Economy

The head of the International Energy Agency has warned European countries against a scramble for energy security this winter that threatens to shatter EU unity and trigger social unrest. Fatih Birol, the IEA’s executive director, said he feared “a wild west scenario” if European countries restricted their own trade or stopped collaborating with neighbours amid mounting anxieties about fuel shortages. “The implications will be very bad for energy, very bad for the economy, but extremely bad politically,” Birol said Thursday in an interview at the inaugural Global Clean Energy Action Forum in Pittsburgh. “If Europe fails this test in energy, it can go beyond energy implications.”European relations have grown more fractious as countries try to maintain a united front amid soaring energy prices that have brought the continent to the brink of an economic recession. But the mounting crisis has prompted fears that some countries may cut side deals for Russian supply or restrict power exports to their neighbours.There were “two scenarios”, said Birol, whose Paris-based watchdog agency is mainly funded by members of the OECD. “EU and members will work in solidarity, supporting each other . . . or there is another scenario, if everybody is for himself.”“One of the founding values of the EU is solidarity. It will negatively affect the EU’s weight across the world,” Birol said of the latter scenario. Norway’s Nordic neighbours last month blasted Oslo for “selfish” behaviour as it considered pausing electricity exports while it refilled its hydroelectric reservoirs. Andreas Bjelland Eriksen, state secretary in Norway’s petroleum and energy ministry, denied it would halt exports, however, telling the Financial Times that the country was simply “prioritising filling reservoirs for the same reason as Europe is filling its gas (storage)”.The EU has faced opposition from Hungary and some other member states as it deepened sanctions on Russian in response to its invasion of Ukraine. Birol also cautioned against European complacency after the continent succeeded in building up natural gas stockpiles ahead of the winter months when demand peaks.Even if the continent avoided “negative surprises” in gas supply, such as a colder-than-expected winter, Europe would suffer “bruises” in the coming months, Birol said, including economic recession and “significant damage to household budgets”. The crisis for Europe would also last well into 2023, he said, given stagnant global supply and the likelihood of increased competition for liquefied natural gas from a recovering China and other importers.

“When we look around there are not many new gas [projects] coming . . . And the Norway, Algeria, Azerbaijan pipelines are near their maximum capacity. It will be another challenging period,” he said. But Birol was also adamant that Moscow had “already lost the energy battle” with Europe as the continent seeks out alternative suppliers. Most of Russia’s gas and oil exports had gone to Europe before the war, he said — but that was now over. “Russia has lost a good client, and forever. This client paid the money on time and didn’t create any political problems,” Birol said. The IEA chief dismissed Russian efforts to replace Europe’s gas market with exports to Asia. “You are not selling onions in the market. You have to build pipelines, infrastructure, logistics. This will take at least 10 years,” he said. Russia will also struggle to maintain output as sanctions restrict its access to the western technology and capital it needed to continue repairing ageing oilfields and gasfields, Birol said.

Video: How Putin held Europe hostage over energy | FT Energy Source More

A feverish week of central bank activity around the globe has left markets at extremes.Currency prices were rattled after Japan intervened in the foreign exchange market to buy yen for the first time since 1998. The yen surged against the dollar after the intervention. Some analysts were skeptical the battered currency would stay strong given the loose monetary policy by the Bank of Japan contrasted with hawkish moves this week by the Federal Reserve and other central banks. The dollar index, which measures the greenback against a basket of currencies, weakened modestly on Thursday, but was not far from its 20-year high.Wednesday’s actions by the Fed continued to reverberate. The U.S. central bank raised rates by 75 basis points for a third straight meeting and Chair Jerome Powell was blunt about the “pain” to come as policymakers commit to taming four-decade-high inflation.Yields on U.S. government debt ascended new peaks on Thursday. Yields on the two-year U.S. Treasury note hit their highest since 2007 and those on the benchmark 10-year reached their highest since 2011. The curve between those two maturities inverted to their most inverted level since at least 2000, indicating rising concerns about an impending recession. The prospect of a downturn weighed on equities. MSCI’s gauge of stocks across the globe touched its lowest point since November 2020 during the session.Investors might be excused for wanting to take a breath on Friday, but further digestion of the week’s central bank action along with inflation data in Asia and economic readings in Europe could beget more volatility. Key developments that could provide more direction to markets on Friday: Malaysia, Singapore CPI dataTaiwan industrial productionEuro zone PMIsFed Chair Powell gives remarks before “Fed Listens: Transitioning to the Post-pandemic Economy” event More

WASHINGTON (Reuters) – A procedural vote on a government funding bill is expected to take place on Tuesday, an aide to U.S. Senate Majority Leader Chuck Schumer said on Thursday.Congress faces a Sept. 30 deadline to pass legislation to approve funding to keep the government operating beyond the current fiscal year. More

Japan intervened to strengthen the yen for the first time in 24 years as a trio of European central banks raised interest rates, underlining the disruptive impact of inflation on currencies and monetary policy.Inflation’s rise to multi-decade highs in much of the world has led to sharp increases in borrowing costs, with foreign exchange markets whipsawing. This in turn has set off what economists call a “reverse currency war” in which central banks seek to shore up their exchange rates against the dollar, through intervention or interest rate rises. The latest moves, which included rate rises in the UK, Switzerland and Norway, came a day after the US Federal Reserve drove the dollar higher by announcing its third consecutive 0.75 percentage point rate rise on Wednesday.However, Turkey’s central bank moved in the opposite direction, continuing its unorthodox policy by slashing its one-week repo rate from 13 per cent to 12 per cent despite inflation rising above 80 per cent last month. The lira fell to a record low against the dollar.As investors bet the Fed and other leading central banks will raise rates higher than previously expected to bring inflation under control, US bond yields have risen, boosting the dollar and putting downward pressure on other major currencies including the yen, the pound and euro.“The Fed is really setting the pace of interest rate rises and transmitting pressure to other central banks via the foreign exchange markets,” said Krishna Guha, head of policy and central bank strategy at US investment bank Evercore. The yen has lost about a fifth of its value against the dollar this year, lifting the price of imports and contributing to an eight-year high in the growth of Japan’s core consumer prices, which exclude volatile food prices, to 2.8 per cent in the year to August.

Masato Kanda, Japan’s leading currency official, said on Thursday that Tokyo had “taken decisive action” to address what it warned was a “rapid and one-sided” move in the foreign exchange market. It was the first time Japan had sold dollars since 1998, according to official data. The move caused the yen to surge to ¥142.39 to the dollar in the space of a few minutes. In the currency’s most volatile day since 2016, it had previously hit a low of ¥145.89 after the Bank of Japan signalled it would not change its forward guidance about interest rates and stuck to its ultra-accommodative policy. Citigroup economist Kiichi Murashima said that, even if the BoJ were to fine-tune its policy, it would not fundamentally change the broader picture of a widening gap in financial conditions between Japan and the rest of the world. “It’s very questionable how far the government can actually avert the yen’s fall against the dollar,” he said.There have been similar concerns in South Korea about this year’s 15 per cent fall in the value of the won against the dollar, prompting speculation about a potential currency swap arrangement with the Fed, which Seoul denied on Wednesday.Japan is now the only country in the world to retain negative rates after the Swiss National Bank lifted its own policy rate by 0.75 percentage points on Thursday, taking it into positive territory and ending Europe’s decade-long experiment with sub-zero rates.The Bank of England on Thursday resisted pressure to match the pace set by other major central banks, raising its benchmark rate by 0.5 percentage points to 2.25 per cent and pressing ahead with selling assets accumulated under earlier quantitative easing schemes. But it also left the way open to take more aggressive action in November, when it will update its economic forecasts and assess the impact of tax cuts set to be unveiled on Friday by UK prime minister’s Liz Truss’ new administration.Norway’s central bank also pushed up rates by 0.5 percentage points, indicating smaller increases would follow until early next year. Pictet Wealth Management estimated central banks around the world had this week raised policy rates by a cumulative 6 percentage points.Emerging and developing economies are particularly vulnerable in what the World Bank’s chief economist has described as the most significant tightening of global monetary and fiscal policy for five decades.In an interview with the Financial Times, Indermit Gill warned that many lower-income countries could go into debt distress.“If you look at the situation of these countries before the global financial crisis and now, they are much weaker,” he said. “If you go in weak, you usually come out weaker.”The interest rate rises set off heavy selling in government bond markets. US 10-year Treasury yields, a key benchmark for global borrowing costs, soared 0.18 percentage points to 3.69 per cent, the highest since 2011. Britain’s 10-year bond yield rose by a similar margin to 3.5 per cent. The volatility in the bond market also rippled into equities, with the European Stoxx 600 falling 1.8 per cent. Wall Street’s S&P 500 fell 0.8 per cent by lunch time, leaving it on track for its third-straight fall as traders bet on further big rate increases from the Fed. More

World Bank president David Malpass faced mounting pressure to resign after criticism from German and US officials as well as environmental groups over his refusal to say whether he believed in human-caused global warming and complaints about the bank’s record on climate-related finance.Malpass avoided giving a clear answer three times during a New York climate week event on Tuesday when asked whether he accepted the reality of human-driven climate change, saying finally that he was “not a scientist”. On Thursday, Malpass attempted to reverse course on the remarks, telling CNN that it was “clear that greenhouse gas emissions are coming from man-made sources”, and that he was “not a denier.”This followed a barrage of criticism of Malpass, who has come under sustained attack for the record of the World Bank under his leadership.The bank provides loans and grants to poorer countries and is seen as crucial to distributing money to the developing world to help limit global warming as those economies grow. It is the largest provider of multilateral climate-related finance, according to OECD data. But it did not join the numerous countries and other development banks that pledged last year to end public financing for coal, oil and gas overseas by the end of 2022, and its climate plan does not include a deadline for phasing out direct and indirect fossil fuel financing. Jochen Flasbarth, the state secretary in the German federal ministry for economic co-operation and development, pointed to the UN scientific body of evidence about global warming. “We are concerned about this confusing signals about scientific evidence of climate change from the top of the World Bank,” he said on Thursday.The bank was “not using its institutional position to lead the global efforts on climate change”, said Sonia Dunlop, a multilateral development banks expert at independent think-tank E3G. “They have the ability to really lead global efforts and to change the global financial system to help us implement the Paris Agreement. They’re just not leading that charge.” The rising discontent is likely to pile pressure on the Bank’s shareholders, its member countries, in the run-up to the COP27 UN climate summit in November. The US is the largest shareholder and traditionally appoints the World Bank president.Malpass, 66, was appointed by former US president Donald Trump, and his term is due to end in April 2024. The US Treasury said on Thursday that it expected the Bank to be “a global leader of climate ambition,” something that it said it would “make clear” to the group’s leadership. Other countries were likely to follow the lead of the US, said Dunlop. “If the Treasury and White House were waiting for an excuse [to replace Malpass], they now have it.” US climate envoy John Kerry would not be drawn on the position of Malpass this week, but called for wider reform of multilateral development banks. He had been “pushing for months”, he said, for an overhaul of the international financial institutions established as a result of the Bretton Woods agreement in 1944, including the IMF and what became the World Bank Group.

With just weeks to go before COP27, the World Bank has been making it difficult for the major development banks to craft a joint statement on climate that they intend to present at November’s summit, according to two people familiar with the matter. This follows a push by the World Bank last year for a joint development bank statement to be shortened and weakened, as reported by the FT.The annual joint report by development banks on climate finance, typically published during the middle of the year, is also yet to be published. The World Bank Group reported this month that it had delivered a record $31.7bn in 2022 to help countries address climate change, up 19 per cent from the year before. “Under the leadership of David Malpass, the World Bank Group doubled its climate finance, published an ambitious Climate Change Action Plan, and initiated country level diagnostics to support countries’ climate and development goals,” it said on Thursday.However, the level of funding falls far short of what experts believe need to be deployed.Former vice-president Al Gore, who has long been calling for Malpass to quit, labelled him a “climate denier” this week. Gore said the bank was not adequately stepping in to help finance the clean energy transition in developing economies. “Since almost 90 per cent of the increased emissions going forward are coming from developing countries, we have to take the top layers of risk off the access to capital in these developing countries,” said Gore. “That’s the job of the World Bank, to co-ordinate the other multilateral development banks, and they’re simply not doing it.”For FT coverage on New York climate week go to Climate Capital and Moral Money.Follow @ftclimate on Instagram More

US senators have asked the intelligence community to examine the threat a potential deal between Apple and the Chinese chipmaker Yangtze Memory Technologies Co poses to national security, in an escalation of the political pressure being applied to the iPhone maker over the arrangement.Mark Warner, the Democratic chair of the Senate intelligence committee, and the Republican vice-chair Marco Rubio wrote to director of national intelligence Avril Haines requesting a review just days after the Financial Times reported that Apple was considering buying memory chips from YMTC for the new iPhone 14.“We write to convey our extreme concern about the possibility that Apple Inc will soon procure 3D Nand memory chips from Yangtze Memory Technologies Co,” the senators said. “Such a decision would introduce significant privacy and security vulnerabilities to the global digital supply chain that Apple helps shape given YMTC’s extensive, but often opaque, ties to the Chinese Communist party.”The FT has reported that YMTC has supplied memory chips to Huawei, the controversial Chinese telecoms equipment giant, for at least two phones, including its flagship foldable Mate Xs 2. This would be a possible violation of a US export control that effectively bars companies from providing products containing American technology to Huawei.Government and industry experts assume that all Chinese chipmakers use US technology because American chip design software and manufacturing tools are ubiquitous in all semiconductor supply chains.Apple recently told the FT that it was “evaluating” sourcing from YMTC for some iPhones in China. Apple on Thursday declined to comment on the letter to Haines, which was also signed by Democratic Senate majority leader Chuck Schumer and John Cornyn, a Texas Republican.The senators asked Haines to review the risks that an Apple-YMTC deal would pose to economic and national security. They asked her to look into how the Chinese Communist party uses YMTC to bolster its domestic chip industry and displace semiconductor manufacturers from the US and allied countries. They also requested an examination of the role YMTC allegedly plays in helping Chinese companies, including Huawei, evade US sanctions.

YMTC is just one of many Chinese technology groups to have come under increasing scrutiny in Washington. National security adviser Jake Sullivan last week said the US had to re-evaluate its longstanding premise that it had to maintain a “relative” advantage over competitors, including in chips, where it “previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead”.“That is not the strategic environment we are in today,” Sullivan told SCSP, a think-tank focused on enhancing US technology in critical fields. “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”The US commerce department is working on a range of measures that would make it harder to export certain chip-related technology to China in an effort to slow down its efforts to build up its domestic industry.Additional reporting by Patrick McGee. Follow Demetri Sevastopulo on Twitter More

When Jay Powell, US Federal Reserve chair, announced another big interest rate hike on Wednesday, he grimly admitted the obvious: “Reducing inflation is likely to require a sustained period of below-trend growth and there will very likely be some softening of labour market conditions.” The Federal Open Market Committee now projects that the overall unemployment rate will hit 4.4 per cent next year, up from earlier forecasts of 3.9 per cent, and the current level of 3.7 per cent.That is bad news for a White House that faces a tough midterm election in the teeth of voter fury about cost of living increases. But the issue that is perhaps even more pressing for politicians, as well as Fed economists, is exactly how this pain might be distributed between different income groups.In the past few years Powell has often defended the Fed’s loose policy, arguing that by ensuring a red hot economy the Fed was also creating jobs that lifted people out of poverty. So will this dynamic now be reversed as rates rise? In other words, could the Fed decision be regressive?Judging from some striking new research released this week, just before the Fed move, the unwelcome answer is: “probably yes.” This analysis comes from the economists Emmanuel Saez, Thomas Blanchet and Gabriel Zucman. Their starting point is the observation that it has hitherto been very difficult to assess in a timely manner how inequality trends are shaping economic growth.The US government publishes aggregate statistics about earnings, spending and growth with a lag of just a few weeks. But granular information about trends in different socio-economic groups only emerges after a long delay — and from different sources. Previously, when economists such as Thomas Piketty (or indeed Saez himself) have warned about widening inequality in America, they have done so by constructing historical data series rather than examining current trends.This time, however, Saez’s group has tried to plug that information gap by creating so-called high frequency inequality data. This means aggregating a vast array of public and private information sources, including non-traditional ones, to create monthly calculations of how income and wealth patterns are evolving, almost in real time.This ambitious undertaking is still a work in progress, and the methodology has been made open source, to enable widespread testing. But the initial data series, which goes back to 1976, contains two very thought-provoking messages for America’s current political economy.The first is that the recession induced by the Covid-19 pandemic had a different impact on US households than that of the global financial crisis. The post-crisis recession sparked a slump in Americans’ incomes, and it took four long years for economic activity, measured by average gross domestic product per capita, to recover to pre-crisis levels. That post-crisis period was even worse for the poor. According to Saez, Blanchet and Zucman, it took “nearly 10 years for the bottom 50 per cent [of workers] to recover [their] pre-crisis pre-tax income level”. This is almost certainly one of the factors that fuelled the rising tide of populism in recent years.However, when the Covid recession hit in the spring of 2020, initially causing another sharp decline in incomes, there was a swift recovery. “All income groups recovered their pre-crisis factor income level within 20 months”, they observe. Indeed, by 2021, average real disposable income was a remarkable 10 per cent above 2019 levels. And what is even more striking is that on this occasion the poorest cohorts were not excluded from the gains, On the contrary, average disposable income for the bottom 50 per cent was actually 20 per cent higher in 2021 than in 2019. This leads to a second key point: while the Covid recovery slightly reduced income inequality, this was not universal. Racial inequalities remained stark, and inequities of wealth, as opposed to earnings, swelled because the Fed’s ultra loose monetary policy bolstered the price of assets held by the rich. But if you just look at real household incomes — arguably the measure that most voters are aware of on a day-to-day basis — the pattern produced relative gains for the poor. And that was a “break from the trend [of rising inequality] prevailing since the early 1980s”. Why? Initially, the rebound stemmed from one-off Covid welfare payments. However, the bigger, and more durable, factor was strong job and wage growth among low-paid workers. And in 2022, this tight job market has continued to benefit the poor — even as welfare payments have ended — with their incomes 10 per higher than they were pre-pandemic. So will this trend now go into reverse? It has not done — yet. But some progressive politicians, such as the Democratic senator Elizabeth Warren, are clearly worried as rates keep climbing, particularly given that high inflation tends to hit poor people harder in relative terms. “What [Powell] calls ‘some pain’ means putting people out of work, shutting down small businesses,” she observed last month, railing angrily against the Fed.And as the midterms loom, such attacks could multiply. All eyes, then, on Powell’s next move, and how this looming “pain” affects voter [email protected] More

TS Lombard’s Dario Perkins, the Paolo Maldini of sellside economists, has just written a grim-as-hell interesting new report on the predicament facing Europe this winter. Perkins estimates that the cost of governments trying to soften the economic hit from spiralling energy prices could cost “at least” 5 per cent of gross domestic product. If that bill seems steep to some governments, the alternative is worse, Perkins argues. Our emphasis below. Inevitably, governments are under enormous pressure to support their economies through this difficult period. They have already announced various fiscal interventions, including liquidity provisions (for utilities companies facing extreme margin calls), income transfers, and even “price caps” on energy. The eventual bill for the public finances could be huge, with a successful intervention likely to cost at least 5% of GDP per annum (depending on what happens to energy prices). But Europe’s politicians have no alternative, especially as — unlike central bankers — they will eventually be seeking re-election. Many low-income households are facing real poverty this winter, while rapidly rising input prices are set to destroy the profitability of European companies (especially the region’s SMEs, which already operate on relatively thin margins). Unless governments act swiftly and decisively, they could find themselves facing an economic crisis similar to the one they successfully dodged during the pandemic: enormous strains on corporate balance sheets, which trigger a wave of bankruptcies and a sharp increase in unemployment. In short, another COVID-style economic crisis demands a COVID-sized policy response. The problem, as Perkins points out, is that all central banks currently seem to see is uncomfortably high inflation. Although the European Central Bank is not acting as aggressively as the Federal Reserve, the direction of travel is pretty clear. So there is currently a tug of war between European governments opening the fiscal spigots in various ways to soften the hit from higher energy costs — what Perkins calls “The Everybody Bailout” — and monetary policy that is essentially trying to gently but firmly choke economic growth. As Perkins notes, this is pretty much a complete reversal of policy over the past decade, when monetary policy was historically easy and fiscal policy was arguably much tighter than it should have been. The question is where this leads. Naturally, a large fiscal expansion runs directly against the philosophy of Europe’s monetary guardians. Governments are, in effect, trying to shield the economy from an adjustment that central banks say is inevitable. But is the public sector’s response to the energy crunch necessarily inflationary? The answer depends on the persistence of the shock. If energy prices quickly return to their pre-2022 levels — or governments withdraw their support quickly — governments will have delivered a one-off increase in public debt, which is not likely to generate persistent inflation. Problems arise, however, if the energy crisis lingers. Wholesale energy prices could remain high in 2023 and possibly beyond, which would make it extremely hard for governments to reduce their support to households and businesses. Instead, the public sector would be under enormous pressure to continue to subsidize private living standards, leading to large, persistent deficits and higher medium-term inflation. Throw in periodic energy blackouts and sectoral lockdowns and we could face another COVID-style dynamic, where governments are simultaneously supporting incomes and restricting supply. Central banks would not be happy, especially as the longer inflation stays high, the greater the risk of “de-anchoring” expectations.Buckle up. More