Economy

The Biden administration’s abrupt withdrawal of subsidies for South Korean electric vehicles is threatening to undermine trust in the US, Seoul’s trade minister has warned, as trade tensions grow between the allies. Seoul is furious that EVs manufactured by Hyundai in South Korea will be excluded from generous consumer tax credits contained in the Inflation Reduction Act, a landmark US climate, tax and spending law.The furore illustrates the impact on US allies of Washington’s efforts to boost domestic manufacturing in high-technology sectors including EVs and semiconductors as competition intensifies with China.In an interview with the Financial Times, Ahn Duk-geun recalled Joe Biden’s visit to South Korea in May, when the US president and Hyundai chair Chung Eui-sun announced a $5.5bn investment to build the company’s first dedicated EV plant and battery manufacturing facility in the US.“President Biden himself said ‘thank you very much, chairman Chung, I will not let you down’ — that was the exact statement, and it was widely broadcast in Korea,” said Ahn, a professor of international trade law who assumed office shortly before Biden’s visit.“Then when this new law was enacted and signed by President Biden, and [it became clear that] that company was being discriminated against, this situation provoked emotional and political repercussions.”South Korea’s trade minister Ahn Duk-geun: ‘We don’t want to aggravate the problem by adopting similar retaliatory measures’ © South Korean Trade MinistryThe Inflation Reduction Act, signed into law by Biden last month, lays out tax credits of up to $7,500 for EVs assembled in the US, Canada, and Mexico. But Hyundai’s Georgia plant is not scheduled to begin production until 2025 — making it ineligible for the subsidies until then.“That caused big trouble for Hyundai Motor Company, which decided to make a huge investment based on the current arrangement,” said Ahn, who suggested that “not many [US] congressmen and senators were fully aware of all the details of the IRA”. Ahn stressed that US officials had acknowledged Hyundai’s predicament and were working positively with their Korean counterparts to try to “minimise the damage”.“We don’t want to aggravate the problem by adopting similar retaliatory measures,” said Ahn, who reiterated South Korea’s position that left open the possibility of taking action at the World Trade Organization.“But you never know, if the situation gets really serious, we are flexible too.” Ahn also acknowledged disagreements between Seoul and Washington over US restrictions on the transfer of cutting-edge manufacturing capabilities to semiconductor facilities in China.“Our semiconductor industry has a lot of concerns about what the US government is doing these days,” said Ahn, citing the recently enacted Chips Act, which prohibits recipients of US federal funding from expanding or upgrading their advanced chip capacity in China for 10 years.“Of course, we share the US government’s concerns about the top level of semiconductor products because there is the danger [that they could be] utilised for military purposes,” said Ahn.“At the very low end are semiconductor products which have nothing to do with those kinds of purposes, and we thought these were for general commercial purposes,” he added. “The problem is in the grey area, where the US government is trying to reach down to what were previously more general commercial areas, and the Korean government sometimes has disagreement about demarcation.”As with many export-oriented countries, South Korea is finding itself increasingly caught up in the intensifying competition between Washington and Beijing.“Like many other countries’ companies, Korean companies are trying to reduce their reliance on the Chinese market,” Ahn said.He cited Beijing’s policy to “arbitrarily interfere with businesses” as well as its “dual circulation” import substitution policies as the most important factors driving foreign companies to reduce their exposure to China.He added that over the course of the decade, the “structure of trade” between South Korea and China “will be changed”, moving down the value chain as the exchange of sensitive technologies is increasingly controlled.

“Maybe the trade volume will increase,” said Ahn. “But maybe it will be an increase in the trade of low-value products, whereas the trade in high-end, technologically advanced products might be reduced.” He said that Korea was looking to expand ties with the US and EU as part of a drive to reduce its trade dependence on China.Ahn said that while South Korea and China remained interested in the possibility of a trilateral free trade agreement with Japan, these efforts were being hampered by Tokyo’s resistance relating to unresolved political tensions with Seoul over Japan’s historic occupation of the Korean peninsula.He added that Japanese opposition had also complicated South Korea’s bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, an Asia-Pacific trade pact that does not include the US or China.“It’s a very important topic for us and we have already talked to all CPTTP members except Japan, which is still very reluctant to talk to us unless we solve these diplomatic issues,” said Ahn. “The official stance of the Japanese government is still very stubborn.”

Video: Cars, companies, countries: the race to go electric More

ISLAMABAD (Reuters) – Pakistan will “absolutely not” default on debt obligations despite catastrophic floods, the finance minister said on Sunday, signalling there would be no major deviation from reforms designed to stabilise a struggling economy.Floods have affected 33 million Pakistanis, inflicted billions of dollars in damage, and killed over 1,500 people – creating concern that Pakistan will not meet debts.”The path to stability was narrow, given the challenging environment, and it has become narrower still,” Finance Minister Miftah Ismail told Reuters at his office. “But if we continue to take prudent decisions – and we will – then we’re not going to default. Absolutely not.”Pakistan was able to bring an International Monetary Fund (IMF) programme back on track after months of delay, thanks to tough policy decisions. But the positive sentiment was short- lived before the catastrophic rainfall hit.Despite the disaster, Ismail said that most stabilisation policies and targets were still on track, including increasing dwindling foreign exchange reserves.Central bank reserves stand at $8.6 billion, despite the influx of $1.12 billion in IMF funding in late August, which are only enough for about a month of imports. The end-year target was to increase the buffer up to 2.2 months. He said Pakistan will still be able to increase reserves by up to $4 billion, even if the floods hurt the current account balance by $4 billion in more imports, such as cotton, and a negative impact on exports.However, he estimated the current account deficit will not increase by more than $2 billion following the floods.”Yes, there has been substantial loss to the very poorest people and their lives will never be made whole again. But in terms of servicing our external and local debt, and being micro- macro-economically stable, those things are under control.”DECEMBER PAYMENT TO BE METHe said global markets were “jittery” about Pakistan, given the economy had suffered at least $18 billion in losses after the floods, which could go as high as $30 billion.”Yes, our credit default risk has gone up, our bond prices have fallen. But…I think within 15 to 20 days, the market will normalise, and I think will understand that Pakistan is committed to being prudent.”Pakistan’s next big payment – $1 billion in international bonds – is due in December, and Ismail said that payment would “absolutely” be met. The IMF said on Sunday that it will work with the international community to support Pakistan’s relief and reconstruction efforts and the endeavour to ensure sustainability and stability.Ismail said external financing sources were secured, including over $4 billion from the Asian Development Bank (ADB), Asian Infrastructure Investment Bank and World Bank. This includes $1.5 billion next month from ADB under the Countercyclical Support Facility – a budget support instrument.The minister also said about $5 billion in investments from Qatar, the UAE and Saudi Arabia would materialise in the current financial year. The three announced interest in investing in Pakistan earlier this year, but no timelines or exact plans have been reported yet.He said $1 billion in UAE investment will “definitely materialise” in the next couple of months in the form of purchases in the Pakistan stock market.Some $3 billion in Qatari investment pledges will all come within the financial year to June 2023, he added. “They’re looking at the three airports in Pakistan, Karachi, Lahore and Islamabad … long-term leases. They’re also looking at buying two plants that run on LNG (liquefied natural gas)… those I think will probably happen this calendar year,” he said. He said if the $3 billion figure was not reached as the financial year closed, the remaining amount would go into the stock market.He also said Saudi Arabia’s crown prince had assured Prime Minister Shehbaz Sharif that Riyadh would invest $1 billion before December.Pakistan’s central bank announced on Sunday that Saudi Arabia’s development authority had also extended a deposit of $3 billion, to mature in December, by one year.He said a legal instrument was going to be signed soon with a “friendly country” to activate a $1 billion deferred payment facility for oil. More

Investors are pricing in a sharper surge in interest rates over the coming months after the world’s major central banks strengthened their resolve to tackle soaring prices, signalling they would prioritise inflation over growth. A Financial Times analysis of interest rate derivatives, tracking expectations for borrowing costs in the US, UK and eurozone, showed markets expect a more drastic pace of tightening during the final quarter of 2022 than they did earlier this year.The shift in mood comes ahead of crucial policy meetings by the US Federal Reserve, the Bank of England, the central banks of Norway and Sweden, and the Swiss National Bank this week. It follows a poor August inflation reading in the US and warnings from monetary policymakers on both sides of the Atlantic that they were becoming increasingly concerned that, without substantial rate rises, high inflation would prove hard to shift. “Central banks are coming to terms with how hard it will be to bring inflation back to target and they are trying to convey that message to the markets,” said Ethan Harris, an economist at Bank of America. The mounting expectations that central banks will increase rates, even if their economies fall into recession, has prompted concern from the World Bank. The Washington-based organisation warned last week that policymakers risked sending the global economy into recession next year.“Central banks will sacrifice their economies to recession to ensure inflation quickly returns to their targets,” said Mark Zandi, chief economist of Moody’s Analytics. “They understand that if they don’t, and inflation becomes more entrenched, this will ultimately result in a more severe downturn.” Since June, the world’s 20 major central banks have together raised interest rates by 860 basis points, according to FT research. As of Friday, markets were pricing in a 25 per cent chance that the US Federal Reserve would raise rates by 100 basis points on Wednesday and expected the federal funds target to be above 4 per cent by the turn of the year — about one full percentage point higher than in early August. Markets expect the European Central Bank’s deposit rate to hit 2 per cent by the end of the year, up from 0.75 per cent now. The latest bet is more than one percentage point higher than what investors were forecasting in early August. Philip Lane, ECB chief economist, told a conference at the weekend that he expected it to raise rates “several” more times this year and early next year. He said this was likely to involve some “pain” of lost growth and jobs to bring down demand, reflecting the ECB’s rising concern that inflationary pressures are spreading from energy and food to other products and services.Year-end interest rate expectations are also higher for the Bank of England, with economists largely split between a rise of 50 basis points and 75 basis points at Thursday’s vote.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Switzerland’s central bank is expected to raise its policy rate by 75-100 basis points next Thursday, ending a seven-year experiment with negative interest rates. Paul Hollingsworth, chief European economist at BNP Paribas, said central banks were “front-loading their tightening cycles” despite signs that growth was weakening. A big shift in market expectations came after policymakers, such as Federal Reserve chair Jay Powell and ECB executive board member Isabel Schnabel, delivered hawkish messages at the Kansas City Fed’s annual Jackson Hole conference in late August. “That sucking sound you hear is the sound of policymakers pulling rate hikes previously expected to take place in 2023 into 2022,” said Krishna Guha, vice-chair at the investment banking advisory firm Evercore ISI, following the meeting. “We are ending up globally with something that — looking across 2022 as a whole — will resemble more of a scrambled level shift than a conventional tightening cycle.”

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Since Jackson Hole, US inflation has proved to be stickier than expected, coming in at an annual rate of 8.3 per cent in August. In the eurozone, price pressures are expected to hit double digits in the coming months. The UK government’s £150bn energy support package will lower inflation in the short term, but boost price pressures in the medium term by bolstering demand. Central bankers such as Schnabel have signalled that, with inflation set to remain close to record highs for the foreseeable future, they are no longer prepared to put their faith in economic models that show price pressures declining over the next couple of years. While most of the inflation seen in Europe remains the result of the surge in energy prices triggered by the war in Ukraine, there have been increasing signs in both the single currency area and the UK that price pressures have become more widespread and more entrenched. “Ordinarily, central banks would look through gains in these volatile prices as temporary,” said Jennifer McKeown, head of global economics at Capital Economics. “But in an environment where core inflation is already high and inflation expectations and wage negotiations seem to be following energy prices higher, monetary policymakers just can’t take that risk.”Additional reporting by Martin Arnold More

OTTAWA (Reuters) – The underlying pressures driving inflation in Canada are likely to peak in the fourth quarter of this year, economists told Reuters, though most see signs fast rising prices are becoming entrenched and warn a recession may be needed to avoid a spiral.Canada’s inflation data for August will be released on Tuesday, with analysts forecasting the headline rate will edge down to 7.3%, from 7.6% in July and a four-decade high of 8.1% in June. But all eyes will be on the three core measures of inflation – CPI Common, CPI Median and CPI Trim – which taken together are seen as a better indicator of underlying price pressures. The average of the three hit a record high of 5.3% in July.Six of eight economists surveyed by Reuters see core inflation peaking in the fourth quarter as underlying domestic and global pressures start to ease, though the path back to the 2% target will not be brisk.”Rapidly cooling growth, the pullback in housing prices, and less pressure on supply chains will help cap core inflation relatively soon,” said Doug Porter, chief economist at BMO Capital Markets. “However, we believe that it will be sticky, and will descend only slowly through 2023,” he added.The broadening of price increases, increased wage settlements, as well as rising consumer and business inflation expectations are signs that inflation is becoming more entrenched in the economy, economists told Reuters. Six of eight said they see signs of entrenchment. That is an outcome that the Bank of Canada has hoped to avoid, saying it would require more aggressive interest rate hikes to bring inflation back under control.The central bank has already raised interest rates by 300 basis points in just six months to 3.25% – a 14-year high and the loftiest policy rate among central banks overseeing the 10 most traded currencies.Still, economists don’t expect any shift to a wage-price spiral to be permanent, particularly if the economy slows down.”We think aggressive interest rate hikes will be followed by a recession next year … which would prevent expectations from coming fully unanchored,” said Nathan Janzen, assistant chief economist at Royal Bank of Canada.Economists at Desjardins Group and Oxford Economics also foresee aggressive rate hikes leading to a recession, though they cast it as a mild downturn.For its parts, the Bank of Canada says it can slow growth without tanking the economy.”The bank still sees a path to a soft landing. That’s still our objective. We need to cool the economy to get inflation back to target,” Senior Deputy Governor Carolyn Rogers (NYSE:ROG) told reporters earlier this month.As for headline inflation, the central bank has it returning to 2% in 2024. Most economists agree with that timeframe or think it could happen sooner.”We think that’ll be a 2024 story,” said Beata Caranci, chief economist at TD Securities. “But there should be compelling evidence that the data is trending in that direction within the second half of 2023.” More

Liz Truss and Kwasi Kwarteng, the UK’s new prime minister and chancellor of the exchequer, are gamblers on a huge scale. According to the Institute for Fiscal Studies, the two-year energy package set out by Kwarteng on September 8 is likely to cost £100bn (4 per cent of gross domestic product) in the first year alone. Its total cost might be £150bn. To this should be added permanent tax cuts amounting to more than 1 per cent of GDP, expected to be announced later this week. Perhaps worst of all, as Paul Johnson, director of the IFS, notes: “The failure to provide any official sense of a costing was extraordinary, and deeply disappointing.” I would call it “frightening”.Some such energy package was necessary, for reasons I laid out two weeks ago. The soaring prices of energy are the result of a Russian war on Ukraine. It was necessary to protect the British people and the economy from the immediate consequences. Moreover, I argued, the rise was too huge to be dealt with only by targeted assistance. In the short run there should be price controls, coupled with additional financial help for those households most adversely affected by what would still be very large price rises.So, what is wrong with what Kwarteng has done, apart from not even trying to tell the world what it might cost?First, it is too generous. Under the plan, energy prices for the typical household are capped at £2,500 for two years from October of this year (up from £1,100 before the crisis). If targeting of the more vulnerable were more generous, the price cap could have been set at, say, £3,500, still below the predicted cost of £4,586 from January 1 and almost certainly still higher later on. This would have been more affordable and also a sharper spur to energy efficiency.Second, too much of the cost falls on public borrowing. The government is bearing all the cost of lowering the prices, instead of imposing price controls on domestic energy producers, as I suggested. Moreover, it is not raising additional taxes on windfall profits or on those able to pay more. I argued instead for a temporary “solidarity levy” on better-off taxpayers, which would have been fully justifiable in such circumstances. Higher taxes on the prosperous have historically helped pay for war.Third, given the failure to raise taxes on the better off or increase support for the least well off, the package is ill-targeted. True, according to the IFS, the gain from the package of support is 14 per cent of household budgets for those in the bottom decile and only 5 per cent for those in the top decile, because the former spend far more of their income on energy. But, in cash terms, the top decile will receive some £2,000 each, against £1,600 for the poorest. According to the Resolution Foundation, if one adds the likely reversal of Rishi Sunak’s changes to national insurance, the richest households gain over twice as much in cash terms as the poorest. Moreover, the latter will still be harder hit by the rise in energy prices relative to their incomes than the former.Fourth, this package is unsustainable. Suppose energy prices continue to be so high for more than two years. What would the government do then? Indeed, that point is likely to come even sooner, since the planned support package for business expires in six months. If the crisis lasts as long as that, the government would have to let prices rise, target assistance better and raise taxes. It should set out its follow-up plan soon.Finally, the combination of a massive fiscal loosening with low unemployment, high inflation and a weak exchange rate creates significant macroeconomic risks. For the Bank of England, the package has the advantage of lowering peak measured inflation by some four percentage points, according to the Resolution Foundation. That was presumably part of its aim. But it seems likely that the Bank of England will consider that the boost to demand will offset the gain from lower headline inflation and adopt higher interest rates than would otherwise have been the case.Whether the impact of such a combination of looser fiscal policy with tighter monetary policy would also raise the exchange rate depends on the most important impact of all, which would be on confidence in the UK. Alas, the new growth target, this fiscal loosening and the expected decision to introduce permanent tax cuts look like one of those “dashes for growth” that have blown up this economy (and those of many others) in the past. This is a risk the country cannot afford to take, especially given the risk-aversion in today’s world economy and the aftermath of Brexit.The UK is not the US. The foreigners who finance it have to believe it is managed by sober and responsible people. With soaring inflation and fiscal loosening, the UK is now on trial. Kwarteng’s duty is to avoid its being found guilty. [email protected] Follow Martin Wolf with myFT and on Twitter More

Will the Fed deliver a third 0.75 percentage point increase?The US Federal Reserve is widely expected to announce a third consecutive 0.75 percentage point interest rate increase at the conclusion of its September policy meeting, which wraps up on Wednesday.The Fed has in recent months raised interest rates at a brisk pace in an effort to rein in price growth that continues to run near 40-year highs. Economists had expected consumer prices to fall in August from July due to the drop in petrol prices, but data released last Tuesday showed a small increase, suggesting the Fed has more work to do.Following the inflation data, investors began betting on the possibility of a full percentage point increase, though the odds of that remain low, given the consistent messaging from the Fed in recent weeks about a 0.75 percentage point move.The Fed on Wednesday will also release its “dot plot”, or summary of economic projections, which shows where the median Fed official believes interest rates, inflation, unemployment and gross domestic product will be over the course of the next few years. Meaningful changes in expectations are expected.The last dot plot was released in June and suggested that inflation, measured as core personal consumption expenditures, would be 4.3 per cent by the end of 2022 and 2.7 per cent by the end of 2023. Core PCE for July was 4.6 per cent. The June dots suggested interest rates would be at 3.4 per cent by the end of 2022 and 3.8 per cent by end-2023. At present, the futures market expects rates to be at 4.2 per cent by year-end, to peak in March 2023 at 4.5 per cent, and be cut to 4 per cent by the end of 2023. Kate DuguidWill the BoJ stick to its ultra-loose policies?The Bank of Japan is expected to maintain its ultra-loose monetary policy as market participants focus on whether authorities will directly intervene to stem the yen’s descent to a new 24-year low.The policy meeting follows a tense week where BoJ officials phoned currency traders to inquire about market conditions in a so-called rate check, illustrating the government’s sense of alarm about the yen’s sharp fall against the US dollar. In the past, such checks have preceded an intervention by the Ministry of Finance to control the exchange rate.Pressure on the yen is unlikely to affect BoJ monetary policy, however, with its governor Haruhiko Kuroda repeatedly arguing that it needs to maintain its stance until wages and inflation rise “in a stable and consistent manner”.Most economists expect Kuroda to stay the course until his term expires in April next year. The only change expected is for the BoJ to confirm the end of a scheme it set up to offer cheap loans to banks financing small and medium-sized companies through the Covid-19 downturn.“We expect the BoJ to keep monetary policy unchanged . . . having maintained its stance that monetary policy is not targeted at forex in the midst of sharp yen depreciation against the dollar,” said Citigroup Japan economist Kiichi Murashima.The Fed, Bank of England and the Swiss National Bank are expected to raise rates this week, widening a divergence in global yields that has pushed down the Japanese currency. Kana InagakiWill the BoE raise rates for the seventh time in a row?The BoE is expected to continue its policy tightening at the next meeting on Thursday as it deals with inflation rates about five times above its 2 per cent target. The central bank has increased rates at the past six consecutive meetings and has accelerated its pace in August with a 0.5 percentage point rise. The median forecast of economists in a Reuters poll is for another half a percentage point rate increase, although some expect an extra-large 0.75 percentage point boost in the bank rate. The UK annual pace of inflation dipped in August to 9.9 per cent, from 10.1 per cent in the previous month, but core inflation, which strips out food and energy, rose 0.1 percentage point to 6.3 per cent.“The acceleration in core alongside the continued level of services inflation remains a notable cause for concern — one that we believe is likely to reaffirm the need for further ‘forceful’ action from the [Monetary Policy Committee],” said Benjamin Nabarro, economist at Citi.Some economists also argue that the energy support package launched earlier in the month and tax cuts expected to be announced with the Budget will help limit the blow of surging gas prices to businesses and consumers, but they also could mean higher interest rates for longer.Prime Minister Liz Truss’s energy market intervention — especially if combined with sizeable cuts to taxes — may keep spending growth too high, said Kallum Pickering, economist at the investment bank Berenberg. “While such fiscal interventions will ease the near-term pain for consumers as well as lower the peak rate of inflation, they tilt the risks to our medium-term inflation calls to the upside,” he added. Valentina Romei More

JEDDAH, Saudi Arabia (Reuters) -Tunisia expects to reach a deal with the International Monetary Fund in coming weeks on a loan of between $2 billion and $4 billion over three years, the central bank governor said on Sunday.Tunisia, which is suffering its worst financial crisis, is seeking to secure an IMF loan to save public finances from collapse.”The size is still under negotiation and I think it will be between $2 billion and $4 billion, we hope to reach a staff level deal in coming weeks,” Marouan Abassi told Reuters.The government and the powerful UGTT union last week signed a deal to boost public sector wages by 5%, a step that may ease social tensions. But they did not announce any further agreement on reforms needed for an IMF bailout.Abassi said the wage deal was an important step for negotiations with the IMF and will give a clear view of wages’ weight in GDP in coming years.”It will give us a clear vision about the wage mass that is expected to decline in the coming years,” he added.Fitch Ratings said on Friday that Tunisia’s wage agreement raises the likelihood of an IMF deal.Abassi said the possible deal will open doors for bilateral financing, including with Japan and Gulf countries. “We have advanced talks with Saudi Arabia about bilateral financing,” he added.The IMF has signalled it will not move forward with a bailout sought by Tunis unless the government brings on board the UGTT, which says it has more than a million members and has previously shut down the economy in strikes.Tunisia is struggling to revive its public finances as discontent grows over inflation running at nearly 9% and a shortage of many food items in stores because the country cannot afford to pay for some imports. More

The new steps include the regional banks raising long-term debt that will help absorb losses in cases of insolvency, the WSJ reported adding three people familiar with the matter.The WSJ report comes over a week after U.S. Federal Reserve chief Michael Barr said that there soon may be tougher rules on large regional lenders after a ‘holistic’ review of bank capital requirements is concluded. More