Economy

Two years ago, the government said it would try to anchor expenditure growth to the growth rate of the economy, at around 5% per year, but suspended that policy this year with a 6.5% increase.Finance Minister Michael McGrath said the proposed spending increases “will allow the government to provide the level of investment that we believe is necessary to maintain public services and protect incomes, without adding unduly to inflationary pressures”. “The rule has to be flexible, it has to be adapted to meet the circumstances of the time”, he said.The finance ministry estimated in April that one of the few current budget surpluses in Europe would reach 6.3% of national income by 2026 thanks to soaring corporate tax receipts, meaning the state’s finances can easily fund additional budget spending.However Ireland’s central bank and independent fiscal watchdog had both urged the government to stick to the 5% spending rule, with the central bank warning that it risked “significantly” adding to inflation and overheating the economy.While Irish inflation has halved in the last nine months to 4.8%, according to preliminary data last week, core inflation is stuck at 5.7% and the central bank only expects the closely watched underlying measure to peak later this year.The Irish economy is also expected to expand strongly again this year after being the fastest growing across the EU in 2022, with unemployment recently falling to a record low of 3.8%.($1 = 0.9175 euros) More

In high-income countries, consumer price inflation is running at rates not seen in four decades. With inflation no longer low, neither are interest rates. The era of “low for long” is over, at least for now. So, why did this happen? Will it be a lasting change? What should the policy response be?Over the past two decades, the Bank for International Settlements has provided a different perspective from those of most other international organisations and leading central banks. In particular, it has stressed the dangers of ultra-easy monetary policy, high debt and financial fragility. I have agreed with some parts of this analysis and disagreed with others. But its Cassandra-like stance has always been worth considering. This time, too, its Annual Economic Report provides a valuable analysis of the macroeconomic environment.

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The report summarises recent experience as “high inflation, surprising resilience in economic activity and the first signs of serious stress in the financial system”. It notes the widely held view that inflation will melt away. Against this, it points out that the proportion of items in the consumption basket with annual price rises of more than 5 per cent has reached over 60 per cent in high-income countries. It notes, too, that real wages have fallen substantially in this inflation episode. “It would be unreasonable to expect that wage earners would not try to catch up, not least since labour markets remain very tight,” it asserts. Workers could recoup some of these losses, without keeping inflation up, provided profits were squeezed. In today’s resilient economies, however, a distributional struggle seems far more likely.

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Financial fragility makes the policy responses even harder to calibrate. According to the Institute of International Finance, the ratio of global gross debt to GDP was 17 per cent higher in early 2023 than just before Lehman collapsed in 2008, despite the post-Covid declines (helped by inflation). Already rising interest rates and bank runs have caused disruption. Further problems are likely, as losses build up in institutions most exposed to property, interest rate and maturity risks. Over time, too, households are likely to suffer from higher borrowing costs. Banks whose equity prices are below book value will find it hard to raise more capital. The state of non-bank financial institutions is even less transparent.Such a combination of inflationary pressure with financial fragility did not exist in the 1970s. Partly for this reason, “the last mile” of the disinflationary journey could be the hardest, suggests the BIS. That is plausible, not just on economic grounds, but on political ones. Naturally, the BIS does not add populism to its list of worries. But it should be on it.So, how did we get into this mess? We all know about the post-Covid supply shocks and the war in Ukraine. But, notes the BIS, “the extraordinary monetary and fiscal stimulus deployed during the pandemic, while justified at the time as an insurance policy, appears too large, too broad and too long-lasting”. I would agree on this. Meanwhile, financial fragility clearly built up over the long period of low interest rates. Where I disagree with the BIS is over whether “low for long” could have been avoided. The Bank of Japan tried in the early 1990s and the European Central Bank in 2011. Both failed.Will what we are now experiencing prove an enduring shift in the monetary environment or just a temporary one? We just do not know. It depends on how far high inflation has been just the product of supply shocks. It depends, too, on whether societies long unused to inflation decide that bringing it back down is too painful, as happened in so many countries in the 1970s. It depends, as well, on how far the fragmentation of the world economy has permanently lowered elasticities of supply. It depends not least on whether the era of ultra-low real interest rates is over. If it is not, this could indeed be a blip. If it is, then significant stresses lie ahead, as higher real interest rates make current levels of indebtedness hard to sustain.Finally, what is to be done? The BIS believes in the old-time religion. It argues that we have put too much trust in fiscal and monetary policies and too little in structural ones. Partly as a result, we have pushed our economies out of what it calls “the region of stability”, in which expectations (not least of inflation) are largely self-stabilising. Its distinction between how people behave in low inflation and high inflation environments is valuable. We are now at risk of moving durably from one to the other. Developments over the next few years will be decisive. This is why central banks must be rather brave.

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Yet I remain unpersuaded by all tenets of this faith. The BIS argues, for example, that policymakers should have been more relaxed about persistently low inflation. But that would have significantly increased the chances that monetary policy would be impotent in a severe recession. It argues, too, that macroeconomic stabilisation is not all that important. But prolonged recessions and high inflation are at least equally intolerable. Moreover, a stable macroeconomic environment is at the least helpful to growth, since it makes planning by business so much easier.Above all, I remain unconvinced that the dominant aim of monetary policy should be financial stability. How can one argue that economies must be kept permanently feeble in order to stop the financial sector from blowing them up? If that is the danger, then let us target it directly. We should start by eliminating the tax deductibility of interest, increasing penalties on people who run financial businesses into the ground and making resolution of failed financial institutions work.Yet the BIS always raises big issues. This is invaluable, even if one does not [email protected] Martin Wolf with myFT and on Twitter More

Lula has criticized some of the European Union’s requests for the deal, including an addendum attaching sustainability and climate change commitments and introducing penalties for nations failing to comply with climate goals.”We don’t want impositions on the Mercosur,” Lula said in a live broadcast on social media. “It’s a deal of strategic partners, so one cannot threaten the other. Let’s sit down and work out our differences.”The European Commission and the South American bloc struck the deal in 2019 after lengthy negotiations, but it was then put on hold largely due to European concerns over Amazon (NASDAQ:AMZN) deforestation.Leaders of the Mercosur gather for a summit in Argentina on Tuesday, with Brazil set to take the group’s temporary presidency for the next six months.The Brazilian leader said he would work for the deal to be completed in that period, despite calling some of the European Union’s demands “unacceptable”.In addition to fearing environmental sanctions, Lula has also been a vocal critic of a procurement clause allowing European companies to sell to Brazil’s public sector, which he says could “kill” some Brazilian companies.Lula recently met with French President Emmanuel Macron and European Commission President Ursula von der Leyen to discuss the deal.Von der Leyen visited Latin America in June and said she hoped the deal would be finalized by the end of the year at the latest.”The European Union made a proposal, we sent a response, then they sent a letter imposing some conditions that we don’t accept,” Lula said. “We are now preparing a response letter saying what we want so the agreement can be consolidated.” More

“Increased interest rates must also be passed on to savers,” Hunt said on Twitter. “@TheFCA (The Financial Conduct Authority) has my full backing to ensure banks are passing on better rates as they should be.”Britain’s main banks meet with the FCA on Thursday to discuss how they are passing on rate increases to savers, a person familiar with the meeting said on Tuesday.Parliament’s Treasury Select Committee on Monday said it had written to Britain’s “Big Four” banks – Barclays (LON:BARC), HSBC, Lloyds (LON:LLOY) and NatWest – asking if they believed their savings rates provided “fair value” and if customer inertia, or reluctance to change accounts, was being exploited.The FCA was already due to report by the end of July to the committee on how well banks are supporting savers.Separately, banks have agreed with Hunt to a “charter” on helping people struggling to pay their mortgages as a cost-of-living crisis hits Britain.Thursday’s meeting is not expected to lead to a “charter” on passing through rate hikes to savers, the person said. More

LONDON (Reuters) – The world’s major central banks delivered in June the biggest number of monthly interest rate hikes year-to-date, surprising markets and flagging more tightening ahead as policy makers grapple to get the upper hand in their battle against inflation. Seven of the nine central banks overseeing the 10 most heavily traded currencies that met in June hiked rates, while two opted for no change, Reuters data showed. Both Norway and the Bank of England surprised markets last month with a larger-than-expected 50 basis points move, while Canada and Australia resumed their rate hiking cycles. Sweden, Switzerland and the European Central Bank also tightened policy, taking the total monthly tally of hikes to 225 basis points last month. May had seen six rate hikes across six meetings. “While some central banks are seeing initial progress toward lower inflation, central bankers overall continue to face a tough balancing act,” said Tiffany Wilding, economist at PIMCO.”Without fiscal policy ready to save the day, we see a more uncertain growth environment with downside risks building over the cyclical horizon.”The latest G10 moves bring the total 2023 rate hike tally among G10 central banks to 950 bps across 28 hikes. Looking at moves since Norway kicked off the rate hiking cycle in September 2021, major central banks have hiked interest rates so far by 3,765 bps. While the U.S. Federal Reserve’s pause at its June meeting did not come as a surprise, the hawkish outlook from the world’s top central bank sent tremors through markets. “We believe central banks have more work to do,” said Vanguard analysts in their mid-year outlook. “The last leg of inflation reduction to central bank targets may be the most challenging, in our view.”Across emerging markets there was more evidence that the tightening cycle was running out of steam. Thirteen out of 18 central banks in the Reuters sample of developing economies had interest rate setting meetings last month. However, 11 central banks opted to keep policy unchanged. Having been a stark outlier in the emerging market tightening cycle that kicked off in spring 2021, Turkey’s central bank under new governor Hafize Gaye Erkan played catch up with a 650 bps rate hike, signalling a return to more orthodox policy making. This was the second biggest rate hike in recent times since Russia was forced to deliver an emergency 1,050 bps rate hike following its invasion of Ukraine. Meanwhile, China’s central bank eased interest rates by 10 bps. The total rate hike tally for the year across emerging markets is 1,375 bps through 22 hikes – less than a fifth of the 7,425 bps of tightening delivered in 2022. The total amount of cuts is 60 bps across two moves. More

Mutual skepticism between the United States and China over a wide range of economic and security issues has festered in recent years.The last time a U.S. Treasury secretary visited China, Washington and Beijing were locked in a trade war, the Trump administration was preparing to label China a currency manipulator, and fraying relations between the two countries were roiling global markets.Four years later, as Treasury Secretary Janet L. Yellen prepares to arrive in Beijing, many of the economic policy concerns that have been festering between the United States and China remain — or have even intensified — despite the Biden administration’s less antagonistic tone.The tariffs that President Donald J. Trump imposed on Chinese goods are still in effect. President Biden has been working to restrict China’s access to critical technology such as semiconductors. And new restrictions curbing American investment in China are looming.Treasury Department officials have downplayed expectations for major breakthroughs on Ms. Yellen’s four-day trip, which begins when she arrives in Beijing on Thursday. They suggest instead that her meetings with senior Chinese officials are intended to improve communication between the world’s two largest economies. But tensions between United States and China remain high, and conversations between Ms. Yellen and her counterparts are likely to be difficult. She met in Washington with Xie Feng, China’s ambassador, on Monday, and the two officials had a “frank and productive discussion,” according to the Treasury.Here are some of the most contentious issues that have sown divisions between the United States and China.Technology and trade controlsChinese officials are still smarting at the Biden administration’s 2022 decision to place significant limitations on the kinds of advanced semiconductors and chip-making machinery that can be sent to China. Those limits have hampered China’s efforts to develop artificial intelligence and other kinds of advanced computing that are expected to help power each country’s economy and military going forward.The government of the Netherlands, which is home to semiconductor machinery maker ASML, on Friday announced new restrictions on machinery exports to China. On Monday, China placed restrictions on exports of germanium and gallium, two metals used to make chips.The Biden administration is mulling further controls on advanced chips and on American investment into cutting-edge Chinese technology.Semiconductors have always been one of the biggest and most valuable categories of U.S. exports to China, and while the Chinese government is investing heavily in its domestic capacity, it remains many years behind the United States.The Biden administration’s subsidy program to strengthen the U.S. semiconductor industry has also rankled Chinese officials, especially since it includes restrictions on investing in China. Companies that accept U.S. government money to build new chip facilities in the United States are forbidden to make new, high-tech investments in China. And while Chinese officials — and some American manufacturers — were hopeful that the Biden administration would lift tariffs on hundreds of billions of dollars of Chinese imports, that does not seem to be in the offing. While Ms. Yellen has questioned the efficacy of tariffs, other top officials within the administration see the levies as helpful for encouraging supply chains to move out of China.The administration is employing both carrots and sticks to carry out a policy of “de-risking” or “friend-shoring” — that is, enticing supply chains for crucial products like electric vehicle batteries, semiconductors and solar panels out of China.President Biden during a visit to a Taiwan Semiconductor Manufacturing Company plant under construction in Phoenix. The Biden administration’s efforts to assist the U.S. semiconductor industry has rankled Chinese officials.T.J. Kirkpatrick for The New York TimesDeteriorating business environmentsCompanies doing business in China are increasingly worried about attracting negative attention from the government. The most recent target was Micron Technology, a U.S. memory chip maker that failed a Chinese security review in May. The move could cut Micron off from selling to Chinese companies that operate key infrastructure, putting roughly an eighth of the company’s global revenue at risk. In recent months, consulting and advisory firms in China with foreign ties have faced a crackdown.American officials are growing more concerned with the Chinese government’s use of economic coercion against countries like Lithuania and Australia, and they are working with European officials and other governments to coordinate their responses.Businesses are also alarmed by China’s ever-tightening national security laws, which include a stringent counterespionage law that took effect on Saturday. Foreign businesses in China are reassessing their activities and the market information they gather because the law is vague about what is prohibited. “We think this is very ill advised, and we’ve made that point to several members of the government here,” said R. Nicholas Burns, the U.S. ambassador to China, in an interview in Beijing.In the United States, companies with ties to China, like the social media app TikTok, the shopping app Temu and the clothing retailer Shein, are facing increasing scrutiny over their labor practices, their use of American customer data and the ways they import products into the United States.CurrencyChina’s currency, the renminbi, has often been a source of concern for American officials, who have at times accused Beijing of artificially weakening its currency to make its products cheaper to sell abroad.The renminbi’s recent weakness may pose the most difficult issue for Ms. Yellen. The currency is down more than 7 percent against the dollar in the past 12 months and down nearly 13 percent against the euro. That decline makes China’s exports more competitive in the United States. China’s trade surplus in manufactured goods already represents a tenth of the entire economy’s output.The renminbi is not alone in falling against the dollar lately — the Japanese yen has tumbled for various reasons, including rising interest rates in the United States as the Federal Reserve tries to tamp down inflation.Chinese economists have blamed that factor for the renminbi’s weakness as well. Zhan Yubo, a senior economist at the Shanghai Academy of Social Sciences, said the decline in the renminbi was the direct result of the Fed’s recent increases in interest rates.At the same time, China has been cutting interest rates to help its flagging economy. The interest rate that banks charge one another for overnight loans — a benchmark that tends to influence all other interest rates — is now a little over 5 percent in New York and barely 1 percent in Shanghai. That reverses a longstanding pattern in which interest rates were usually higher in China.The Fed’s rate increases have made it more attractive for companies and households to send money out of China and invest it in the United States, in defiance of Beijing’s stringent limits on overseas money movements.China pledged as part of the Phase 1 trade agreement with the United States three years ago not to seek an advantage in trade by pushing down the value of its currency. But the Biden administration’s options may be limited if China lets its currency weaken anyway.Global debtChina has provided more than $500 billion to developing countries through its lending program, making it one of the world’s largest creditors. Many of those borrowers, including several African nations, have struggled economically since the pandemic and face the possibility of defaulting on their debt payments.The United States, along with other Western nations, has been pressing China to allow some of those countries to restructure their debt and reduce the amount that they owe. But for more than two years, China has insisted that other creditors and multilateral lenders absorb financial losses as part of any restructuring, bogging down the loan relief process and threatening to push millions of people in developing countries deeper into poverty.In June, international creditors including China agreed to a debt relief plan with Zambia that would provide a grace period on its interest payments and extend the dates when its loans are due. The arrangement did not require that the World Bank or International Monetary Fund write off any debts, offering global policymakers like Ms. Yellen hope for similar debt restructuring in poorer countries.Human rights and national security issuesTensions over national security and human rights have created an atmosphere of mutual distrust and spilled over into economic relations. The flight of a Chinese surveillance balloon across the United States this year deeply unsettled the American public, and members of Congress have been pressing the administration to reveal more of what it knows about the balloon. Mr. Biden’s recent labeling of China’s leader, Xi Jinping, as a “dictator” also rankled Chinese officials and state-run media.American officials continue to be concerned about China’s human rights violations, including the suppression of the democracy movement in Hong Kong and the detention of mainly Muslim ethnic minorities in the Xinjiang region of northwestern China. A senior Treasury Department official, speaking on the condition of anonymity before Ms. Yellen’s trip, said the United States had no intention of shying away from its views on human rights during the meetings in China.Chinese officials continue to protest the various sanctions that the United States has issued against Chinese companies, organizations and individuals for national security threats and human rights violations — including sanctions against Li Shangfu, China’s defense minister. The Chinese government has cited those sanctions as a reason for its rejection of high-level military dialogues. More

Trade officials were assessing the fallout from the latest escalation in the US-China technology battle after Beijing said it would impose curbs on exports of metals used in chipmaking.South Korea’s commerce ministry convened an emergency meeting to discuss China’s decision to control exports of gallium and germanium, metals used in chips, electric vehicles and a range of telecoms products.“We can’t rule out the possibility of the measure being expanded to other items,” said Joo Young-joon, South Korea’s deputy commerce minister. Japanese trade minister Yasutoshi Nishimura said Tokyo was studying the impact on its companies as well as checking Beijing’s plans for implementing the controls. Tokyo kept the door open for action at the World Trade Organization, warning that it would oppose any breach of international rules.South Korea and Taiwan are home to Samsung and TSMC, companies that dominate semiconductor manufacturing, while Japanese groups play a critical role in the chip supply chain.Taiwan’s deputy foreign minister Roy Lee said Beijing’s move was likely to have some short-term impact, including price increases. The export controls “will be a kind of accelerator for countries including Taiwan, South Korea and Japan to reduce our dependence on China for supplies of those critical materials”, Lee added.In Germany, Europe’s biggest importer of the metals, Wolfgang Niedermark, board member at industrial lobby group BDI, said the controls illustrated how perilous Europe’s dependency on China was. There was “urgency for Europe and Germany to quickly reduce dependence” on China for critical raw materials, he added. The German government will hand Intel €10bn in subsidies for a project to build a fabrication plant in Magdeburg.Beijing’s announcement on Monday showed how President Xi Jinping’s administration is willing to target western interests in response to Washington tightening curbs on China’s access to sophisticated technology. The metal restrictions are significant because China dominates the production of many raw materials critical to modern technology and infrastructure.China’s foreign ministry spokesperson Mao Ning said on Tuesday that China had “always implemented fair, reasonable and non-discriminatory export control measures”. She said the measures were “a common international practice and do not target any specific country”. Gallium and germanium are among dozens of minerals classified by the US government as critical to economic and national security. The US state department did not immediately respond to a request for comment.

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The move comes just days ahead of US Treasury secretary Janet Yellen’s visit to Beijing, which begins on Thursday, in a trip billed as a bid to stabilise the turbulent US-China relationship. “This looks like a punch from China thrown at the US — a warning about what supply chain disruptions can do to inflation, interest rates and the presidential election,” said CW Chung, an analyst at Nomura, in Singapore.According to officials and experts in China, Beijing is expected to introduce further retaliatory measures in response to the expansion of US-led controls on technology exports. “There will be more retaliatory measures against the snowballing semiconductor export controls from western countries,” said one senior official close to the Chinese commerce ministry.Shares in Chinese producers of gallium and germanium rose on Tuesday following the announcement, with traders expecting the export controls to push up the price of the metals.Yunnan Lincang Xinyuan Germanium Industrial closed by the maximum 10 per cent allowed in Shenzhen on Tuesday, while shares in Yunnan Chihong Zinc & Germanium closed 6 per cent higher. The rally added a combined $350mn to the companies’ combined market cap. “We’ll be seeing China engage in extraterritorial application of its laws, reneging on treaty obligations, and imposing countermeasures in a tit-for-tat manner — all in the name of China’s perceived national security and public interest,” said James Zimmerman, a lawyer at Perkins Coie in Beijing.Zimmerman also pointed out that China last week passed a foreign relations law that, in Beijing’s eyes, has strengthened the legal basis for countermeasures against western threats to national and economic security.

Kim Yang-paeng, a researcher at the Korea Institute for Industrial Economics and Trade, said the restrictions were “worrisome” for South Korean chipmakers.“Korean companies can find alternative sources, but it will take some time . . . if you lack some materials, no matter how important they are, this could hit chip production,” he said.Samsung and SK Hynix, the world’s two biggest producers of memory chips, declined to comment. Infineon, the largest supplier of semiconductors to the car industry, said it did not see any “major impact” on material supplies. The Munich-based company added that the ban followed a “multi-sourcing strategy to include suppliers in different geographies”. Chinese nationalist tabloid the Global Times said the export controls followed the US and some of its allies “relentlessly stepping up crackdowns on China’s technological development”.Reporting by Edward White and Song Jung-a in Seoul, Qianer Liu, Hudson Lockett, Gloria Li and Greg McMillan in Hong Kong, Kathrin Hille in Taipei, Kana Inagaki in Tokyo and Patricia Nilsson in Frankfurt More

Here’s what people are saying about the measure: LUCY CHEN, VICE PRESIDENT AT TAIPEI-BASED ISAIAH RESEARCH:”We believe that gallium and germanium are indeed important raw materials for the semiconductor industry, and China currently accounts for at least 80% of their supply. The gallium and germanium export controls that China has recently implemented have a direct impact primarily on the field of compound semiconductors, such as GaAs substrate suppliers Sumitomo, Freiberger and AXT (NASDAQ:AXTI), as well as U.S. GaN substrate suppliers including Cree (NYSE:WOLF) and II-VI. This also has a knock-on effect on the production of related products such as radio frequency, power amplifier, LED and communication equipment.””Although the above-mentioned substrate suppliers rely on gallium imported from China as raw materials, there are other secondary suppliers in Japan, South Korea, Europe, America and other regions that can provide materials, which can control the risk of upstream material shortages. However, under China’s export controls, the cost of gallium and germanium may increase. Whether other suppliers can provide enough material to meet demand is also the focus of our continuing observation.”JOHN STRAND OF STRAND CONSULT: “Gallium and Germanium are not like the rare earths where there is almost no alternative suppliers. These are metals that can be gotten in other ways, by-product of coal mining. The effect of restriction would yes be an increase in price, but not at all as painful for the rest of the world as chip restrictions are for China.”BEN WOOD, CMO OF INDUSTRY ANALYSIS FIRM CCS INSIGHT:”There has been speculation for some time that China would respond to the escalating sanctions it has faced from the U.S. and others. This is a bold move that will take time to filter through the supply chain but there is little doubt raw materials play a key role across numerous sectors which could cause some disruption over time.”KAZUMA KISHIKAWA, ECONOMIST AT DAIWA INSTITUTE OF RESEARCH: “From what I’ve seen, they haven’t narrowed down the countries targeted by the export restrictions, but since Japan, the U.S., and the Netherlands will naturally be included, I think it’s fair to say that this is a de facto retaliatory measure.” PETER ARKELL, CHAIRMAN OF GLOBAL MINING ASSOCIATION OF CHINA: “It hardly comes as a surprise that China would respond to the American-led campaign to restrict China’s access to microchips. With roughly 90% of global production of these minor metals, China has hit the American trade restrictions where it hurts. It seems to be a pretty fundamental trade negotiation tactic. “Gallium and germanium are just a couple of the minor metals that are so important for the range of tech products and China is the dominant producer of most of these metals. It is a fantasy to suggest that another country can replace China in the short or even medium term.”STEWART RANDALL AT SHANGHAI-BASED CONSULTANCY INTRALINK:”Chinese suppliers would lose customers, and in the short term it would cause supply issues if China did actually deny exports. “To me it doesn’t seem as much of a chokepoint because there’s no difficult technological blocker. It is a logistical supply chain blocker of finding new raw materials suppliers.”MANAGER AT A CHINA-BASED GERMANIUM PRODUCER, WHO DECLINED TO BE NAMED DUE TO THE SENSITIVITY OF THE MATTER: “The number of enquiries from abroad surged overnight after the export control news. Many overseas buyers are asking, mainly from Europe, Japan and the United States, as it may take as long as two months to get licence permit for exports, so overseas buyers will need to stockpile more cargoes in advance to sustain production in at least two months.”Offer prices in the domestic market and the export market have increased to 10,000 yuan ($1,380) per kg and over $1,500 per kg, respectively.” More