Economy

A race between European and Chinese energy groups to lock in shipments of liquefied natural gas from the US is driving investment in a range of export projects that will boost a market facing a potential supply shortage.The growing number of long-term contracts signed by European and Chinese buyers will help the US to expand export infrastructure to bring LNG supply online in the next two to three years. European demand for LNG — gas that is cooled to liquid form for safe storage and transport by sea or road — has risen sharply during the war in Ukraine as the region scrambled to replace gas that came from Russia through pipelines.Demand for the gas has also increased despite pressure to switch to renewable energy to meet net zero emissions targets, creating a tight market and causing prices to surge last year.In the past few weeks, US LNG exporter Cheniere signed a 15-year deal to supply Norway’s Equinor, and a contract for more than 20 years with China’s ENN.In addition, rival Venture Global LNG inked a 20-year deal with Germany’s Securing Energy for Europe (SEFE), while France’s TotalEnergies bought a $219mn stake in a Texas terminal to transport LNG, which is being developed by Houston-based energy group NextDecade.

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The announcements add to a steady stream of deals between US exporters and European or Chinese entities over the past few years.Together Europe and China accounted for nearly 40 per cent of the US’s LNG supply contracts agreed between 2021 and late June 2023, data from S&P Global Commodity Insights showed. China accounted for 24.4 per cent, owing to large volumes being signed in 2021 and 2022. So far in 2023, Europe has contracted more volumes than China.These long-term purchase agreements are needed for new or expanding LNG projects as they underwrite the financing needed.The pressure on supplies of LNG had a profound impact on developing nations such as Pakistan and Bangladesh last year, whose energy security was crippled as Europe outbid them for LNG cargoes.Analysts said increased capacity would also make it easier for these nations to secure gas to replace dirtier coal in their power generation.“More volumes are good for the market, and with the new deals we will see more LNG export projects being developed,” said Sindre Knutsson, partner of gas and LNG research at Rystad Energy. More supplies “can create opportunities for emerging markets that cannot commit to long-term contracts”, he added. This is because of factors such as the flexibility in contracts to resell to developing nations.Any loosening of the market from new projects will take time, however. Most of the planned additional US export capacity is not due to come online until the middle of the decade.European buyers have been wary of signing long-term LNG deals, as they attempt to decarbonise their economies. But the contracts offered by US exporters often allow buyers to divert cargoes to other entities, mitigating the risk for European buyers of being stuck with gas for longer than they want.“The European buyers are giving an additional tailwind for US projects to push towards the finishing line,” said Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights. “It can really help a US LNG project if it can get a portfolio of Asian and European buyers together as it reduces the risk for them.”Europe’s interest in securing US LNG is a stark shift from just a few years ago, when concerns over pollution prompted the French government to intervene to scupper a $7bn deal between utility Engie and NextDecade.

Speaking after his company signed a deal with NextDecade a few weeks ago, TotalEnergies chief executive Patrick Pouyanne said it “strengthen[ed] our ability to ensure Europe’s security of gas supply”.Shortly after Vladimir Putin sent Russian troops into Ukraine last year, US president Joe Biden and European Commission president Ursula von der Leyen announced a strategic pact under which EU companies would seek to guarantee more demand for US LNG, a bid to spur investment in more export capacity. US developers are confident that European demand will endure. Cheniere chief commercial officer Anatol Feygin recently told analysts that European LNG imports were forecast to remain stable at elevated levels “despite net zero rhetoric and policy induced pressure on the demand outlook”.On Asia, he said the economic growth and the “energy evolution” of the region would “underpin decades of growth in LNG demand driving the need for substantial investment in new liquefaction capacity”.Additional reporting by Myles McCormick in New York More

Central banks have been raising interest rates at the fastest pace since the 1990s, but the most severe bout of inflation in a generation is yet to be tamed. While many were late to spot just how big a problem this wave of inflation would prove, officials representing the world’s 20 largest economies have now increased rates by an average of 3.5 percentage points each since they began tightening borrowing costs. However, neither Federal Reserve chair Jay Powell nor European Central Bank president Christine Lagarde expect inflation to return to their common 2 per cent target before the start of 2025. While headline consumer indices have fallen, central bankers cite higher core inflation, tight labour markets and pressures in the services sector as evidence that prices will continue to soar for some time yet. So what explains inflation’s persistence in the face of aggressive rate rises?

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More delayed than usual Monetary policy always comes with a lag, taking about 18 months for the impact of a single rate increase to fully seep through into spending patterns and prices. Monetary policymakers began raising rates less than a year and a half ago in the US and UK, and less than a year ago in the eurozone. They went higher than the neutral rate — where they are actively restricting the economy — only a few months ago.But some central bankers and economists believe lags may be even longer — and the effect of the tightening less potent — this time around. “Maybe monetary policy is not as powerful as it was several decades ago,” said Nathan Sheets, chief economist at US bank Citi. They argue that, despite surging borrowing costs, growth has proved surprisingly resilient, especially in the services sector that makes up the bulk of economic output in most economies. “The major economies and the global economy as a whole have absorbed rate hikes extraordinarily and surprisingly well,” Sheets said. A long-term shift away from manufacturing towards services, which require less capital, could also mean slower transmission of a tighter monetary policy.

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Structural changes in important parts of the economy — including housing and labour markets — between now and the 1990s may explain why rate rises had a much snappier and sharper impact then. Housing trends play a roleShifts in the housing market may be key in explaining why interest rate rises are taking longer to bite. In several countries, the proportion of households that either own their property outright or are renting has risen. Fixed-rate mortgages are now more popular than flexible ones, where higher central bank rates feed through to households’ spending power almost instantly. In the UK, the share of households owning a property with a mortgage has declined from 40 per cent in the 1990s to less than 30 per cent. Those with a floating rate mortgage has gone from 70 per cent in 2011 to slightly more than 10 per cent this year.Andrew Bailey, governor of the Bank of England, said last week that those trends meant “the transmission of monetary policy is going to be slower as a result”.

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Labour markets are tightThe after-effects of the pandemic on hiring trends are still being felt. Widespread labour shortages remain — especially in the services sector, boosting wage growth and in turn inflation. Lagarde said last week that services sector companies may be engaging in “labour hoarding”, fearful of being unable to recruit should growth strengthen. The sector could be “insulated from the effects of policy tightening for longer than in the past”, the ECB president said.

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Central bankers’ conundrumCentral bankers’ initial insistence that inflation would prove shortlived led to delays in discarding decades of aggressive and ultra-loose monetary policy. Those delays may have made inflation all the more difficult to vanquish with higher rates, as price pressures broadened from a problem affecting a small number of products hit by supply chain bottlenecks to a far broader phenomenon, hitting almost all goods and services. The Bank for International Settlements, often dubbed the central bankers’ bank, warned last year that, if interest rates are raised too little or their effect is much delayed, countries might slip into an environment where high inflation becomes the norm. The risk is that shifting back to 2 per cent inflation may require central bankers to increase borrowing costs to a point where they endanger the health of the financial system.

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The collapse of several midsized US lenders and the troubles of Credit Suisse earlier this year have been blamed in part on higher borrowing costs. If growth disappears too, economists expect more pressure on central bankers tasked with trying to tame inflation. Jennifer McKeown, chief global economist at Capital Economics, now expects higher rates to “push most advanced economies into recession in the months ahead”. More

Financial institutions often did not understand the models they were using to predict the economic cost of climate change and were underestimating the risks of temperature rises, research led by a professional body of actuaries shows.Many of the results emerging from the models were “implausible,” with a serious “disconnect” between climate scientists, economists, the people building the models and the financial institutions using them, a report by the Institute and Faculty of Actuaries and the University of Exeter finds. Companies are increasingly required to report on the climate-related risks they face, using mathematical models to estimate how resilient their assets and businesses might be at different levels of warming. The International Sustainability Standards Board last week launched long-awaited guidance for companies to inform investors about sustainability-related risks, including the climate scenarios chosen in their calculations. Countries including the UK and Japan have said they plan to integrate these standards into their reporting rules. Companies will also have to report the full scope of their emissions, including those from their supply chains, from the second year they begin to report under the guidelines due to come into effect in 2024. That was a particular “challenge”, since companies would need to collect the data from all their suppliers, said George Richards, head of ESG reporting and assurance at KPMG. In California, lawmakers are expected to vote in coming months on a bill that would require big companies doing business in the state to report the full scope of their emissions.Some models were likely to have “limited use as they do not adequately communicate the level of risk we are likely to face if we fail to decarbonise quickly enough,” the paper released on Tuesday said. It also found that significant factors were sometimes missing from models.For example, an assessment of global gross domestic product loss in a so-called “hothouse” world of 3C higher temperatures by a group of 114 central banks and financial supervisors, known as the Network for Greening the Financial System, did not include “impacts related to extreme weather, sea-level rise or wider societal impacts from migration or conflict”.As a result of such overly “benign” models, large financial institutions had reported that they would suffer minimal economic impacts if the world warmed by significantly more than 1.5C higher than pre-industrial levels, it said.The Paris Agreement commits countries to strive to limit warming to 1.5C by 2100, though policies in place now put the world on track for a rise of between 2.4C and 2.6C, say the UN body of scientists.In Task Force on Climate-Related Financial Disclosures reports, several large UK financial institutions had reported that they would fare equally well or better economically in a hothouse scenario compared with more moderate warming scenarios, the researchers found, without naming the institutions.Some economists had even predicted “relatively low economic damage” from high levels of warming, said Tim Lenton, a co-author of the report who holds the chair in climate change at Exeter. It was “concerning” to see those models being used by financial institutions to estimate their risks, Lenton said.The consequences of passing climate “tipping points” — self-reinforcing and irreversible negative planetary changes — were often not captured by the models, the researchers said. Financial institutions often did not understand the assumptions baked into the models and their limitations, they added. More

The FT’s first Tech Champions survey, in 2021, focused on companies’ responses to the Covid pandemic. If that now seems like a distant memory, it is because the disruptions have kept on coming.Businesses, today, are having to rethink their supply chains as Russia’s war with Ukraine continues and tensions simmer between the US and China. At the same time, persistent inflation — and governments’ attempts to rein it in — are squeezing budgets. Pressure to switch to green energy is still growing as climate change bites. Meanwhile, the rise of artificial intelligence is presenting a threat to established ways of working — and an opportunity for innovation. Do you know of companies that are rising to these challenges? If so, please nominate them for the Financial Times’s “Tech Champions of 2023” project.In conjunction with Workday, we aim to showcase UK and European businesses, and other organisations, that are using technology to adapt to new risks and opportunities.As with last year’s Tech Champions, we are looking for examples of innovation that can help companies — and society — overcome the problems posed by geopolitical turmoil, economic headwinds and disruptive AI.Nominations are now open and can be submitted by filling in a very short online form. FT journalists will also contribute to the process, research the entries, and help to draw up a shortlist. A panel of judges will then study the companies nominated and select the best examples from different sectors, naming them “Tech Champions of 2023”. We invite entries from the following sectors:

Sector categoriesBanking, payments & ecommerceLogisticsEducation and trainingManufacturingEnergyMarkets & financial servicesHealthcareMediaIT & cyber securityProfessional services

Those companies and organisations selected as “Tech Champions of 2023” will be showcased in a special online report in November. Accompanying articles will profile them and their senior management — and examine their approach to innovation, their perseverance, and their technical ingenuity.To make a nomination, please click this link to our short online entry form, which takes less than a minute to fill in. There is no limit on entries — readers may make multiple nominations, across all of the sectors. The closing date for entries is September 8, 2023. More

Local authorities across England and Wales face a funding gap of £2bn or more next year as inflation eats into the ability of many to provide basic services without dipping into reserves, according to their representative body. Analysis released on Tuesday by the cross-party Local Government Association, which meets for its annual conference this week, provides an alarming picture of rising costs and diminishing services as councils struggle to balance the books in the wake of successive shocks. The LGA estimated the extra cost to councils would exceed their core funding by £2bn in 2023-24 and £900mn in 2024-25, even if the rate of price rises falls in line with government forecasts to 2.9 per cent by the end of this year. If inflation remains higher, tracking the Bank of England’s more pessimistic outlook, local authorities would face additional costs of £740mn next year, and £1.5bn in 2024-25.The analysis relates solely to funding needed to maintain services at current levels and does not include tackling the continuing crisis in the provision of adult and child social care, or addressing homelessness.Pete Marland, Labour leader of the council in Milton Keynes and chair of the LGA’s resources board, said local governments were having to cut services to meet their legal duty to balance the books this year, and using reserves meant to mitigate risk to plug funding gaps.“We are in an endgame where unless something changes in the medium- to long-term funding settlement, we start to see more and more councils taking more drastic action,” he said.“This won’t just be around potholes that need to be filled, play areas that need maintenance and grass that needs cutting,” he added. “It will be around more fundamental things like children’s services and social care, and it will have knock on effects for the NHS.”Two councils — Thurrock in Essex and Woking in Surrey — have in recent months been forced to announce section 114 notices, in effect declaring bankruptcy. Both local authorities got into difficulties as a result of investment strategies that were designed to deliver additional revenues but instead left them with record deficits of £500mn and £1.2bn respectively.Marland described Thurrock, Woking and a handful of other councils in similar trouble as “outliers”. Of the 340 district and unitary councils in England and Wales, about 20 were in sever financial distress, he said. Others had proved adept at managing cuts in the decade to 2020, when councils bore the brunt of government austerity budgets with funding slashed overall by £15bn, he noted.Marland added, however, that councils of all political colours were now struggling to meet growing demand for the basic services they are legally required to deliver. Local government officials were surprised when, in December last year, Rishi Sunak, prime minister, agreed a £59.5bn funding package for councils for 2023-24, representing a 9 per cent increase on the year before.Joanne Pitt, head of local government policy at the Chartered Institute of Public Finance and Accountancy, which represents accountants working in the public sector, said inflation had eaten away at most of the benefits of the 9 per cent since. “If you went back 10 years you had some give and take. Now they have given everything they have got to give so we are looking at really serious implications,” she said, adding that fundamental questions needed to be raised about what councils could be expected to deliver within the current funding framework.Analysis in March by the County Councils Network, which represents the largest councils in England and Wales, said 2023 would be one of the most challenging financial years ever. It found that members would need to make at least £1bn in savings and use £350mn in reserves, even after raising council taxes, to balance the books.“The government will look in the round at local government spending when finalising budgets at next year’s finance settlement, as we do every year to ensure councils can continue to deliver vital services,” a UK government spokesperson said.“We have also provided multiyear certainty to local government, outlining spending over the next two years to allow councils to plan ahead with confidence.” More

Kanda was speaking to reporters as market players brace for possible Japanese intervention in the foreign exchange market to stem yen weakness.”We are exchanging views with and communicating with authorities in other countries including our ally the United States not only on currencies, financial markets but various other issues,” Kanda told reporters.The yen fell to near eight-month lows against the dollar last week prompting Finance Minister Shunichi Suzuki to warn against excessive yen selling after it weakened past the 145 to the dollar threshold. Some market players see 150 yen as a new threshold.Japan bought yen in September, its first foray in the market to boost its currency since 1998, after a Bank of Japan (BOJ) decision to maintain ultra-loose policy drove the yen as low as 145 per dollar.The U.S. Treasury said after last year’s intervention that such actions should be rare.The United States last month removed Japan from its currency monitoring list in its twice-yearly currency report. Some market players say the move may make it easier for Tokyo to intervene in the market. More

BENGALURU (Reuters) – Malaysia’s central bank will leave its key interest rate unchanged at 3.00% on Thursday and keep it there for the rest of the year, marking the end of its modest tightening cycle as inflation has showed signs of cooling, a Reuters poll found.While headline inflation eased to its lowest in a year in May at 2.8%, core inflation – which excludes volatile items – moderated only a bit to 3.5%, suggesting the central bank will hold its key rate higher for longer.All but three of 25 economists polled between June 27 and July 3 forecast Bank Negara Malaysia (BNM) will hold the policy rate steady at 3.00% – its pre-COVID pandemic level – at the end of the July 6 meeting, following a surprise hike in May.Those three expect another 25 basis-point hike to 3.25%.”The 25 bp surprise hike in May marked the end of the tightening cycle… a slower trajectory of growth and retreating inflation will likely prompt BNM to stand pat for the remainder of 2023,” noted Khoon Goh, head of Asia research at ANZ.Median forecasts showed rates will remain unchanged at 3.00% until end-2023, with no one predicting a cut this year.This puts BNM in line with its regional peers, who have already ended their tightening cycles. [KR/INT][ID/INT][IN/INT][NZ/INT]With the U.S. Federal Reserve, the European Central Bank and the Bank of England still intent on raising rates to control inflation, the ringgit has lost nearly 6% against the dollar this year, declining more than its Southeast Asia peers.A weaker currency and resulting higher inflation feeding through expensive imports may restrict BNM from cutting rates any time soon.Gareth Leather, senior Asia economist at Capital Economics, noted that while most central banks in the region were expected to cut rates over the coming year, “the BNM will remain on the sidelines”. More

TOKYO (Reuters) -Japanese authorities are facing renewed pressure to combat the yen’s fresh declines driven by market expectations that the Bank of Japan will keep interest rates ultra-low, even as other central banks tighten monetary policy to curb inflation.Here are possible steps the government and the central bank could take to tackle further yen weakness, which gives exports a boost but hurts households and retailers by inflating already rising import costs for fuel and food.ESCALATE VERBAL INTERVENTION – HIGHLY LIKELYJapanese authorities began jawboning markets this week, describing recent yen falls as “sharp and one-sided”. Top currency diplomat Masato Kanda also said he would not rule out any options, when asked if intervention could become a possibility.If the pace of yen declines accelerates, authorities may escalate their warnings to promise “decisive action” against speculative moves.Such remarks, aired prior to Japan’s previous yen-buying intervention last year, would signal that Tokyo was edging closer to directly intervening in the currency market.CONDUCT YEN-BUYING INTERVENTION – LESS LIKELYTokyo made rare forays into the currency market to prop up the yen in September and October last year to stem a plunge in the currency that eventually hit a 32-year low of 151.94 to the dollar.While the yen is still well off that low, many market players see 145 as Tokyo’s line-in-the-sand and then 150 which, if breached, could trigger another round of intervention. The dollar stood around 144.63 yen in Asia on July 4.Authorities have said the speed of yen moves, rather than levels, were key to deciding whether to step into the market. This means the chance of intervention will rise if the yen’s declines are rapid and viewed as driven mostly by speculative trading.But yen-buying intervention would be costly as authorities must tap Japan’s foreign reserves for dollars to sell.Tokyo would also need consent from other major economies, particularly the United States, to ensure the scale of intervention is sufficient to turn the tide.BOJ RAISES INTEREST RATES – HIGHLY UNLIKELYThe Bank of Japan (BOJ) has vowed to keep interest rates ultra-low to support the economy, even as inflation exceeded its 2% target for more than a year.The dovish stance is partly driving the yen’s fall, as markets focus on the divergence between Japan and U.S. and European central banks, which have hiked rates aggressively.Some market players speculate the BOJ may allow interest rates to rise, such as by raising an implicit 0.5% cap on its 10-year bond yield target, as early as July.But BOJ policymakers are cautious of taking such steps too soon, given uncertainty on whether wages will keep rising, and the risk of a deeper global economic slump hitting Japan’s fragile, export-reliant recovery.The BOJ also has no intention of using monetary policy tools to directly curb yen declines – a move that could be interpreted as currency manipulation and would go beyond its remit.That means the BOJ will consider tweaking its yield control policy only if inflation rises for longer than expected, and prods firms to raise wages and prices on a sustained basis. More