Economy

The UK economy disappointed expectations by shrinking in August as the cost of living crisis contributed to a sharp fall in manufacturing production and consumer services, suggesting the economy may already be in recession. Maintenance in the North Sea pushed down oil and gas production, which was a further drag on industrial output, according to data published on Wednesday by the Office for National Statistics. Gross domestic product fell 0.3 per cent in August compared with July, the data showed, falling short of forecasts by economists polled by Reuters who predicted no month-on-month change.In the three months to August, economic output was down 0.3 per cent compared with the previous three months, also dropping back from analysts’ expectations.“The UK economy is teetering on the edge of recession,” said Yael Selfin, chief economist at KPMG UK. She added that “the ongoing squeeze on household finances continues to weigh on growth”, and was likely to have caused the UK to enter a technical recession from the third quarter of this year.Growth was revised down in July and the economy is now smaller than at the start of the year, after having recovered to pre-pandemic levels.

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Commenting on the ONS data, chancellor Kwasi Kwarteng said the UK’s soaring energy prices had been caused by Russia’s invasion of Ukraine, and expressed confidence that the government’s fiscal plan would “grow our economy”.However, Brian Coulton, chief economist at the rating agency Fitch, expects the economy to shrink by 1 per cent in 2023 because of continued market turmoil and the prospect of higher interest rates following Kwarteng’s announcement of unfunded tax cuts last month.Robert Alster, chief investment officer at the investment management company Close Brothers Asset Management, said that “a lot will depend on what the chancellor says in the Budget next month” when the Treasury will seek to bolster confidence in UK debt sustainability.“Unless they succeed, financial conditions will remain tight and are likely to weigh on growth,” he added.Despite the disappointing reading, markets still expect the Bank of England to increase rates by 75 points as the bank battles with persistently high inflation. ONS data showed that output in consumer-facing services, such as restaurants, shops and entertainment, fell 1.8 per cent in August and remained 8.9 per cent below pre-pandemic levels, in a sign that consumers are tightening their belts amid soaring prices.Industrial production contracted sharply by 1.8 per cent between July and August, with sharp falls in pharmaceutical and car production because of unprecedented cost pressures at a time of weakening demand and soaring borrowing costs. The health sector also contributed to the GDP decline, with a drop in the number of hospital consultations and operations.

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The ONS also showed that imports rose faster than exports because of higher prices for energy, of which the UK is a net importer. As a result, in the three months to August, the trade deficit, excluding precious metals, widened by £200mn to £25.6bn compared with the previous three months, the largest since records began in 1997. Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, expected the trade deficit to remain “huge” by past standards, despite the recent depreciation in sterling that should boost exports. “Sterling, therefore, will remain very sensitive to any changes in overseas investors’ willingness to provide finance to UK institutions,” she added. More

Argentines are leaving the country in waves as its deepening economic crisis spurs thousands to emigrate for the first time in a generation. The Latin American country has historically drawn in migrants from elsewhere. In the late 19th century, people arrived from Europe, followed by Jewish migrants in the pre-war period and later Bolivia, Paraguay and more recently those fleeing economic turmoil in Venezuela. But poor job prospects, rocketing inflation and a government that is struggling to restore public confidence appear to be slowly reversing this trend, as more Argentines opt to escape the nation’s troubled finances.“Five years ago, no one I knew lived abroad,” Belén Ferrari, 30, told the Financial Times. Fifteen of her friends from the capital, Buenos Aires, live in Europe, more than half of them in Spain. Some call Barcelona “BA on the Med”, in a reference to the latest influx from the capital. Spain received 33,600 Argentine-born citizens last year, the most since 2008 and three times more than six years ago, according to Spain’s national statistics institute. These figures are considered an underestimate, migration officials said, since many hold European passports by descent.Requests to obtain Spanish or Italian citizenship hit a record last year. Between January and September 2021, more than 55,000 applications were made for a certificate of “non-naturalisation” issued by Argentina’s electoral chamber, a mandatory requirement when applying. That surpassed the highest peak of the previous economic crisis of 2001-2002, when 39,000 applications were made. In neighbouring Chile and Uruguay, the number of residency applications by Argentines since 2020 has also reached new heights. Uruguay issued residency permits to 1,656 Argentines last year, the highest in almost a decade. At least 10,000 Argentines have become residents of Chile since 2017, making up the country’s sixth-largest migrant group. How, and whether, to leave has become a big talking point among families, friends and colleagues. At wine bars in Buenos Aires’s more affluent neighbourhoods of Colegiales and Palermo, farewell parties have felt more frequent than birthday celebrations. Ferrari, who trained as a journalist, said she moved to Madrid last year because of limited career prospects: “I was on a low wage made worse by inflation”, which is heading for 100 per cent this year. Confidence in the Argentine economy has evaporated. The leftwing Peronist government is struggling to fund itself with an ever-increasing pile of domestic debt and precariously low-net international reserves. Political infighting ahead of an election next year has dashed any hopes about the government’s ability to shepherd reforms to bring down inflation. Strict currency exchange controls are deterring foreign investment, and the rapid deterioration in sentiment and the government’s difficulty in funding itself are raising fears among bank analysts that an economic recovery will take years.According to research by Statista, the minimum wage in Argentina is the lowest in dollar terms, after Venezuela, among nine major Latin American economies. Tomas Alet Baker, 31, who recently moved to the Spanish Balearic Islands, said his final pay cheque, when converted into dollars at the widely used unofficial exchange rate, was worth the same amount as when he first entered the workforce 10 years ago, wrecked by high inflation. Chronic homelessness is evident in wealthier suburbs, and a decline in living standards is changing perceptions around security. Although overall poverty levels fell slightly to 37 per cent in the first quarter of this year, from 40 per cent in early 2020, there was a sizeable increase in extreme poverty and poverty among children, according to a September report published by the national statistics agency.Pessimism and the public mood are big factors driving the moves overseas. “The numbers might not necessarily be very high, but the idea you might be better off somewhere else is growing and resonates,” said Roy Hora, a historian and investigator for CONICET, the country’s scientific and technical research council. Migration statistics issued by authorities in Argentina are hard to come by, in part because emigration numbers have been historically insignificant, said Hora. At one point at the turn of the 20th century, foreigners in Buenos Aires outnumbered those born in Argentina, and so successive governments have had few incentives to publish official figures because small groups of émigrés were not worth monitoring. Only during the pandemic have some figures been collected as part of Covid-19 immigration requirements. Between September 2020 and October 2021, around 50,000 Argentines stated that they were leaving to move to another country, an average of 3,500 per month. “There’s a significant flow of creative and wealthy people leaving,” said Hora, and that could accelerate given how most pandemic-related travel restrictions have been lifted to major cities worldwide. Argentine entrepreneur Mercedes Caamaño, 32, has seen the numbers first hand. Requests from Argentina made to her migration agency in Madrid, Cruzar El Charco, have increased by 40 per cent over the past 12 months. “It’s a historic moment, people are leaving like never before and it hasn’t stopped,” said Caamaño, who has lived in Spain since 2016.

What many clients have in common is that they are highly skilled professionals. “The country has lost its credibility among the public,” which will be hard to build back, Caamaño said.Azul Agulla, 29, moved to London a year ago with no plans to return. Agulla said it had become easier to emigrate because of the onset of remote work and better access to information: “We’ve found loads of Argentines in London, there’s even a WhatsApp group for milanesas [breaded cutlets].”Estimates suggest 26,000 Argentines were living in the UK last year, 6,000 more than in 2020 and the highest in at least a decade, according to the UK’s Office for National Statistics. “Living in Argentina there are obstacles everywhere, you can’t afford to travel, you’re constantly renegotiating your salary to keep up with inflation,” Agulla said. “It’s exhausting.” More

PROVO, Utah — Chad Pritchard and his colleagues are trying everything to staff their pizza shop and bistro, and as they do, they have turned to a new tactic: They avoid firing employees at all costs.Infractions that previously would have led to a quick dismissal no longer do at the chef’s two places, Fat Daddy’s Pizzeria and Bistro Provenance. Consistent transportation issues have ceased to be a deal breaker. Workers who show up drunk these days are sent home to sober up.Employers in Provo, a college town at the base of the Rocky Mountains where unemployment is near the lowest in the nation at 1.9 percent, have no room to lose workers. Bistro Provenance, which opened in September, has been unable to hire enough employees to open for lunch at all, or for dinner on Sundays and Mondays. The workers it has are often new to the industry, or young: On a recent Wednesday night, a 17-year-old could be found torching a crème brûlée.Down the street, Mr. Pritchard’s pizza shop is now relying on an outside cleaner to help his thin staff tidy up. And up and down the wide avenue that separates the two restaurants, storefronts display “Help Wanted” signs or announce that the businesses have had to temporarily reduce their hours.Provo’s desperation for workers is an intense version of the labor crunch that has plagued employers nationwide over the past two years — one that has prompted changes in hiring and layoff practices that could have big implications for the U.S. economy. Policymakers are hoping that after struggling through the worst labor shortages America has experienced in at least several decades, employers will be hesitant to lay off workers even when the economy cools.Mr. Pritchard cannot hire enough employees to open the bistro for lunch at all, or for dinner on Sundays or Mondays.That may help prevent the kind of painful recession the Federal Reserve is hoping to avoid as it tries to combat persistent inflation. America’s economy is facing a marked — and intentional — slowdown as the Fed raises interest rates to chill demand and drive down price increases, the kind of pullback that would usually result in notably higher unemployment. But officials are still hoping to achieve a soft landing in which growth moderates without causing widespread job losses. A few have speculated that today’s staffing woes will help them to pull it off, as companies try harder than they have in the past to weather a slowdown without cutting staff.“Businesses that experienced unprecedented challenges restoring or expanding their work forces following the pandemic may be more inclined to make greater efforts to retain their employees than they normally would when facing a slowdown in economic activity,” Lael Brainard, the Fed’s vice chair, said in a recent speech. “This may mean that slowing aggregate demand will lead to a smaller increase in unemployment than we have seen in previous recessions.”For now, the job market remains strong. Employers added 263,000 workers in September, fewer than in recent months but more than was normal before the pandemic. Unemployment is at 3.5 percent, matching the lowest level in 50 years, and average hourly earnings picked up at a solid 5 percent clip compared with a year earlier.But that is expected to change. When the Fed raises interest rates and slows down the economy, it also weakens the labor market. Wage gains slow, paving the way for inflation to cool down, and in the process, unemployment rises — potentially, significantly.The State of Jobs in the United StatesEconomists have been surprised by recent strength in the labor market, as the Federal Reserve tries to engineer a slowdown and tame inflation.September Jobs Report: Job growth eased slightly in September but remained robust, indicating that the economy was maintaining momentum despite higher interest rates.A Cooling Market?: Unemployment is low and hiring is strong, but there are signs that the red-hot labor market may be coming off its boiling point.Factory Jobs: American manufacturers have now added enough jobs to regain all that they shed during the pandemic — and then some.Missing Workers: The labor market appears hot, but the supply of labor has fallen short, holding back the economy. Here is why.In the 1980s, when inflation was faster than it is now and entrenched, the Fed lifted rates drastically to roughly 20 percent and sent unemployment to above 10 percent. Few economists expect an outcome that severe this time since today’s inflation burst has been shorter-lived and rates are not expected to climb nearly as much.Mr. Pritchard demonstrated how to stretch pizza dough in Fat Daddy’s Pizzeria, his other restaurant in Provo.Many of the workers Mr. Pritchard and his business partner, Janine Coons, have hired are new to the industry or young.Still, Fed officials themselves expect unemployment to rise nearly a full percentage point to 4.4 percent next year — and policymakers have admitted that is a mild estimate, given how much they are trying to slow down the economy. Some economists have penciled in worse outcomes. Deutsche Bank, for instance, predicts 5.6 percent joblessness by the end of 2023.Labor hoarding offers a glimmer of hope that could help the Fed’s more benign unemployment forecast to become reality: Employers who are loath to jettison workers may help the labor market to slow down and wage growth to moderate without a spike in joblessness.“Companies are still confronting this enormous churn and losing people, and they don’t know what to do to hang on to people,” said Julia Pollak, chief economist at the career site ZipRecruiter. “They’re definitely hanging on to workers for dear life just because they’re so scarce.”When the job market slows, employers will have recent, firsthand memories of how expensive it can be to recruit, and train, workers. Many employers may enter the slowdown still severely understaffed, particularly in industries like leisure and hospitality that have struggled to hire and retain workers since the start of the pandemic. Those factors may make them less likely to institute layoffs.And after long months of very tight labor markets — there are still nearly two open jobs for every unemployed worker — companies may be hesitant to believe that any uptick in worker availability will last.“There’s a lot of uncertainty about how big of a downturn are we facing,” said Benjamin Friedrich, an associate professor of strategy at Northwestern University’s Kellogg School of Management. “You kind of want to be ready when opportunities arise. The way I think about labor hoarding is, it has option value.”Employers in Provo, where unemployment is near the lowest in the nation at 1.9 percent, have no room to lose workers.Instead of firing, businesses may look for other ways to trim costs. Mr. Pritchard in Provo and his business partner, Janine Coons, said that if business fell off, their first resort would be to cut hours. Their second would be taking pay cuts themselves. Firing would be a last resort.The pizzeria didn’t lay off workers during the pandemic, but Mr. Pritchard and Ms. Coons witnessed how punishing it can be to hire — and since all of their competitors have been learning the same lesson, they do not expect them to let go of their employees easily even if demand pulls back.“People aren’t going to fire people,” Mr. Pritchard said.But economists warned that what employers think they will do before a slowdown and what they actually do when they start to experience financial pain could be two different things.The idea that a tight labor market may leave businesses gun-shy about layoffs is untested. Some economists said that they could not recall any other downturn where employers broadly resisted culling their work force.“It would be a pretty notable change to how employers responded in the past,” said Nick Bunker, director of North American economic research for the career site Indeed.And even if they do not fire their full-time employees, companies have been making increased use of temporary or just-in-time help in recent months. Gusto, a small-business payroll and benefits platform, conducted an analysis of its clients and found that the ratio of contractors per employee had increased more than 60 percent since 2019.If the economy slows, gigs for those temporary workers could dry up, prompting them to begin searching for full-time jobs — possibly causing unemployment or underemployment to rise even if nobody is officially fired.Policymakers know a soft landing is a long shot. Jerome H. Powell, the Fed chair, acknowledged during his last news conference that the Fed’s own estimate of how much unemployment might rise in a downturn was a “modest increase in the unemployment rate from a historical perspective, given the expected decline in inflation.”But he also added that “we see the current situation as outside of historical experience.”Bistro Provenance opened in September.Dinner service at the restaurant.The reasons for hope extend beyond labor hoarding. Because job openings are so unusually high right now, policymakers hope that workers can move into available positions even if some firms do begin layoffs as the labor market slows. Companies that have been desperate to hire for months — like Utah State Hospital in Provo — may swoop in to pick up anyone who is displaced.Dallas Earnshaw and his colleagues at the psychiatric hospital have been struggling mightily to hire enough nurse’s aides and other workers, though raising pay and loosening recruitment standards have helped around the edges. Because he cannot hire enough people to expand in needed ways, Mr. Earnshaw is poised to snap up employees if the labor market cools.“We’re desperate,” Mr. Earnshaw said.But for the moment, workers remain hard to find. At the bistro and pizza shop in downtown Provo, what worries Mr. Pritchard is that labor will become so expensive that — combined with rapid ingredient inflation — it will be hard or impossible to make a profit without lifting prices on pizzas or prime rib so much that consumers cannot bear the change.“What scares me most is not the economic slowdown,” he said. “It’s the hiring shortage that we have.” More

Demand for new-build housing is cooling fast with economic turmoil and higher borrowing costs putting the brakes on the property market, the UK’s largest housebuilder has said.Barratt Developments said in a trading update on Wednesday that buyers were reserving an average of 188 homes per week, compared with 281 in the past financial year. Demand is markedly slower than in each of the past three years, it added, reflecting “increased wider economic uncertainty, where growing cost of living concerns have been compounded by increased mortgage interest rates and reduced mortgage availability”. It has lowered its profit estimates in response.The company, which is also grappling with build cost inflation of 9-10 per cent, said it now expected adjusted pre-tax profits of £972.5mn for the full year, in line with analysts’ estimates but down on previous guidance and lower than the £1.05bn recorded last year. Chief executive David Thomas said the slowing pace of sales was a clear sign of customers reacting to wider economic uncertainty. Since chancellor Kwasi Kwarteng’s “mini” Budget last month, mortgage rates have risen sharply, with the cost of a two-year fixed-rate loan now about 6 per cent.Citing mortgage rates as vital to the health of the housing market, Barratt said the outlook was uncertain. As a result, it is being “increasingly selective” when buying land — an indicator that the pace of development is also likely to slow. “It remains too early for much clarity on what the downturn looks like,” said Glynis Johnson, an analyst at Jefferies, in a note. “But retrenching in land buying, although yet to be followed by build, will be important for cash preservation.”Chris Millington, an analyst at Numis, said the update signalled that “the “mini” Budget is starting to have an impact. It’s inevitable really.” The slowdown in demand was likely to hit harder next year if there was no change in the mortgage market, added Millington. “The longer the lower sales rate persists it will eat into [Barratt’s] order book next year,” he said.Rising mortgage rates and cooling demand add to a list of challenges for housebuilders. Build costs have risen with inflation, affecting demand and margins and hitting share prices across the sector.Shares in Barratt fell more than 7 per cent after the update on Wednesday, taking year to date falls to nearly 60 per cent. Rivals like Taylor Wimpey and Persimmon are also down between 50 and 60 per cent this year. More

Good morning. It appears Unhedged has become, for the time being, a column about the gilt market. This is an odd position for a Wall Street column to find itself in. But the gilt drama is emblematic of the sorts of things that happen at moments like this one. The plot is universal, even if the players are local. Email us: [email protected] and [email protected] the BoE is rolling the diceHere is a comment that requires some explaining:“My message to the funds involved and all the firms is you’ve got three days left now,” Bailey said at the Institute of International Finance annual meeting in Washington on Tuesday. “You’ve got to get this done.”That’s Bank of England governor Andrew Bailey yesterday, telling the market in firm tones that the BoE’s special bond-buying operation would end, as planned, on Friday. This is a gamble, if a calculated one, by Bailey and the BoE. Will it pay off?If you are catching up with the gilt drama now, it runs as follows:Prologue: The UK has very high inflation.Scene 1: The government announces a fiscally expansionary budget, featuring energy subsidies and unfunded tax cuts. Gilts sell off and yields jump.Scene 2: The yield leap causes pension fund hedges, designed to protect against falling rates, to go badly the wrong way. Facing margin calls, the pension funds sell what they can, namely gilts, driving yields up further.Scene 3: The BoE intervenes, buying long duration gilts, but not many sellers take up the bank’s offers. The rout continues, and spreads with even greater violence to the inflation-linked gilt market.Scene 4: The bank starts buying linkers, too, and the market calms for a day — but in a cliffhanger, Bailey makes the comments quoted above. Will the market meekly accept the stern talking-to from the governor, or will it call his bluff?Scene 5 begins this morning.Why would Bailey take the chance of offering the market an ultimatum at such a sensitive time, putting the bank’s credibility on the line? If the market is still in disorder on Friday, what will happen? It’s not clear, but it might be ugly. The pound/dollar exchange rate saw the risks in Bailey’s gambit, and swooned:It is important not to read too much into this. The pound is still above the levels ($1.07 or so) that it hit immediately after the UK’s “mini” Budget was announced. But still: spooky.The only justification for taking this risk that Unhedged can get its head around is that the BoE is acutely focused on its inflation mandate. It will not tolerate even the appearance that it is continuing quantitative easing by new means or, worse, is indulging in outright yield-curve control.This may be a stand worth taking. UK CPI rose at a 10 per cent annual rate in August, and just yesterday employment figures made clear that the labour market remains very tight indeed.It should be noted, however, that the BoE has now put two challenges to the market. The Friday time limit is one. The other is that the bank has made it clear that even while the bond-buying persists, it is quite prepared to quibble with sellers over price. We noted in yesterday’s letter that, at least before Tuesday, the bank’s buying of bonds fell billions of pounds short of its self-imposed purchase limits. It has described which offers it will accept as follows:The Bank . . . reserves the right to set a maximum price/minimum yield that will be applied to auctions. These reserve prices/yields are reviewed ahead of each auction to ensure consistency with the backstop nature of the scheme.The Bank is studying patterns of demand and will continue to use reserve pricing in order to ensure the backstop objective of the tool is delivered. In addition, the Bank stands ready to adjust any of the other parameters of the auction in order to secure that objective.Without parsing exactly what this might mean (several people close to the gilt market told Unhedged they are not perfectly clear on this) we can say for sure that this is very far from “whatever it takes”. The BoE is evidently concerned that the pension funds might use the scheme not for emergency liquidity, but to secure favourable prices for their bonds. “They do not want the market taking the piss,” as one observer put it to me.It is not clear that a bit of price insensitivity in a temporary bond market intervention is much of a threat to the bank’s price stability mandate. But if the bank is concerned, not just about inflation, but about preserving the appearance of independence from the government — if it is worried about the accusation that it is “monetising the debt”, or something similar — then its parsimony about price makes more sense.Behind Bailey’s ultimatum may be the view that, while the pension funds have a liquidity problem, they are not in absolutely dire straits. The thinking could be: if you are not willing to take the prices we are offering by Friday, you must not really need our help. And this may be quite right. Remember that in the long run, higher interest rates are good for pension plans, because they lighten the plans’ liabilities.But even if the pension plans are not all that desperate, there is a chance the stand-off causes a nasty financial accident. This is how Edward Al-Hussainy of Columbia Threadneedle summarises the worst-case scenario:The Bank of England entered the market, which is dislocated because of the pension funds’ need for liquidity. It says, you guys are desperate, sell at today’s low prices; we’re not paying you what the bonds were worth two weeks ago. But the pension funds really don’t want to be forced sellers and crystallise losses on their bonds. They say, this market is going to be better next week, we’re not selling here.So, hypothetically, the pension funds might not sell and the Bank might not buy. And next week, the BoE is out of the market. Let’s say yields go up again. The pension funds face another margin call. But there is no BoE this time, and the funds have to liquidate at even lower prices . . . this is how a liquidity problem can turn into a solvency problem.The threat of solvency issues at pension funds could force the BoE right back into the market, with its reputation in tatters. Fighting moral hazard is well and good. But there is a lot at stake here.Good news, then, that the intervention seemed to work pretty well on Tuesday. The BoE bought just under £2bn in inflation-linked bonds and £1.4bn in vanilla gilts, its biggest day yet. Yields on 10-year linkers fell 5 basis points, and 30-year bonds, both standard and inflation linked, saw relatively modest yield increases.Maybe the market is getting in line when it matters. Mr Bailey had better hope so.One good readThe bid-ask spread is wide in taupe suede leather Birkenstocks. More

At least there were only four horsemen of the apocalypse. But reflecting today’s rampant inflation, Nouriel Roubini now identifies 10 so-called megathreats, spanning various economic, financial, political, technological and environmental disasters. “Sound policies might partially or fully avert one or more of them, but collectively, calamity seems near certain,” Roubini jauntily concludes. “Expect many dark days, my friends.” Readers of a nervous disposition may want to file this book in the bin before they turn a page. Those braced for an ice bath of pessimism may profit from its gloomy insights about the state of the world. Roubini’s warnings may be alarmingly scary, but they are also disturbingly plausible. One only prays that policymakers have better solutions than the author unearths. Roubini certainly has form in predicting calamity and investors have learnt to ignore him at their cost (as he quips, he’s graduated from “being a Cassandra to a sage”). The Turkish-born American economist was labelled Dr Doom for warning of a housing crash ahead of the global financial crisis of 2008. But he cavils at this nickname because, he claims, it fails to recognise that he examines the upside with as much rigour as the downside. “If I could choose my nickname, Dr Realist sounds right.”Little reassured, the reader confronts an avalanche of coming catastrophes.On his specialist subject of economics, Roubini warns in Megathreats that the debt crisis of our lifetimes lies ahead. The entire world resembles the financial delinquent that is Argentina that has defaulted on its debt nine times since its independence in 1816. By the end of 2021, global debt, both public and private, exceeded 350 per cent of the planet’s gross domestic product. The Mother of All Debt Crises (Roubini capitalises the phrase to emphasise the point) looks inevitable either this decade, or next.

Every possible remedy to this looming debt disaster brings its own perils: the paradox of thrift, the chaos of defaults, the moral hazard of bailout, the wealth or labour taxes that kill investment or hit the most needy, the inflation that wipes out creditors. “Choose your poison,” he writes. The latest infatuation with modern monetary theory, keeping interest rates low while piling up more debt, will only lead to a different form of reckoning.As if explicit debts were not enough to worry about, implicit debts are even more alarming. Even the richest societies are not rich enough to deliver on all the promises made to the swelling ranks of pensioners. The Organisation for Economic Co-operation and Development has estimated that unfunded or underfunded government pension liabilities in the top 20 economies amount to a staggering $78tn. “Implicit debt is a major time bomb and a severe megathreat.”Roubini doubts that our current crop of central bank governors are up to the challenge. Outstanding economists, such as the Federal Reserve’s Ben Bernanke (who has just been awarded the Nobel Prize) and the European Central Bank’s Mario Draghi, have been replaced by the current crop of lawyers and regulators. The strong likelihood is that they will do nothing to stop stagflation — the painful combination of stagnant growth and rising prices — that will make the 1970s look like a warm-up act. That will only lead to a Great Stagflationary Debt Crisis (note those capitals again).Further currency meltdowns and economic instability will follow. The financial weakness of Greece and Italy may yet trigger a collapse of the European monetary union. Financial turmoil will also lead to more protectionism and the reshoring of industrial production. That will accelerate deglobalisation and the further fragmentation of our interconnected world.

Naturally, Roubini takes a dismal view of the impact of artificial intelligence, which is already leading to dangerous concentrations of corporate power, widening social inequalities and the spread of disinformation that undermines democratic politics. Such is the power of AI that it will destroy swaths of white-collar jobs and lead to mass technological unemployment. “I do not see a happy future where new jobs replace the jobs that automation snatches. This revolution looks terminal,” he writes.The fight for technological supremacy between the US and China will further aggravate existing geopolitical tensions. That could well trigger a war between the two rival superpowers. Roubini airs the view that Washington’s previous embrace of China might count as the worst strategic blunder by any country in recent times because it accelerated the rise of a deadly, authoritarian rival. “China will become the largest economy in the world, there’s no doubt about that — it’s only a question of when,” he writes.By this point, you might be able to guess Roubini’s conclusions about the climate emergency. All economic or technological fixes that stand any chance of addressing the scale of the problem (think global carbon taxes or direct air capture) are either politically impossible or prohibitively costly. The one million or so refugees who entered the EU in 2015, causing a massive political backlash, is only the prelude to the vast migrations of peoples to come. And Roubini suggests that with only 17mn people in Siberia, Russia’s far east may well be colonised by the Chinese, fleeing the consequences of climate change.What, if anything, can be done to counter these megathreats? Not much, Roubini miserably concludes. Only seven pages of his book are devoted to a more Utopian future. While it is hard to dispute much of Roubini’s analysis, it would at least have been worth noting that humanity has experienced, and endured, many terrible times in the past. The world was not a happy place in 1941 but the global scourge of fascism was ultimately defeated. Great crises have often galvanised collective action that was unpredictable at the time.The one possible Hail Mary pass Roubini sees is technological innovation leading to a surge in economic productivity and environmental improvement. Strong, inclusive, sustainable economic growth of more than 5 per cent a year could check many of these dangerous trends and enable us to afford universal basic income. This reviewer was glad to see that one of his own articles on the promise of nuclear fusion energy provided some comfort to the author. But even on the most optimistic of assumptions, plentiful, cheap and green fusion energy remains decades away. “For anything resembling a happy ending to happen, computers poised to displace us must come to our rescue,” he writes. Despite the dangers, we had better bet on AI.Megathreats: The Ten Trends That Imperil Our Future, and How to Survive Them by Nouriel Roubini, John Murray £20/Little, Brown $30, 320 pagesJohn Thornhill is the FT’s Innovation EditorJoin our online book group on Facebook at FT Books Café More

After the outbreak of war in Ukraine, inflation spiralling dangerously out of control and punishing waves of coronavirus infections and lockdowns, the IMF this week had more bad news: the pain is far from over and the worst is yet to come. At the onset of its annual meetings, held jointly with the World Bank, the multilateral lender warned that the “darkest hour” lay ahead. Next year could feel like a recession in much of the world and further sell-offs in markets could not be ruled out. The twin threats — to growth and financial stability — underscored the enormity of the challenge facing policymakers from central banks and finance ministries that are gathering in Washington, over the coming days. “Downside risks remain elevated and policy trade-offs are becoming hugely challenging,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters on Tuesday. “The risk of monetary, fiscal or financial policy miscalibration has risen sharply at a time of high uncertainty and growing fragilities.”Pierre-Olivier Gourinchas, the IMF’s chief economist © Patrick Semansky/APThe IMF once again downgraded its outlook for global growth for next year to just 2.7 per cent. More worryingly, the fund’s economists see high odds that the economy could fare even worse, with a 25 per cent chance that growth would fall below 2 per cent and as high as a 15 per cent chance that it could fall below 1 per cent.Nor is inflation expected to moderate quickly, with advanced economies expected to face annual consumer price growth of 7.2 per cent this year and 4.4 per cent next year — a level more than double the longstanding 2 per cent targets. As borrowing costs soared, the financial system’s fragility was also likely to be exposed, acknowledged Tobias Adrian, head of monetary and capital markets at the IMF.Other analysts shared the fund’s gloomy prognosis. “The worst of the slowdown is ahead of us, not behind us,” said Seth Carpenter, chief global economist at US bank Morgan Stanley. “We see a really big slowdown and outright recession in important economic blocs, [such as] the UK and the euro area. To the extent that there is a recovery, it is only in the emerging markets. And, even then, [it is] somewhat tepid.”There is also mounting concern that officials’ policy responses will come with increasingly pernicious side effects. Almost every central bank has turned to sharply higher interest rates to tame inflation. The US Federal Reserve has led the charge, embarking on the most aggressive campaign to tighten monetary policy since the early 1980s after initially misdiagnosing the extent of the inflation problem.The fund did not remotely think the job had been done, urging monetary policymakers to have a “steady hand” and “stay the course”. Gourinchas stressed that, at this stage, the risk of “over-tightening” and causing a recession was smaller than the risk of allowing high inflation to become ingrained. The speedy surge in interest rates has threatened to exacerbate a wave of sovereign defaults that has already forced the IMF to enter into discussions with members such as Sri Lanka and Zambia. With markets already on edge, the UK government’s decision to unveil £45bn worth of unfunded tax cuts led to a surge in the country’s cost of financing and threatened to trigger a financial crisis until the Bank of England stepped in and said it would buy sovereign bonds. Adrian acknowledged that the risks of other economies falling victim to similar financial stability problems would mount. “There could certainly be financial stability problems and market dysfunction in other countries as well,” he told reporters on Tuesday. The challenge for highly indebted emerging and developing economies will be even more immense, likely resulting in a wave of additional defaults.He said monetary authorities should be prepared to follow the BoE’s example — intervening to ensure financial stability and fulfil their traditional roles as “lender of last resort” to the financial system. Increasingly, there are calls for central banks to moderate the pace of tightening — mostly directed at the Fed, which is considering a fourth straight 0.75 percentage point rise at its meeting in early November. The EU’s chief diplomat, Josep Borrell, complained this week that “everybody has to follow [the Fed’s higher interest rates], because otherwise their currency will be [devalued]”. World Bank economists have also warned about the negative global repercussions of the Fed’s actions. Others argue that by the time central banks’ aggressive increases have fully worked their way into every corner of the economy, much of the world could be in recession.

Robin Brooks, chief economist of the Institute of International Finance, a trade body for global finance, said there was now a need to at least discuss a global “pivot” away from supersized rate rises because he foresaw a much sharper downturn across Europe and a weaker global economy than the IMF.Policymakers increasingly appear more attuned to these concerns. Lael Brainard, vice-chair of the Fed, on Monday said the central bank should press ahead with its plans to raise rates, but do so “deliberately and in a data-dependent manner”. This was, she said, due to “elevated global economic and financial uncertainty”. More

SEOUL (Reuters) – South Korea’s central bank raised interest rates by a half percentage point for a second time since July on Wednesday, as a surging dollar driven by aggressive U.S. monetary policy tightening fanned import inflation.The Bank of Korea (BOK) raised its benchmark policy rate by 50 basis points to 3.00% on Wednesday, bringing total rates hike since August last year to 250 basis points.Twenty-three of 26 analysts expected the bank to go for a half-point hike in a Reuters poll, while the remaining three expected a quarter-point hike.The U.S. Federal Reserve’s three 75-basis-point hikes have propelled a dollar rally against most other currencies, forcing policymakers around the world to review the risk of fresh inflation pressure and capital outflows.The won’s 17% slump this year could fuel consumer price gains by making imports more expensive.Governor Rhee Chang-yong has repeatedly said inflation is the No.1 priority after it surged to near 24-year high in July before slowing in August and September.The BOK’s move contrasts with that of the Reserve Bank of Australia last week, which surprised markets with a smaller-than-expected 25 basis point hike as it tried to quell inflation without crashing the economy.The median forecast in the poll showed the BOK’s base rate going to 3.25% by year-end and then peaking at 3.50% in the first quarter of 2023. Almost half of respondents in the Reuters poll expected the base rate to reach 3.75% in the first quarter of next year, suggesting a bias towards higher borrowing rates with inflation at 5.6% in September from the same month a year ago far above the BOK’s 2.0% target.Governor Rhee Chang-yong will hold a news conference at 0210 GMT. More