Economy

SHARM EL-SHEIKH, Egypt – (Reuters) – U.S. climate envoy John Kerry said on Tuesday he wants to come up with a plan by April to reform the multilateral development banks system to unleash “hundreds of billions” of dollars to help vulnerable countries combat and adapt to climate change.Kerry said he wants to work with Germany to come up with a strategy by the next World Bank Group meetings in April 2022 to “enlarge the capacity of the bank” to put more money into circulation and help countries deal with climate change. “There’s no reason why not. We’re the largest shareholders, we need to call the meetings, put out the policy and make it happen,” he said at a side event at COP27. He said any new strategy should not require new finance from donor countries or for the banks to accept a lower credit rating.Kerry said if the World Bank and regional development banks could increase their lending by the hundreds of billions of dollars, it could leverage trillions in capital from the private sector and other sources. “We’ve got to get the MDBs to do what the MDBs can do, and they’re not today. And we can free more finance by unleashing what is a permissible way of enlarging the capacity of the bank to actually leverage itself and put more money into circulation,” he said.As the delivery of billions of dollars pledged by rich countries to assist countries to adapt to and combat climate change falters, the United States, Germany and other major economies have joined some middle-income countries like Barbados in calling for a “fundamental” overhaul of the World Bank and other international financial institutions.Kerry’s comments come amid growing calls by civil society groups, developing countries and academics, as well as U.S. Treasury Secretary Janet Yellen, for a new “Bretton Woods,” a reference to the conference held in 1941 that led to the creation of the International Monetary Fund and the World Bank. These calls intensified after World Bank President David Malpass in September initially declined to say at a public event whether he accepts the scientific consensus on global warming, which drew condemnation by the White House.Kerry said he would work with German State Secretary for Economic Cooperation and Development Jochen Flasbarth to develop the plan.”We just need a leadership that’s ready to stand up, do what the laws allow,” he said. More

Tuesday marks one year since President Joe Biden signed the massive spending bill, which will disburse billions of dollars to state and local governments to fix bridges and roads, while expanding broadband internet access to millions of Americans.National Economic Council Director Brian Deese said the infrastructure, the Inflation Reduction Act and a bipartisan law funding domestic semiconductor production together would generate some $3.5 trillion in investment over the next decade.Deese said the funding had put the United States into a better position than nearly any other country in the world, laying the ground for private investments and equipping the United States to deal with major global economic challenges.He rejected concerns raised by some Republicans that the added funding would boost inflation, already running at close to 8%, since investments in the digital economy, transportation and other industrial sectors would improve efficiencies, reduce supply chain pressures and lower costs in the longer term.Former New Orleans Mayor Mitch Landrieu, who oversees implementation of the law, said the Biden administration had announced nearly 7,000 projects reaching over 4,000 communities across all 50 states, Washington, D.C. and the U.S. territories.He said the federal government had hired over 3,500 workers to implement the law, which is already funding the repair and replacement of 2,800 bridges and funding procurement of 5,000 new clean transit and school buses.”But the reality is that we’re just at the beginning,” he said. “Between now and the end of the year, we’re going to kick off even more major projects.” More

One of the UK’s top landlords has swung to a loss after an almost 10 per cent drop in the value of its City of London offices, in an early sign that higher interest rates could trigger a widespread commercial property downturn.Landsec on Tuesday reported a pre-tax loss of £192mn for the six months to the end of September, compared with a £275mn profit in the same period last year, as the valuation of its portfolio of national offices and shops fell 2.9 per cent to £10.9bn.The steepest falls were on the FTSE 100 landlord’s nearly £2bn portfolio of City of London offices, which lost 9.7 per cent of their value in the period.Mark Allan, chief executive, said rising borrowing costs had changed the outlook for the sector.“The material increase in bond yields since March has started to put upward pressure on property yields, principally for those assets where yields were lowest,” he said. “In the sectors we are in, this principally affected London offices.”Interest rates have been rising since late last year, when the Bank of England moved the benchmark rate up from historic lows.A higher base rate has increased the cost of borrowing and made commercial property less attractive to institutional investors that can now hold bonds with a similar yield but lower risk than offices or shops. The result has been to push up property yields — which move inversely to prices.Allan added that the outlook was increasingly challenging.“Decades of globalisation, fuelling growth and depressing inflation, have started to go into reverse, with rising geopolitical tensions adding to risks around energy reliance and supply chains,” he said.Colm Lauder, an analyst at Goodbody, said Landsec’s results had given an early taste of what is to come for commercial property owners. “The pain that is coming through in the second half [of the year] is going to be significantly worse,” he said. “The market has moved on so much since September.”The “mini” Budget put forward by former chancellor Kwasi Kwarteng on September 23 and eventually dismantled by his successor Jeremy Hunt accelerated an increase in property yields, as investors started pricing in higher risk and expectations of further interest rate rises.With the measures in that Budget now rejected and the market pricing in more moderate inflation and a less severe increase in borrowing costs than previously feared, the company’s share price has risen by almost 20 per cent in the past month.Nonetheless, underlying property values are likely to continue falling. Lauder estimated that yields for prime commercial property assets such as high-grade London offices or urban warehouses could move to 5 per cent, from a starting point earlier this year of close to 3 per cent — implying much more significant drops in valuation than those revealed so far. Landsec is also contending with relatively high office vacancy rates of 12.2 per cent in the City of London, as businesses consider their post-Covid workplace needs. More

The UK jobs market held steady in September even as the economy slid towards recession, according to official data.The employment rate was unchanged on the quarter at 75.5 per cent in the three months to September, Tuesday’s figures showed, while the unemployment rate of 3.6 per cent remained near multi-decade lows, although it had edged up slightly from the previous month’s reading of 3.5 per cent.The Office for National Statistics said increasing numbers of businesses were holding back recruitment because of economic pressures, but the number of vacancies remained near historic highs at 1,225,000 in the three months to October.This is partly because the UK’s workforce remains smaller than it was before the pandemic, with no sign in the latest data of those who have dropped out of work returning.The ONS said 21.6 per cent of the working age population was economically inactive — neither in a job nor looking for one — in the three months to September, which is 1.4 percentage points higher than before the pandemic.With living costs rising and fewer people available to work, employers have had to offer higher pay to fill vacancies, even though earnings have still not kept pace with rising prices.The ONS said growth in average total pay held steady at 6 per cent in the three months to September, while growth in regular pay — excluding bonuses — strengthened to 5.6 per cent. Despite this, real-terms falls in pay were still among the largest seen since comparable records began in 2001, the ONS said.Jeremy Hunt, chancellor, said low unemployment was “testimony to the resilience of the British economy” but added that inflation was “eating into paychecks and savings”.The chancellor made it clear in comments over the weekend that he saw the UK’s shrinking workforce as one of the main challenges facing the economy, because it would hold back economic growth while adding to wage pressures that could make inflation more persistent. More

A traffic jam of container ships has dissipated outside the ports of Los Angeles and Long Beach, enabling US imports to flow freely again through a critical gateway. The ports in California became so congested last year that the Biden administration intervened to unclog them. In January, a record 109 ships queued outside the harbour waiting for a chance to be unloaded. Last week only seven ships were waiting for a berth, Gene Seroka, executive director of the Port of Los Angeles, told the Financial Times in an interview. The backlog declined after retailers rushed to stock warehouses months before the winter holiday shopping season. A report by the National Retail Federation and Hackett Associates last week showed that US retailers’ imports exceeded 2021 levels every month from January to June this year. Since then, their imports have trailed last year’s pace. Los Angeles and Long Beach — the entry point for about 40 per cent of goods imported to the US — experienced their peak holiday traffic in June and July. “Many retailers brought their seasonal holiday goods [into the country] much earlier than normal,” Seroka said. “They wanted to get ahead of the curve and not get caught up in any last-minute slowdowns in the transportation network.“We were able to bring [the queue] down to single digits in August while breaking records on cargo volume.” But volume has fallen off since then. Despite improvements to wait times at the ports of Long Beach and Los Angeles, the US supply chain still faces challenges. Covid-19 lockdowns in China have interrupted the flow of imports, and there is still a shortage of critical semiconductors used in automobiles. US consumers continue to shop in the face of high inflation, but there are mismatches between what shoppers want and what is available. “Our warehouses in southern California are still filled to the gills, but it may not be the exact products that the American consumer wants today,” Seroka said.Besides seeking to avoid a repeat of last year’s congestion problems at the ports, retailers were concerned about potential slowdowns amid protracted labour negotiations at Pacific coast ports. The union representing the longshore and warehouse workers at the west coast ports has been engaged in talks with the Pacific Maritime Association, while railroads have also held discussions with unions representing their workers. Now, with less than two weeks before the traditional start of the US holiday shopping season, ports in other parts of the country are facing congestion. Retailers decided to bypass the west coast ports and have goods shipped to Houston, Savannah, New York and New Jersey instead, leading to backups at some of those locations, officials say. This has led to lines of ships waiting outside the Gulf of Mexico and east coast ports to be unloaded. Houston set cargo records this summer, with container volume up more than 25 per cent in September from the previous year. Officials at the port in Texas, the largest on the Gulf coast, have recently introduced fees on containers that sit there too long in an effort to ease congestion. Savannah, in the state of Georgia, has been congested since last year. This past August was its busiest month ever, with October the second busiest, the port said. A total of 28 ships still wait to be unloaded, down from 40 in August, officials said. According to the most recent data from PIERS/IHS Markit, the east coast increased its share of the container trade from 47 per cent in July 2021 to 48.4 per cent in July 2022. “There’s not a day goes by that there isn’t some real problem with the supply chain,” Seroka said, noting difficulties receiving goods from some Chinese manufacturers and labour shortages in the US. “Every day we’ve got something . . . we’ve still got a supply chain in need of workers in different segments, whether it’s truck drivers or warehouse workers.” Some experts say the pressure on US ports could begin to ease as the record-breaking pace of imports that began during the depths of the pandemic slows. The easing demand is lowering the cost of shipping, with prices for freight between Asian and US west coast ports down 80 per cent year on year, according to data provider Freightos, while still 81 per cent above November 2019. Prices for cargo from Asia to the east coast are down 64 per cent over 2021 but more than double 2019’s level.

Rail congestion has improved, while members of seven rail unions have agreed new terms on wages and working conditions with the largest freight rail companies. Two unions have yet to approve such a deal but have extended a cooling-off period from November 19 to December 4, delaying any potential strike. Ben Hackett, founder of Hackett Associates, said last week he expects a “flattening of demand” that will continue into the first half of next year. “This will depress the volume of imports, which has already declined in recent months,” said Hackett, whose firm publishes the Global Port Tracker with the NRF. More

Central bankers are to shift towards a more gradual monetary tightening, economists predict, as recent “jumbo” rate moves show signs of taming inflation and officials acknowledge the growing threat of recession.After central banks’ last meetings and a cooling in US inflation to 7.7 per cent in October from 8.2 per cent in September, markets are pricing in a greater probability of 50 basis point rather than 75bp rises in the banks’ next announcements, and smaller rate rises continuing into next year.The US Federal Reserve, European Central Bank and Bank of England had given a “clear signal” that “we’re coming towards a period of slower tightening, mirroring what we’ve seen from Australia, Canada and Norway”, said James Pomeroy, an economist at HSBC.Monetary policymakers believed the aggressive rounds of tightening were having an effect on consumer prices, said Jennifer McKeown, chief global economist at Capital Economics. “We expect central banks to slow the pace of rises due to a combination of weakening economies, easing domestic price pressures and the fact that interest rates are above or reaching equilibrium levels [where activity is neither restricted nor boosted],” she said.Capital Economics expects that most of the next moves across more than 20 central banks it tracks to be rate rises of 50bp or 25bp.Hawks in the world’s central banks won the battle of ideas over the autumn, announcing interest rate rises of a magnitude last seen decades ago. Together, 20 leading central banks have increased rates by a total of almost 11 percentage points since August, showing the recent direction of travel in monetary policy. The Bank of Japan is an outlier as it has not raised rates since 2007 and is not forecast to increase them any time soon, while Russia and Turkey have cut rates.The Fed, ECB, BoE and Bank of Canada alone increased rates by a total of 5.5 percentage points over that period, with all of them delivering at least one 75bp increase. The Fed had not raised rates by 75bp since 1994 but has delivered four consecutive rises of that size since June, with the main federal funds rate now between 3.75 and 4 per cent. The ECB’s 75bp rises in September and October, taking the deposit rate to 1.5 per cent, were the biggest tightening moves in its 24-year history, while the BoE’s similar increase in November was its largest in more than four decades, leaving the rate at 3 per cent.With policy rates now much closer to their equilibrium or “neutral” level and economic activity weakening, “the case for scaling back policy tightening . . . has strengthened”, said Ben May, global economist at the consultancy Oxford Economics.

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There are many signs of weakening output. S&P Global’s purchasing manager indices indicated a deepening downturn for the US, UK and eurozone in October. The global index of new orders dropped to the lowest level since spring 2020, at the height of the pandemic. Consumer and business confidence levels are near record lows in many countries as high inflation and a surge in borrowing costs after the round of big rate rises hit household and corporate spending. Economists are revising down their growth forecasts for 2023 for the wealthiest countries and expect output to decline in Germany, Italy and the UK. Market expectations for next summer have also eased. Based on derivative products such as interest rate swaps, expectations for the ECB deposit rate next summer had soared to 3 per cent in September from less than 1 per cent in early August, but they have not been raised since then. In the UK, higher rates were priced in after aggressive tax cuts were announced in September’s “mini” Budget. But with these cancelled as part of the new government’s more modest fiscal plans, expectations for next summer have largely returned to their mid-September levels of 4.6 per cent.

Susannah Streeter, senior investment analyst at asset manager Hargreaves Lansdown, said it was “sensible” to expect smaller increases in the UK, “especially with a recession forecast which could last two years and bring deflationary pressures”.In the US, market expectations for next summer continue to rise after Jay Powell, the Fed chair, warned that rates would peak at a higher level than expected. However, even the Fed may be adjusting policy as the recent rate rises begin to reduce economic activity. “The more aggressive moves appear to be coming to an end, with a gentler strategy expected in the months to come,” said Streeter. More

Japan’s economy saw an unexpected contraction for the first time in a year on the back of surging import bills in the third quarter, caused by the yen’s plunge to multi-decade lows.GDP in the July to September period shrank 1.2 per cent from the previous year. Japan faced a surge in Covid-19 cases during the summer that slowed a rebound in consumer spending for Asia’s largest advanced economy.Economists expect growth to pick up towards the end of the year with the return of tourism and the rollout of Prime Minister Fumio Kishida’s $200bn spending package to ease the impact on households of soaring commodity prices and a weaker yen.The fall in Japan’s gross domestic product contrasts with economists’ expectations of a 1.1 per cent rate rise and second-quarter growth of 4.6 per cent. The data translated to a real quarterly drop of 0.3 per cent, compared with forecasts of 0.3 per cent growth, according to preliminary figures released by the cabinet office on Tuesday.

Household spending continued to rise but only by 0.3 per cent compared with 1.3 per cent in the second quarter, as savings accumulated during the pandemic helped consumers weather rising living costs.Export growth of 1.9 per cent was widely outpaced by a 5.2 per cent rise in Japan’s imports bill, reflecting the weaker yen and trade environment.Since September, Japanese authorities have carried out multiple interventions to prop up the yen, which fell to a 32-year low last month because of a widening gulf between the Bank of Japan’s super-dovish monetary policy and tightening by most other big central banks.Real gross domestic income also fell a sharper than expected 3.9 per cent during the quarter. Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, said the drop indicated further downside risks to the economy, since sluggish wage growth would mean consumer spending might not grow strongly beyond the anticipated pent-up demand caused by the pandemic.Economists expect Japan to outperform other advanced economies next year, since it still has room for further recovery from the pandemic and the economy will be supported both by government spending and the BoJ’s ultra-loose policy.“Still, it is hard to be optimistic about the outlook for the Japanese economy just because of the stimulus measures, since the economic impact of tightening by central banks globally will start to be felt from next year and Japan’s economy will slow down if overseas economic conditions deteriorate,” Shinke said. More