Economy

China’s president Xi Jinping has vowed to step up trade and investment co-operation with Iran and “constructively participate” in efforts to revive its nuclear deal with world powers, as he sought to reassure Tehran about the two nations’ bilateral relationship. During a visit on Tuesday to Beijing by Iran’s president Ebrahim Raisi — the first such trip by an Iranian leader in more than 20 years — Xi said: “No matter how the international and regional situation changes, China will unswervingly develop friendly co-operation with Iran and promote the development of [the] China-Iran comprehensive strategic partnership.” Raisi’s three-day visit to Beijing comes as a bilateral 25-year co-operation deal signed in 2021 has failed to deliver economic benefits expected by Tehran. Xi’s push to deepen ties with Iran’s regional rivals such as Saudi Arabia has also rattled the Islamic Republic. During the meeting with his Chinese counterpart, Raisi said the two countries’ relations were “moving forward” but that “what has been done is still behind what should have been done”, according to Iranian media.“After the two countries signed this agreement in 2021, the relationship has not yet achieved a breakthrough,” said Fan Hongda, an Iran expert at Shanghai International Studies University. “Some Iranian officials have expressed dissatisfaction with China’s investment in Iran. At present, the most urgent need in Iran is economic development. Therefore, the more Chinese investment the better.”According to a readout of the meeting with Raisi, Xi said China was willing to work with Iran to implement the 2021 deal, “deepen practical co-operation in trade, agriculture, industry, infrastructure and other fields, and import more high-quality Iranian agricultural products”.Raisi was accompanied by his ministers for economy, oil, mining and agriculture as well as the top nuclear negotiator Ali Bagheri Kani.One area of concern for Tehran is Iran’s oil sales to China. There has been widespread speculation that Beijing could increase purchases from Russia and buy less from Iran as western sanctions imposed over the Ukraine war put pressure on Moscow to find alternative customers for its oil.The growing tensions between Washington and Beijing give China an incentive to further strengthen ties with Tehran, analysts say. Xi on Tuesday said: “China supports Iran in safeguarding national sovereignty and resisting unilateralism and bullying.” Fan said: “The current US sanctions are one of the core factors affecting China’s exchanges with Iran. If the US continues to impose increasingly severe sanctions on some countries, these sanctioned countries may also have to seek co-operation with each other.”But while China and Iran are expected to sign economic agreements in Beijing, Chinese analysts expressed doubts that they would bring firm commitments. “One reason implementation of the . . . co-operation agreement has not moved as fast as Iran may have hoped is the state of relations between Iran and the US,” said Ma Xiaolin, director of the Institute for Studies on the Mediterranean Rim at Zhejiang International Studies University. “Chinese companies and the Chinese government cannot not be cautious when it comes to violating US sanctions, because China-US relations are the most important.”On the 2015 nuclear accord between Tehran and world powers, Xi said China would “continue to constructively participate in the negotiations” on reviving “the implementation of the comprehensive agreement on the Iranian nuclear issue, support Iran in safeguarding its legitimate rights and interests and promote the early and proper resolution of the Iranian nuclear issue”.

The EU has been brokering indirect talks between the US President Joe Biden’s administration and Tehran in the hope of saving the nuclear pact, which former president Donald Trump unilaterally abandoned in 2018. But there have been no discussions since September, when Iran was blamed for rejecting a draft proposal to revive the accord that had been agreed by the other signatories.Western diplomats have been sceptical about the prospects of reviving the deal. But Chinese analysts say there is a chance.“China delivered a big impetus to the deal in 2015. While several other powers have changed their stance, China has not and is therefore in a position to work on the other parties to revive the deal,” Ma said. “There is an opportunity because destroying the Non-Proliferation Treaty is of no use to anyone.” More

Global fund managers are becoming increasingly nervous over the durability of the rally in Chinese equities, with one-in-five of the view that it has become the market’s “most crowded trade.”Allocations by global fund managers to emerging market equities, including China, increased for a third month in succession in February, according to a widely-watched Bank of America monthly survey which canvassed the views of 262 participants who oversee combined assets of $763bn.Chinese blue-chip stocks in Shanghai have risen 14 per cent since the start of November as investors warmed to President Xi Jinping’s decision to drop its economically disruptive zero-Covid policy. But fund managers have become concerned about the rapid increase in the popularity of Chinese stocks, a potential warning sign that momentum could flag.It was the first time a ‘long China equities’ position featured as the most crowded trade in the survey’s history, which dates back to 1985.The reopening of the Chinese economy is expected to push up inflation globally, adding to the uncertainty over the outlook for monetary policy in the US and Europe. Just over two-thirds of the survey’s respondents said they believed that inflation would rise as a consequence of China reopening and the biggest ‘tail risk’ for fund managers was that inflation would stubbornly remain “higher-for-longer”. On Tuesday the US consumer price data was higher-than-expected, increasing investors’ concerns that the Federal Reserve would have to raise rates further.

“It is clearly good for global economic growth that China’s economy is reopening but if this does translate into higher inflationary pressures, as we have seen on other parts of the world during the post pandemic recovery, then that could pose problems for central banks [outside of China],” said Michael Hartnett, chief investment strategist at BofA global research. The BoA survey found that a net 46 per cent of fund managers had moved to an “overweight” allocation in emerging market equities in February, helped by increased optimism about the outlook for the Chinese economy and growing confidence that the rise of the US dollar has peaked. Some strategists argued that the rally in Chinese equities still had further to run. Société Générale estimates that the Shanghai market is trading on a price to earnings multiple for this year of 11.6 times, with earnings growth forecast at 18.8 per cent, the bank found. That compares to a multiple of 12.4 times and earnings growth of 6.7 per cent for emerging markets.Pramol Dhawan, managing director at Pimco, the US fund manager said valuations for emerging markets were cheap compared with history and that emerging markets were “under-owned” as an asset class following big investor withdrawals during 2022. “We are becoming increasingly positive on EM more broadly and select EM local debt in particular,” said Dhawan.Robert Buckland, chief global equity strategist at Citigroup, said that cash-rich Middle Eastern sovereign wealth funds could also stoke the rally in China.“This is a good time for energy producers to invest these riches given their purchasing power in financial markets has risen sharply. Petrodollar investors will use their riches to cement long-term economic and business relationships, most notably with other emerging markets,” he said. More

Inflation rose in January by 0.5% following a 0.1% increase in December, according to the consumer price index report released Tuesday.
The CPI was up 6.4% from the same period in 2022. Both numbers were higher than expected.
Across-the-board increases in shelter, food and energy boosted the index after inflation had shown signs of receding in recent months.
“Super core” services inflation, which is key for the Fed and excludes food, energy and shelter, rose 0.2% for the month and was 4% higher than a year ago.

Inflation turned higher to start 2023, as rising shelter, gas and fuel prices took their toll on consumers, the Labor Department reported Tuesday.
The consumer price index, which measures a broad basket of common goods and services, rose 0.5% in January, which translated to an annual gain of 6.4%. Economists surveyed by Dow Jones had been looking for respective increases of 0.4% and 6.2%.

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Excluding volatile food and energy, the core CPI increased 0.4% monthly and 5.6% from a year ago, against respective estimates of 0.3% and 5.5%.

Markets were volatile following the release, with the Dow Jones Industrial Average down about 200 points at the open and heading lower.
Rising shelter costs accounted for about half the monthly increase, the Bureau of Labor Statistics said in the report. The component accounts for more than one-third of the index and rose 0.7% on the month and was up 7.9% from a year ago. The CPI had risen 0.1% in December.
Energy also was a significant contributor, up 2% and 8.7%, respectively, while food costs rose 0.5% and 10.1%, respectively.
Rising prices meant a loss in real pay for workers. Average hourly earnings fell 0.2% for the month and were down 1.8% from a year ago, according to a separate BLS report that adjusts wages for inflation.

While price increases had been abating in recent months, January’s data shows inflation is still a force in a U.S. economy in danger of slipping into recession this year.
That has come despite Federal Reserve efforts to quell the problem. The central bank has hiked its benchmark interest rate eight times since March 2022 as inflation rose to its highest level in 41 years last summer.

“Inflation is easing but the path to lower inflation will not likely be smooth,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed’s liking.”
In recent days, Fed Chairman Jerome Powell has talked about “disinflationary” forces at play, but January’s numbers show the central bank probably still has work to do.
There was some good news in the report. Medical care services fell 0.7%, airline fares were down 2.1% and used vehicle prices dropped 1.9%, according to seasonally adjusted prices. Egg prices, however, rose 8.5% and are up a stunning 70.1% over the past year.

Evaluating ‘super-core’ inflation

The rise in housing prices is keeping a floor under inflation, though those numbers are widely expected to decelerate later in the year.
That’s why some Fed officials, including Powell, say they are looking more closely at core services inflation minus shelter prices — “super-core” — in determining the course of policy. That number rose 0.2% in January and was up 4% from a year ago.
Markets expect the Fed over its next two meetings in March and May to raise its overnight borrowing rate another half a percentage point from its current target range of 4.5%-4.75%. That would give policymakers time to watch for the broader economic impacts of the monetary policy tightening before deciding how to proceed. Should inflation not fall back, that could mean more rate hikes.
Dallas Fed President Lorie Logan on Tuesday cautioned that the central bank may need to push rates higher than expected, particularly if super-core remains anchored in the 4%-5% range.
“We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions,” she said during a speech in Prairie View, Texas.
Logan, a voting member this year on the rate-setting Federal Open Market Committee, added that she is concerned about higher commodity inflation as China reopens from its Covid lockdowns, and sees the surprisingly strong labor market as another risk.
“When inflation repeatedly comes in higher than the forecasts, as it did last year, or when the jobs report comes in with hundreds of thousands more jobs than anyone expected, as happened a couple weeks ago, it is hard to have confidence in any outlook,” she said.

Recession possibility

The next big data point will be retail sales, which hits Wednesday morning at 8:30 a.m. ET. Economists surveyed by Dow Jones expect the figure, which is not adjusted for inflation, will show that sales rose 1.9% in January from the prior month.
“The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%,” said Maria Vassalou, co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management. “If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation.”
There’s widespread belief that the economy could tip into at least a shallow recession later this year or early in 2023. However, the latest tracking data from the Atlanta Fed puts expected GDP growth at 2.2% for the first quarter, following a relatively strong finish for 2022.
A New York Fed barometer which uses the spread between 3-month and 10-year Treasury yields to estimate the probability of a recession puts the chances at 57.1% over the next 12 months, the highest level since the early 1980s.
January’s CPI report will take some time to analyze, as the BLS changed its methodology in how it reports the index. Some components, such as shelter, were given higher weightings, while others, such as food and energy now have slightly less influence.
The Fed also changed how it computes an important component called owners’ equivalent rent, a measure of how much property owners could get if they rented. The BLS is now placing a bit more emphasis on the pricing of stand-alone rentals rather than apartments.

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Rishi Sunak is due to meet EU leaders in Bavaria this week in a final push for a Brexit deal on Northern Ireland, amid warnings of a revolt by Conservative MPs if they judge the UK prime minister is ceding too much ground to Brussels.Sunak is expected to hold talks with EU leaders on the margins of the Munich security conference to try to resolve the long-running dispute over Northern Ireland’s post-Brexit trading arrangements.French President Emmanuel Macron, German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen are scheduled to attend the summit, where the main focus will be the war in Ukraine.Downing Street said “intensive scoping” of a Brexit deal was continuing, but the involvement of senior British ministers, including Sunak, was seen by some in London as a sign an agreement could be reached this month.The putative accord would overhaul the so-called Northern Ireland protocol, part of Boris Johnson’s 2019 Brexit deal, by reducing trade friction between the region and Great Britain.Under the deal, Northern Ireland remained part of the EU single market for goods, and the region’s pro-UK politicians and businesses have complained about the number of checks on products coming from Great Britain.Senior British officials said a deal would include a continuing role for the European Court of Justice in overseeing Northern Ireland’s trading arrangements, although it would not be involved in the majority of legal cases.For many of Sunak’s Eurosceptic MPs, ECJ jurisdiction over British territory is unacceptable. “The question is whether EU law binds the UK,” said David Jones, deputy chair of the European Research Group of pro-Brexit Conservative MPs.Jones said a report in the Daily Telegraph that stated the ECJ would only be used as a court of last resort sounded like a “weather balloon” being floated by Downing Street to gauge Eurosceptic reaction.“The problem with weather balloons these days is that they tend to be shot down,” he added. “We can’t have a state of affairs where we are subject to the ECJ, whether directly or indirectly.”Asked whether the ERG had sufficient MPs to stop any Brexit deal that did not restore “full sovereignty” to all parts of the UK, Jones said: “We have enough.”Sunak will have to take a decision on whether to confront elements of his own party to secure a deal, which would, in turn, significantly improve relations with the EU.An early “win” from an accord would be an expected agreement by the EU to readmit British scientists and universities to the €95bn Horizon Europe research programme, seen as a vital element of pan-European collaboration. Meanwhile, Sunak would be expected to drop the government’s Northern Ireland protocol bill, which would unilaterally scrap the crucial parts of Johnson’s Brexit deal affecting the region.Some in the British government believe “sovereignty purists” in the Conservative party are taking a tougher line on any overhaul of the protocol than Northern Ireland’s pro-UK Democratic Unionist party.The DUP, which is boycotting the region’s devolved government in protest at the protocol, set “seven tests” for assessing any deal, but did not explicitly mention the ECJ. One British official said: “There’s a risk the ERG out-DUP the DUP.”

Goods from mainland Britain arrive at the Port of Larne in County Antrim, Northern Ireland © Paul Faith/AFP/Getty Images

An critical part of the deal would be the creation of a “green lane” at ports in the region, where goods coming from Great Britain and intended for sale in Northern Ireland would be subject to minimal checks. Goods from Great Britain and destined for sale in the Republic of Ireland and the rest of the EU would go through the “red lane” and be subject to closer inspections.An EU official said the two sides were “very close” to reaching an agreement on the proposed green lane. However, final details to be hammered out include the question of labelling goods for sale in Northern Ireland only, which is firmly opposed by some supermarkets and unionist politicians.“This is in the hands of Sunak,” said the EU official. Another EU official said London and Brussels were drawing up an explanatory document that would play down the role of the ECJ in Northern Ireland’s affairs. The official said the ECJ would only interpret matters on single market law, and about 90 per cent of complaints over non-compliance with the rules in the bloc never reach Luxembourg. The DUP said: “The checks on the Irish Sea border are the symptom of the underlying problem, namely, that Northern Ireland is subject to a different set of laws imposed upon us by a foreign entity without any say or vote by any elected representative of the people of Northern Ireland.”The DUP has said it will not return to Stormont, which it has been boycotting since elections last May, until there is a deal that meets its demands. More

We are all interventionists now. In the US, not long ago the bastion of free market thinking, fear of China, worries over the security of supply chains, aspirations for re-industrialisation and hopes of a green transformation are combining to reshape trade and industrial policies. The EU shares US worries over China, mostly in terms of the technological threat. But it is also concerned by the “America First” character of US policymaking, notably the $369bn Inflation Reduction Act. This growing belief in the ability of governments to reshape their economies for the better may have been inevitable, given economic disappointments and geopolitical tensions. But what does it imply?A big question is what these shifts towards economic nationalism and interventionism will do to the world economy. As things stand today, deep disintegration seems unlikely, though it is, alas, imaginable. It would also be very costly, as Geoeconomic Fragmentation and the Future of Multilateralism, a recent discussion note from the IMF, points out. Moreover, the deeper the disintegration the bigger such costs will be. Technological decoupling would be the most costly of all, especially for emerging and low-income countries. Beyond this are the inevitable geopolitical costs. As James Bacchus, former head of the World Trade Organization appellate body, has rightly noted, containing these costs in today’s world poses huge challenges. A narrower question is how well the new interventionism will work in its own terms. Will the US federal government, which is the most active and potent player, obtain the results it wants from the policies it is now committed to employ? There are good reasons for doubt. Successful intervention is hard.It is not that theoretical arguments for intervention are lacking. On the contrary, ever since Alexander Hamilton, arguments for infant industry protection (and other such interventions) have been well known. The core argument is that markets on their own will fail to exploit available opportunities. Harvard’s Ricardo Hausmann has recently restated these arguments. To such infant industry arguments we can add those for protecting economic, technological or military security.Yet in practice it is quite difficult to make such interventionism work. Too often, for example, it is assumed that the successes of Japan, South Korea and more recently China are due to far-sighted government interventionism. This is exaggerated: the main engine was market competition. Moreover, government intervention becomes more difficult the closer an economy is to the technological frontier: innovation is usually harder than copying. Not least, there is a political economy of intervention, with losers picking governments rather than governments picking winners. The more open to lobbying a state is, the greater the chances of such capture. This is particularly applicable to the US.Helpfully, in 2021, the Peterson Institute for International Economics published a briefing entitled Scoring 50 Years of US Industrial Policy. It details some grotesquely expensive policies of industrial protection, noting that “US consumers and taxpayers are currently paying more than $900,000 a year for every job saved by Trump’s steel tariffs, extended by Biden”. Sometimes, alas, bipartisanship can be foolish.What did work? As expected, the star has been Darpa, perhaps the most successful innovation programme in world history. Another success was Operation Warp Speed, the vaccination programme of the Trump administration — a triumph many Republicans have wished to disown. Another was the North Carolina Research Triangle Park. Encouragement of foreign automobile assembly worked quite well, as did tax credits for solar panels.Yet what is striking is how often such programmes failed to make industries competitive, save jobs at reasonable cost or advance the technological frontier. This was notably true for trade measures and firm-specific subsidies. The big successes were in combining public and private outlays on research and development, as one might expect. Given this, one must wonder whether today’s subsidy programmes will work.Against this, there are legitimate security reasons for promoting production of computer chips, whatever the costs. Again, in the absence of better policies, subsidies for the green transition should push the economy in the right direction. Moreover, subsidies have the advantage of being transparent, while protection is a hidden tax on consumers transferred to producers. Tariffs also bias production towards the home market, while subsidies are neutral between domestic and foreign markets. Yet subsidies are not neutral across countries: those with the deepest pockets will win. Moreover, subsidies, especially subsidies limited to domestic producers, will cause friction, including with allies. The outcome will be a subsidy war. This may lower emissions of high-income countries. But it will not solve global climate change, which depends on successful co-operation towards a global transformation.The new interventionism has many causes and many goals. In theory, it might lead to better outcomes, especially where the case for government intervention is strong, as with climate change or national security. But there are also large potential risks, not least that many of these programmes will turn out to be a huge waste of money, as so many interventionist programmes have been in the past. Moreover, these interventions will worsen the trade wars now under way. Fragmentation is very easy to start. But it will be hard to control and even harder to [email protected] Martin Wolf with myFT and on Twitter More

The survey of 299 fund managers, who have a combined $847 billion in assets under management, found investors were still broadly cautious, but less so than been in recent months. Just 24% predict a recession compared to 77% who did in November, according to the survey, which covered the week to Feb 9. Investors remain net overweight cash and underweight equities, but a combined index that measures growth expectations, cash allocations and equity allocations improved to its highest level in a year. “(Fund manager survey) investors remain pessimistic in February but to a lesser degree, with all key measures of sentiment improving (month on month) and shift in positioning highlighting stronger risk appetite,” BofA analysts said in a note. The survey also found that the percentage of investors who are overweight emerging market equities increased by 51 percentage points from November 2022 to February, marking the largest three-month increase on record. More

Emirates Airline suspended the flights after its ticket sales in local currency were trapped in Africa’s most populous nation.In a telephone conversation with the president of the United Arab Emirates, Sheikh Mohammed bin Zayed Al Nahyan, Buhari requested a resumption of Emirates Airline’s flights to Nigeria and lifting of a ‘blanket’ visa ban imposed on Nigerians. More

DUBAI (Reuters) – The World Bank is particularly concerned in the Middle East and North Africa region about Lebanon and Tunisia and, to a lesser extent, Egypt and Jordan, the bank’s vice president for MENA said on Tuesday.”We have a number of tensions in those countries,” including debt levels and high inflation, Ferid Belhaj told Reuters on the sidelines of the World Government Summit in Dubai.”The role of the state in the economy, generally in MENA, has always been a matter of concern for us,” he said, adding there was a “a chunk” of public debt that is not disclosed, referring to debts of state-owned enterprises.”And we are advocating that transparency because that’s the only way you can start reforming – you need to have your books clear in front of you,” Belhaj said.In Tunisia, he said a drive for reform was “moving forward, but slower than what we wish it to be.”While Lebanon has long had high levels of public debt, it is becoming “extremely problematic,” Belhaj said.”People are feeling the brunt of the almost-collapse of the financial sector,” he said, adding Lebanon “is really one of those places that, as they say, keeps you awake at night.”The World Bank has already committed $900 million to Egypt this fiscal year through June, and “will see how things go – we may commit more,” Belhaj said.A country partnership framework with Egypt – typically a five-year programme – will hopefully go to the World Bank’s board on March 21 for approval, he added.Egypt last week said it plans to sell stakes in at least 32 state companies by the end of March 2024, which Belhaj said was important.”It’s not going as far as you want it to go, but I see it,” Belhaj said of reforms in the region. “Unfortunately progress, because of what’s happening in the world, sometimes backtracks a bit. But that’s life.” More