Economy

What is the future of globalisation? This is among the biggest questions of our time. In June, I argued that, contrary to increasingly widespread opinion, “Globalisation is not dead. It may not even be dying. But it is changing.” Among the most important ways in which it is changing is via the growth of services provided at a distance.Since the industrial revolution, we have, argues Richard Baldwin in his book The Great Convergence, seen three waves of opportunities to trade. First, industrialisation and the revolution in transport generated opportunities for trade in goods. More recently, new information technologies allowed “trade in factories”: it became profitable to move entire factories to where labour was cheap. Today, however, the broadband internet allows “trade in offices”: if one can work for one’s employer from home, someone in India can do so, too.Moreover, an important difference between the first and second waves, which need movement of objects, and the third, which moves information virtually, is that obstacles to physical trade are far easier to impose than those to virtual trade. It is not impossible to impose the latter, as China shows. But it requires great effort.As Baldwin argues in four recent blogs, this analytical framework allows us to view the future of trade in a different light from the one now fashionable. In particular, what he calls the “lazy” view of the history of globalisation and trade is misleading on a number of dimensions. What then is that view? It is that after some two decades of very rapid growth, world trade in goods peaked in 2008, under the mortal blow of the financial crisis, as the world turned away from trade.This view both of what happened and why is misleading.First, the trade ratio of the world’s second largest trader of goods, China, actually peaked before 2008 (in 2006). Those of the third and fourth largest goods traders, the US and Japan, peaked after 2008 (in 2011 and 2014). The ratio of the largest trader, the EU, has not peaked, though it has stagnated.Second, the biggest fall in the trade ratio is in China. But this does not reflect protectionism abroad or a deliberate turning away from trade by China itself. China has merely normalised reliance on trade relative to its economic size.Third, in money terms, the biggest cause of the declining trade ratio was the fall in the price of commodities, not a reduction in the volume of trade. This price fall accounted for 5.7 percentage points of the 9.1 percentage points decline in the ratio of goods trade to world output between 2008 and 2020.Finally, there is indeed evidence of an unwinding of cross-border supply chains, but the turning point seems to be in 2013, after the financial crisis, but before the election of Donald Trump. A principal explanation is the shift of supply chains inside the new suppliers, especially China, the dominant one. Instead of assembling imported intermediates, China now produces them itself.In all, there exist perfectly natural explanations for the fall in the ratio of world trade in goods to output. But the slowdown in supply chain unbundling is real. Among other explanations, many of those chains have now shifted inside China.Services are a different story. The ratio of trade in services to world output, though much lower than for goods, has continued to rise. Services are a very heterogeneous group of activities, some of which require movement of people (tourism, for example). But activities in the exceptionally dynamic category of “other commercial services” (OCS) can, in large part, be supplied virtually. These include a highly diverse range of activities. The growth of trade in OCS is also exceptionally dynamic: between 1990 and 2020, trade in goods expanded fivefold while OCS multiplied 11-fold.A crucial point is that the expansion of trade in such services has depended little on trade agreements. The regulation of service activities focuses on final services, not intermediate ones. There exist, for example, strict rules on selling accounting services in the US. Yet there are few rules on the qualifications of the workers that do the paperwork behind the provision of such services.Thus, a “US accountant can employ pretty much anybody to tally up a client’s travel expenses and collate them with expense receipts”. Examples of occupations that provide intermediate as opposed to final services include book-keepers, forensic accountants, screeners of CVs, administrative assistants, online help staff, graphic designers, copy-editors, personal assistants, X-ray readers, IT security consultants, IT help staff, software engineers, lawyers who check contracts, financial analysts who write reports. The list goes on.As Baldwin argues in The Globotics Upheaval, the potential for this sort of technology-enabled trade is huge. It will also be highly disruptive: the white-collar workers who provide these services in high-income countries are an important part of the middle class. But it will be hard to protect them.In all, the evidence suggests that natural economic forces have largely been responsible for past changes in the pattern of world trade. Growing concern over the security of supply chains will no doubt add to these changes, though whether the result will be “reshoring” or “friendshoring” is doubtful. More likely is a complex pattern of diversification. Meanwhile, technology is opening up new areas of growth in services.Needless to say, disasters may change this picture: Covid was disruptive; so, too, is today’s energy crisis; and war or the threat of it would disrupt even more. Healthy global trade is a sign of peace, even if it may not cause it. Nobody sane would desire the grim [email protected] Martin Wolf with myFT and on Twitter More

(Reuters) – The Federal Reserve is seen delivering a third straight 75-basis point interest rate hike next week after a government report showed that consumer prices did not ease as expected in August, meaning more work ahead for the central bank as it fights decades-high inflation. Futures contracts tied to the Fed’s policy rate fell after the Labor Department said the consumer price index climbed 0.1% last month from July, and gained 8.3% from a year earlier. Economists had expected a small monthly decline. The price rise in interest-rate futures contracts reflects near-certainty that the Fed will at least deliver a 75-basis point rate hike next week, with a small chance of an even bigger increase. More

The ruling Law and Justice party has seen a drop in public support as energy costs soared following Russia’s invasion of Ukraine, driving Polish inflation to its highest in more than two decades, with prices up 16.1% year-on-year in August. “We have decided … after taking into account various comments that have been made at the Social Dialogue Council over the last many months, to raise the minimum wage more – to a level of 3,490 zlotys from Jan. 1 and to 3.600 zlotys from July 1,” Morawiecki told a news briefing. The minimum wage is currently set at 3,010 zlotys ($651.36).($1 = 4.6211 zlotys) More

NEW DELHI/KOCHI (Reuters) – At least 10 Indian states have announced over 1 trillion rupees ($12.6 billion), mainly in cash transfers and electricity subsidies, for households to combat inflation, according to government officials. Local politicians are worried about the impact of sharp increase in prices on household essentials. For example, food inflation, which accounts for nearly 40% of the CPI basket, rose 7.62% year on year in August compared to a revised 6.69% in July, the National Statistics Office said on Monday.The Southern Indian State of Kerala distributed a package of free food items costing about 450 rupees ($5.70) each to over 8 million families during the Onam festival earlier this month. Also a 1,000 rupee additional rural job guarantee programme for over 500,000 workers was announced. In the northern state of Punjab and national capital Delhi, the ruling Aam Aadmi Party recently announced 300 kilowatt hours of free electricity per household and free travel for women on state buses, while promising such measures in other states if it comes to power in state elections later this year.Last week, in the state of Rajasthan, ruled by the Congress party, the state government announced a jobs guarantee programme for urban poor as part of its relief measures for households.Also, “The state government has announced free electricity supply of 50 units of electricity every month to all households,” Ashok Gehlot, the state chief minister, said on Saturday, citing increasing economic stress due to rising prices. Graphic: Subsidies by major Indian states: https://graphics.reuters.com/INDIA-ECONOMY/INFLATION/lgpdwdajyvo/chart.pngMany other states, including Uttar Pradesh ruled by Prime Minister Narendra Modi’s Bharatiya Janata Party, have also cut electricity tariffs and announced cash transfers for poor households. A study by the research department of the Reserve Bank of India (RBI) in June estimated that nine states in their annual budget this year said that 0.1% to 2.7% of state gross domestic product went to free items and services for citizens.The study warned that fiscal conditions of some debt-ridden states could deteriorate in coming years due to increased spending on subsidies.RISING HOUSEHOLD BURDENOpposition leaders said that despite an increase in interest rates by the central bank and fuel tax cuts by the federal government earlier this year, nearly half of the country’s 1.4 billion population are facing a surge in living costs amid little growth in income. “We have cut down the use of cooking gas and vegetables due to rising prices,” said Jessy George, 40, a housewife in the Kottayam district of Kerala.Graphics: India’s inflation rate: https://graphics.reuters.com/INDIA-ECONOMY/INFLATION/xmpjoaebkvr/chart_eikon.jpgCooking gas prices have more than doubled in the last two years, while transport costs rose more than 40%, but she said that her husband’s income has remained same. Gireesh Kumar, 38, a mason with a wife and two school-age children, said he had to borrow 10,000 rupees this month as he failed to save sufficiently due to rising prices.”I am planning to shift my children from private school to government school as I will not be able to afford the fees,” he said. Annual consumer inflation rose to 7% in August, remaining above the tolerance band of the Reserve Bank of India’s 2%-6% for a ninth straight month, and is projected to remain above 6% until March 2023. Indian opposition political parties launched a five-month 3,570 kilometre cross-country protest march on foot earlier this month to mobilise people to seek more relief.”Common people need urgent relief. It is essential for every government to help them,” said Prasanna Acharya, a leader of Biju Janata Dal, ruling the state of Odisha. ($1 = 79.1690 Indian rupees) More

The consumer price index gained 0.1% last month after being unchanged in July, the Labor Department said on Tuesday. Economists polled by Reuters had forecast the CPI dipping 0.1%.In the 12 months through August, the CPI increased 8.3%. That was deceleration from the July’s 8.5% rise. The annual CPI peaked at 9.1% in June, which was the biggest gain since November 1981.Overall inflation is slowing as goods prices retreat after surging earlier this year amid a loosening of bottlenecks in global supply chains and a shift in spending back to services. U.S. gasoline prices have plunged from an average record high above $5 per gallon in June, according to data from AAA. They were averaging $3.707 per gallon on Tuesday. Fed officials gather for their regular policy meeting next Tuesday and Wednesday with inflation remaining way above the U.S. central bank’s 2% target. Fed Chair Jerome Powell reiterated last week that the central bank was “strongly committed” to fighting inflation.Financial markets have almost priced in a 75 basis points rate increase next Wednesday, according to CME’s FedWatch Tool. The Fed has twice hiked its policy rate by three-quarters of a percentage point, in June and July. Since March, it has lifted that rate from near zero to its current range of 2.25% to 2.50%.The inflation report followed data last week showing continued labor market resilience. First-time applications for unemployment benefits are at a three-month low and job growth remains solid. There were two job openings for every unemployed person on the last day of July. That is supporting strong wage gains, contributing to higher prices for services and keeping underlying inflation elevated.Excluding the volatile food and energy components, the CPI rose 0.6% in August after advancing 0.3% in July. The so-called core CPI increased 6.3% in the 12 months through August after rising 5.9% in July. More

US stock futures and bond prices dropped on Tuesday and the dollar rose, after widely anticipated US inflation data for August came in higher than expected.Futures contracts tracking Wall Street’s broad S&P 500 share gauge fell 1.5 per cent, while those following the Nasdaq 100 — which is stacked full of tech companies that are more sensitive to changes in interest rate expectations — dropped 2.2 per cent. Those moves came after a report on Tuesday showed US consumer prices ticked up 0.1 per cent in August from the previous month, compared with expectations for a fall of 0.1 per cent. The annual rate came in at 8.3 per cent, down from 8.5 per cent in July, but still higher than the 8.1 per cent Wall Street economists forecast. Core consumer price growth — which strips out volatile items such as energy and food — rose from 5.9 per cent to 6.3 per cent.In government debt markets, the yield on the two-year US Treasury note jumped 0.11 percentage points to 3.68 per cent, reflecting a steep drop in the price of the bond. The 10-year yield rose 0.06 percentage points to 3.42 per cent. The dollar jumped 0.7 per cent against a basket of six peers. Tuesday’s inflation report was hotly anticipated ahead of the US Federal Reserve’s next monetary policy meeting in late September. Markets are pricing in the probability of a third consecutive 0.75 percentage point interest rate rise by the central bank and for further aggressive rate rises in November and December. The Fed’s current target range stands at 2.25 to 2.50 per cent.In Europe, the regional Stoxx 600 dropped 0.1 per cent, having climbed 1.8 per cent in the previous session. London’s FTSE 100 also lost 0.1 per cent.In Asia, China’s mainland CSI 300 index rose 0.4 per cent but Hong Kong’s Hang Seng slipped back 0.2 per cent as markets in greater China reopened following a national holiday. Japan’s Topix rose 0.3 per cent. Kristina Hooper, chief global market strategist at Invesco, said the US economy was “still fundamentally sound” but added that the Fed “has readily admitted that it will take time for the negative effects of tightening thus far to show up in the economy”. More

The monthly pace of US consumer price growth unexpectedly rose in August, maintaining pressure on the Federal Reserve to deliver another big interest rate increase this month.The consumer price index, published by the Bureau of Labor Statistics on Tuesday, increased 0.1 per cent in August — above economists’ expectations for a 0.1 per cent drop and an acceleration from the pause registered in July — as a fall in energy costs failed to fully offset increases in services and other spending categories.On an annual basis, headline inflation is running at 8.3 per cent, down from 8.5 per cent in July, but still near a four-decade high.The surprising jump came despite petrol prices having tumbled in recent months. Earlier this summer, they topped a record $5 a gallon earlier in the summer following a jump in oil prices after Russia’s full-scale invasion of Ukraine. The current national average is $3.70, according to the American Automobile Association.However, once prices for energy and food are stripped out, core CPI rose further. Between July and August, it increased 0.6 per cent, translating to an annual increase of 6.3 per cent. That is up from the 5.9 per cent recorded during the previous period.The latest CPI report is the last big data release before the US central bank’s next policy meeting, at which officials are expected to implement a third consecutive 0.75 percentage point rate rise.That will lift the federal funds rate to a new target range of 3 per cent to 3.25 per cent. By the end of the year, futures markets suggest the benchmark policy rate will settle between 3.75 per cent and 4 per cent.In recent weeks, Fed policymakers have reaffirmed their commitment to bringing inflation under control, emphasising the risks associated with allowing price pressures to persist.

Failing to bring down inflation, and allowing expectations of future price increases to spiral, was likely to mean more economic pain later on, chair Jay Powell and vice-chair Lael Brainard warned last week.As petrol prices have fallen, so too have expectations about future inflation. Data released by the New York branch of the Fed on Monday showed that households now expect inflation to settle at 5.7 per cent in a year’s time, down from 6.2 per cent.Policymakers worry this downward trend will not be sustained, however, especially if energy prices jump later this year. Treasury secretary Janet Yellen warned of that possibility over the weekend, citing concerns about a widespread shortage across Europe as the bloc stops buying oil from Russia.Christopher Waller, a governor who sits on the Federal Open Market Committee, said on Friday that he supported “another significant increase” to the benchmark policy rate at the September gathering. He noted that the US economy’s resilience and the strength of the labour market gave the Fed “the flexibility to be aggressive” in its fight against inflation.US president Joe Biden is expected to host an event at the White House on Tuesday afternoon to celebrate passage of the Inflation Reduction Act — a package of measures approved by Congress in August that includes incentives for clean energy and some higher taxes on the wealthy and large companies. While economists do not believe the legislation will have an immediate effect on inflation, it could ease price pressures over the longer term.High inflation has dogged the economic recovery for months, handing Republicans an advantage heading into midterm elections in November. But the recent softening of price pressures, particularly through lower petrol prices, has offered some political relief to the White House. More

A clutch of recent data from major economies is suggesting moderating inflation and wage pressures as well as stabilizing consumer confidence, the brokerage said in a note dated Monday.”The probability for soft landing has ticked up with moderating inflation and jobs prints, while at the same time, positioning remains at extreme lows,” the brokerage added.Among stocks, the energy sector is trading at a heavy discount and offers a favorable investment opportunity, the analysts said. The brokerage is also bullish on China as COVID-19 restrictions in the country ease and fiscal stimulus expands, boosting bets on risk assets.Surveys from last week showed Europe is almost certainly entering a recession, with inflation running at more than four times the European Central Bank’s 2% target. Deepening cost of living crisis and a gloomy outlook is also keeping consumers wary of spending.But J.P. Morgan said it was expecting European governments to act to shield consumers from biting energy inflation, as natural gas prices skyrocket after sanctions-hit Russia disrupted supply.Corporate earnings in Europe are also “defying economic momentum”, J.P. Morgan said. The U.S. Labor Department’s data last month showed consumer prices did not rise in July due to a sharp drop in the cost of gasoline, delivering a sign of relief for Americans who have watched inflation reach levels not seen in four decades. More