Economy

Britain’s minister for international trade has said farmers’ anxiety that free trade agreements with Australia and New Zealand would mean the UK market will be flooded with cheap meat are “misplaced”.Anne-Marie Trevelyan, secretary of state for international trade, told the Financial Times in an interview during a trip to Australia that the deals would help curb inflation in Britain by “stripping away” tariffs on imported goods.She said the UK had built safeguards into the free trade agreements in the form of quotas over a period of 15 years to act as a “sliding scale” to rebalance Britain’s agricultural economy after Brexit. New Zealand, for example, already has a large quota for lamb exports to the UK that it does not use because most of its meat is sold in Asia. “Some of the anxiety was misplaced,” she said of the fears expressed by UK farmers. “I don’t think we need to be concerned but because there were anxieties, and we understand why, both governments were very happy to work up a transitional protection, which, you know, tapers away eventually,” she added. The National Farmers Union has said that the cost of the free trade agreements to the UK industry would be £150mn and has warned that the deals could exacerbate precarious trading conditions for the industry. That led to accusations that farmers were trying to take a trade deal designed to improve migration flows and benefit a range of industries “hostage”. The UK government expects the New Zealand trade deal to boost trade by 60 per cent and add £800mn to the British economy. The Australian deal is estimated to boost trade by £10.4bn and add £2.3bn to the UK economy.

Trevelyan is the first British cabinet minister to visit Australia since the election of Anthony Albanese as prime minister in May. She said the enabling legislation for the trade deals would be introduced within the coming few weeks and expects the deal to be fully ratified by early 2023. Trevelyan was also confident that negotiations over Britain’s entry to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTTP, regional trading bloc would be concluded by the end of the year.“It’s a really important trading bloc to us, because it stands up for its values of free and fair trade. So that’s why we’re keen to be a part of it,” she said. Asked whether the UK would support China’s entry into the bloc, Trevelyan said that any prospective member would need to be tested on whether its legislation withstands “gold standard” tests for entry. More

It has always been entertaining to read predictions that fail the test of time. In 1865, as engineers were racing to develop the telephone, an American editor sniffed: “Well-informed people know that it is impossible to transmit the human voice over wires . . . and that, were it possible to do so, the thing would be of no practical value.”A more recent favourite is the 2007 interview with Steve Ballmer, then chief executive of Microsoft, in which he confidently declared: “There’s no chance that the iPhone is going to get any significant market share. No chance.” About one in five smartphones sold globally is now an iPhone.Fun to gloat, perhaps, but less entertaining to have money resting on your own predictions. Unfortunately, investing requires you to do just that. You cannot avoid having to make forecasts. If you own a share today then you must believe that it will be worth more in future. Maybe you think the company has a product that will enjoy growing sales. Maybe you think the share price does not reflect current profits. Maybe you believe you are on to something early and that you will offload your stock once the herd belatedly piles in.Some predictions depend on so many moving parts that you can be wrong even if you are right. Pity the investor who backed 50-year inflation-linked gilts at the beginning of this year in the belief that the market was underestimating the trend for RPI inflation. They were right. At that time RPI was expected to peak in April 2022 at 8.6 per cent. In the event, it hit 11.1 per cent and Citigroup economists now expect it to peak in January at 18.6 per cent. But they failed to account for the response of central banks in raising interest rates and the impact of that on long-duration fixed interest assets. The value of their investment has nearly halved in just eight months.While predictions cannot be avoided, it seems odd how much money is invested in areas where there is a history of forecasts being wildly wrong. Think inflation, the number of months before the next credit crisis, how long a war will last or who will be the next UK prime minister (and what they will do). However, there are some predictions that can be made with considerable confidence. Among these are demographic trends, the move towards power with lower carbon emissions and increased automation of manufacturing. Timing can often prove tricky, but the direction of travel here is pretty certain. Let’s take demographic trends. One prediction seems inescapable: the world’s population will age. The World Health Organisation (WHO) expects the proportion of the world’s population aged over 60 to double by 2050 — from 12 to 22 per cent (it is already over 30 per cent in Japan). That’s 2.1bn people — up from just 1bn in 2020. In the UK the Office for National Statistics estimates there are likely to be an additional 8.5mn people aged 65 and over.The irony of investors exploiting the opportunities this creates to fund their own pensions is not lost on me. We have been waiting for some time to buy a hearing aid maker at a reasonable price. Hearing aids used to be rather basic small loudspeakers that would amplify all sounds and blast them into your ear. Digital hearing aids are tuned to each person’s weaker frequencies and increasingly focused to enhance the sound from the direction in which you are looking and reduce background noise. Wearing a hearing aid is generally something you do reluctantly. The more advanced digital aids are expensive, but they are smaller and less noticeable than the older models.Demand for them is likely to rise — and for some time. The WHO estimates that more than 1bn young people are at risk of avoidable hearing loss due to unsafe listening practices. This must include all those commuters listening to music turned up loud enough to hear against the background clatter of the train. The trend will result in an even larger market for hearing aids as these working generations age. On top of that, adoption in many emerging markets is starting from very low levels.Sonova is the Swiss-based global leader in this area. Like many “quality growth” companies, its valuation soared a couple of years ago, with the price/earnings ratio approaching 45x at one point. The shares have fallen recently as consumers delayed purchases and the company has, like many others, seen input costs inflate. The shares now trade closer to their long-term p/e multiple of 25x. For some this will still look pricey, but this company’s long-term prospects suggest the valuation is worth paying.Similarly, we have recently added a Japanese eyeglass maker to our portfolios. Hoya is a world leader in producing eyeglasses, contact lenses, photomasks for semiconductor manufacturing and glass discs for large data storage. All these sectors have long-term growth potential, and Hoya shares — like many Japanese shares — have fallen back in sterling terms this year. An ageing population supports eyeglass demand. I now seem to carry reading and driving glasses despite having had laser eye surgery 20 years ago. The greater engine of growth is the young — and specifically young people in Asia, where myopia levels have risen astonishingly in the past 50 years. Studies suggest more than 80 per cent of 20-year-olds in Asia are short-sighted and need glasses — more than twice as many as in Europe. Some believe myopia is associated with greater time spent doing close work such as studying and watching screens; others think the problem is too little time spent outdoors. The evidence is mixed, but China’s recent crackdown on private tutoring and the video-gaming industry is in part a response to the problem. Whatever the cause, I am daring to predict that demand for glasses will rise.

Lastly, for some of us cycling seems a good way to travel if only if it were not for hills. Electric bikes — including cargo bikes, which carry modest loads — are selling well around the world. Shimano, the Japanese global leader in regular bike brakes and drives, is benefiting from this trend, yet its shares have fallen from Y35,000 to Y25,000 over the past year. The company is developing more powerful brakes for electric bikes with heavier loads, as well as automatic gears for those who do not want to change gears themselves. Advances in technology sometimes seem more modestly valued in shares listed as “consumer goods” stocks rather than “technology” stocks. With fuel bills eating into household budgets, consumers may defer buying a new bike — as some have deferred buying an expensive hearing aid. However, a longer-term investor might take advantage of the share price weakness.Many shares have tumbled further this year and some might prefer to look through the rubble of those fallen stocks for better bargains, in the expectation that economies will rapidly return to modest inflation, interest rate cuts and steady growth.I do not like to base my investment decisions too heavily on any of those predictions. I prefer very high-quality businesses whose shares have come back to reasonable levels but whose growth can be more reliably predicted. I may be wrong. You can laugh at me later if I am. Simon Edelsten is co-manager of the Mid Wynd International investment trust and the Artemis Global Select fund. More

The dollar is on the cusp of its third straight month of gains after reaching a 20-year high against peers, in a stark reflection of diverging outlooks for interest rates and growth in the world’s largest economies. The dollar index, a measure of the currency’s value against a basket of others, has risen 14 per cent since the start of the year. It has continued to climb on expectations that the Federal Reserve will not back down in raising US interest rates to tamp down inflation, as emphasised by its chair Jay Powell at the annual Jackson Hole symposium last week. The US currency’s lead on others also reflects worries that soaring energy prices in Europe stoked by Russia’s war in Ukraine will drive inflation higher and push economies into recession. “Everything is pointing towards a stronger dollar,” said Christian Kopf, head of fixed income at Union Investment. “The dollar is independent from energy imports and not that much struck by the rise in energy prices that we’ve seen particularly in Europe.” August will mark the third consecutive month that the dollar has risen, while sterling and the euro have dropped 7.4 per cent and 6.6 per cent respectively over the same period. Japan’s yen and Switzerland’s franc are down 7.1 per cent and 1.5 per cent over the same three-month period.The Fed has led big central banks in forging ahead with aggressive monetary policy tightening. Higher yields on US government bonds push the dollar up as investors sell debt denominated in other currencies in favour of the better premiums on US Treasuries.The yield on the two-year Treasury note, which moves with interest rate expectations, on Tuesday hit its highest level since 2007, at 3.497 per cent.

Higher yields, and the strong dollar that accompanies them, have also hurt emerging market economies. This is partly because of the flow of capital away from their assets into dollars, but also because many emerging market countries hold debt denominated in dollars. A stronger dollar means higher debt payments for those countries, which has prompted some investors to predict a wave of defaults. Energy prices have hit record highs in Europe as the region searches for natural gas supplies that would otherwise come from Russia. The EU is preparing to announce emergency measures to tackle the region’s spiralling energy costs as businesses and households struggle.“It doesn’t appear that they can really put up a decent fight against king dollar when we’re looking at this really sour backdrop,” Jane Foley, head of FX strategy at Rabobank, said about other major currencies. “If you’re going to sell the dollar, what are you going to buy?”The stress is unlikely to abate soon. US inflation hit 8.5 per cent year on year in July, easing slightly from the previous month, though the Fed remains focused on its target of 2 per cent inflation. EU inflation figures for August were scheduled for release on Wednesday. Powell cemented his “unconditional” commitment to tackling high inflation last week, delivering a hawkish message at Jackson Hole and quashing any doubts that the world’s most powerful central bank would soon ease its monetary tightening. More

The head of the world’s largest building materials company has warned that the industry faces a “second wave” of inflation as spiralling energy prices drive up the cost of everything from wages to logistics. Albert Manifold, the chief executive of CRH, said he was seeing a “second wave of cost increases” following the surge in gas prices that accelerated after Russia’s invasion of Ukraine. The London and Dublin-listed group, which works on big construction projects across Europe and the US and is valued at €30bn, was hit by a 50 per cent increase in energy costs in the first half of the year. Wages and logistics costs had been rising “since June or July”, said Manifold.“The energy cost came through almost immediately after Russia invaded Ukraine,” said Manifold. “That put pressure on the cost of living and that is what is now driving wage inflation. As people absorb energy [cost] increases, they are ramping up the costs for logistics . . . central bankers and politicians have to deal with that challenge,” he added.CRH’s projects include the construction of London’s new east-west Crossrail line and the HS2 railway line in the UK, long-term, government-backed plans that have helped insulate the company from the rising costs. That helped CRH report an almost 30 per cent jump in first-half profits. Manifold’s view that the biggest inflationary worry for the construction industry lies in the second-order effects of higher energy costs was echoed by other big companies.Rob Perrins, chief executive of UK housebuilder Berkeley Group, said rising costs in the second half of the year were likely to slow the construction of new homes, particularly in London. “Energy is the key [to inflation], but the second order is wage inflation and that does have to come through if energy prices and the cost of living keep going up, that’s the worry . . . I see [construction] projects falling off quite heavily in London [as a result of inflation],” he added.

Build costs, including materials, energy and labour, make up roughly half of Berkeley’s overall cost base. If those increased by 4 per cent a year, the company would have to choose between increasing sales prices by 2 per cent or taking an equivalent hit to its margins, said Perrins.In the UK, the rise in inflation is already threatening to drive the economy into recession. Inflation is on track to exceed 18 per cent next year if gas prices sustain their surge, according to economists at Citigroup.The Bank of England is targeting an inflation rate of 2 per cent a year, but the Berkeley boss anticipates that inflation will run at “4-5 per cent” for the next three to four years, even after the energy price spike eases back. More

“After the most recent questioning before the investigative committee in Hamburg, no additional knowledge can be expected from a renewed questioning,” the source, a member of the Bundestag Finance Committee, told Reuters.The president of Germany’s lower house of parliament had previously approved a request by the opposition CDU/CSU conservatives to convene a special session off the Finance Committee to question Scholz on the case. A final decision on the issue is to be made on Wednesday.A grilling by Hamburg lawmakers of Scholz over his handling of the tax fraud case when he served as the city’s mayor ended in a stalemate earlier this month.The Social Democratic chancellor denied any impropriety and opposition lawmakers accused him of obfuscating the truth.”The chancellor must finally come clean about his role in the tax affair,” Thorsten Frei, the CDU/CSU parliamentary secretary, was quoted as saying by Rheinische Post newspaper.Prosecutors said the fraud involved dividend stripping in which banks and investors swiftly traded shares of firms around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.The loophole, now closed, took on a political dimension in the northern port of Hamburg due to authorities’ sluggishness in 2016 when Scholz was mayor in demanding repayment of millions of euros gained under the scheme by local bank Warburg. More

TOKYO (Reuters) -Japan’s factories extended expansion in output to a second month in July as motor vehicle production improved, marking a positive start to the third quarter for manufacturers and broader economic activity.Separate data showed retail sales grew for a fifth straight month in July, adding to hopes that the world’s third-largest economy will benefit from resilience in spending by consumers in the current quarter.Factory output rose a seasonally adjusted 1.0% in July from a month earlier, official data showed on Wednesday, extending the prior month’s near double-digit surge.Output was boosted by higher production of passenger cars and trucks and general-purpose machinery to come in better than a 0.5% decrease expected by economists in a Reuters poll.”There was a big jump in output last month so I had expected a pullback but growth of cars and capital goods pushed up overall production,” said Takeshi Minami, chief economist at Norinchukin Research Institute.”Supply disruptions that were there from the spring onwards such as due to China’s lockdowns and semiconductor and parts shortages appear to be easing.”Production of electronic parts and devices, however, declined a sharp 9.2% largely due to falling output of memory chips, posting their biggest one-month drop since comparable data became available in February 2013.Output of electronic parts and devices had surged 11.6% in June.The data comes after Japan’s main automaker Toyota Motor (NYSE:TM) Corp said on Tuesday its global vehicle production for July had fallen 8.6% year-on-year, missing its target for the fourth straight month.Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to rise another 5.5% in August and 0.8% in September.”Given the tendency of firms to issue forecasts that are overly optimistic, we think output will be flat if not outright contract in September, after peaking in August,” said Darren Tay, Japan economist at Capital Economics in a note. Separate data showed retail sales were stronger than expected, rising 2.4% in July from a year earlier to extend its gains to a fifth straight month.Retail sales were helped by stronger sales of medicine and toiletries as well as general merchandise.The rise compared with a median forecast for a 1.9% advance in a Reuters poll. More

(Reuters) – U.S. Federal Reserve officials on Tuesday reiterated their support for further interest-rate hikes to quell inflation, with the influential chief of the New York Fed saying the central bank will likely need to get its policy rate “somewhat above” 3.5% and keep it there through the end of 2023. “I see us needing to kind of hold a policy stance – pushing inflation down, bringing demand and supply into alignment – it’s going to take longer, will continue through next year,” New York Fed chief John Williams told the Wall Street Journal. “Based on what I’m seeing in the inflation data, and what I’m seeing in the economy, it’s going to take some time before I would expect to see adjustments of rates downward.” The Fed in March embarked on what’s become the sharpest round of rate hikes since the 1980s, and Fed Chair Jerome Powell last week made clear he and fellow monetary policymakers are prepared to raise borrowing costs as high as needed to restrict growth and reduce inflation that’s currently running at more than three times the Fed’s 2% target. Doing so, he said, will likely mean a softer labor market and pain for households and businesses; but allowing inflation to remain high would cause even worse damage, he said.Williams, who as vice chair of the Fed’s rate-setting panel plays a key role steering monetary policy, said that the central bank’s decision on whether to deliver a third straight 75-basis-point rate hike next month or a smaller half-point hike will depend on the incoming data, which includes Friday’s monthly jobs report and the consumer price index reading just days before the Sept. 20-21 meeting.But September’s decision will also, Williams said, depend on policymakers’ views of where they think interest rates will need to be by the end of the year.”If based on the data it’s clear that we need to get interest rates significantly higher by the end of the year, then obviously that informs a decision at any given meeting,” Williams said. “We’re going to need to have restrictive policy for some time – this is not something that we’re going do for a very short period of time and then change course; it’s really more about getting policies to the right place to get inflation down and keeping it in this position” to achieve the Fed’s 2% inflation goal.The Fed’s current target range for the benchmark Fed funds rate is 2.25-2.50%.In June, the last time the central bank published a summary of policymakers’ rate-path expectations, U.S. central bankers saw rates rising to 3.4% by year end.Financial markets are pricing in a steeper increase. Futures contracts tied to the Fed policy reflect trader bets that rates will rise 1.5 percentage points further by year end. There are three more policy-setting meetings this year, including next month’s. “I don’t think we are done tightening. Inflation remains too high,” Atlanta Fed President Raphael Bostic wrote in an essay published Tuesday on the regional bank’s website. “That said, incoming data – if they clearly show that inflation has begun slowing – might give us reason to dial back … We will have to see how those data come in.”Inflation by the Fed’s preferred measure slowed to 6.3% in July, down from 6.8% in June, but price pressures remain “stubbornly widespread,” Bostic said.Other data show key segments of the economy remain tight – including data released on Tuesday showing job openings remained high through July, a possible indication of continued wage pressuresBostic called the overall picture “fuzzy,” and said that while focused on the path of inflation, he was also sensitive that moving too aggressively to raise interest rates also carried risks.”Moving either too aggressively or too timidly has downsides,” Bostic wrote, with entrenched higher inflation looming if the Fed does not squeeze it from the economy, and lost growth and higher unemployment the outcome of “severe policy tightening.”To Richmond Fed President Thomas Barkin, it’s clear the Fed needs to raise interest rates, although exactly how much next month will hinge on the upcoming jobs and inflation reports. “I’m not going to prejudge it,” Barkin told Yahoo Finance, adding that the Fed does need to get rates “into restrictive territory” to bring inflation down.(This story refiles to fix typographical error in last paragraph) More

The carrier now has 185 days to reach an agreement with creditors, during which Interjet’s payments are suspended, according to the document.”This makes us all very happy,” said Carlos del Valle, son of Interjet owner Alejandro del Valle, saying the decision signaled a way of moving forward.”Once our mediator is assigned, we’re going to ask for the authorization to make essential payments,” the younger del Valle said in a message on Twitter (NYSE:TWTR). According to the document seen by Reuters, Mexico’s transportation ministry has five days to assign a mediator to the case. Interjet’s union has been on strike since January 2021, alleging employees went months without their salaries or benefits before the airline abruptly went offline.Thousands of customers were also affected by the flight cancellations, and some have launched a collective complaint through Mexico’s federal consumer protection office.”Soon we will announce the steps to follow for all those people left with the issue of tickets, vouchers and all of the customers who had any inconvenience,” del Valle said.Aguilar Amilpa Abogados, which according to local media reports was bringing the case against Interjet on the behalf of a group of creditors, did not immediately respond to a request for comment. More