Economy

Germany has positioned itself ahead of the forthcoming UN climate summit to lead G7 countries on the issue of “loss and damage” funding for poor countries worst affected by global warming, as it reported its highest ever international climate financing commitments.The federal ministry for economic development on Thursday committed to an increase in funding through a G7-backed financial agreement between Germany and the V20 group of vulnerable nations. Despite the European energy crisis that has hit Germany hard and prompted an extension of the use of fossil fuels and nuclear energy, the country is keen to demonstrate that it will keep to its climate goals after taking over the G7 presidency this year.Germany’s agreement with the V20 group, dubbed the Global Shield, akin to an insurance fund, is distinct from longstanding calls by the world’s poorest countries for compensation for the effects of greenhouse gas emissions by the rich, through a global loss and damage financing facility.Jennifer Morgan, Germany’s climate envoy, told an FT Energy Transition conference this week that the Global Shield plan was tailored to provide a quick financial response after disasters, to allow assistance “on the ground immediately”.Morgan also supported calls for a change in the leadership of the World Bank and its action on climate-related finance, after president David Malpass recently declined to say whether he believed in climate science. He later changed his position after pressure from key shareholders including the US and Germany.“We would like to have a leader of the World Bank who understands climate science, and the urgency, and scales up [finance] and with a focus on integrating adaptation and climate into pretty much everything,” Morgan told the FT conference. “We think that its time to have the bank led by someone that prioritises the climate crisis, who has internalised what this means for developing countries, and is ready to do everything they can to move it forward.”The issue of loss and damage funding, to help the developing countries put in place measures to cope with extreme weather events, was “going to be on the agenda forever,” she said, “because of the fact the impacts are intensifying”.It is expected to remain a sticking point at the COP27 meeting in early November as richer nations push back against shouldering financial responsibility for the effects of climate change. Germany, Europe’s largest economy, has doubled its climate finance for developing and emerging economies since 2015, when countries drafted the Paris agreement to limit global warming to below 2C at worst, and ideally 1.5C. Temperatures have already risen at least 1.1C in pre-industrial times. Of the €5.34bn it provided last year, half went towards climate change adaptation and half to mitigation. President Olaf Scholz in June announced that Germany would increase its commitments to €6bn by 2025.In 2015, rich nations promised to mobilise $100bn a year to support poorer nations by 2020, but continues to fall short, at $83.3bn at last count.The US and EU rejected calls for a new loss and damage financing facility at COP26 in Glasgow last year and pushed back again when the debate arose at UN climate talks in Bonn in June. In a statement last week, V20 chair and Ghana’s finance minister Kenneth Nana Yaw Ofori-Atta said the group’s debt service payments amounted to $500bn over the next four years and that pre-arranged funding was critical to ensure they did not increase their debt burdens. “It’s important to recognise that we do not ask for charity,” he said. “What we need is stronger economic co-operation through Climate Prosperity Plans between the developed world and the climate vulnerable countries of the world.”Last month Denmark became the first country in the world to offer loss and damage compensation to countries affected by climate change, pledging around $13mn of support. More

Global copper stocks have fallen to perilously low levels, one of the world’s largest commodity traders Trafigura has warned.Speaking at the FT Mining Summit on Thursday, Kostas Bintas, co-head of metals and minerals trading at Trafigura, said the copper market is today running with inventories that cover 4.9 days of global consumption and is expected to finish this year at 2.7 days, according to its own forecasts. Copper stocks are usually counted in weeks.The price of copper, used in everything from wind turbines, electric wires to electric vehicles, is now trading around $7,400 a tonne, some 30 per cent lower compared to early March, when it was trading above a record $10,000 a tonne.Limited inventories raise the risk of a sudden spike in prices should there be large drawdowns and a dash among traders to secure supplies. While the strong dollar and global recession fears have weighed on copper prices in recent months, executives in the global metals industry argued on Thursday that limited supply in the market remained supportive of prices.“While there is so much attention being paid to the weakness in the real estate sector in China, quietly, the demand for infrastructure, electric vehicle-related copper demand, more than makes up for it,” Bintas said. “It actually not only cancels completely the real estate weakness, but also adds to their consumption growth increase.”He added that the situation was no different in Europe, with the region accelerating its transition into renewables as it tries to wean itself off Russian gas, leading to copper demand increase.“It is not accidental that the EU has decided to bring forward the target of doubling its solar capacity from 2030 to 2025. All that requires a lot of copper,” he said. “Look at electric vehicles everywhere, [the numbers on the road] are surprising to the upside. That’s a lot of copper too. As a result, we’ve been drawing down stocks throughout this very difficult year.”However, some copper bears believe the slowdown in China’s property market — where the metal is used in wiring, plumbing and facades — and the energy crisis in Europe will weigh on demand.Marcus Garvey, head of commodities strategy at Macquarie, said the copper market is set to head into a surplus of 600,000 tonnes next year as supply grows from Latin America and elsewhere. “All industrial metals will move into surplus next year,” he said, citing the impact of the global macroeconomic downturn.This week stocks of copper in London Metal Exchange warehouses have fallen sharply. Analysts at Peel Hunt said “traders in China are scrambling to secure metal as Shanghai stocks have fallen recently and traders are grabbing what they can”.Inventories of copper in warehouses run by exchanges such as the LME do not provide a full picture of copper stocks in the supply chain, since many industrial users will hold their own reserves of metal.But visible stocks can have a large influence on sentiment in the market.“We certainly have no problem selling copper,” Freeport chief executive Richard Adkerson told investors on a conference call, Reuters reported. “It’s just striking how negative the financial markets are about this industry and yet the physical market is so tight.”Jonathan Price, chief executive of Canadian copper miner Teck Resources, said the “macro view is very disconnected from the underlying physical fundamentals of the copper market”. Bintas, who last year had predicted copper prices would reach $15,000 a tonne, said copper was being sold on recession fears, but he expects to see “very quickly” a “structural repricing” once those fears subside.Considering the copper shortage that is happening now, “I think it’s fair to assume a higher price of what we have today,” he said. “Is it going to be more than $15,000? I think time will tell.” More

Investors now expect the Federal Reserve to raise interest rates to 5 per cent next year, suggesting that it will need to hammer the brakes on the economy harder than expected to tackle high inflation.According to futures markets that track the federal fund rate, traders have fully priced in the benchmark policy rate reaching 5 per cent in May 2023, up from 4.6 per cent before the latest inflation data released late last week.Expectations had ratcheted up after September’s consumer price index report that showed an alarming acceleration in monthly price pressures across a broad array of everyday items and services.The larger-than-expected jump in consumer price growth all but guaranteed the Fed will yet again opt for an aggressive interest rate increase at its next policy meeting in early November and deliver a fourth-consecutive 0.75 percentage point rate rise, the odds of which have been fully priced into the market. That would bring the federal funds rate to a new target range of 3.75 per cent to 4 per cent, significantly higher than the near-zero level registered as recently as March and closing in on the 4.6 per cent peak policy rate pencilled in by most officials in September.The elevated inflation figures, coupled with additional signs pointing to a resilient labour market, also fanned fears that the 0.75 percentage point pace will be extended to December, with another half-point rate rise expected for February.“Can markets push it higher? Definitely,” said Edward Al-Hussainy, a senior interest rate strategist at Columbia Threadneedle. “But we’re also at a stage where the Fed may be at risk of not being able to meet market expectations,” he added, citing financial stability concerns. To slow the pace of its interest rate increases, Fed officials have said they need to see signs that inflation is beginning to ease on a monthly basis. To consider a pause in the historically aggressive tightening campaign, the central bank has said it needs to see substantive evidence that “core” inflation — which strips out volatile items such as food and energy — is falling back towards the longstanding 2 per cent target.The plan, officials have said, is to lift rates to a level that actively restrains the economy and keep them there for an extended period. The higher rates rise and the longer they stay at restrictive levels, the extent of the economic pain grows, chair Jay Powell warned last month.Patrick Harker, president of the Philadelphia Fed, said on Thursday that he supports the Fed pausing after rates reach a restrictive level in order to take stock of the economy, adding that he sees fed funds “well above” 4 per cent by the end of 2022.“After that, if we have to, we can tighten further, based on the data,” he said in a speech. “But we should let the system work itself out. And we also need to recognise that this will take time: Inflation is known to shoot up like a rocket and then come down like a feather.”On Wednesday, Neel Kashkari, president of the Minneapolis Fed and a voting member on the Federal Open Market Committee next year, also affirmed that the bar is high for the Fed to adjust course.

“If we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping at 4.5 per cent, or 4.75 per cent or something like that,” he said on a panel. “We need to see actual progress in core inflation and services inflation and we are not seeing it yet.”The move in rate expectations came after earlier this week both Canada and the UK reported that consumer prices rose more than expected in September. “This is a global story. Inflation numbers in Canada and the UK have surprised to the upside. It is the global inflation dynamic that is pushing US yield higher this week,” said Subadra Rajappa, head of US rates strategy at Société Générale. More

It’s a fashion of late to compare the UK with Italy. Because yields on their government bonds are at similar levels, commentators have been keen to claim that Britain has became as profligate as the southern pizza, pasta and mafia economy.Tory MPs are in disarray, and Liz Truss has become the human equivalent of Larry the cat, living in Downing Street but wielding no power. Things are turning ever more Britalian: https://t.co/Wf26N0kFPv pic.twitter.com/c1KoKtsMfu— The Economist (@TheEconomist) October 20, 2022
But fiscal profligacy is more a reality for the UK than it has been for Italy over the last twenty years. UK gilt prices dived on the outgoing prime minister’s announcement of large unfunded tax cuts. Drastic U-turns on nearly all the promises, a return to austerity and a record-quick defenestration have stabilised markets but left reputations shredded. Meanwhile, Italy is waiting for its next finance minister following the election victory last month of Giorgia Meloni’s arch-conservative coalition. Whoever gets the job will be taking control of a government primary budget excluding debt interest payments that has been in surplus for nearly two decades. This is not the case for the UK, which has recorded a deficit for most of that period. In fact, without interest payments on government debt, Italy has been running a budget surplus similar to that of Germany. It has showed much more frugality than the UK, and of the average of the most industrialised countries. Today’s UK fiscal similarities would probably be closer with Italy’s fiscal choices in the 1980s, when rapid increases in government spending were not matched by corresponding rises in revenues, resulting in a surge in government debt.The accumulated government debt still weighs on Italy’s fiscal and economic outlook via the highest payments in the OECD. Coupled with the need for structural reform, Italy’s economy has largely stagnated for the last two decades. This is what is risky about Italy for investors, not recent fiscal profligacy.Not convinced? Here’s Bert Colijn, senior economist at ING:The concerns in financial markets about the UK stem from a very accommodative fiscal stance, despite budget deficits already being high and a trade deficit on the back of that,” he said. “This stands in sharp contrast with Italy, which suffers from high legacy debt from the 1980s and 90s, while they have actually delivered primary fiscal surpluses for most of the past two decades.This means that “Italy has a structural problem of low economic growth and high debt, while the UKs concerns seems mainly related to the very expansionary budget proposals,” said Colijn.Nicola Nobile, economist at Oxford Economics, agrees. Italy’s problem is “mainly a legacy of the previous accumulated debt as well as a problem stemming from lacklustre growth.”Even Italians households do not live beyond their means. Italy’s households have one of the lowest debt-to-GDP ratios among all advanced economies, well below that of the UK and even lower that of Germans.Like the UK, Italy’s economy is struggling with weak domestic demand. But its businesses are successful exporters running a goods exports surplus for the last decades. The UK is running one of the largest current account deficits among advanced economies adding uncertainties for investors.

In summary, rather too many commentators have preso lucciole per lanterne. More

Turkey slashed its benchmark interest rate for the third consecutive month as president Recep Tayyip Erdoğan pushed ahead with a plan to bring down borrowing costs even as the country fights a powerful spell of inflation. The country’s central bank on Thursday said it was lowering the benchmark one-week repo rate from 12 per cent to 10.5 per cent — a deeper than expected cut — even as Turkey’s official inflation rate exceeded 83 per cent in September. Turkey’s decision on Thursday starkly contrasts with most other central banks, which have sharply boosted borrowing costs this year as they battle inflation and push back against a surging dollar. The rate cuts highlight Turkey’s approach of pursuing high rates of economic growth even at the cost of price stability. The country’s real interest rate, an inflation-adjusted measure that is closely watched by investors, is now among the lowest in the world at minus 72 per cent. Erdoğan, an ideological opponent of high interest rates, has said repeatedly that he wants borrowing costs to drop below 10 per cent in the months ahead.Speaking earlier this month, he said: “As long as this brother of yours is in this position, interest rates will continue to come down with every passing day, week and month.”The central bank indicated that it would cut rates one more time before bringing the easing cycle to a halt. Erdoğan is seeking to prioritise growth in the run-up to key parliamentary and presidential elections that are scheduled for June 2023. The president believes that low interest rates also play well with his political base, which includes small businesses and construction firms that rely on cheap credit.Turkish authorities have used a raft of micromanagement tools to limit the damage to the lira. The currency is under pressure due to Turkey’s gaping current account deficit, its large foreign debt burden and a highly dollarised economy, as well as deeply negative real interest rates that deter investors from buying lira-denominated assets. Those tools include forcing exporters to convert 40 per cent of their revenues into lira and pressuring corporates to limit their purchases of foreign currency. Still, the currency is down around 30 per cent against the dollar this year.The lira was little changed after Thursday’s decision, at 18.59 to the dollar. Haluk Bürümcekçi, an Istanbul-based analyst, said the central bank had once again failed to outline any “concrete policy proposals” to combat inflation. He said that the central bank would continue to rely on currency interventions and other measures in a bid to steady the lira and limit inflation. “These policies do not seem sustainable, but it seems that the economic management will try to maintain this approach until the elections,” he added. Enver Erkan, chief economist at Tera Securities in Istanbul, said Turkey was serving as a “case study” for the consequences of unorthodox economic model. In a note to clients, he said: “So far, the results of the model have been the deterioration of price stability and the worst-performing emerging currency of the year after the Argentinian peso.” More

LONDON (Reuters) – Liz Truss said on Thursday she was resigning as British prime minister just six weeks after she was appointed, brought down by an economic programme that sent shockwaves through financial markets last month and divided her Conservative Party.Speaking outside the door of her Number 10 Downing Street office, Truss accepted that she could not deliver the promises she made when she was running for Conservative leader, having lost the faith of her party.A leadership election will be completed within the next week to replace Truss, who is the shortest serving prime minister in British history. George Canning previously held the record, serving 119 days in 1827 when he died.”I recognise though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party. I have therefore spoken to His Majesty the King to notify him that I am resigning as leader of the Conservative Party,” she said.Earlier, Conservative Party officials had gathered at Downing Street while a growing number of her own lawmakers called on her to quit. Appointed on Sept. 6, Truss was forced to sack her finance minister and closest political ally, Kwasi Kwarteng, and abandon almost all her economic programme after their plans for vast unfunded tax cuts crashed the pound and British bonds. Approval ratings for her and her Conservative Party collapsed. On Wednesday she lost the second of the government’s four most senior ministers, faced laughter as she tried to defend her record to parliament and saw her lawmakers openly quarrel over policy, deepening the sense of chaos at Westminster. New finance minister Jeremy Hunt is now racing to find tens of billions of pounds of spending cuts to try to reassure investors and rebuild Britain’s fiscal reputation as the economy heads into recession and with inflation at a 40-year high. More

A government committee issued new guidelines for how it determines penalties for foreign companies that break agreements to protect U.S. national security.WASHINGTON — The federal government on Thursday laid out for the first time how it will determine penalties for foreign companies that break agreements to protect American national security.When some foreign companies buy American firms, they sign agreements with the Committee on Foreign Investment in the United States, a group of federal agencies, in order to mitigate national security concerns about the new ownership. The committee, known as CFIUS, has the ability to levy fines, some of them very large, on companies that break those agreements.The new guidelines issued on Thursday give insight into how the committee, which wields considerable power over foreign transactions but is often seen as a black box, makes its decisions. In recent years, CFIUS has forced a Chinese company to sell the dating app Grindr and has made another Chinese firm divest an American maker of hotel management software. The committee is currently negotiating an agreement with TikTok, the popular video app, to resolve concerns posed by its Chinese ownership.According to the new guidelines, the committee could consider more serious penalties when a foreign company’s failure to follow an agreement causes an especially grave risk to national security. CFIUS would also consider whether it took a long time for the committee to learn of a foreign company’s failure to comply with an agreement. And it would take into account whether a company’s failings had been intentional or simply negligent, according to the new guidelines, which are not binding.President Biden has been trying to limit the sway that China and other adversaries have over American companies and consumers. Lawmakers and regulators have grown increasingly concerned that China could use its proximity to major computer chip manufacturers in Asia to influence the supply of a device that is central to a vast array of products, including appliances and automobiles. Many are also worried that Chinese-owned apps like TikTok and WeChat might hand over Americans’ data to Beijing under Chinese laws.This month, the Biden administration issued restrictions that stop Americans from working with Chinese chip companies. Last month, Mr. Biden signed an executive order directing CFIUS to closely scrutinize whether corporate deals involving foreign companies, including from China, would expose the personal data of Americans or involve crucial emerging technologies.The guidelines issued on Thursday do not name any specific foreign country.Paul Rosen, the assistant secretary for investment security at the Treasury Department, which oversees CFIUS, said in a statement that most foreign companies abided by their agreements on national security. But, he said, “those who fail to comply with CFIUS mitigation agreements or other legal obligations will be held accountable.”The committee has been busy in recent years, reviewing hundreds of corporate deal filings in 2021, according to the reports it sends to Congress. In some of those cases, the committee agreed to approve a deal only if the foreign company agreed to carry out measures designed to reduce its concerns.Mr. Rosen said in his statement that the guidelines sent a “clear message” that it was “not optional” for companies to follow their agreements with the government.Under federal law, the government can fine companies that violate their agreements with the committee. The fines can be significant, reaching as high as the total value of the corporate deal in question.The guidelines also publicly explain how companies can challenge a penalty from the government, and they shed more light on how the committee monitors for violations. According to the memo, the government learns of possible violations from “across the U.S. government, publicly available information, third-party service providers (e.g., auditors and monitors), tips” and participants in the deal itself. More

KYIV (Reuters) -The National Bank of Ukraine kept its key rate unchanged at 25% on Thursday, a level it said was forecast to be maintained until the second quarter of 2024 as it grapples with high inflation fuelled by Russia’s invasion. The central bank, led by new Governor Andriy Pyshnyi, said it expected a 32% GDP contraction in 2022, a slight improvement on its earlier forecast, and that the economy was “livening up” after falling sharply when the war began eight months ago. It said a gradual recovery was set to continue into 2023-24 and that a key assumption underpinning its forecast was that security risks in Ukraine would start to decline significantly from mid-2023. The rate meeting was the first under Pyshnyi, who served as head of Ukraine’s state savings bank from 2014 to 2020 and was appointed head of the central bank on Oct. 7. His predecessor, Kyrylo Shevchenko, resigned initially citing health problems, but later saying he faced political pressure after an old embezzlement case against him was reawakened immediately after his departure.Pyshnyi said monetary policy since the Feb. 24 invasion had been “entirely appropriate” and that no extra measures were foreseen by the central bank despite Russian air strikes on Ukrainian energy facilities. The central bank was standing by, however, and was ready to step in if necessary, he said. Inflation will hit around 30% this year, but should decrease in the coming years as the security situation improves, though it flagged high energy costs as the biggest obstacle to any recovery. Inflation should be under 21% next year and under 10% in 2024, it said. The central bank said it viewed cooperation with Ukraine’s international partners as a critically important source of funds to replenish the budget. More