Economy

The events of the past year have radically altered Europe’s energy policy. The goal of achieving net zero before 2050, confirmed 12 months ago at the COP26 meeting in Glasgow, is still in place. But the immediate priority across Europe, now, is to secure energy supplies for the coming winter and to mitigate the economic and social impact of dramatic increases in oil and gas prices.The short-term responses — extensions of the use of coal and the search for new local and imported sources of natural gas — might suggest that the climate agenda set in Glasgow has been abandoned. However, that is not the case. If anything, energy is now a much more immediate political concern than it was a year ago.The energy crisis sparked by Russia’s invasion of Ukraine has certainly provided a sharp reminder to European consumers, and governments, that hydrocarbons still provide more than 80 per cent of the continent’s energy needs.But the sudden turn of events has also made the risks of reliance on hydrocarbon imports glaringly evident. As a result, the prospect of shifting to low-carbon sources of supply has become more attractive.Wind and solar are, for now at least, both cheaper providers of electricity than imported gas. Using power produced locally also reduces the discomfort of dependence on unreliable trading partners. The energy transition and the cause of energy security have merged into one.Not surprisingly, the growth of investment in wind and solar supplies of electricity is the dominant trend.Vorsprung durch Technik: panels and wind turbines in Germany © AlamyPreviously seen as a “bridge” to a lower carbon economy — as it is a less polluting fossil fuel than coal and oil — gas is regarded as the principal source of energy insecurity and has become the primary target of the transition agenda.Demand for it cannot be eliminated quickly because the infrastructure of energy consumption from home heating systems to industrial plants is entrenched. Even so, total consumption has fallen. In the second quarter of this year, Europe used 16 per cent less natural gas than a year earlier. That level is set to fall further.In the short term, new LNG facilities being built in the US and the Middle East will provide additional supplies to fill the immediate gap. But, in a shrinking market, Russia will struggle to regain its dominant role as a supplier even if the war in Ukraine ends soon.A new, lower carbon energy mix is therefore emerging in Europe — but at some cost to the wider ambitions of the COP26 agenda. The urgency of the situation over the past six months has led to a reassertion of national control of energy policy. Governments liable to be judged by their ability to keep the lights on and to protect consumers from soaring prices cannot afford to wait for consensus across 28 countries, let alone for a global deal.Proposals from the European Commission for price caps and common purchasing arrangements have been hindered by the need to move at the pace of the most reluctant member state. In Germany, in particular, national support packages — securing supplies and protecting consumers with price subsidies — have transcended efforts to find pan-European solutions.The focus of national policies is internal and the cost is high. Thanks to Covid and energy support packages, government debt across the EU has risen to over 90 per cent of GDP — and will be pushed higher by new packages being put in place. Rising bond rates are adding to the costs of servicing the borrowing. In a climate characterised by inflation and austerity, there is little prospect of any serious response to the cries from emerging economies for climate justice. Nor, too, can we expect a rush to provide the new funding for energy transition in the world’s poorer countries that will be demanded at COP27 in Sharm el-Sheikh.

The mood in Europe is one of protectionism — a determination to protect Europe’s industrial base from the risks of high energy costs and supply interruptions. The levers of this protectionism range from the Carbon Border Adjustment Mechanism, which will put tariffs on imports from countries not meeting European climate standards, to maximising locally produced energy supplies — which, in the short term, will include fossil fuels.A period of low economic growth or, in some countries, recession, can only reinforce the trend. This approach could trigger an open trade conflict with countries such as India, which resents Europe’s unwillingness to accept that emerging economies still produce far fewer emissions per capita than the EU. And such conflicts, unfortunately, will hinder attempts to reach new and tighter agreements on the climate agenda.The good news is that Europe will probably lower its emissions more rapidly than could have been expected a year ago. The bad news is that, for the moment, little progress is likely on global deals.Climate policy remains an important focus for leaders across the continent. Optimists can only hope that, once economic stability is restored, they will realise that delivering a clean Europe in a dirty world achieves nothing.The author is visiting professor and former chair of the Kings Policy Institute at King’s College London More

It was the $100bn question during COP26 last year: would rich countries fulfil their pledge to give that sum to poorer states of the global south, to address climate change. In 2009, they said they would do so by 2020. But the figure was not achieved — falling short at $83.3bn, and Oxfam calculates that most of this was provided as loans, rather than grants.At COP27 in Egypt this month, discussion will once again be dominated by rifts over climate finance. African ministers have called the failure to provide the promised money “shameful”.And, even if $100bn is delivered, leaders in the global south argue it is insufficient, particularly when most climate-vulnerable countries are already mired in debt and still grappling with the economic fallout from Covid-19.“Developing countries have to balance between urgent climate needs and paying back debts,” says Jessica Omukuti, research fellow at the University of Oxford’s Inclusive Net Zero initiative. “If you can’t pay back your debts, your credit rating goes down, [and] you compromise your partnerships and your future capacity to get finance.” More than half of the world’s poorest countries are either in debt distress or at high risk of it, according to the World Bank. Poorer countries bear the brunt of environmental degradation and are simultaneously unable to meet the cost of low-carbon and climate-resilient development.Research by the campaigning group Debt Justice found they spend five times more on debt payments than on dealing with climate change, resulting in a vicious circle of climate catastrophe, borrowing, and spiralling debt burdens.The climate crisis is driving poor countries further into debt distress, says Mary Robinson, former president of Ireland and chair of The Elders, an independent group of global leaders. “As Mia Mottley [Barbados prime minister] said, in many places like the Caribbean, climate and other natural disasters account for 50 per cent of the long increase in public debt there. And that’s typical.” Pakistan is a recent case in point. Fierce flooding in the summer ravaged the country, displacing 33mn people, killing more than 1,400, and costing around $40bn in property damage. The IMF approved a bailout loan of more than $1.1bn but, last month, Pakistan’s government announced it would need to borrow billions more. The country already has external debt of around $130bn.Debt crises in poor countries are often triggered by extreme climate events. In 2019, Mozambique took on a $118mn loan from the IMF to deal with the aftermath of cyclone Kenneth and cyclone Idai. Decades earlier, Belize’s debt doubled from 47 per cent of GDP in 1999 to 96 per cent by 2003, following devastating storms in 2000 and 2001.

Nearly three-quarters of climate finance still comes in the form of loans, usually with high interest. A 2020 Oxfam report revealed that as much as 80 per cent of funds gathered for the $100bn pot came as loans and, of that, about half was in the form of non-concessional loans: those offered on ungenerous terms.Increasing climate threats make lending to vulnerable countries more risky, so borrowing becomes more expensive. But, equally, as the intensity and frequency of extreme weather escalates, vulnerable countries desperately need cash for adaptation, yet only a quarter of climate finance in 2019 was spent on adaptation, according to the OECD.Some in the global south argue that, because they bear little responsibility for the climate chaos wrecking their nations, debts should be cancelled and the global north should pay reparations for the damage it has caused.Demands are also growing for a “loss and damage” fund to help low-income countries deal with climate-related devastation, though so far most developed nations have sidestepped the issue.Members of V20, a bloc of 20 countries among the most vulnerable to climate change, are considering halting debt payments. Between them, they owe $500bn over the next four years. Leading the charge, Mohamad Nasheed, former president of the Maldives, said poor nations were locked in a Sisyphean trap: borrowing money to ward off storms, only to see climate change destroy the improvements.There are potential solutions. Thinkers in the Caribbean, Germany and elsewhere have proposed debt-for-adaptation swaps: creditors would forgo debt repayments so that the funds could instead be spent locally on adaptation. This would boost domestic economies, eliminate the search for hard currency to repay loans, and spur climate resilience.Similar debt swaps have worked in Seychelles, Poland and Argentina. The Bridgetown Initiative, unveiled by Mottley in September, puts forward a number of proposals to transform international financing, including natural disaster clauses in every debt contract, more concessional funding, and expanding the lending capacity of multilateral development banks (MDBs).“We need all the possibilities,” says Robinson. Securing the promised $100bn is important because it has become a trust issue, she says, but there also needs to be “a real pathway to doubling climate adaptation finance” and “debt swaps for adaptation and nature”.“Above all else, we need to work out how to open the coffers of the MDBs. There’s so much capital available. It’s the political will that’s the problem.” More

LONDON (Reuters) – British businesses fear a gloomy Christmas ahead, as almost half of households plan to cut festive spending due to the soaring cost of living and sales are already falling sharply in inflation-adjusted terms.Payments processor Barclaycard said 48% of people it surveyed over Oct. 21-24 plan to spend less this Christmas, with 59% intending to buy less generous gifts and 42% cutting back on socialising.The British Retail Consortium said spending at major stores in October was 1.6% higher than a year earlier, slowing from 2.2% in September and representing a big fall in the volume of purchases once inflation was taken into account.”Christmas will come later than last year for many and there may be more gloom than glitter as families focus on making ends meet, particularly as mortgage payments rise,” BRC chief executive Helen Dickinson said.British consumer price inflation returned to a 40-year high of 10.1% in September and the Bank of England last week forecast it would peak at around 11% during the current quarter.The BoE also raised interest rates to 3%, their highest since 2008, and said Britain was at risk of two years of recession – longer than any in the past century, although the outright decline it forecasts is shallower than in 2008-09.The BRC’s measure of like-for-like sales, which adjusts for changes in retailers’ floor space, slowed to 1.2% in October from September’s 1.8%.”The small rise in sales masked a much larger drop in volumes once inflation is accounted for,” the BRC said.Britain’s official retail sales data, which cover more shops than the BRC figures and is adjusted for inflation, showed sales volumes excluding fuel dropped 6.2% year-on-year in September. Spending on food in the three months to October rose by 5.1% compared with a year earlier, while non-food spending dropped by 1.2%, the BRC said. Mild weather saw shoppers delay buying winter clothes, but electric blankets and air fryers saw high demand as people sought cheaper ways to cook and stay warm.Barclaycard said consumer spending in October was 3.5% higher than a year before, up from 1.8% growth in September but still representing a fall when adjusted for inflation.”Consumers continue to swap big nights out for cosy evenings in as they reduce their discretionary spending,” Barclaycard director Esme Harwood said. Spending on hospitality and leisure grew at the weakest pace since March 2021, when COVID-19 lockdowns were still in effect, due to rail strikes as well as people saving money by getting take-away meals and digital subscriptions to consume at home.Spending on energy bills were 36% higher than a year earlier, down from a 48% rise in September, as many households received a 400 pound government credit to their bills. More

SINGAPORE (Reuters) – The dollar was kept on the back foot on Tuesday by strength in the Chinese yuan and other currencies sensitive to China’s growth, as markets clung to hopes that China’s restrictive zero-tolerance approach to COVID-19 will eventually ease.The yuan had its best day in two years on Friday and managed to hold most of its gains through a choppy Monday. It was firm at 7.2200 per dollar in offshore trade on Tuesday.The euro, linked via German exports to China’s economy, regained parity on the dollar overnight and hovered at $1.0026. The New Zealand dollar climbed 0.2% to touch a seven-week high of $0.5951 in early Asia trade.U.S. voters go to the polls in midterm elections later in the day, with a Republican victory and consequently gridlock in Congress forecast. A conclusive result could take days, but is unlikely to move currency markets if it meets expectations.China’s strict virus policy includes lockdowns, quarantining and rigorous testing, and officials said over the weekend the measures are “completely correct” and will stay. But incremental adjustments have been enough to keep traders’ hopes alive.”Where there’s smoke, eventually there’s fire, so the market is pricing in improved optimism, though at the moment it’s all based on hopes,” said Rodrigo Catril, senior currency strategist at National Australia Bank (OTC:NABZY) in Sydney.”It’s very CNY and pro-growth supportive,” he said.”This idea that maybe in 2023, we’ll see a gradual reopening in China means that growth prospects in China should improve significantly, against a backdrop where most expect the U.S. economy to start slowing down.”The growth-sensitive Australian dollar is up two sessions in a row and last bought $0.6486, within range of its 50-day moving average at $0.6516.The South Korean won rose 1%.The Japanese yen hit a one-week high of 146.35 per dollar. Japanese foreign currency reserves posted the second-sharpest monthly decline on record in October as authorities spent 6.35 trillion yen intervening to support the yen.Bank of Japan policymakers debated the need to look out for the side-effects of prolonged monetary easing and the potential impact of a future exit from ultra-low interest rates, a summary of opinions at their October policy meeting showed on Tuesday.Sterling held sharp overnight gains made as a disappointing auction lifted gilt yields a bit. It was last at $1.1531, though traders are wary of chasing it too much higher ahead of a fiscal update expected on Nov. 17.========================================================Currency bid prices at 0045 GMTDescription RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.0031 $1.0017 +0.14% -11.76% +1.0031 +1.0014 Dollar/Yen 146.3300 146.4950 -0.09% +0.00% +146.7050 +146.3600 Euro/Yen 146.78 146.91 -0.09% +12.63% +146.9800 +146.7600 Dollar/Swiss 0.9877 0.9887 -0.06% +8.33% +0.9891 +0.9880 Sterling/Dollar 1.1535 1.1516 +0.17% -14.70% +1.1535 +1.1507 Dollar/Canadian 1.3479 1.3492 -0.10% +6.60% +1.3498 +1.3478 Aussie/Dollar 0.6490 0.6482 +0.14% -10.71% +0.6490 +0.6472 NZ Dollar/Dollar 0.5948 0.5941 +0.14% -13.08% +0.5952 +0.5938 All spotsTokyo spotsEurope spots Volatilities Tokyo Forex market info from BOJ More

Tuesday’s survey from National Australia Bank (OTC:NABZY) Ltd (NAB) showed its index of business conditions eased 1 point to +22 in October, still far above its long-run average.The volatile measure of confidence eased 5 points to 0, leaving it below the long-run average.”Consumers continue to spend despite headwinds from inflation and interest rates, and that run of strength looks to have carried on into October,” said NAB chief economist Alan Oster. “Overall, the survey suggests that firms are growing wary of the potential for a slower period ahead, despite ongoing strong demand.”The NAB surveys have shown business activity beating all expectations for some months even as the Reserve Bank of Australia (RBA) has lifted interest rates by a total 275 basis points to a nine-year peak of 2.85%.That tightening has taken a heavy toll on consumer sentiment, yet spending has held up well helped by an unemployment rate near five-decade lows of 3.5%.The NAB survey continued to show resilience in demand, with its measure of sales slipping 6 points to a still very strong reading of +31 and far above pre-pandemic levels.Firms were running flat out with capacity utilisation just off a record high at 85.8%.Profitability edged up a point to +22, while the employment index dipped 3 points to +14 which was still high from a historical perspective.Labour costs eased a little in the month but both producer costs and retail prices accelerated.”Strong price growth in October reinforces our expectation that inflation will continue to rise strongly through Q4,” said Oster. “Retail price growth was higher again in October, signalling that goods-side inflation remains a key challenge.” More

TOKYO (Reuters) -Bank of Japan policymakers debated the need to look out for the side-effects of prolonged monetary easing and the potential impact of a future exit from ultra-low interest rates, a summary of opinions at their October policy meeting showed on Tuesday.Some in the nine-member board also saw signs the recent cost-driven inflationary pressure was broadening, with one warning that a “big overshoot of inflation cannot be ruled out,” according to the summary.”It’s important to continue to examine how future exit strategies (from ultra-loose policy) will affect markets, and whether market participants will be well prepared for them,” one member was quoted as saying. While there is no need to immediately tweak monetary policy, the central bank must pay attention to the side-effects of prolonged easing, according to another opinion quoted in the summary.At the Oct. 27-28 meeting, the BOJ kept ultra-low interest rates and maintained its dovish guidance, cementing its status as an outlier among global central banks tightening monetary policy to combat soaring inflation. More

TOKYO (Reuters) – Japanese households ramped up spending in September from a year earlier to mark a four-month growth streak, as shoppers enjoyed their first summer without coronavirus curbs since before the pandemic.Robust consumption, however, faces increasing inflationary pressure aggravated by the yen’s sharp depreciation. Real wages fell in September for a sixth consecutive month, separate data showed, blurring growth prospects.Household spending rose 2.3% in September from a year earlier, government data showed on Tuesday, coming slightly lower than economists’ median estimate of 2.7%.On a month-on-month basis, spending gained 1.8%, turning back to growth after two months of contraction. Analysts had expected a 1.7% advance for September.Private consumption, which accounts for more than half of the world’s third-largest economy, has benefited from the government ending restrictions in March on face-to-face services to prevent the spread of COVID-19.The easing of strict border control measures last month is another boon for consumption as the government courts foreign tourists to prop up the economy amid the yen’s plunge to 32-year-lows, while conducting record currency interventions and compiling a $200 billion fiscal package to curb the rising cost of living.But for domestic shoppers, a weaker currency fuels already rising prices of food and energy items. The Bank of Japan’s preferred measure of consumer inflation rose 3.4% in October in Tokyo, the fastest annual pace since 1989.Japan’s real wages fell 1.3% in September from a year earlier, even though nominal wages posted their biggest growth in more than four years, showed labour ministry data released on Tuesday.With accelerating inflation and stalling momentum in the corporate sector, economists now expect an annualised 1.1% growth in July-September gross domestic product due next week, sharply slower than a 3.5% expansion in the second quarter supported by solid private and business spending. More

The writer is chief Asia economist at Morgan StanleyIf there were a constant in the ever-changing world of investing, it would be investors’ continuing search for the next big thing. Over the past 20 years, and from a macro standpoint, that story has been about China. The unprecedented nature of its economic success led to a fundamental reassessment of how we think about the global economy. Over the next decade, while the US and China will remain just as important to global investors, we think the ascendancy of India’s economy will mean it features more prominently on their radars. The key lies in the size and scale of India’s opportunity set. We forecast that India will be the third-largest economy by 2027, with its GDP more than doubling from the current $3.4tn to $8.5tn over the next 10 years. Incrementally, India will add more than $400bn to its GDP every year, a scale that is only surpassed by the US and China. My colleague Ridham Desai projects that India’s market capitalisation will rise from $3.4tn to $11tn by 2032, the third largest globally. These projections are underpinned by a confluence of favourable domestic and global forces. The most important change domestically is the shift in policy approach away from redistribution and towards boosting investment and job creation.This was evident in the introduction of the goods and services tax which creates a unified domestic market; corporate tax cuts; and production-linked schemes to incentivise investment from both within and outside India’s borders. Overlaying this is the emergence of a multipolar world where companies are diversifying their supply chains, with India emerging as a destination of choice. These forces will integrate India’s fast-growing workforce into the global economy. As it is, India already has a high global market share in services exports, and its lead has only increased since the onset of the pandemic as corporates became more accustomed to remote work. India is now making concerted efforts to attract investment to boost manufacturing exports. These new factories and offices of the world will draw more employment into the formal sector and more crucially raise productivity growth, creating a virtuous cycle of sustained growth. Indeed, the shift in India’s policy approach is moving it closer to the East Asian model of leveraging exports, raising saving and recycling it for investment.Against this backdrop, we think that India is entering a phase where incomes will be compounding at a fast rate on a high base. For context, India took 31 years since 1991 to raise its GDP by $3tn. According to our projections, it will take just another seven years for GDP to grow by an additional $3tn. To contextualise how important this development would be for global investors, the experience of China provides a useful template. India’s GDP today is where China’s was in 2007 — a 15-year gap.However, from an outlook perspective, India’s working age population is still growing, which suggests that it will have a longer growth runway. India’s median age today is 11 years younger than China’s.Productivity growth differentials should also swing in India’s favour. Taken together, we think this means that India’s real GDP growth will average 6.5 per cent over the coming decade while China’s will average 3.6 per cent. China’s industrialisation drive, which has propelled much of its growth over the past 30 years, has been enabled by a buildout of hard infrastructure like roads and railways. India is admittedly playing catch-up and is now making concerted efforts to raise the public expenditure on infrastructure. But in today’s world, a digital infrastructure is perhaps as important as the physical kind and this is where India is leading and taking a unique developmental approach. Unlike other economies where private networks have taken root, India has led the world in building public digital infrastructure. This is based on its unique digital identification system, Aadhaar. Further layers are being built, which will leverage this digital infrastructure to better match consumers and businesses, facilitate transactions, and ease the cost of doing business. For instance, the open network for digital commerce set up by the government facilitates ecommerce transactions across a network of buyers and sellers.To sum up, we estimate India is set to drive a fifth of global growth in the coming decade. We think this offers a compelling opportunity for multinationals and global investors in a world starved of growth.  More