Economy

CERNOBBIO, Italy (Reuters) – Italy cannot afford weeks of political inertia after an election this month, business chiefs said, adding that sky-high energy prices are already forcing more and more firms to curtail production.Gathered on the shores of Lake Como for the annual Ambrosetti Forum this weekend, business owners lashed out at politicians for ousting Prime Minister Mario Draghi in the midst of an energy crisis in Europe.”Before the new government’s ministers get their bearings it’ll be Christmas, but we face problems that need tackling in days, not weeks,” said Armando De Nigris, chairman of the balsamic vinegar maker of the same name. Record gas prices have more than doubled the cost of condensing the grapes that go into the 35 million bottles of balsamic vinegar De Nigris produces every year.”We risk producing something that we won’t be able to sell in six months’ time because we can’t pass on the price increases,” he said.A centre-right bloc is on course for a clear victory in the Sept. 25 election but government formation is a notoriously slow process in Italy. Industry lobby Confindustria last week warned Italy faced “an economic earthquake” due to higher energy prices and called for support from the caretaker administration led by Draghi, a former chief of the European Central Bank.Italy has already earmarked over 50 billion euros this year to try to soften the impact of higher energy costs for firms and households and more help is expected this week.RECOVERY FUNDS AT RISK?Riccardo Illy, chairman of the Polo del Gusto food group that owns French tea brand Damman Freres and chocolate label Domori, feared Italy will miss out on some of the promised EU funds for its post-COVID recovery.”Draghi could have continued till the end of his mandate … whoever comes next will make us lose billions of euros,” he said. Italy is in line for some 200 billion euros but the funds are conditional on it implementing a series of reforms.Reliance on Russian gas and a large manufacturing sector made up predominantly of small businesses render the Italian economy particularly vulnerable to the energy crisis.Since the Ukraine conflict started in February, many companies in energy-intensive sectors such as steel, glass, ceramics and paper have been forced to curtail production because production costs were too high.”When the next (economy) minister sets out to solve our problems – and we can only hope he’s the best of ministers – it may be too late,” said Romano Pezzotti, who runs metals recycling business Fersovere near the northern city of Bergamo.”After making the big mistake of toppling the government during the worst crisis of the past century … politicians will need to again turn to somebody capable of solving the country’s problems,” he added.The energy crisis casts the longest shadow.”We all know what needs to be done,” said Matteo Tiraboschi, executive chairman of premium brakes maker Brembo, a larger business listed on the Milan stock market.”The energy bill in Italy has virtually doubled.” More

Desperate times call for desperate measures. The UK has rightly supported Ukraine’s cause in its war with Vladimir Putin’s Russia. Today’s soaring gas prices are as much a weapon in Putin’s fight as missiles directed at Ukraine and, like them, they will kill. It would be a crime and a folly to let the domestic costs of the war fall disproportionately on the least well off. Solidarity in sharing these burdens is obligatory. So, too, is willingness to shed shibboleths. In wartime, markets are not sacrosanct. Price controls, even rationing, must be on the table.The price of natural gas is nearly 5 times what it was a year ago. The result is a distributional shock, a terms of trade shock (since the UK is a big net importer of gas), an overall price shock, with inflation likely to hit 20 per cent, and a contractionary shock to gross domestic product.

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The distributional shock is the most important. According to ING, even with the measures already taken by the government, the cost of energy could rise from 12 per cent of household disposable income for the lowest decile in 2021 to 41 per cent between October 2022 and September 2023. Even at the sixth decile it could go from 4 to 14 per cent of disposable income. This would be a massive (and massively unequal) squeeze on people’s real incomes. According to the Resolution Foundation, the UK is set to experience the largest two-year decline in median non-pensioner real disposable income after housing costs in 100 years.It is evident that losses to less well off households on this scale would be morally and politically unbearable. So, too, would be the costs to businesses and the likely reductions in spending and gross domestic product. Something has to be done and it has to be massive, given the scale of this shock. So what should it be?

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There exists a standard, professionally approved package. It is, as IMF staff have recently repeated, to allow price signals to operate freely and target the vulnerable. That approach would surely be better than the regressive tax cuts discussed in the Tory leadership contest. But this is one of those situations in which a difference of degree is a difference in kind. A rise in prices that is manageable by most of the population is one thing. A rise in prices that imposes such big costs on almost everyone, while giving huge windfalls to a few producers, is something else altogether.These price rises are unnecessarily and unsustainably large. It is also hard to target assistance, without creating a cliff edge between those who are helped and those who are not. Not least, it is very difficult to target the help in ways that allow for differences in household circumstances. None of this matters all that much if the price rises were smaller. But these ones are too large. The country cannot permit many millions to do without the energy they need, especially in winter.So, what is to be done? Torsten Bell has argued in the FT that we need to cap energy prices at below the current market rates. I agree. Indeed, we need to do this, while also simultaneously targeting assistance at the most vulnerable, since it is certainly sensible, in terms of incentives and limiting the fiscal costs, to allow a significant, albeit constrained, rise in prices.The UK has the substantial advantage that it is not overwhelmingly dependent on foreign sources of gas. On the contrary, almost half of total supply comes from the UK continental shelf. Furthermore, only 44 per cent of electricity is generated by gas, with another 43 per cent coming from “zero-carbon” sources (nuclear and renewables).

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So, while imported gas is a big tail, there is no reason at all why it should wag the energy dog. As an emergency measure, the government can and should impose price controls on domestic gas producers and generators of nuclear and renewable electricity. These prices should be substantially higher than prewar, but not at today’s “Putin levels”. The government should also subsidise the price of gas imports to these controlled levels. These controls (and subsidies) should end when prices of imports fall back, as they surely will.The government will also need to fund the envisaged subsidies and targeted assistance to the vulnerable. Again, as in wartime, this should be done through additional borrowing and taxes on the well off justified as a special and temporary “solidarity levy”. This will not go down well with many members of the Conservative party. Yet the new prime minister needs to remember that this electorate need never again be their concern. The nation as a whole definitely is. This is war. The government must act. Tinkering is not enough. Go big. Be [email protected] Follow Martin Wolf with myFT and on Twitter More

Liz Truss, widely expected to be named Britain’s prime minister on Monday, has promised to tackle the cost of living crisis in her first week in Number 10, as she looks to accelerate long-term reforms to the electricity market.Truss, the foreign secretary, said she would immediately set out “action on energy bills and energy supply” while her new chancellor — expected to be Kwasi Kwarteng — would flesh out details in a mini-Budget later this month.The results of the seven-week contest to find a new Conservative leader will be announced at lunchtime on Monday, with Truss expected to beat her rival, former chancellor Rishi Sunak.Boris Johnson will make a farewell statement in Downing Street on Tuesday morning before flying to Balmoral, the Queen’s Highland residence, to tender his resignation.The new Tory leader will then also travel to Balmoral before returning to Downing Street on Tuesday afternoon to face one of the most daunting in-trays of any incoming prime minister.Truss, writing in the Sunday Telegraph, repeated her promise of tax cuts for business and households but also said: “I will take decisive action to ensure families and businesses can get through this winter and the next.”Sunak’s team claims that a combination of short-term palliative measures coupled with Truss’s promises to reverse increases in national insurance and corporation tax, and with her pledge for higher defence spending could cost more than £100bn.Truss said her approach would be “underpinned by a firm grip on the public finances and commitment to the principles of sound money and a lean state”.Treasury insiders are worried about the impact of new borrowing at a time of rising interest rates and market jitters about the British economy, but Truss has dismissed “stale thinking” in the UK economic establishment.She said she would appoint a council of economic advisers that would bring together “a team of world-class economists so my chancellor and I have the best ideas and latest research on how to get the economy moving”.

Truss also said she wanted to move away from an approach of “sticking plasters and kicking the can down the road” and her allies have talked about reforms to the energy market to lessen the impact on future crises.Kwarteng, current business secretary, wants to speed up reforms to the wholesale electricity market to break the link with volatile gas prices. The current system means that even those producing power from nuclear or renewables can receive high wholesale prices for electricity because of high market prices for gas.Sunak had proposed a temporary windfall tax on electricity generators that would raise £3bn-£4bn a year until the market is fixed, but Truss has ruled out extending the existing levy, which applies only to North Sea oil and gas producers. More

Speaking to reporters in northern Japan’s Niigata prefecture, Kishida said the government should consider reviewing and raising subsidies for regional revitalisation so they can be used to respond effectively to surging prices.”I would like to compile additional measures and implement them without hesitation,” he said, adding that he recognised the importance of offering support that matches the needs of local communities.Kishida has made a top priority of addressing the impact of rising energy, food and raw materials prices on businesses and consumers, instructing his government last month to draw up new policy measures. More

Will the European Central Bank deliver a historic rate rise?Even before last week’s data showing eurozone inflation hit a record high and unemployment fell to a new low, markets were already betting the European Central Bank would step up the pace of interest rate rises when it meets on Thursday.The ECB raised rates in July for the first time in more than a decade, lifting its benchmark deposit rate from minus 0.5 per cent to zero. But in the past week, a string of ECB governing council members have called for it to act “forcibly” by “front-loading” the path of future rate rises to prevent surging inflation from becoming a 1970s-style spiral of persistently higher wages and prices.Investors have taken note, driving bond yields up to bet on a strong probability of the ECB raising rates by 0.75 per cent for only the second time in its history. The first was a shortlived technical adjustment only days after the euro’s launch in 1999.“The key decision at the upcoming meeting will be between a 50 basis point or 75 basis point hike,” Jens Eisenschmidt, an economist at Morgan Stanley, wrote in a note to clients. “We think it is a very close call, with good arguments on each side, but ultimately think those advocating for a larger hike will prevail as September offers the best opportunity to send a clear signal of determination.”The ECB could also announce measures to reduce a multibillion bonanza it is set to give to banks from its ultra-cheap lending scheme known as the targeted longer term refinancing operations, or TLTRO, he said. But other moves, such as starting to shrink its balance sheet, are likely to wait until its meetings in October or December. Martin ArnoldDid growth in US services activity slow last month?Activity in the US services sector is expected to have slowed in August to the lowest reading since May 2020, as economic growth decelerates amid aggressive rate increases implemented by the Federal Reserve to tackle persistently high inflation.The ISM non-manufacturing index is forecast to report a reading of 54.8 from 56.7 in July, according to economists polled by Reuters. Although any reading above 50 indicates an expansion, growth in the services sector is expected to slow, after recovering from a drop in activity from lockdowns at the start of the pandemic. Oren Klachkin, lead US economist at Oxford Economics, said the best days of the services industry’s recovery are “behind us”. “The post-Covid pop in activity is behind us,” said Klachkin. “Economic growth was bound to slow eventually. More normal spending patterns mean growth will slow.”In an effort to tame soaring inflation, the Federal Reserve implemented two consecutive rate increases of 0.75 percentage points to cool down the economy. US inflation moderated in July, but consumer spending slowed more than expected, rising 0.1 per cent and missing expectations for a 0.4 per cent increase, according to the personal consumption expenditures price index.Although some aspects of the services industry like supply chain conditions have improved, labour costs, prices and inventories have yet to rebound to pre-pandemic conditions.“Better inflation and supply chain conditions should result in some release of pent-up demand, all else equal. However, price and supply-side dynamics remained far from pre-Covid norms,” said Klachkin. Alexandra WhiteDid China’s exports growth wane in August?China’s exports have been a rare bright spot for the economy, which has been battered by Covid-19 lockdowns. The country’s surplus in July confounded experts, jumping to a record of more than $101bn, boosted by a bigger-than-expected 18 per cent increase in exports.Imports missed expectations, however, rising just 2.3 per cent compared with the same period a year before, suggesting sustained weakness in domestic demand in the country.The economy took a further hit in August as heatwaves and droughts led to power shortages and led several provinces and cities to suspend or restrict electricity supplies to factories. There were further hints that the country’s export growth would slow in August in the latest manufacturing purchasing managers’ index, which notched a second consecutive month in contraction territory. The new export orders sub-index came in at 48.1, below the 50-point threshold that separates contraction from expansion for the 16th month in a row.“The robust export growth seen over the past two years is really behind us and set to decelerate over the next few quarters, as major developed economies enter recessions amid a more synchronised global slowdown,” wrote analysts at Nomura, the Japanese bank.Analysts at Barclays, meanwhile, forecast that China will post a smaller trade surplus of $91bn for the month, with imports growth increasing to 4 per cent and exports growth slowing to 14 per cent.“We expect . . . import growth to remain in low-single digits in August in view of weaker domestic demand . . . led by contracting property investment and subdued consumption,” the bank’s analysts wrote in a note. William Langley More

Fresh restrictions this week on exports of US chip technology to Chinese companies have provoked an angry reaction from Beijing, but beyond the rhetoric, China is expected to unleash a new wave of funding to boost domestic production of semiconductors. Washington has been steadily tightening the noose on China’s tech sector, limiting access to cutting-edge chip components and machinery. Its latest move is to introduce tough licensing requirements that are likely to block sales of high-end processors from US chipmakers Nvidia and AMD, which are used in artificial intelligence systems.China’s foreign ministry accused the US on Thursday of attempting to impose a “technological blockade” on China to maintain its tech “hegemony” and said it was stretching the concept of national security. The US has said it fears its tech will be adapted for military purposes.Unable to break such a “blockade”, “the restrictions will turbocharge China to find local replacements”, said one senior executive at a Chinese chipmaker. The government has already poured vast sums of money into the chip sector, with state-owned investment funds targeting chip start-ups that promise to replace foreign rivals. The largesse has prompted accusations of waste, corruption and mismanagement. Chipmaker Tsinghua Unigroup defaulted on its bonds in 2020 despite receiving tens of billions of dollars in government support.Analysts believe a string of high-profile failures will not deter Beijing in its quest for chip self-sufficiency, as Washington accelerates the encirclement of China’s tech sector with ever-tighter controls. Putting blocks in place for the supply of cutting-edge chips from Nvidia and AMD comes weeks after the US banned the sale to China of electronic design automation (EDA) software, needed to design high-end chips. The moves will hasten Chinese firms switching to domestic chipmakers to pre-empt being cut off from foreign suppliers, wrote Shanghai-based wealth management firm HWAS Assets in a note. In July, the US congress approved $52.7bn in grants to build chip facilities in the US for those companies agreeing not to fund high-end semi production in China, under the landmark US Chips and Science Act. Randy Abrams, head of Asia Semiconductors research at Credit Suisse, wrote in a note that the ban on investing in advanced fab production in China would “further limit access to overseas talent and investment to build up China’s domestic semis industry”.In the past, chip factories or “fabs” in China run by Korea’s Samsung, Intel of the US and UMC of Taiwan “have been a good source for China to help build up IP, talent and resources to develop its domestic semis industry”, he said. Analysts at investment bank Jefferies said the biggest customers for Nvidia products that were effectively banned this week are cloud service providers, internet and AI companies. They predicted there would be an attempt to switch to local graphics processing unit (GPU) substitutes, but the widespread use of Nvidia’s Cuda “operating system for AI” software would create incompatibility issues.The senior executive said it was only a matter of time before China developed its own functioning EDA software. The US tools “are incredibly complex and sophisticated, so you can’t replicate them overnight, but with enough money and ingenuity, you can get close,” he said. Others disagree that China can strike out on its own. Stephen Ezell, a director at the Information Technology and Innovation Foundation in Washington, said China’s efforts to develop a “closed loop semiconductor ecosystem” had failed. “It is self-defeating for a country in a high-tech industry to try and do everything by itself,” he said. The devastating impact of Washington’s sanctions on Huawei, which barred the Chinese telecoms behemoth from all chips using US tech in 2020, underscores the interconnected nature of the global chip supply chain. The move crippled the company’s smartphone business. The Netherlands has also caved in to Washington pressure and banned exports of extreme (EUV) lithography equipment to China, required to manufacture chips that power AI and blockchain technology. “China was not going to be a player once the US got the Netherlands to acquiesce,” said Douglas Fuller, an expert on the Chinese semiconductor industry.

Even as the US successfully limits China’s access to foreign chip technology, industry insiders are sceptical about Washington’s ability to shut it out completely from the global supply chain.One industry veteran in Japan said that the last attempt by Washington to compete with an adversary ended in failure after political appetite waned and funds dried up. In the late 1980s, the US established a consortium of semiconductor companies driven by concerns that Japan had usurped its dominant position. “It was reasonably successful for a time, mainly because large companies like Intel supported it heavily. But government funding is fickle and dries up with the change of an administration in Washington,” he said. “The semiconductor industry is global, and it is difficult to mount an effort to help one country be competitive against its global allies and competitors.” Additional reporting by Nian Liu in Beijing More

Italy relies on imports for three-quarters of its power consumption, increasing its vulnerability to Europe’s current energy crisis.Addressing the annual Ambrosetti business forum on Saturday, Economy Minister Daniele Franco said Italy’s high debt reduced its room for manoeuvre going forward.Measures to help firms and consumers cope with high energy bills will be approved next week, following six aid packages so far worth in total 52 billion euros, Franco said.”To keep offsetting, at least in part, rising energy prices through public finances is very costly and we could never do enough,” he said.Franco said it was key to address the functioning of Europe’s energy market, where soaring gas prices amid shrinking Russian exports have driven power prices higher. “What matters is to bring the price of gas and energy back to sustainable levels,” Franco said.Speaking at the same conference on Saturday, French Finance Minister Bruno Le Maire said it was necessary to severe any links between the price of gas and that of electricity, moving to “a total decoupling” of gas and power prices.Italy’s net energy imports cost 43 billion euros in 2021, broadly in line with previous years barring 2020 which was affected by the COVID-19 virus outbreak, Franco said.The increase of around 60 billion euros expected in 2022 amounts to roughly three percentage points of gross domestic product and will wipe out the net surplus in exchanges with the rest of the world Italy recorded in recent years, Franco warned.”We are transferring abroad a significant part of our purchasing power,” he added. ($1 = 1.0049 euros) More

(Reuters) – A federal appeals court has revived https://fingfx.thomsonreuters.com/gfx/legaldocs/znvneweoopl/Arrington%20v%20Burger%20King.pdf a potential class action against Burger King over its prior use of a “no-hire” clause that blocked all franchisees from hiring each other’s employees.The 11th U.S. Circuit Court of Appeals Wednesday reversed a ruling by a district court judge in Miami, who dismissed the workers’ claims that the no-hire clause was an unlawful conspiracy to suppress wages and employee turnover.The 11th Circuit said the judge erred in finding that Miami-based Burger King Worldwide, its parent companies, and its franchisees had all operated as a “single economic enterprise” that was categorically incapable of conspiring with itself.“(T)here’s just no question that Burger King and its franchisees compete against each other and have separate and different economic interests,” and that, “in the absence of the No-Hire Agreement,” each franchised restaurant “would pursue its own economic interests and therefore potentially and fully make its own hiring decisions, including about wages, hours, and positions,” Circuit Judge Robin Rosenbaum wrote for the panel.“They might even attempt to entice stand-out employees to leave one restaurant and join their own. But the No-Hire Agreement removes that ability,” Rosenbaum wrote, joined by Circuit Judge Charles Wilson and Senior Circuit Judge Frank Mays Hull.Dean Harvey of Lieff Cabraser Heimann & Bernstein, lead counsel for Jarvis Arrington, Sandra Munster and Geneva Blanchard, declined to comment on the pending litigation. The workers’ appeal drew amicus support from the U.S. Justice Department.Burger King and its attorneys did not immediately respond to requests for comment.The lawsuit was one of many filed by fast-food workers since 2016, when the U.S. Justice Department and the Washington state attorney general began targeting the industry’s ubiquitous use of no-hire or “no-poach” agreements.Burger King dropped the no-hire clause from its franchise agreements in 2018 as part of a settlement with the Washington attorney general. Several other fast-food chains did the same.In lawsuits by pre-2018 workers, however, the chains have argued that there was no conspiracy or, in the alternative, that any restraint of trade was not unreasonable.The judge in the Burger King case found it unnecessary to consider the latter argument, but Burger King urged the 11th Circuit to uphold the dismissal on that ground anyway. The International Franchise Association and the Florida Chamber of Commerce agreed in separate amicus briefs. The panel declined, saying “those inquiries are best left to the district court” on remand.The case is Arrington, et al. v. Burger King Worldwide Inc., Burger King Corp., and Restaurant Brands International (NYSE:QSR) Inc., 11th U.S. Circuit Court of Appeals, No. 20-13561.For Arrington et al.: Dean Harvey of Lieff Cabraser Heimann & Bernstein, Yaman Salahi formerly of Lieff Cabraser, and Derek Brandt of McCune Wright ArevaloFor Burger King: Stuart Singer of Boies Schiller & Flexner; Luis Suarez of Heise Suarez Melville More