Economy

“A steady pace – that is neither too slow nor too fast – in closing the gap to the terminal rate is important for several reasons,” he said. “The appropriate size of the individual increments will be larger the wider the gap to the terminal rate and the more skewed the risks to the inflation target.”Several policymakers have made the case in recent days for a 75 basis point rate hike next month after a 50 basis point move in July. Lane’s comments did not make clear his own preference. More

Belousov said Russia’s gross domestic produce would fall by “a little more than 2%” this year. That will be followed by a decline of “no more than 1%” in 2023, Belousov predicted.Some economists were predicting a 15% collapse in GDP this year in the face of Western sanctions imposed because of the Ukraine crisis and designed to cripple the Russian economy. More

LONDON (Reuters) – Worsening droughts, storms and torrential rain in some of the world’s largest economies could cause $5.6 trillion in losses to GDP by 2050, according to a report released Monday.This year heavy rains have triggered floods that inundated cities in China and South Korea and disrupted water and electricity supply in India, while drought has put farmers’ harvests at risk across Europe.Such disasters are costing the global economy hundreds of billions of dollars. Last year’s extreme droughts, floods and storms led to global losses of more than $224 billion, according to the Emergency Events Database maintained by the Brussels-based Centre for Research on the Epidemiology of Disasters.But as climate change fuels more intense rainfall, flooding and drought in coming decades, these costs are set to soar, warns the report by engineering and environmental consultancy firm GHD.Water – when there’s too much or too little – can “be the most destructive force that a community can experience,” said Don Holland, who leads GHD’s Canadian water market programme.GHD assessed the water risks in seven countries representing varied economic and climatic conditions: the United States, China, Canada, the United Kingdom, the Philippines, the United Arab Emirates and Australia. Using global insurance data and scientific studies on how extreme events can affect different sectors, the team estimated the amount of losses countries face in terms of immediate costs as well as to the overall economy.In the United States, the world’s biggest economy, losses could total $3.7 trillion by 2050, with U.S. gross domestic product shrinking by about 0.5% each year up until then. China, the world’s No. 2 economy, faces cumulative losses of around $1.1 billion by mid-century.Of the five business sectors most vital to the global economy, manufacturing and distribution would be hit hardest by disasters costing $4.2 trillion as water scarcity disrupts production while storms and floods destroy infrastructure and inventory.The agricultural sector, vulnerable to both drought and extreme rainfall, could see $332 billion in losses by 2050. Other sectors facing major challenges are retail, banking and energy. At this year’s World Economic Forum in Davos, Switzerland, a global group of experts launched a new commission to research the economics of water that aims to advise policymakers on water management.We must “transform how we govern water and the climate together,” said commission co-chair Tharman Shanmugaratnam. “The costs of doing so are not trivial, but they are dwarfed by the costs of letting extreme weather wreak havoc.” More

JACKSON HOLE, Wyo. (Reuters) – In 2019, the U.S. unemployment rate averaged 3.7% and consumer prices rose at an annual rate of around 1.8%.Fast forward to 2022, and while the unemployment rate has averaged the same 3.7% for the first seven months of the year, prices are sky-rocketing at an annual rate of more than 8% – touching off a potentially intense debate at the Federal Reserve over whether the “hot” labor market policies embraced before the COVID-19 pandemic can survive in the economy that is emerging.U.S. central bank officials acknowledge their battle to tame raging inflation is likely to cost jobs as rising interest rates slow the economy and companies retool staffing plans in response, though whether the loss of employment will be modest or massive is unknown.More contentious: Whether the combination of a tight job market and high inflation is a coincidence of the pandemic or a sign that labor and the economy have changed in fundamental ways that mean efforts to control inflation may require higher unemployment than before.That’s a controversial issue. When Gita Gopinath, the first deputy managing director at the International Monetary Fund, suggested at this year’s Jackson Hole central banking conference that hot labor market policies now carried a risk of higher prices, there was quick pushback.Today’s U.S. job market “isn’t hot. This is a raging inferno,” said Minneapolis Fed President Neel Kashkari, arguing that efforts to curb the imbalances don’t mean officials need to forever abandon monetary policies meant to coax more workers into the labor force and push unemployment lower.St. Louis Fed President James Bullard countered that the Fed should be cautious in assuming indicators like the labor force participation rate should always go higher. “People do value leisure and you want them to get the right tradeoff,” he said.In the wake of the pandemic, it remains an open question whether those preferences have changed. There’s growing evidence they did. Retirements rose, and while some retirees went back to work, not all did. Labor force participation for younger workers remains lower than pre-pandemic levels as well.Recent research has suggested a decline also in the hours people want to work.The implication is the economy may remain labor-constrained, with continued pressure on wages, and that for any given unemployment rate there may be even less available labor than headline numbers indicate.For the current inflation debate, that may mean that policymakers have to accept a relatively larger rise in joblessness if they wish to lower the rises in prices.In the Fed’s most recent economic projections, the median estimate tagged a long-run unemployment rate of 4% as consistent with inflation at the central bank’s 2% target. Joblessness is seen increasing as part of the inflation battle, but only gradually to 3.7% by the end of this year, 3.9% next year, and 4.1% in 2024 – in effect a “soft landing” for the job market in response to the highest inflation and most aggressive interest rate increases in 40 years.Many analysts regard that outlook as too optimistic, and argue that the Fed will need to create much more economic slack – lower demand and slower growth – to get the needed response on prices. That may mean broader job losses.’A LITTLE PREMATURE’The Labor Department on Friday will issue its employment report for August, with analysts polled by Reuters forecasting that the unemployment rate will remain unchanged at 3.5%. Less than three weeks later, Fed policymakers will issue new economic projections at their Sept. 20-21 meeting.One estimate from San Francisco Fed economists posited that an unemployment rate consistent in the short-run with lower inflation to be as high as 6%. That would imply roughly 4 million lost jobs. “Economic disruptions appear to have pushed up the short-run noninflationary rate substantially,” the research concluded.There are contrary theories. If inflation is driven less by resource slack, including labor, and more by recent global supply problems or by public expectations, it may come under control with minimal job losses. That case has been argued by Fed Governor Christopher Waller. In a recent paper, he concluded that shifts in the relationship between job openings and joblessness may mean a drop in vacancies could do much to ease labor market pressure – a point rebutted by former U.S. Treasury Secretary Lawrence Summers’ projections of a sharp rise in unemployment.Fed Chair Jerome Powell stuck with the euphemistic “some softening of labor market conditions” in his keynote speech on Friday at the Jackson Hole conference in Wyoming as he promised a tough fight against inflation.Cleveland Fed President Loretta Mester told Reuters in an interview that the unemployment rate may only need to rise as high as 4.25%.”I don’t think anybody can be very precise now about where the sustainable rate of unemployment is,” she said on the sidelines of the Jackson Hole conference on Saturday. If there was a wide range before, there is a wider range now because of the nature of work changing … But it is a little premature to say we have to get unemployment up to 6%. That is not in my forecast.” There also is a longer-run consideration for the Fed. Under Powell, the Fed conceded that in the past it had sometimes overstated the risk of inflation, and kept monetary policy stricter than necessary at a cost of needless unemployment. To avoid that error, the Fed adopted a new strategy in 2020 that pledged to fight “shortfalls of employment from its maximum level.” In practice, that meant looser policy that took greater risks with inflation in favor of pushing up employment – the very hot labor market strategy Gopinath warned about.There was a sense at the time that the unemployment rate consistent with low inflation had fallen far below Fed estimates, and ignoring that to chase phantom inflation would foster unnecessary joblessness. The unresolved issue now is whether that so-called “natural” rate of unemployment has risen either temporarily or permanently, and whether tradeoffs between inflation and unemployment – thought to have faded as a concern – will now bind policymakers.”People are concerned that these tradeoffs will be more pointed … There are still unresolved pandemic issues layered on top of the long-run demographics,” that would tend to decrease labor force participation, said Janice Eberly, an economist at Northwestern (NASDAQ:NWE) University. “Nobody really wants to put a stake in the ground on what the unemployment rate is going to look like in the long run.” More

(Reuters) – Russia’s First Deputy Prime Minister Andrei Belousov said inflation will come in at 12-13% in 2022, below earlier expectations, as the economy looks set to defy the gloomiest predictions of a near collapse in the face of Western sanctions.In a televised government meeting, Belousov also said consumer goods imports had largely rebounded thanks to parallel import schemes designed to replace Western goods that firms have pulled from the Russian market. More

JACKSON HOLE, Wyo. (Reuters) -The message from the world’s top finance chiefs is loud and clear: rampant inflation is here to stay and taming it will take an extraordinary effort, most likely a recession with job losses and shockwaves through emerging markets.That price is still worth paying, however. Central banks spent decades building their credibility on inflation fighting skills and losing this battle could shake the foundations of modern monetary policy.”Regaining and preserving trust requires us to bring inflation back to target quickly,” European Central Bank board member Isabel Schnabel said. “The longer inflation stays high, the greater the risk that the public will lose confidence in our determination and ability to preserve purchasing power.”Banks should also keep going even if growth suffers and people start to lose their jobs.”Even if we enter a recession, we have basically little choice but to continue our policy path,” Schnabel said. “If there were a deanchoring of inflation expectations, the effect on the economy would be even worse.”Inflation is near double-digit territory in many of the world’s biggest economies, a level not seen in close to a half century. With the notable exception of the United States, a peak is still months away.The complication is that central banks for the most part appear to have only limited control. For one, high energy prices, a function of Russia’s war in Ukraine, is creating a supply shock on which monetary policy has little effect. Copious spending by governments, also outside central bank control, exacerbates the problem. One study presented at Jackson Hole argues that half of U.S. inflation is fiscally driven and the Fed will fail to control prices without government cooperation.Lastly, a new inflation regime may be setting in that will keep upward pressure on prices for an extended period. Deglobalisation, the realignment of alliances due to Russia’s war, demographic changes and more expensive production in emerging markets could all make supply constraints more permanent.”The global economy seems to be on the cusp of a historic change as many of the aggregate supply tailwinds that have kept a lid on inflation look set to turn into headwinds,” Agustín Carstens, the head of the Bank of International Settlements, said.”If so, the recent pickup in inflationary pressures may prove to be more persistent,” said Carstens, who heads a group often called the central bank of the world’s central banks.All this points to rapid interest rates hikes, led by the Fed with the ECB now trying to catch up, and elevated rates for years to come.EMERGING MARKETSThe pain of high U.S. rates will reverberate well beyond the nation’s economy and hit emerging markets hard, especially if high rates prove as lasting as Powell now signals. “For the Fed right now – it is crunch time,” said Peter Blair Henry, a professor and dean emeritus of the New York University Stern School of Business. “The credibility of the last 40 years is on the line, so they are going to bring inflation down no matter what, including if that means collateral damage in the emerging world.”Many emerging market countries borrow in dollars and higher Fed rates hit them on multiple fronts.It pushes up borrowing costs and raises debt sustainability issues. It also channels liquidity to the U.S. markets, pushing up emerging market risk premiums, making borrowing even more difficult.Lastly, the dollar will keep firming against most currencies, pushing up imported inflation in emerging markets. Bigger countries like China and India appear to be well isolated but a host of smaller countries from Turkey to Argentina are clearly suffering.”We have a number of especially frontier economies, and low income countries that have seen their spreads increased to what we call distress or near distress levels, so 700 basis points to 1000 basis points,” IMF chief economist Pierre-Olivier Gourinchas said. “There is a large number of countries, it’s about 60% of the low income countries, we have about 20 emerging and frontier economies that are in a situation,” he said. “They still have market access, but certainly the borrowing conditions have worsened a lot.”A monitor by S&P Global (NYSE:SPGI) now considers the funding risk of lenders in South Africa, Argentina and Turkey high or very high. It also sees the credit risk of financial firms high or extremely high in a host of countries, including China, India, and Indonesia.”There are a few frontier economies like Sri Lanka, Turkey and so on that are going to get hammered if the Fed hikes rates and rates stay high,” said Eswar Prasad, an economics professor at Cornell University.”A two to three year horizon will start making things difficult…If it becomes clear the Fed is going to keep rates high for a long time, the pressures could hit home right away,” Prasad added. More

STAVANGER, Norway/PRAGUE (Reuters) – Ukraine’s President Volodymyr Zelenskiy accused Russia on Monday of economic terrorism by trying to prevent European nations from stocking up on gas ahead of a winter when the impact of soaring energy bills is set to hit households and businesses hard.How to respond to the rise in gas prices, which has been made worse by a squeeze on supplies from Russia, is top of the political agenda across the continent as autumn approaches.Zelenskiy spoke in a video address to an energy conference in Norway. His comments come as Russia’s Gazprom (MCX:GAZP) plans maintenance this week that will halt gas flows along the Nord Stream 1 pipeline that links Russia and Germany via the Baltic Sea.The outage has fuelled fears that Russia is curbing supply to put pressure on Western nations opposed to its invasion of Ukraine, a charge Moscow denies.German benchmark power prices for 2023 breached 1,000 euros per megawatt hour for the first time on Monday as supply concerns kept prices of gas and related fuels such as electricity and coal sky-high.Czech Prime Minister Petr Fiala said that a response should be coordinated by the European Union (EU) as his nation called an emergency meeting of energy ministers.”Ahead of the EU Energy Council we want to find a way to help people and businesses that we can agree on with other European leaders,” he added. The Czechs, who hold the rotating EU presidency, said the meeting would be on Sept. 9.The Czech Republic said last week it was looking at building support for a bloc-wide cap on energy prices, a step that outgoing Italian Prime Minister Mario Draghi has championed.”NO LEHMAN BROTHERS REPEAT”Countries such as Germany and Italy, heavily reliant on Russian gas imports for their energy, have been building up storage levels ahead of the cold winter months when demand peaks.German Economy Minister Robert Habeck said on Monday that German gas facilities were more than 80% full and he expects prices to retreat. Italy has hit a similar level, giving a cushion against further supply shocks.”As a result, the markets will calm and go down,” Habeck said.Habeck also reiterated that Germany will not allow a Lehman Brothers-style domino-effect to happen on its gas market.”I promise on behalf of the German government that we will always ensure liquidity for all energy companies, that we don’t have a Lehman Brothers effect on the market,” said Habeck, referring to the U.S. investment bank’s collapse, which helped trigger the 2008 financial crisis.There was a less upbeat prediction from the head of gas major Shell (LON:RDSa) who warned the gas shortages could persist.”It may well be that we will have a number of winters where we have to somehow find solutions,” Shell CEO Ben van Beurden told a news conference at the industry meeting in the Norwegian city of Stavanger.Tesla (NASDAQ:TSLA) founder Elon Musk told reporters at the same event that the world must continue to extract oil and gas to sustain civilisation, while also developing sustainable sources of energy.”Realistically I think we need to use oil and gas in the short term, because otherwise civilisation will crumble,” Musk said. More

The government has unveiled a series of policies this year to support the COVID-ravaged economy.”This year, in response to new challenges, we decisively launched a package of policies and follow-up policies to stabilise the economy, with the strength exceeding 2020,” Li was quoted as saying.Last week, the cabinet announced 19 new policies, including raising the quota on policy bank financing tools by 300 billion yuan ($43.4 billion). That was on top of a package of 33 measures unveiled in May.Beijing will seek to cut red tape, stabilise employment and prices, and keep economic operations within a reasonable range, Li said.China’s economy narrowly escaped a contraction in the June quarter. Economic activity rebounded that month but slowed in July, raising pressure on policymakers to step up support.With no sign that the government is planning to ease its tough “zero-COVID” policy, some private economists expect the economy to grow by about 3% this year, which would be the slowest since 1976 – excluding 2020’s 2.2% expansion during the initial COVID outbreak.($1 = 6.9165 Chinese yuan renminbi) More