Economy

LONDON/OSLO (Reuters) – Europe’s gas prices surged, its share prices slid and the euro sank on Monday after Russia stopped pumping gas via a major supply route, sending another economic shock wave through the European Union as it struggles to recover from the pandemic.EU governments are pushing through packages worth billions of dollars to prevent utilities being crushed by a liquidity crunch and to protect households from soaring energy bills, after Russia’s state-controlled Gazprom (MCX:GAZP) said it would stop pumping gas via the Nord Stream 1 pipeline due to a fault.Europe has accused Russia of weaponising energy supplies in retaliation for Western sanctions imposed on Moscow over its invasion of Ukraine. Russia blamed sanctions by “the collective West” for causing the gas supply problems.A host of European power distributors have already collapsed and some major generators could be at risk, hit by caps that limit the prices rises they can pass to consumers or caught out by hedging bets, with gas prices now 400% more than a year ago.”This has had the ingredients for a kind of a Lehman Brothers of energy industry,” Finnish Economic Affairs Minister Mika Lintila said on Sunday, referring to the U.S. bank that collapsed in 2008 and heralded the global financial crash.Finland aims to offer 10 billion euros ($10 billion) and Sweden 250 billion Swedish crowns ($23 billion) in liquidity guarantees to their power companies.”The government’s programme is a last-resort financing option for companies that would otherwise be threatened with insolvency,” Finland’s Prime Minister Sanna Marin said. Utilities often sell power in advance to secure a certain price but must maintain a “minimum margin” deposit in case of default before they supply the power. The margin deposit required has raced higher with surging power prices, leaving companies struggling to find cash to cover the new demands.SHIELDING CUSTOMERSGermany, more reliant than most EU states on Russian gas, has offered a multibillion-euro bailout to power utility Uniper. Berlin said it would spend at least 65 billion euros to shield customers and businesses from soaring inflation, stoked by surging energy prices.The benchmark gas price rose as much as 35% Monday and was up more than 400% on the year, after Russia said on Friday a leak in Nord Stream 1 equipment meant it would stay shut beyond last week’s three-day maintenance halt.European financial markets were reeling from the news. The euro sank to a 20-year low and European shares tumbled.Nord Stream 1, which runs under the Baltic Sea to Germany, historically supplied about a third of the gas Russia exported to Europe, although it was already running at just 20% of capacity before last week’s maintenance outage.”Problems with gas supply arose because of the sanctions imposed on our country by Western states, including Germany and Britain,” Kremlin spokesman Dmitry Peskov said on Monday. “There are no other reasons that lead to problems with supplies.”Adding to the standoff over energy, he also said Russia would retaliate if G7 states imposed a price cap on Russian oil. “There can only be retaliatory measures,” he said.Russia also sends gas to Europe via pipeline across Ukraine, another major route. But those supplies have also been reduced during the crisis, leaving the EU racing to find alternative supplies to refill gas storage facilities for winter.RECESSION FEARSSome energy-intensive industries in Europe, such as fertiliser makers and aluminium producers, have already scaled back production. Other industries, already grappling with chip shortages and logistics logjams, face rocketing fuel bills.Several EU states have triggered emergency plans that could lead to energy rationing and fuelling recession fears, with inflation soaring and interest rates on the rise.”We cannot rule out that Germany might look at rationing gas,” Uniper Chief Executive Klaus-Dieter Maubach told Reuters on the sidelines of the Gastech conference in Milan.Germany, which is installing liquefied natural gas (LNG) terminals so it can ship in fuel and expand its range of global suppliers, is at phase two of a three-stage emergency gas plan. Phase three would see some industry rationing.The global market for LNG was already tight as the world economy sucked up supplies in the recovery from the pandemic. The Ukraine crisis has added further demand.Norway, a major European producer, has been pumping more gas into European markets but cannot fill the gap left by Russia.EU countries’ energy ministers are due to meet on Sept. 9 to discuss options to rein in soaring energy prices including gas price caps and emergency credit lines for energy market participants, a document seen by Reuters showed.Klaus Mueller, president of Germany’s Federal Network Agency energy regulator, said in August that even if Germany’s gas stores were 100% full, they would be empty in 2-1/2 months if Russian gas flows were halted completely.Germany’s storage facilities are now about 85% full, while facilities across Europe hit an 80% target last week. More

This may shock you, but investors are a little bit worried about the UK’s “policy paralysis”, as they described it to our colleagues last week. However, things could get a lot worse, according to Deutsche Bank. Here’s what Deutsche Bank’s Shreyas Gopal wrote in a note just published as Liz Truss is formally announced as the UK’s next prime minister (our emphasis below):With the current account deficit already at record levels, sterling requires large capital inflows supported by improving investor confidence and falling inflation expectations. However, the opposite is happening. The UK is suffering from the highest inflation rate in the G10 and a weakening growth outlook. A large, unfunded and untargeted fiscal expansion accompanied by potential changes to the BoE’s mandate could lead to an even bigger rise in inflation expectations and — at the extreme — the emergence of fiscal dominance. Taking emergency measures around the Northern Ireland Protocol could add to the uncertainty on trade policy. With the global macro backdrop so uncertain, investor confidence cannot be taken for granted. The risk premium on UK gilts is already rising, coincident with unusually large foreign outflows. If investor confidence erodes further, this dynamic could become a self-fulfilling balance of payments crisis whereby foreigners would refuse to fund the UK external deficit.. . . With the current account at risk of posting an almost 10% deficit, a sudden stop is no longer a negligible tail risk. The UK is increasingly at risk of no longer attracting enough foreign capital to fund the external balance. If so, sterling would need to depreciate materially to close the gap in the external accounts. In other words, a currency crisis typically seen in EM. As DB points out, a balance of payments crisis may sound extreme for a G7 economy, but it’s hardly unprecedented. Aggressive fiscal spending, a big energy shock and a sterling slide sent the UK into the IMF’s arms back in the 1970s. Today’s environment looks eerily similar. Gopal estimates that sterling needs to slump another 15 per cent in trade-weighted terms simply to bring the UK’s external deficit back to its 10-year average. At the same time, the economic fundamentals look . . . not great.

So in an extreme EM-style sudden stop scenario, how far could sterling fall? A whopping 30 per cent might be required, DB estimates. Truss wants to avoid a recession by cutting taxes and supporting households through the spike in energy costs. DB is worried that while fiscal support is appropriate to support growth, massive largesse could be dangerous. A very large but untargeted spending package — such as a 10ppt VAT cut — would risk materially worsening the already wide current account deficit and exacerbating investors’ fears about its sustainability — quite apart from worries about fiscal sustainability. Indeed, given the ongoing real income squeeze, the bar is extremely high for a rise in private-sector savings to offset rising government borrowing. This is not a time to expect ‘Ricardian equivalence’. Hence, debt-financed government spending should almost mechanically widen the current account deficit.. . . To be sure, in the UK, the incoming government is likely to verbally commit to a smaller state and a desire to keep the debt-to-GDP ratio down, but the bar for the market to believe this would be high if actual policy consisted of sweeping and unfunded VAT cuts.This is not the first time that people have worried about the UK. Bill Gross famously said that the UK government bond market rested “on a bed of nitroglycerine” back in 2010, but gilts had the last laugh.The country’s net international investment position has weakened, but is still a defence against a sudden stop. The money that finances its external deficit is not “hot money” that emerging markets historically relied on, and the UK has not borrowed money in other currencies — another classic EM vulnerability. The price of insuring against an outright UK default has ticked up a little lately but it remains very low, and far below the levels seen in the wake of the 2008 financial crisis.

But DB remains worried that there is a “non-zero probability” of policy mistakes that lead to a balance of payments crisis. Sterling weakness this year is far from just being a story of pure pessimism on the pound itself. There is a broad global dollar factor at work, too. To the extent that sterling weakness has been idiosyncratic, we would argue that a mild recession is now in the price. But from here, we argue that the pound is threading a fine needle. The risk is that policy exacerbates the key vulnerability: the external imbalance. If large and untargeted fiscal stimulus pushed the current account deficit toward 10% of GDP, risks of a sudden stop would rise materially, in our view.Let’s hope Nigel Farage’s gin venture takes off abroad. More

(Reuters) -UK’s FTSE 100 was unchanged after opening lower on Monday as the Conservative Party announced Liz Truss as Britain’s new prime minister as expected, while the British pound remained lower against the dollar.The benchmark FTSE 100 slid 0.5%, while the domestically oriented FTSE 250 shed 1.3% at 1212 GMT.Foreign minister Liz Truss won the ruling Conservative Party’s leadership contest with 57.4% of the vote, triggering the start of a handover from Boris Johnson, who was forced to announce his resignation in July after months of scandal saw support for his administration drain away.”Truss winning the elections did not surprise the markets at all, it was pretty much priced in,” said Pooja Kumra, senior European & UK rates strategist at TD Securities.”The markets are hanging on what actually Truss would do in terms of fiscal policy and tax cuts that would solve the cost of living crisis which is determining the price impact on UK’s household and the consumer sector.” Also weighing on the markets, European stocks slid after Russia extended a halt to flows on the Nord Stream 1 gas pipeline to Europe, adding to fears of winter fuel shortages and the impact on growth. (EU)A survey showed Britain’s economy ended August on a much weaker footing than previously thought as overall business activity contracted for the first time since February 2021 in a clear signal of recession.Truss is poised to take charge of Britain when it is facing a cost of living crisis, industrial unrest and a looming recession.Some investors are alarmed that tax cuts promised by Truss could aggravate Britain’s inflation problem, speeding up the Bank of England’s interest rate hikes and worsening a recession that the BoE expects to start this year.The rate-sensitive banking sector declined 1.3%.The pound edged lower after the announcement and remained close to its pandemic trough.Oil majors Shell (LON:RDSa) and BP (NYSE:BP) gained 1.2% and 1.7% on firm crude oil prices as investors eyed possible moves by OPEC+ producers to cut output and support prices at a meeting later in the day. [O/R] More

The 109 year-old company said on Monday it would issue four new shares at 103 pence apiece for every existing share. At 0750 GMT, the stock was down 10% at 432.9 pence. The rights issue is part of a previously announced equity raising of 653.8 million pounds, which makes Saudi Arabia’s Public Investment Fund (PIF) one of the company’s largest shareholders.Aston Martin said the rights issue was fully committed and underwritten, with support from PIF, as well as chairman Lawrence Stroll’s Yew Tree and Mercedes Benz.The fundraising will allow the company to lower its debt and invest in new models, it has said. The Formula One racing team owner has been burning through cash and has been hit by supply chain snags. It posted a tripling of pretax half-year losses in July.The company rejected a 1.3 billion pound investment proposal that would have handed control of the business to Italian investor Investindustrial and Chinese carmaker Geely that month.”Aston Martin’s fundamentals remain shaky with or without the capital raise,” said Victoria Scholar, head of investment at interactive investor, pointing to the first-half problems. She said a recent slump in the pound could encourage interest from a foreign buyer. ($1 = 0.8728 pounds) More

JAKARTA (Reuters) -Indonesian authorities were on Monday bracing for mass protests after an unpopular hike in fuel prices, a move the government said could see inflation increase to 6.8% this year, though with limited impact on economic growth.President Joko Widodo bit the bullet and raised subsidised fuel prices by about 30% on Saturday to rein in a ballooning energy subsidy budget, ending weeks of deliberation about the impact on the public and spectre of mass protests.Police beefed up their presence in the capital Jakarta and deployed officers to hundreds of petrol stations ahead of a planned demonstration on Tuesday by workers’ groups. Small rallies took place over the weekend and again on Monday, with tyres burned and some roads blocked as students and workers vented anger over a jump in fuel prices amid rising food costs, with the public still reeling from the impacts of COVID-19. “We’ll continue to speak out about this problem until the government lowers the fuel price,” said protester Ranto Mombulan a member of the Islamic Student Association. “The government is issuing policies without taking into account the wellbeing of the people who are still recovering from the pandemic.”National police chief Listyo Sigit Prabowo on Monday told regional authorities to step up their engagement with the public to explain why the fuel hike was necessary and keep tempers from flaring. Indonesia’s high energy subsidy budget had kept a lid on its inflation rate even when global policymakers were hiking rates at a furious pace. The fuel hike would cut subsidy spending by about 48 trillion rupiah ($3.22 billion) this year to 650 trillion rupiah, Deputy Finance Minister Suahasil Nazara said, but it would also set inflation on an accelerating trajectory.Finance Ministry official Febrio Kacaribu on Monday said economic growth this year could still reach 5.2%, from 3.69% in 2021, and authorities would offset the fuel price increase by ensuring adequate food supply to control inflation, keeping the rate in a range of 6.6% to 6.8%. Suahasil said the price hike would push up inflation, but the monthly rate should normalise in November.”Usually, inflation rises quickly in one or two months and by the third month, it begins to normalise,” he said.’WHY CREATE THIS CHAOS?’The rising prices could anger some Indonesians whose lives were just returning to normal after taking an economic hit from the pandemic. “Why, why the fuel price going up again, why?” said Ismail, a motorcyclist with a ride-hailing app in the capital Jakarta, who like many Indonesians goes by only one name. “Now it has only been three months since we started to live our life again, the price of fuel has increased. Why create this chaos? Everything is messed up.”Economists on Monday said Bank Indonesia (BI) will step up the pace of interest rate increases after the fuel price hike, having raised borrowing costs by 25 basis points last month.The August annual inflation rate was 4.69%, already above the central bank’s target range of 2%-4% for a third straight month, due to high food prices. “Given the fact that price pressures had been building for some time this year even before the fuel effect, the degree of broadening in the price effects will be the key thing to watch now,” said OCBC Bank economist Wellian Wiranto, predicting inflation will top 7% in the coming months.Jokowi, as the president is widely known, said on Saturday the price hike was his “last option”, due to pressure building up on the fiscal front. ($1 = 14,920.0000 rupiah) More

Investing.com — Liz Truss is to succeed Boris Johnson as the U.K.’s new Prime Minister, after winning a run-off for the leadership of the ruling Conservative Party.Truss, currently Foreign Secretary, defeated her rival Rishi Sunak by a margin of 81,326 to 60,399, after fighting a campaign based on a promise of tax cuts and increased spending on defense. She’s also mooted ending the Bank of England’s independence. Concerns about how those pledges would be financed have helped drive the pound and U.K. government bond prices down sharply over the course of the last month. The pound fell below $1.15 for the first time in over two years in early trading on Monday, hurt by a fresh surge in the price of natural gas amid the ongoing economic war between Russia and Ukraine. It’s now only a whisker above its lowest level since 1985.Likewise, the 10-year U.K. government bond yield rose another 8 basis points on Monday to trade above 3% for the first time since 2014. In a short acceptance speech, Truss repeated her pledge to lower taxes and also pledged to “deliver” on the energy crisis facing the country, both with regard to the short-term issue of soaring energy bills and with the longer term issue of supply. She had earlier promised a package of energy-related measures within a week of being confirmed in office. Her speech appeared to lend weight to unconfirmed reports that Truss may announce a freeze on household bills, meaning that the 80% rise in average prices outlined by the regulator Ofgem, last month, would not take place.Her previous comments have indicated she intends to incentivize new drilling for oil and gas in the largely depleted North Sea basin, while taking a more skeptical approach to rolling out renewables (singling out the use of agricultural land for solar farms in particularly disapproving terms). More

Welcome to my first appearance in the Trade Secrets newsletter since the end of July. In case you missed them, the two excellent editions in the interim by Financial Times colleagues are here (the great Edward White on grounds for optimism on fisheries subsidies) and here (the magnificent Andy Bounds on how US climate policy became trade policy and created a transatlantic row over cars).No big surprise about the two (related) themes that have emerged over the summer and which we’ll be looking at from various angles in coming months. One is climate change, the impact of which is underlined by the current horrors in Pakistan on top of droughts around the world. The other is what the now fast-arriving energy shock means for globalisation. Since you ask, here’s my column from last week about how energy self-sufficiency and energy security are not the same thing.As ever, I’m on [email protected] and my Twitter DMs are open at @alanbeattie for hints, tips, special requests, offers to pay my gas bills in London this winter, knitting patterns for thermal gloves and so on. Today’s Charted waters looks at how Russia’s energy squeeze complicates Europe’s battle with inflation.The forces that governments struggle to controlToday’s newsletter will sketch out the broad themes of what I’m likely to be writing about over the next few months — though let’s be honest, the remarkable capacity of the world’s governments, weather systems and malign pathogens to push globalisation off course means it’s hard to make firm plans. Time was, back before Covid-19 and beyond, the trade issue was more narrowly about trade policymakers doing trade policy, or at least so you would have thought from a lot of the (let’s be honest, not always lavish) media attention it got. And to be honest there often wasn’t that much policy about to make much of a difference in the real world. Multilateral trade deals that never happened, bilateral and regional agreements that often didn’t make a lot of difference when they did, a lot of legal argy-bargy over antidumping in mature industries such as steel and so on.Well, there’s now rather a lot of substantive traditional trade policy about: Donald Trump’s tariffs against China, which President Joe Biden has just announced will largely stay in place indefinitely, the US’s local-content requirements in electric vehicles, the EU tooling up with a bunch of unilateral measures against allegedly subsidised, dumped or unethical imports, the battle for dominance of the Asia-Pacific with the CPTPP and so on — not to mention the blackly amusing sideshow of the UK’s hapless Conservative party finding out what the Brexit a bunch of them fervently voted for actually means.But the real action in globalisation more broadly defined these days isn’t trade policy as such: even extraordinary interventions such as Trump’s trade war with China haven’t been as cataclysmic as you might have thought. More important are the direct effect of events in the real world, particularly the economic cycle, climate change and the energy shortages, and the collateral effects from governments setting policy in other areas.The massive real-world shock in the near future is the coming economic crunch. Obviously this is likely to be bad for trade in the near term, at least in goods. Imports have traditionally dropped a lot further during a recession than growth overall. On the other hand, as we’ll explore in future newsletters, the world saw big inflationary-recessionary crunches in the 1970s and 1980s, and they didn’t stop the medium-term march of globalisation. Even the massive collapse in goods trade during the financial crisis in 2008, and then again in the first year of the Covid pandemic, haven’t sent the post-cold war surge of globalisation into reverse.Climate change in its various manifestations also has the potential directly to affect trade and globalisation in the medium term. But it’s not at all clear in which direction it will go in terms of increasing or reducing cross-border commerce. As my esteemed colleague Helen Thomas points out, freight barges being unable to progress down the dried-up Rhine or Danube will concentrate minds on the threat from relying on shipping. Companies may wish to shorten supply chains accordingly. On the other hand, if unreliable harvests create shortages in populous food-importing countries they will require more imports rather than fewer.Similarly, you might assume that higher energy prices and hence transport costs will reduce the returns to long-distance trade in goods with low profit margins, and lead to shorter supply chains and the reshoring of production. But then again, as European manufacturers have discovered, more expensive fuel can also provide incentives for the offshoring of energy-intensive goods such as bicycle parts to Asia where power costs are generally lower.On the policy side, explicit trade-related actions such as the electric vehicle credits in Biden’s big climate change bill are important. But a vast spending programme designed to put the US at the forefront of the renewable technology is a much wider issue for the world economy in the long run than the specific trade-focused aspects. (Also, it’s much less likely to be a bad idea overall.)Similarly, there are attempts to put trade policy at the service of geopolitics, including an expanded sanctions regime from the US and EU, and lots of talk about governments encouraging their companies to “friendshore”, that is construct supply chains with political allies. But in reality, the geopolitical developments that are really likely to affect companies’ decisions in the medium term are the much more fundamental ones. Overwhelmingly, the biggest thing the US can do to affect the configuration of supply chains in the Asia-Pacific is to protect Taiwan from even a credible threat of Chinese military incursion, not fiddle around signing minor regulatory co-operation deals with its allies there.Globalisation is too important to be left to governments, and the future of trade is definitely too important to be left to trade policymakers. We’ve got a far more robust global trading system than the often feeble or wrong-headed response of governments deserves. Let’s see if we can keep it.As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersThe big economic news item this week will be the European Central Bank rate-setting committee’s decision on how far and how fast to tighten eurozone monetary policy. The expectation is for an aggressive move, raising the benchmark deposit rate to 0.75 per cent. Trade — or rather the breakdown in trade via the Ukraine conflict — is at the centre of this issue. The primary cause of the inflation surge is the sharp rise in wholesale gas prices in Europe, fuelled by Russia throttling gas supplies. Russia’s decision to indefinitely suspended natural gas flows through the Nord Stream 1 pipeline spooked the markets, pushing down the euro to a 20-year low against the dollar, further fuelling inflation by pushing up the prices of imports to the EU, especially energy. This complex problem is not going to go away easily and the solutions are likely to be painful. (Jonathan Moules)Trade linksThe academic Richard Baldwin, the globalisation wonk’s globalisation wonk, has embarked on an epic multi-part assessment of the state of said phenomenon, which starts here (and to which I will return).The former US Treasury international finance guru Mark Sobel, in a lengthy post for FT Alphaville, says that the global architecture for resolving sovereign bankruptcies is messy (as I noted here in July), but there’s going to be no sweeping reform, so better deal with it as it is. He’s very likely right.The EU is set to make it much harder for Russian travellers to get visas, following demands from central and eastern member states. There’s already political tension with Turkey after a sharp rise in rejections of Turkish applications for visas for the free-movement Schengen zone inside the EU.The US ambassador to Japan (and former Barack Obama chief of staff) Rahm Emanuel muses about the next era of globalisation.My former student politics contemporary Liz Truss will today almost certainly be announced as the new prime minister of the UK, and as the FT’s excellent Britain after Brexit newsletter points out here, she is surrounded by a bunch of ideological deregulators and sovereigntists whose ideas appear somewhat at odds with business reality.Trade Secrets is edited by Jonathan Moules More

Turkey’s official inflation rate exceeded 80 per cent for the first time since 1998 in August as policymakers insisted that runaway price increases would soon begin to slow.The consumer price index increased at an annual rate of 80.2 per cent last month, according to data published by the government statistics agency — the highest level since President Recep Tayyip Erdoğan took power almost two decades ago. The figure was up from a rate of 79.6 per cent in July.Turkey has pursued what some economists have termed a giant economic experiment as the Turkish president, a notorious opponent of high interest rates, has insisted on maintaining one of the world’s lowest interest rates in real terms and inflation has soared as a result. With the central bank’s benchmark rate now at 13 per cent after an unexpected rate cut last month, the real cost of borrowing now stands at minus 67 per cent. Government officials, who argue that they are pursuing a new economic model, have insisted that inflation will begin falling in the final months of 2022 even as they raised their year-end forecast to 65 per cent over the weekend.“In the months ahead, we will witness inflation losing speed even more,” Nureddin Nebati, the country’s finance minister, wrote on Twitter in response to Monday’s data. He said the latest figures supported his view, adding: “We will drive high inflation out of these lands, never to return again.” Turkish officials are hoping that cooling inflation will help Erdoğan’s campaign for re-election in polls that are scheduled for June next year. Soaring inflation and a plunge in the value of the lira have eroded living standards and fuelled dissatisfaction with the president’s leadership. Most analysts agree that inflation will start to fall next year as the impact of the soaring rate of increase in early 2022 falls out of the index. But many have warned it still has further to rise before it begins to decline — and could end up stuck at a much higher level than the single-digit rate of 9.9 per cent that officials say they are ultimately targeting in 2025.

Liam Peach, a senior emerging markets economist at the London-based consultancy Capital Economics, said he expected inflation to peak at 85 per cent before falling sharply in early 2023.Peach warned that price rises would remain “entrenched at high levels for some time” because of Erdoğan’s deeply unorthodox economic policy.“The central bank is likely to remain beholden to President Erdoğan’s wishes for looser policy, and it seems that further interest rate cuts are more likely than not later this year,” he said.Monday’s inflation data was slightly below the consensus expectation among analysts of 81 per cent. Opposition parties and some analysts, however, have cast doubt on the official figures, accusing the government of publishing artificially low numbers. Inflation data published by the Turkish Statistical Institute, a state-run agency, has diverged strongly in recent months from a cost of living index produced by the Istanbul Chamber of Commerce, which increased almost 100 per cent year on year in August. The two indices had previously tracked each other closely. More