Economy

Investors get the latest U.S. inflation figures on Tuesday, which will set the seal – or not – on a third consecutive 75 basis point rate hike from the Fed, and set the tone for global markets for the next several weeks.Headline annual consumer inflation is expected to have slowed in August to 8.1% from 8.5%, and on a monthly basis, prices are expected to have fallen outright by 0.1%. Core inflation is expected to be a little stickier.But that was the consensus forecast before the New York Fed’s latest survey of consumers’ inflation expectations was released on Monday. It showed a pretty steep decline in inflation expectations, particularly the one-year ahead outlook.It is another piece of evidence that suggests the inflation peak is firmly in the rear-view mirror. Shipping rates, oil, lumber, and a whole host of other commodities prices have fallen substantially in recent months. Asian stocks are likely to open in the green on Tuesday after Wall Street once again climbed higher. That was despite a rise in longer-dated bond yields following a weak 10-year Treasury auction, and a spike in the ‘VIX’ volatility index.Some of the equity market optimism is down to news that Ukrainian forces had advanced against Russia in a war that has hurt the global economy. Some of it is down to the easing of financial conditions brought on by the falling dollar. The dollar has weakened for four days in a row, and on Monday posted its biggest one-day decline in a month. Elsewhere in currencies, meanwhile, Japan’s central bank is nowhere near close to trying to support the yen with higher interest rates, three sources familiar with the thinking of the Bank of Japan told Reuters.Key developments that should provide more direction to markets on Tuesday: Japan business survey index ((Q3)Australia consumer sentiment, business confidence (August)U.S. inflation (August) More

Respondents to the New York Fed’s August Survey of Consumer Expectations indicated they expect the annual inflation rate to be 5.7% a year from now.
Along those lines, consumers now expect gas prices to be little changed a year from now — though they see food rising 5.8%.

A person removes the nozel from a pump at a gas station on July 29, 2022 in Arlington, Virginia.
Olivier Douliery | AFP | Getty Images

Lower gas prices are raising optimism that inflation is on the decline, according to a survey Monday from the New York Federal Reserve.
Respondents to the central bank’s August Survey of Consumer Expectations indicated they expect the annual inflation rate to be 5.7% a year from now. That’s a decline from 6.2% in July and the lowest level since October 2021.

Three-year inflation expectations dropped to 2.8% in August from 3.2% the previous month. That was tied for the lowest level for that measure since November 2020.
The lowered outlook came amid a tumble in gasoline prices from more than $5 a gallon earlier in the summer, a nominal record high. The current national average is about $3.71 a gallon, still well above the price from a year ago, but about a 26-cent decline from the same point in August, according to AAA.

Along those lines, consumers now expect gas prices to be little changed a year from now, according to the Fed survey. Food prices are expected to continue to climb, but the 5.8% anticipated increase a year from now is 0.8 percentage point lower than it was in July.
Rents are projected to increase 9.6%, but that is a 0.3 percentage point drop from the July survey.
Those numbers come as the Fed is using a series of aggressive interest rate hikes to battle inflation that is still running close to a more than 40-year high. The central bank is widely expected to approve a third consecutive 0.75 percentage point increase when it meets again next week.

Rising cost of living

While consumers expect inflation pressures to ease somewhat, they still think the cost of living will escalate.
Median expectations for household spending over the next year rose 1 percentage point to 7.8% in August, an increase in outlook driven largely by those holding a high school education or less and a group largely composed of lower earners.
Moreover, respondents said credit is harder to come by now. Those reporting that it’s more difficult now to get credit rose to a series high, with 57.8% saying that it’s either harder or much harder, the New York Fed reported.
Also, those expecting to miss a minimum debt payment over the next three months rose 12.2%, a 1.4 percentage point gain that was the highest reading since May 2020.
The Bureau of Labor Statistics on Tuesday will release the August consumer price index reading. Economists surveyed by Dow Jones expect CPI to have risen 8% from a year ago, though they see a decline of 0.1% from July. Excluding food and energy, core CPI is projected to rise 6% year over year and 0.3% month over month.

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Russia’s budget surplus for 2022 has almost evaporated after a sharp drop in energy exports during August led to a monthly deficit of as much as Rbs360bn ($5.9bn).Russia recorded a surplus of almost Rbs500bn in the first seven months of the year. But the cumulative total fell to only Rbs137bn last month, suggesting a big deficit in August which economists attributed to sharp declines in oil and gas revenues. Russia’s surplus over the first six months of the year reached Rbs1.37tn as it built a war chest on the back of soaring energy prices.Russian gas flows to Europe have dwindled to about one-fifth of pre-invasion deliveries. In early September it said it would keep Nord Stream 1, which runs under the Baltic Sea to Germany, shut indefinitely unless the west lifted sanctions imposed over Moscow’s invasion of Ukraine. The sharp deterioration of Russian state finances comes as its army is being routed in northeastern Ukraine in its biggest military setback since losing the battle for the capital Kyiv in March.Oil and gas revenues, which make up almost half of the budget revenues received so far this year, were down 18 per cent year-on-year over the January-August period, according to the data.The EU has also banned imports of Russian coal. An EU ban on shipped Russian crude imports is due to come into effect in December.Non-oil and gas revenues also fell drastically, by 37 per cent year on year, in January-August, the data showed.Russia initially showed resilience in weathering the impact of punitive measures, including a freeze on half its foreign exchange reserves.

But Russia’s state gas monopoly Gazprom said earlier this month that production fell by 15 per cent year on year in the first eight months of the year. Exports, which flow mostly to Europe, were down by more than a third. Revenues look set to worsen following Russia’s suspension of Nord Stream 1, one of its main gas pipelines to Europe, in early September.Russia’s economy shrunk 4.3 per cent in July 2022 compared with the same month a year earlier, according to the country’s economy ministry. Analysts at Aton, a Russian brokerage, expect the economy to contract by a further 5 per cent in 2023 because of falling energy output. Russia’s central bank voiced caution on the economic outlook in a report published last week on the regional economy, noting that exports were likely to slide. The central bank is set to meet on Friday for a decision on interest rates. Monetary policymakers raised rates to a record 20 per cent and introduced capital controls to quell an attack on the rouble in the days that followed the outbreak of war. Borrowing costs have been gradually lowered since then, and now stand at 8 per cent. More

The labor market appears hot, but the share of people who are either working or actively looking for a job still hasn’t quite recovered.As the United States emerges from the pandemic, employers have been desperate to hire. But while demand for goods and services has rebounded, the supply of labor has fallen short, holding back the economy.More than two years after the Covid-19 recession officially ended, some sectors haven’t found the workers they need to operate at capacity. Only in August did the work force return to its prepandemic size, which is millions short of where it would have been had it continued to grow at its prepandemic rate.In simple numbers, some of that gap is due to Covid’s death toll: more than a million people, about 260,000 of them short of retirement age. In addition, a sharp slowdown in legal immigration has pared the potential work force by 3.2 million, relative to its trajectory before 2017, according to calculations by economists at J.P. Morgan.But the problem isn’t just that population growth has stalled. Even with an uptick in August, the share of Americans working or actively looking for work is 62.4 percent, compared with 63.4 percent in February 2020.“It’s my sense that the most important reason that the labor market feels so hot right now is that we have so many fewer people in it,” said Wendy Edelberg, director of the Hamilton Project, an economic policy center at the Brookings Institution. “Demand largely recovered, and we didn’t have the supply.”Unraveling the causes of that lingering reluctance is difficult, but it’s possible to identify a few major groups who are on the sidelines.People at retirement age, who had been staying in the work force longer as longevity increased before the pandemic, dropped out at disproportionate rates and haven’t returned. More puzzlingly, men in their prime working years, from 25 to 54, have retreated from the work force relative to February 2020, while women have bounced back. Magnifying those disparities are two crosscutting factors: the long-term health complications from Covid-19, and a lagging return for workers without college degrees.Older workers are lagging behind in returning to the work forcePercent change in labor force participation rate for each age group since before the pandemic More

Britain and the EU are preparing to avoid a diplomatic confrontation this week over post-Brexit trading arrangements on Northern Ireland, according to officials on both sides.The sides are expected to agree a diplomatic finesse to avoid a September 15 legal deadline on grace periods becoming a flashpoint in the relationship, which has soured over the implementation of the Northern Ireland protocol on trade. There were fears last month that Liz Truss, UK prime minister, might immediately trigger the Article 16 safeguards clause in the protocol to maintain the grace periods, which allow for temporary lighter-touch implementation of the deal, but insiders in London and Brussels said these have now have been allayed.Instead, the UK is expected to make a written request to the European Commission to extend the light-touch implementation, and Brussels is expected to give informal consent by not lodging any objection. A similar diplomatic fudge was agreed in July 2021. London says the continuation of the grace periods is the bare minimum for businesses pending a fundamental renegotiation of the protocol.EU officials said the “best scenario” would be for the UK to advise that it intended to continue with the grace periods without triggering the Article 16 safeguards clause. “That will allow us to continue muddling through,” said one.Since Truss became prime minister last week, officials on both sides have indicated they want to create diplomatic space in order to try to reset talks over the protocol, which have been stalled since February.In another sign that the two sides were stepping back from confrontation, Downing Street insiders said they did not consider the requirement to respond to EU legal action accusing the UK of failing to implement the protocol by September 15 to be a “hard deadline”. One said: “It may just be one of things where we just carry on.”A second senior EU official said the commission would be open to extending the deadline. “We are used to this kind of delay with the UK,” they said. However, they warned that passing threatened legislation that would unilaterally rip up the protocol would eject Northern Ireland from the single market. “I hope she [Truss] understands what the legal implication will be for Northern Ireland. Businesses would lose access to the single market. Exporters will be in legal limbo.” Truss’s allies say there is still a big gap on trade between the two sides; the prime minister wants to end the European Court of Justice’s jurisdiction in Northern Ireland and stop all checks on goods going from Great Britain if they are not destined to stay in the region.

Comments by Maroš Šefčovič, EU vice-president, to the Financial Times about reducing the number of border checks at Northern Ireland ports were seen by Truss’s allies as “essentially proposals they’ve put forward before”.However, the new prime minister does not want a confrontation with Brussels over Brexit ahead of Queen Elizabeth’s state funeral on Monday, which is expected to be attended by world leaders including US president Joe Biden and Emmanuel Macron, president of France.Biden told Truss in a phone call last week that it was important to reach “a negotiated agreement with the EU on the Northern Ireland protocol”, and suggested she should drop unilateral legislation to scrap it.Truss, who is expected to travel to New York after the state funeral to attend the UN General Assembly may meet Biden again in the US, where the Northern Ireland situation is likely to be raised. More

The UK trade gap widened to a near all-time high in the three months to July as a result of surging energy imports following the war in Ukraine and weak export performance, according to new data on Monday.The war also resulted in exports to the EU rising to the highest level on record, as the UK increased its gas flows from other countries to the bloc after Russia cut energy supplies to Europe. Data from the Office for National Statistics showed that trade in goods and services’ deficit, excluding precious metals, widened by £1.2bn to £27bn in the three months to July compared with the previous quarter, a near-record since comparable data was first collected in 1997.William Bain, head of trade policy at the British Chambers of Commerce, a business association, said the overall trade picture was “concerning”. He added that the data “demonstrate the case for the UK government to refresh its export strategy to prioritise export-led growth as a greater proportion of UK economic growth”.The widening was caused by the surging value of imports, reflecting rising energy prices because of Russia’s invasion of Ukraine and a weak export market.

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The UK is a net energy importer and gas prices reached a new high in August, which will probably boost the value of imports further. Exports are also likely to continue to struggle as external demand from key trading partners softens and Brexit trade frictions remain.“The trade deficit will reach enormous proportions over the coming months,” said Gabriella Dickens, economist at Pantheon Macroeconomics, a consultancy.Dickens added that she expected the trade deficit to grow to a record 7.5 per cent of GDP in the final quarter, from 4.7 per cent in Q2, “making sterling even more sensitive than usual to changes in overseas investors’ sentiment”.The figures come after prime minister Liz Truss last week announced policy measures aimed at making the UK a net energy exporter by 2040, including lifting a three-year ban on fracking in England.Following Russia’s cut in energy flows to Europe, the UK is processing large volumes of liquefied natural gas arriving at its ports from countries such as the US and Qatar. It then regasifies it for export to the EU via subsea pipelines from Bacton in Norfolk to Belgium and the Netherlands. This trend was captured in the trade data by a rise between June and July of 7.9 per cent in UK goods exports to the EU to £17.4bn, the highest since records began in January 1997. UK fuel exports accounted for £800mn of July’s £1.3bn goods export increase to the EU. UK fuel exports to the bloc more than doubled compared with July last year, while exports to non-EU countries remained unchanged. In July, the UK exported about £900mn worth of gas to the EU, about three times higher than in the same month last year, despite some reduction in UK gas trade owing to pipelines operating at overcapacity.As a result, the UK exported £50.3bn worth of goods to the EU in the three months to July, more than £2bn more than exports to non-EU countries. This is in contrast with 2019, when goods exports to non-EU countries was larger than to the bloc“Trade in fuels played a significant role in the uplift in UK exports to the EU,” said the BCC’s Bain.   More

Good eveningThe ever-present menace of inflation is rising to the fore again this week. The US publishes August inflation figures tomorrow and economists polled by Reuters expect the consumer price index to fall 0.1 per cent month on month, after remaining flat in July, with a year-on-year reading of 8.1 per cent for August, down from 8.5 per cent a month earlier.However, do not expect such positive news to moderate the Federal Reserve’s aggressive push to tame cost of living increases. Chair Jay Powell and vice-chair Lael Brainard vowed last week to keep raising rates, fuelling expectations that a third consecutive 0.75 percentage point increase will be implemented later this month.The mood was reflected in the currency markets, with the dollar beginning the week on a downbeat note as traders priced in a narrowing of the policy differences between the Fed and other central banks. Meanwhile, India has imposed export controls on various varieties of rice in an effort to shore up food security and constrain its inflation rate, rising because of supply disruptions stemming from the Covid-19 pandemic and the war in Ukraine. However, the move is also likely to increase inflation elsewhere — given that rice is one of the most commonly eaten staple foods globally. The Ukraine invasion continues to fuel rising commodity and energy costs, hitting Europe particularly hard. Although Ukrainian forces’ surprisingly rapid success in recapturing territory from Russian forces has raised hopes of a turning point in the nearly seven-month conflict, the war and its impact on the global economy is far from over. Ukraine’s military success throws the conflict into an even more dangerous phase as Russia tries to regroup and perhaps escalate its attacks, according to FT columnist Gideon Rachman. All of which means we must brace ourselves for many more months of disrupted times.Latest newsRussia will push on with Ukraine war until all military goals are met, Kremlin saysAnti-immigrant Sweden Democrats celebrate election gainsHong Kong must boost vaccinations before Covid rules are lifted, says ministerFor up-to-the-minute news updates, visit our live blogNeed to know: the economyChina has emerged as a rival to the IMF in the volume of emergency loans being provided to nations at risk of financial crisis. Pakistan, Sri Lanka and Argentina have together received more than $32bn since 2017, data show. There is a sense of enlightened self-interest at work here. Analysts said that in most cases the objective of the emergency lending was to prevent defaults on infrastructure loans extended under China’s Belt and Road Initiative. However, FT senior trade writer Alan Beattie warns that the lack of oversight of these bilateral lending arrangements is a real danger (premium subscribers only).Latest for the UK and EuropeThe UK economy stagnated in the three months to July, with output flat over the period, down from growth of 0.3 per cent in the three months to April.There was better news in the protracted battle between the UK and the EU over the Northern Ireland protocol, with Brussels offering a plan to cut physical customs checks across the Irish Sea to just a few lorries a day.Maroš Šefčovič, the EU’s Brexit chief, expressed hope that the proposal could smooth the way to a deal with newly appointed British prime minister Liz Truss over post-Brexit trading arrangements in Northern Ireland.Global latestThe renminbi is on course for its largest annual fall on record against the dollar despite Beijing taking its strongest steps to stem the currency’s decline. Covid lockdowns and sputtering economic growth have helped pile pressure on to China’s currency.The drop of 8.7 per cent against the greenback this year (to Rmb6.96) puts the renminbi on track for its biggest yearly decline since China abandoned its longstanding currency peg and moved to a managed floating exchange rate in 2005.Need to know: businessThe energy crisis should be a spur to a regulatory overhaul of the sector, similar to the more robust oversight of banks after the 2008 financial crisis, FT deputy editor Patrick Jenkins writes in the Inside Business column today.In the meantime, companies are doing what they can to minimise the upset. Some of Europe’s most energy-intensive industries — including some of the world’s largest steelmakers — are finding ways of cutting back on their power use, our correspondents report.High inflation has made people reluctant to splash out on new washing machines and other white goods, appliance maker Electrolux has warned. The company, which is undertaking a major cost-cutting exercise as a result, said the problem had been exacerbated by high levels of inventory at retailers. It warned that third-quarter earnings would decline significantly compared with the second quarter.Wall Street is staging a counter-offensive in its war with Silicon Valley for talent, attracting computer engineers frustrated by the hiring freezes and lay-offs among embattled cryptocurrency and tech ventures, according to FT correspondents in New York.The World of WorkCorporate headshots are being taken far too seriously, according to FT columnist Pilita Clark. A click on the gymnastic LinkedIn profile pic of Klarna co-founder and CEO Sebastian Siemiatkowski is perhaps the most extreme example.Making yourself indispensable at work may seem like a good career move but the reality is that it is a curse, resulting in burnout for you and resentment from your colleagues, as Miranda Green explains.Get the latest worldwide picture with our vaccine trackerSome good news . . . A tiny particle that can travel through concrete could save many lives, detecting faults inside buildings before they collapse. Geoff Manaugh explains the magic of muons. More

The writer is governor of the National Bank of UkraineSix months ago, Ukraine woke up to the reality of a full-scale war being waged against it. We have been forced to fight the enemy on two fronts at once — in the battle zones and in finance — so that we can secure the resources to fight until we win.Survival and victory require Ukraine to have a strong economic backbone and a reliable financial system. Thanks to tremendous efforts, we have managed to ensure the stable operation of the banking system. Customer payments are being made without interruption. We have prevented deposit outflows. In fact, hryvnia retail deposits have risen by 31.7 per cent, equivalent to almost $3.7bn, since the outbreak of hostilities. Lending to strategically important sectors continues. The hryvnia corporate loan portfolio has expanded by 6.5 per cent or nearly $1bn.In addition, we have avoided monetary destabilisation. In August, year-on-year inflation in Ukraine stood at 23.8 per cent. Other countries have had far worse inflation during or immediately after a war. Think of Germany after the first world war, South Korea in the early 1950s or Serbia in the early 1990s. Taking into account the global trend of accelerating inflation, Ukraine’s rate of price growth can be considered an achievement. Yet it is too early to relax. Ukraine has benefited from a safety margin accumulated before the war. However, international reserves have shrunk by almost 18 per cent since the beginning of the year. These have allowed us to bolster the economy, but they will not last long if we continue to burn through them.As winter draws near, it is time for the state’s economic policy priorities to shift in a way that can accommodate a protracted war effort. This requires effective redistribution of domestic resources and strong financial support from abroad. After years of pursuing a balanced fiscal policy and implementing reforms in monetary policy and finance, Ukraine faces a huge wartime budget deficit. This is inevitable for a country fighting a defensive war. To cover the gap, the government needs at least $5bn a month in funding, according to the finance ministry. By the end of 2022, the deficit may reach 25 per cent of gross domestic product, excluding international grants. History suggests there are limited ways to finance state expenditure in a war. National economic stability depends on how successfully the authorities combine these limited methods.A simple solution would be for the central bank to issue money. But this would erode household savings, deepen crisis trends in the economy, fuel inflation and undermine social stability. Modern European history is full of lessons of the dire political consequences that can follow.As an EU membership candidate, Ukraine knows that such action would hobble its prospects. The EU’s founding treaty expressly prohibits national central banks from financing their governments. Ukraine needs other sources of financial support for its economy.What are they? First, Ukraine should revitalise domestic borrowing by issuing government debt on market-driven terms. The purpose is to shift the burden of financing the deficit to postwar times. However, this process should be structured so as to prevent public debt from continuing to rise in peacetime. Second, Ukraine should curtail the deficit by slashing non-priority expenditures and raising taxes. And third, international financial support for Ukraine should increase. Russia’s strategic goal is to undermine Ukraine’s economic resilience. Financial assistance from our partners is therefore almost as important as military support. They have already provided Ukraine with more than $17bn in aid. We expect another $12bn by the year’s end. The launch of a new co-operation programme with the IMF will send an important signal to creditors. The IMF has always stood by Ukraine in times of crisis. A four-year programme worth $17.5bn was set up in 2015 after the Russian occupation of part of Ukraine. This IMF support was part of a package of about $40bn in international financial aid for Ukraine. Coupled with powerful sanctions against Russia, a similar assistance programme will help Ukraine endure and thwart the aggressor’s ability to bankroll its war machine. What is more, we believe the free world’s weak response to Russia’s annexation of Crimea and military aggression against Ukraine in 2014–2015 encouraged this year’s full-scale invasion.Had the global community introduced an adequate sanctions package in 2015, this war might never have broken out and our current and future losses would not be so huge.  More