Economy

To IRA or not to IRA? That is the question for EU leaders as they try to agree on how to respond to the Inflation Reduction Act, Washington’s belated but punchy commitment to subsidise the green transition. Europeans are at loggerheads. French and German ministers want a new green industrial policy and European Commission president Ursula von der Leyen has called for “our European IRA”. Frugal free-traders such as Sweden and the Netherlands resist further subsidies. The commission itself is divided on how interventionist to be. It has challenged the US’s most egregious protectionism and promised to loosen subsidy rules somewhat. A “sovereignty fund” for EU-level subsidies is endorsed by European Council president Charles Michel but is hotly contested among member states.The disagreements all revolve around one big difference of judgment as to which of two dangers is the greatest: the competitive threat to EU industry or a subsidy race to the bottom? The problem for cogent decision-making is that both “dangers” are misconceived. To see US spending on greening its energy, industry and transport as a threat reveals a European inferiority complex. The real threat is that the US fails to make good on its belated intention to address climate change. With debt ceiling politics kneecapping Washington’s ability to spend even what it has already budgeted, it is misplaced to fear it is doing too much.European leaders already worry that internet services are dominated by US giants. If European business leads America’s green tech transformation, why not celebrate that the tables are turned? Or would they prefer it the other way round? Surely not, seeing how they fret at China’s ambitious construction of battery factories in the EU. Nobody in their right mind would think that those threaten Chinese competitiveness.The tacit presupposition is that European companies can only invest in one place, and if that place is America then European economies will fall behind (though European shareholders would not). But the idea that there is only so much investment to go around in the world is a lump of investment fallacy. Even where true for any particular capital-constrained company, it is not true in aggregate. If too little capital flows to the European economy, it’s the flipside of domestic policies that have for too long resulted in export surpluses rather than higher domestic investment.The task is not to stop a European company from building a wind farm, battery factory or electric vehicle plant in the US, but to ensure they get built in Europe regardless. Europe has the wherewithal to do so: a firm commitment to phasing out carbon-intensive activities, a carbon pricing system, soon a carbon border tax and — yes — subsidies that range from the post-Covid recovery fund to EU-financed “important projects of common European interest” in such sectors as batteries and hydrogen. What the EU needs is to make these types of tools more efficient, faster to access and better funded. Further raising the cost of emissions while subsidising that of decarbonising more will accelerate the necessary investments, IRA or not. That means expanding the carbon pricing and tariff policies. But it also means boosting public money for research, capacity and production.Sceptics of new funds are right that the priority is to get money already granted out the door faster. But they should not oppose more subsidies too. Unlike some other sectors keen on subsidies, such as commoditised semiconductors, the world is nowhere near saturated with green technology and infrastructure. Climate change is the biggest market failure the world has ever known and a subsidy race in green tech and carbon-free energy would be a race to the top not the bottom. Europe’s embrace of carbon pricing means such subsidies can have a greater effect than on the other side of the Atlantic.The most valid complaint by business is that Europe’s financial support is too cumbersome, whereas US-style tax credits are virtually automatic. Tax credits are no silver bullet: they only help companies in a position to pay tax, which favours established players over newcomers. But they are quick and easy. The EU is hamstrung, as tax remains a national prerogative. Still, all members can treat green investment much more generously in their tax codes. Swift EU effort to co-ordinate and encourage such action, through better state aid and fiscal rules, would be a good idea.The job of EU leaders is to make business confident of a big and growing market for green solutions. There is no reason why the IRA should make that [email protected] More

The writer is chair of Rockefeller InternationalOver the past half century, as governments and central banks teamed up ever more closely to manage economic growth, recessions became fewer and farther between. Often they were shorter and shallower than they might have been. After so much mildness, most people cannot imagine a painfully lasting business cycle. But the global economy is heading into a period unlike any we have seen in decades. Faith in government as a saviour in recessions has been worming its way into people’s minds for most of their lifetimes. Since 1980, the US economy has spent only 10 per cent of the time in a recession, compared with nearly 20 per cent between the end of the second world war in 1945 and 1980, and more than 40 per cent between 1870 and 1945. One increasingly important reason is government rescues. Combined stimulus in the US, the EU, Japan and the UK, including government spending and central bank asset purchases, rose from 1 per cent of gross domestic product in the recessions of 1980 and 1990 to 3 per cent in 2001, 12 per cent in 2008 and a staggering 35 per cent in 2020.Though the 2020 recession was sharp, it was the shortest since records begin, lasting just two months. Government bailouts in the pandemic came so fast and large that it felt to many people, particularly white-collar employees working from home, as if the recession never happened. Their incomes and credit scores went up. Their wealth exploded with rising stock and bond markets. Now this experience of recession as a non-event seems baked into the professional psyche.Some commentators are beginning to say the world economy could be in for a “soft landing”, not an outright recession. In the latest consensus surveys, economists aren’t quite that optimistic. But they continue to expect the mildest recession since the second world war, starting soon and lasting less than six months, as the Federal Reserve again comes to the rescue. This consensus view may be wrong in key respects, whether on how soon the next recession arrives, how long it lasts or how generous the rescue effort can be. In 2020, governments injected so much money into the economy that consumers are still sitting on much of it two years on — $1.5tn in the US alone. Investment by US and European business barely broke stride. Governments continue to spend. Because of this, the next downturn may come later than expected, a view bolstered by the latest US GDP data, which showed a resilient economy. When the pandemic stimulus finally runs out by year end, the next downturn, once it comes, may not pass so quickly. The key sticking point is inflation. This is now retreating almost as quickly as it surged last year — as supply chains normalise and “revenge spending”, unleashed by the end of lockdowns and boosted by stimulus, calms down. But it is not likely to return to its pre-pandemic level of under 2 per cent. The most lasting legacy of Covid may be its impact on work and wage inflation. One in eight people say they plan “no return” to pre-pandemic activities, including work. The number of hours people of all ages want to work plunged, and their attitude has changed as well. Social media celebrates “quiet quitting” and “acting your wage” — meaning do what you are paid for, and no more.In conversations I hear chief executives saying that they have “pricing power” for the first time in decades. Inflation for goods such as cars is slowing fast, but that for services is stickier. The Fed tracks a special index for “sticky services” like real estate and recreation — in which prices move slowly — and it is rising. Meanwhile, the world is changing in fundamentally inflationary ways: birth rates have been falling for years but are now rapidly shrinking working-age populations. Countries are retreating inward, offshoring to the nearest and most friendly nations rather than to the least costly. The pressure from demographics and deglobalisation will push the new normal for inflation higher, closer to 4 than to 2 per cent. This will make it harder for central banks to cut rates to counter the next recession. Higher rates mean governments can borrow and spend heavily to stimulate sluggish economies only at risk of inviting punishment in the global bond markets, which are already much less tolerant of free spending.While the next downturn may take longer to hit, it is likely to take an unfamiliar shape, possibly not much deeper but more enduring, as stickier inflation forces central banks and government rescue teams to the sidelines. The world is not ready for the long grind ahead. More

LONDON (Reuters) -British Prime Minister Rishi Sunak sacked Conservative Party chair Nadhim Zahawi on Sunday after an investigation found he committed a serious breach by not being open about a tax probe, the latest scandal to hit one of Sunak’s top ministers.Sunak had initially stood by Zahawi before ordering an independent adviser to investigate questions over his tax affairs after it emerged Zahawi had settled a probe by Britain’s tax authority HMRC last year.Zahawi has said the tax body ruled he had been “careless” with his declarations but hadn’t deliberately made an error to pay less tax, confirming he paid a penalty to HMRC. Sunak’s independent adviser Laurie Magnus said that Zahawi didn’t declare that his tax affairs were being investigated when he was briefly made finance minister last year, and failed to disclose details when Sunak appointed him to his current role.”Following the completion of the Independent Adviser’s investigation … it is clear that there has been a serious breach of the Ministerial Code,” Sunak said in a letter to Zahawi. “As a result, I have informed you of my decision to remove you from your position in His Majesty’s Government.”Zahawi’s response to Sunak did not mention either the HMRC or independent adviser’s investigation. He expressed concern at the conduct of some in the media in recent weeks and said he would support Sunak’s agenda as a backbench lawmaker.”I am sorry to my family for the toll this has taken on them,” he said.It is a setback to Sunak’s attempt at a government reset after a chaotic year that saw three different British prime ministers. An investigation into alleged bullying by Deputy Prime Minister Dominic Raab is ongoing and could cause further headaches.One Conservative lawmaker said sacking Zahawi was “clearly the right decision,” adding Zahawi “should have resigned to avoid the embarrassment.” “Raab is rather different,” the lawmaker, who declined to be named, said. “One man’s bullying is another’s firm direction.” Raab has denied bullying allegations.The opposition Labour Party said that Sunak had shown weakness in how he had handled the Zahawi and Raab cases. “It’s vital that we now get answers to what Rishi Sunak knew and when did he know it,” Labour’s education spokesperson Bridget Phillipson said on Sunday.Zahawi’s sacking comes as Sunak’s government, facing decades-high inflation and a wave of public sector strikes, trails badly in opinion polls ahead of an expected 2024 election. UNTRUE PUBLIC STATEMENTMagnus said that the details of HMRC’s own investigation – relating to Zahawi’s co-founding in 2000 of opinion polling firm YouGov, and how many shares his father had taken to support its launch – was outside the scope of his own inquiry.But he found that Zahawi had failed to declare HMRC’s probing of affairs, or acknowledge that they were a serious matter. Zahawi had characterised reports last July over his tax affairs as “clearly smears”. Zahawi did not correct the record until last week, when he said he had reached a settlement with the authorities.”I consider that this delay in correcting an untrue public statement is inconsistent with the requirement for openness,” Magnus said in a letter to Sunak.He added that Zahawi had shown “insufficient regard” for the requirement “to be honest, open and an exemplary leader through his own behaviour.”Zahawi became finance minister following Sunak’s own resignation from the role in July last year, which helped end Boris Johnson’s scandal-hit premiership. When he replaced Liz Truss as prime minister after her brief but tumultuous time in power, Sunak promised that “this government will have integrity, professionalism and accountability at every level.”But the reboot has got off to a tricky start. Along with the investigations into Zahawi and Raab, Sunak reappointed interior minister Suella Braverman just five days after Truss sacked her for breaching the ministerial code around security rules, while in November minister Gavin Williamson resigned over bullying allegations.Asked if Conservative politicians consistently follow their own set of rules, senior minister Michael Gove said there were “always people who will fall short.””Because someone commits a lapse or a sin, that shouldn’t be automatically taken as an opportunity to damn an entire organisation,” he told the BBC. More

The People’s Bank of China will roll over a lending tool for supporting carbon emission reduction to the end of 2024, and extend a relending tool for promoting the clean use of coal to the end of 2023, the bank said in a statement on its website.The central bank will also extend a relending tool for the transport and logistics sector to June 2023, it said.Some foreign financial institutions will be included in the scope of the carbon reduction tool, the central bank said.The move to extend the lending tools will help “precisely and effectively implement the prudent monetary policy, guide financial institutions to increase support for green development and other areas”, the central bank said.Since 2020, when the world’s second-largest economy was first jolted by the coronavirus, the central bank has expanded its arsenal of structural policy tools, including relending and rediscount facilities and other low-cost loans.Outstanding loans made via structural tools amounted to nearly 6.45 trillion yuan ($950.98 billion) at the end of 2022, central bank data showed.The central bank is poised to ramp up targeted support for troubled sectors through its structural policy tools, according to policy sources and analysts.($1 = 6.7825 Chinese yuan renminbi) More

Marton Nagy, a former central bank deputy governor, told state radio that the “very high” interest rates made the government’s job difficult and harmed the economy. Prime Minister Viktor Orban’s government is trying to avoid economic recession at a time when inflation is still running well above 20%.Nagy said inflation could slow to single digits by the end of the year.”When there is a turnaround in inflation, I think that the central bank can also justifiably take a turn in policy…and they can start cautiuously reducing interest rates,” Nagy said, talking about rate cuts for the second time this week.The central bank declined to comment in an emailed response to Reuters on similar remarks made by Nagy in a weekly newspaper on Thursday.On Tuesday, the central bank left its base rate at 13% and said it would keep its one-day deposit rate at 18% until it sees “a trend improvement” in risk assessment. The bank is due to release its fresh inflation forecasts in March.Credit ratings agency S&P on Friday cut Hungary’s long- and short-term foreign and local currency ratings to ‘BBB-/A-3’ from ‘BBB/A-2’, citing persistently high inflation and external pressures. Nagy told the radio that he did not expect a similarly “drastic” move by Moody’s (NYSE:MCO) during a debt rating review due in early March. He also said Hungary’s economic fundamentals were improving, and energy prices have dropped. More

The Chinese government has vowed to make consumption the “main driving force” of the economy as hopes grow that Beijing’s abandonment of zero Covid policies will unleash a flood of spending by Chinese consumers, fuelling a global rebound. “The greatest potential of the Chinese economy lies in the consumption by the 1.4 billion people,” Li Keqiang, China’s premier said during a meeting of China’s cabinet, the state council, according to a statement released late on Saturday. “Boosting consumption is a key step to expand domestic demand. We need to restore the structural role of consumption in the economy.”While China has long sought to boost consumer spending, the comments from its outgoing premier come at a crucial moment as Beijing seeks to rebuild the economy after years of punishing lockdowns.The Chinese economy grew by just 3 per cent in 2022, underscoring the impact of the government’s zero-Covid strategy before it was abandoned last month. Last year’s collapse of the property market, which has contributed around one quarter of GDP over the past decade, has also added to economic stress. Economists hope that China’s pent-up consumer activity will buoy global demand. Multinationals including Unilever have said in recent weeks they were expecting a rebound in demand in the country and banks including Morgan Stanley have increased their Chinese growth forecasts. “We believe the market is underappreciating the far-reaching ramifications of reopening, and the possibility that a robust cyclical recovery can occur despite lingering structural headwinds,” the bank said in a January note. Still doubts remain over the willingness of Chinese consumers to start spending again. Experts have long warned that China’s desire to move away from property-driven growth towards greater consumer spending will be challenging. Household spending accounted for 38 per cent of Chinese gross domestic product in 2021. By comparison, it accounted for nearly 70 per cent of US GDP in 2022. The last few years of Covid has also bred economic caution as incomes and house prices came under pressure in the real estate crash. The country’s already high gross national savings rate swelled during the pandemic. Renminbi deposits held by households nationwide grew in 2022 by a record Rmb17.8tn ($2.6tn), compared with growth of Rmb9.9tn in 2021, according to data from the People’s Bank of China.Chinese citizens celebrated lunar new year last week for the first time since pandemic controls were lifted. While state media say 226m domestic trips were made, 74 per cent more than last year at the height of Covid restrictions, that is still just half the 420m trips made in 2019. More

The government collects a 12% VAT on goods consumed within the Southeast Asian country. The plan is to allow foreigners to get a VAT refund on items they are taking out of the Philippines, similar to what many other countries offer.The measure is among the proposals a private sector advisory council presented to Marcos recently to boost the tourism industry, including improving airport infrastructure and operations and promoting tourism investment, the PCO said in a statement.Marcos has also approved the launch of an online visa this year for Chinese, Indian, South Korean and Japanese tourists, it said.The Philippines recorded 2.65 million international visitors last year, who brought in an estimated $3.68 billion in revenue, exceeding its 2022 target of 1.7 million tourists, according to the Department of Tourism.Last year’s total comprised of 2.02 million foreign nationals and 628,445 Filipinos based abroad, which compared with only 163,879 tourists recorded in 2021 and was still significantly lower than the pre-pandemic annual level of 8.26 million.The government aims to boost visitor arrivals this year to 4.8 million tourists. More

The Bank of England is set to keep its options open on whether UK interest rates will peak at 4.25 per cent or 4.5 per cent, after it raises rates for the tenth consecutive time later this week. The BoE is also expected to signal that once interest rates peak, it will need to keep them high for some time before it can be sure to have defeated high inflation. The bank’s Monetary Policy Committee is expected to raise rates by 0.5 percentage points to 4 per cent at noon on Thursday, according to a large majority of economists polled by Reuters. While a rate rise is almost universally expected, there is less consensus on how much more work the BoE will need to do thereafter in order to cool the economy sufficiently to bring inflation under control. Andrew Bailey, BoE governor, last week said that the path towards lower inflation would be “easier” than previously thought with lower wholesale gas prices limiting the depth of the downturn needed to quell price rises.But he pointedly refused to say that financial market expectations that UK interest rates will peak at 4.5 per cent were wrong. He noted that the MPC in December had not suggested markets were “out of line” with the BoE’s thinking as it had in November, when markets expected a considerably higher peak interest rate of 5.25 per cent. Inflation stood at 10.5 per cent in December after falling back from 41-year peak in October.Economists are divided on how high UK interest rates ultimately need to go with that division likely to be replicated on the MPC itself. Karen Ward, chief European market strategist at JPMorgan Asset Management, said she expected interest rates to rise to 4.5 per cent. “Although activity is clearly slowing in the UK, I’m not yet convinced that it will be sufficient to reduce underlying inflationary pressure,” Ward said. Recent wage and employment intention data “suggest that if anything the momentum in the labour market is improving, not deteriorating”, she added.In contrast, Jagjit Chadha, director of the National Institute of Economic and Social Research, said that neither the MPC nor the economics profession properly understood the effect of raising interest rates from almost zero to the current rate of 3.5 per cent so quickly.“The danger is that we go too far too quickly,” he said, adding that, “with inflation set to fall mechanically this year, rates ought to climb only a little in small steps and rest at around 4 per cent”. The BoE started raising interest rates in December 2021, followed by subsequent increases of at least 0.5 percentage points in every meeting since August last year.Financial markets and most economists think a majority on the MPC will opt for another “forceful” 0.5 percentage point increase, which would match the rate rise in December and bring rates to 4 per cent. The vote is likely to be split because two members of the MPC, Swati Dhingra and Silvana Tenreyro, voted not to increase rates from 3.5 per cent at the December meeting. Philip Rush, founder of the consultancy Heteronomics, said that private sector regular wage inflation of 7.2 per cent in the three months to November would worry the BoE and was not compatible with bringing inflation down to its target of 2 per cent in the medium term.To address these worries, he said he expected the MPC “to reinforce its credibility with another 0.5 percentage point hike in February ahead of April’s critical wage round”.Pay is one leg of a feared wage-price spiral that could keep inflation too high for too long. The other is the ability and willingness of companies to raise prices and these also look concerning for the BoE. Core inflation — excluding food and energy — has been stuck around 6 per cent for the past nine months even as headline inflation peaked in October and has since been falling. The committee is unlikely to feel reassured that lower energy prices later this year will bring underlying inflation down sufficiently rapidly. The BoE’s own survey of companies in its Decision Maker Panel, for example, showed companies are still expecting to raise their prices by 5.7 per cent in the year ahead. Alongside the decision on interest rates, BoE watchers will also be interested in the economic projections produced by the central bank and commentary by officials [as guidance] on how much more action the bank will take.The bank’s forecasts are likely to show headline inflation falling fast later this year, and in 2024, reaching the 2 per cent target in roughly two years before dropping below the target for a period. James Smith, research director at the Resolution Foundation think-tank, said the key signal was the inflation forecast at the “policy-relevant horizon” of around two years, and whether the BoE believes “underlying inflation might prove more persistent” than previously thought. He also noted that the February meeting allows the BoE to rip up its previous forecasts and come to a fresh view, as it coincides with the MPC’s annual stock take of the economy’s ability to grow without inflation.

The BoE could modify its view on how many people it thinks are looking for work and the productivity performance of the economy, both of which would influence its view of inflationary pressure.“The MPC became much more pessimistic about supply potential last year without saying a lot about what was driving that view,” Smith said. Focus on the BoE’s signals after its decision will be intense. Bailey’s recent suggestion of an “easier path” ahead suggest it now sees a way to return to price stability with less pain from higher unemployment and the longest recession since the second world war.The governor is expected to reiterate a tough message on prices, however, because any failure to bring inflation down would destroy his reputation and that of the bank’s independence to set monetary policy. More