – Secretary Yellen will do well in this political climate if they manage to stay where they are,” Bown said.U.S. officials have been tight-lipped about any response to the Chinese call for action, noting that no new initiatives were under way. A U.S. Treasury spokesperson declined comment on tariffs.A USTR spokesperson said the agency was continuing its review and was evaluating feedback received, nearly seven months after it closed public comments.Collections of U.S. tariffs on Chinese goods peaked at $49 billion in fiscal 2022, bringing the total amount collected from U.S. importers over four years to $182.9 billion, according to U.S. customs data.U.S. imports from China had nearly reached their 2018 peak in 2022, but are down 24% so far this year. ENDLESS ‘GROVELING’Hardliners who dominate China discussions within the U.S. Republican party took to social media memes to mock Yellen for appearing to bow to Chinese vice premier He Lifeng at the start of a meeting. Firebrand Republican Senator Josh Hawley said in a tweet that such “embarrassing groveling to China is a historic mistake.”Republican presidential hopefuls have adopted confrontational rhetoric with respect to China, which they see as the nation’s top geopolitical foe.Florida Governor Ron DeSantis and former UN Ambassador Nikki Haley have laid out the most specific plans so far to confront China on trade, and advocate revoking China’s permanent normal trade relations status, a legal designation granted by the U.S. that lowers trade barriers with specific nations.Haley has said she would push Congress to revoke China’s trade status until China curbs its alleged role in the fentanyl trade. China is a major producer of chemicals required to create fentanyl, which is frequently smuggled over the U.S.-Mexico border.Former President Donald Trump, who leads the Republican field with DeSantis a distant second, told Reuters that he would give China 48 hours to remove what sources say is Chinese spy capability on the island of Cuba 90 miles off the U.S. coast. If China fails to comply, his administration would impose new tariffs.(This story has been refiled to add missing words in paragraph 4) More

US inflation dropped to 3 per cent in June, lower than expected, in the latest sign that the Federal Reserve’s interest rate rises are having an effect on price pressures.The annual increase in the consumer price index slowed from 4 per cent in May to 3 per cent, the slowest rate of inflation since March 2021.Prices increased 0.2 per cent on a monthly basis in June, up from 0.1 per cent the previous month but less than economists had forecast. The annual figure was further helped by so-called base effects, as extremely large rises from June 2022 drop out of the calculations. There was a more modest dip in the “core” CPI, which slowed to an annual rate of 4.8 per cent in June from 5.3 per cent. Core prices, which strip out volatile food and energy costs, rose 0.2 per cent month on month, compared with 0.1 per cent in May.

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The headline rate of inflation has been moving closer to the Federal Reserve’s 2 per cent target after peaking at more than 9 per cent last June. However, core inflation has proven more sticky, raising expectations that the US central bank will need to lift interest rates further.The Fed has raised its benchmark interest rate to a range of 5-5.25 per cent from close to zero at the start of 2022. Officials kept rates steady at their most recent policy meeting in June, to take stock of the effect of previous rises, but have made clear that they expect further increases before the end of the year.Labour market data released last week also suggested that the Fed’s aggressive rate rises were beginning to cool the economy, with jobs growth slowing. However, it also highlighted continued inflationary pressures, with unemployment still close to a multi-decade low and wages growing well above the levels considered consistent with the Fed’s target inflation rate.In response to the CPI data, the two-year Treasury yield, which moves with interest rate expectations, fell to its lowest level in two weeks. In the futures market, traders pulled back slightly from bets on higher interest rates in the second half of this year, though an increase from the Fed is still expected in July. US stock market futures rose, tipping the S&P 500 to open about 0.7 per cent higher.Additional reporting by Kate Duguid in New York More

ISLAMABAD (Reuters) – Pakistan’s Prime Minister Shehbaz Sharif said he was optimistic that the International Monetary Fund will approve a $3 billion bailout at its board meeting on Wednesday. Pakistan and the Fund reached a staff level agreement last month, securing much-needed funding for the cash-starved country.The agreement needs the board’s approval before disbursing $1.1 billion upfront and the rest of the money in instalments.”The meeting is happening today,” Sharif said at an event in Islamabad. “I hope the board will approve the programme. This programme will help Pakistan’s economy to stabilise.”The nine-month short-term lifeline for Pakistan’s ailing economy, which has been on the cusp of default, came after eight months of tough negotiations over fiscal discipline. The $350 billion South Asian economy faced a crippling balance of payments crisis, with its central bank’s reserves barely enough to cover a month of controlled imports.The IMF board approval will also unlock other bilateral and multilateral external financing for Pakistan.Beijing rolled over $5 billion of Pakistan’s loan in the last three months, which Sharif said he believed played a major role in averting the debt default.Saudi Arabia deposited $2 billion in support funds with the central bank on Tuesday. Fitch credit rating agency on Monday upgraded Pakistan’s sovereign rating to CCC from CCC-, and the bailout has brought relief to investors in the country’s stocks and bonds. More

German business morale has been deteriorating, suggesting that Europe’s largest economy will struggle to shake off recession.”The economy needs stimulus – rarely has this been so urgent as now,” finance minister Christian Lindner tweeted on Wednesday.The tax relief plan will be part of the draft Growth Opportunities Act, which Lindner has proposed to make Germany more competitive as a business location amid a loss of appeal due to high energy prices and burdensome bureaucracy.The draft legislation includes a total of almost 50 tax policy measures, mainly aimed at small and medium-sized enterprises, the sources said.There is also a provision to incentivise companies to invest in climate protection.This will offer companies certain tax benefits between 2024 and 2027 if they make climate friendly investments, the sources said.Lindner’s package also provides stronger tax incentives for research. It also would allow companies to offset more losses against profits from other financial years and make it possible to take write-offs for low-value assets more quickly.The Federation of German Wholesale, Foreign Trade and Services (BGA) welcomed the plans. “Tax simplifications and better depreciation options are important incentives for more investment in Germany,” said BGA President Dirk Jandura.($1 = 0.9074 euros) More