Economy

The coronavirus pandemic dealt the UK economy a larger blow than previously estimated, according to official data on Monday that showed the country recorded its biggest fall in growth in gross domestic product since 1709.The Office for National Statistics said it had revised down annual volume GDP growth in 2020 by 1.7 percentage points, meaning that it fell by 11 per cent, the largest in more than 300 years and the worst recorded among G7 countries.Craig McLaren, ONS head of national accounts, said “the updated estimates for 2020” showed that “overall, the economy fared worse than we initially estimated”. The revision means that the economy could now be smaller than initially estimated, and could suggest that the UK faced a cost of living crisis before it managed to recover fully from the hit of the pandemic.Because of the downward revision for 2020, “growth in 2021 and 2022 will be starting from a lower point than we previously estimated”, added McLaren. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that, assuming growth rates since the fourth quarter of 2020 are not altered, the revision implied that GDP in the second quarter of 2022 was 1.7 per cent below its peak in the fourth quarter of 2019, rather than 0.6 per cent above it.“The UK economy’s structural problems, therefore, look even worse than before, with output still well below levels before Covid struck, despite very low unemployment and significant increases in government spending,” said Tombs.Even before the revisions to the 2020 data, the UK’s economic recovery was lagging that of other countries. In the second quarter of this year, output in the US was 2.5 per cent above pre-pandemic levels, while eurozone output was 1.4 per cent larger.In 2020, Covid-19 restrictions resulted in a sharp drop in output in most countries, but the double-digit fall registered in the UK compares with contractions of between 3.4 per cent and 5.2 per cent in the US, Canada, Japan and Germany. The ONS’s revision could also lead to the Bank of England’s already bleak economic forecast proving optimistic, unless there are upward revisions to the latest data or forecasts.The BoE this month forecast that by the third quarter of 2025, the latest forecast period, the UK economy would be 0.8 per cent smaller than before the pandemic. This is because the central bank expects the economy to enter a prolonged recession from the end of this year as a result of inflation, which it forecasts to reach 13% in the autumn. But its estimates were based on stronger growth rates in each quarter of 2020 than the revised ones.

The ONS now forecasts that the economy fell 21 per cent in the second quarter of 2020, rather than by 19.4 per cent as estimated previously. It also revealed that the GDP contraction was marginally larger in the first three months and the recovery weaker in the third and fourth quarters of 2020.The revised data showed the health sector performed worse than previously calculated. Retailers and wholesalers also sold less than initially thought during the pandemic. Meanwhile, manufacturing output is now estimated to have notched up 0.1 per cent, revised up from a previous 8.9 per cent fall.However, Martin Beck, chief economic adviser to the EY ITEM Club, warned that it might be too early to judge the status of the economy as the ONS had yet to calculate the implications for 2021 and 2022.“Eventually, the ONS is likely to say that while the downturn was deeper in 2020, the recovery afterwards was stronger, essentially keeping things in the same place as before,” he added. More

The central bank lifted its key rate to 2.0% from 1.25%, continuing a tightening cycle that began in April when policymakers first raised the rate from 0.1% — an all-time low where it had stayed for the prior 15 decisions since a 0.15 point reduction at the outset of the COVID-19 pandemic.Israel’s annual inflation rate reached a fresh 14-year high of 5.2% in July, well above the government’s 1%-3% annual target range. At the same time, Israel’s economy grew an annualised 6.8% in the second quarter from the first quarter.”The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment,” the Bank of Israel said in a statement. “The (monetary policy) committee has therefore decided to continue the process of increasing the interest rate.”The central bank has one more scheduled interest rate decision, on Oct. 3, before a Nov. 1 general election. More

HONG KONG (Reuters) – China on Monday lodged a “stern representation” over the visit of the governor of the U.S. state of Indiana to Taiwan, its foreign ministry said in a statement.Governor Eric Holcomb is making the third trip to Taiwan this month by a U.S. delegation after U.S. House Speaker Nancy Pelosi visited briefly, infuriating China, which views Taiwan as its own territory. More

HONG KONG (Reuters) – Major Chinese financial institutions will have to lead the way in maintaining the stable growth of total loans and protecting the reasonable financing needs in the real estate sector, China’s central bank said in a statement on Monday.In a meeting called by the China central bank and attended by state-owned banks, financial institutions were urged to step up financial support on key areas such as network infrastructure and platform economy, the statement said. More

Hello and welcome to Trade Secrets. This week’s newsletter comes from a sweltering Brussels. Alan will be back for the next edition on September 5.The dispute between the US and the EU about subsidies for electric vehicles tells you a lot about how they view climate change. For Brussels, it is an existential danger to the planet requiring global action involving some short-term economic pain to prevent worse in the longer term.For the Biden administration, it is an existential danger that provides a chance to favour domestic industries and erect trade barriers against China. Climate policy as industrial policy, if you will.“Folks, when I think about climate change . . . I think jobs,” said US president Joe Biden last month. Given the threat of a Donald Trump run for re-election in 2024, he rarely thinks of anything else. “We have to outcompete China and the world, and make these [low carbon] technologies here in the United States — not have to import them.”His Inflation Reduction Act, passed by Congress on August 12, would restrict the $7,500 bung consumers get for buying an electric vehicle to those assembled in North America. Canada and Mexico were originally excluded, but the nature of supply chains built up under the North American Free Trade Agreement (now renegotiated as USCMCA) and Ottawa’s complaints changed the policy.It also links the subsidy to vehicle batteries whose critical minerals are produced or recycled in the US or countries with which the US has a preferential trade deal. By 2026, the level required will hit 80 per cent.EU gripes did not have the same effect as Canadian ones, despite Biden’s clear goal of restoring relations eroded by Trump’s “America First” policies. Brussels has called on Washington “to remove these discriminatory elements from the bill” as they “appear to violate WTO rules” by discriminating between foreign and domestic manufacturers. It points out that its own subsidy schemes are available to vehicles made anywhere.The US may have learned lessons from this approach. From the late 1990s, the German government paid feed-in tariffs to generators of renewable energy — paid for by consumers — in a green push that eventually became the Energiewende, the “energy turnround”.Energy expert Daniel Yergin noted in his book, The New Map: “While the solar market created by the Energiewende may have been in Germany, the panels could come from anywhere.”“In time, most of them would come from the new solar juggernaut that would rise in China and eventually extinguish German manufacturers.”Chinese national and local governments provided cheap land, low-cost loans and other subsidies to foster a photovoltaic panel industry. Between 2010-18 its capacity increased fivefold, swamping the market and even threatening the Chinese industry’s own survival. Beijing’s response was to install solar energy at home. By 2017, it accounted for half of global demand.Trade purists would defend the German approach as the best way to keep costs down. But the rise of populism has led many governments to prioritise domestic industrial jobs over lower prices. They also fear overreliance on certain countries that could impose controls for political reasons — as Russia has done by turning down gas taps to the EU.As a recent paper from the Peterson Institute in the US found: “These risks become clear when comparing the supply chains of carbon-based energy and clean energy. “For oil and gas, the United States dominates the supply chain (upstream, refining, and consumption). In contrast, the United States is only a minor player in the supply chains of clean technologies, in which China is the dominant actor.”Within the EU, France shares the US view. But many liberal, free-trading members are happy to prioritise imports. Thierry Breton, the French EU commissioner, wants the billions to be spent on the green transition to boost industries. He notes the EU imports from China 98 per cent of the rare earths used in electric vehicles, wind turbines and rockets and relies on a few countries for lithium, copper and other vital green resources. He told Trade Secrets he would launch a plan later this year to include mining, processing and recycling minerals domestically. “There is no point in extracting all these raw materials in Europe or obtaining them through strategic partnerships if they are then sent to the other side of the world to be processed. And then sold back to us in finished products.”Overall EU-US trade relations have warmed under Biden. The long-running dispute over subsidies for aircraft makers Airbus and Boeing was parked. A deal was struck on a global minimum tax, leading European governments to drop their digital taxes on US tech groups. And the US suspended Section 232 tariffs on EU aluminium and steel. The two sides also set up a Trade and Technology Council to discuss aligning regulation.Next year might be trickier. Washington lifted the steel tariffs until the end of 2023 pending a deal on a mechanism to put tariffs on Chinese steel, which is more carbon intensive. But negotiators have yet to find a way to make this WTO-compliant.The EV tax credit sidelined the TTC entirely. It was not mentioned to EU officials at the meeting in May. The next meeting is not yet in the diary.Brussels also sees China as a necessary ally in fighting climate change, and is reluctant to join the US effort to frame everything as part of its rivalry with Beijing. Adam Hodge, spokesman for the US Trade Representative, said: “The [Inflation Reduction] bill provides strong incentives to reduce our dependence on China for the critical materials that will power this key industry, and we look forward to working with allies and partners to advance our climate goals, strengthen and diversify our supply chains, and address our shared concerns with China’s non-market policies and practices.”Jonathan Branton, a subsidy expert at law firm DWF, said the bill was a “prima facie breach” of WTO local content agreements. Few in Brussels are seeking a direct confrontation with Washington, however.Other countries could bring cases (including China, though it might not want to open its own can of subsidy worms), but they are more likely to use diplomatic lobbying as the first step, he said.Indeed, there could be pushback from the US car industry itself. Only about 20 models are eligible for the tax break — here’s a list — and probably none will meet the battery requirements that kick in from 2024.EU car manufacturer lobby group ACEA points out that it is unrealistic to expect any carmaker to build a localised battery supply chain in a year. US policy might be based on wishful thinking, leading to a softening of approach when reality bites.Charted watersHave fertiliser prices passed their peak? Six months into Russia’s war in Ukraine, the disruption to the supply of commodities is still weighing on farmers around the world. Growers have cut their fertiliser usage to ease some of the pain, but the crisis is far from over. Today’s chart shows how fertiliser prices have steadily risen since mid-2020, hitting record highs after western sanctions against Moscow curbed Europe’s supply of natural gas, which makes up 15 per cent of global crop nutrient supplies. My colleagues Andres Schipani, Emiko Terazono and Heba Saleh explain the realities of reduced crop production on the world’s poorest continent, Africa, which has already been facing droughts across regions. As nations face shortfalls in food, the shadow of social unrest looms. (Jennifer Creery)Trade linksTo find out more about how China dominates the supply chain for raw materials used in electric cars, read this on how Ganfeng Lithium is dealing with political pressure from Beijing and Washington.The US and Taiwan have begun formal trade talks, putting further strain on relations with China. China believes it has sovereignty over the island and has increased military activity nearby since US House Speaker Nancy Pelosi visited this month.Exports to Russia from Turkey, which has not joined western sanctions over the war in Ukraine, are up by nearly half. Western diplomats believe Turkish companies are filling the gap left by sanctions and blunting their impact.Trade Secrets was edited by Jennifer Creery today. Jonathan Moules will be back next time. More

HIGASHIOSAKA, Japan (Reuters) -The small factories in the western Japanese city of Higashiosaka for decades fuelled the thundering rise of the country’s biggest brands – but a weak yen and rising costs have accelerated a slow decline, and are reshaping the industrial heartland.Home to about 6,000 firms, 87% of which have fewer than 20 employees, the city is emblematic of how such forces are pushing Japan’s small manufacturers toward a tipping point. The workshops in Higashiosaka create metal components for everything from train seats to ballpoint pens, and have long relied on powerhouses such as Sharp (OTC:SHCAY), Panasonic (OTC:PCRFY), and Sanyo for orders.Now Sanyo is gone, acquired by Panasonic. Work in general has dried up in recent years in the face of competition with South Korea and China; when Taiwan’s Foxconn acquired Sharp in 2016, it moved much of the company’s manufacturing out of Japan.The amalgam of issues that Higashiosaka faces – an ageing population, offshoring, and a sagging currency – mirrors the problems that have been chewing at the foundation of the world’s third-largest economy and its global exports, which hit 83.1 trillion yen ($610.54 billion) last year.One factory in the city, aircraft component manufacturer Aoki, is pivoting to the food industry after being hit hard by the pandemic. Another, air drill parts maker Katsui Kogyo, raised prices for the first time since it started business in 1967. Lampshade company Seiko SCM scaled back its production and is seeking to revive Higashiosaka’s manufacturing industry by converting part of its headquarters to shared working space.”It’s like being the frog being slowly boiled alive,” said Hiroko Kusaba, CEO of Seiko SCM. “We all believed that the big brands would always protect us, but that’s just not the case anymore.” HUMAN CONNECTIONIn the past six months, the value of the Japanese yen has plummeted from about 115 yen to the dollar in early March to more than 130 yen in August. Although a weak currency boosts export profits, past a certain point it makes materials cost so much they wipe out that benefit.The pain of COVID lingers as well: 67% of the small firms in Higashiosaka say they are still hurting from the pandemic, according to a survey conducted in April by the local chamber of commerce.For these companies, weathering the economic storm isn’t just about surviving, but preserving the industrial ecosystem.Small- and medium-sized enterprises account for 99.7% of companies and 68.8% of employment in Japan. But these same companies represent only 52.9% of the economy, according to a 2016 government survey, the most recent data available.The region around Higashiosaka has a history as a manufacturing hub dating back hundreds of years. The city still has industrial enclaves where tiny factories are wedged between houses, hammering, sawing and shaping metal from early morning to dusk.That mishmash of production has given rise to human connections and a sense of community, said Hirotomi Kojima, chief executive of Katsui Kogyo, the air drill company. That provides a crucial support network, but also makes it difficult to pass along higher costs.Kojima raised prices in October. Materials costs have soared since then, but he is hesitant to raise prices again, worried that he may lose longtime customers.They have asked favours of Kojima, such as splitting costs or “going easy” on price increases.”The closer I am to the customer, the harder it is to start that conversation,” Kojima said.Torn between protecting those ties or hurting his business, Kojima is seeking new clients for the first time in his 10 years as CEO. He often visits with Hironobu Yabumoto, a close friend who manages another air drill manufacturer. Although they are in direct competition, they pass each other orders and share clients.”We want the manufacturing industry and this culture to stay,” and that is a bigger priority than being the last one standing, Yabumoto said.SLOW DECLINEIn the past decade or so, both Kusaba and Kojima have seen at least one factory quietly close every year as ageing owners die, fall ill or shut down their heirless businesses.The surviving companies are close knit. Kusaba, who is not from the city, said the locals – such as the baker and rice seller – anchor her to the community. “And they come to me saying how business is down, how they had so many customers before when the manufacturing industry was thriving, and how times have changed so much,” said Kusaba, who has been CEO of Seiko SCM for 12 years.That is why she is turning her own business on its head to protect her bottom line and help manufacturers in Higashiosaka.In June, she reduced the die-cast department of her company to three people from six and decreased the amount of machinery. In its place, she is creating a co-working office space and opening a “shared factory,” where users can pay for access to machines and resources that will cut fixed costs and increase production.”The big brands, the big manufacturers – they’ve forsaken us,” Kusaba said. “Now, we need to communicate with the consumer directly. We only have ourselves to rely on.”Her decision means there will be more die-cast work for her competitors, but Kusaba said she would rather do that than watch the entire industry fall into ruin.”Competition isn’t the way to survival. We have to join forces instead,” she said.NON-ESSENTIALAoki, which was labelled “non-essential” during the pandemic, is trying to avoid being dragged down by an airline industry wrecked by COVID-19. CEO Osamu Aoki has pegged his hopes on a different arena: food manufacturing.He is designing and building a machine that processes meat. For now, it sits in the Aoki factory as workers fine tune the device. Although he predicts the food industry will provide more stability, Aoki is expecting his electricity bills to double in August – an 8 million-yen increase that will require a 4% jump in revenue to cover.Japan’s manufacturing has traditionally been dependent on selling value-added products, in which a weak yen boosts profits. But that no longer seems true, Aoki said.”I think it’s a reckoning,” said of the sagging currency. “It’s now the time to re-evaluate.”MANUFACTURING TRADITIONThe changes and experiments in Higashiosaka do not guarantee its survival, or that of Japan’s small-business culture. “We won’t see a total wipe-out if the factories can pass through the extra costs… but the longer (high prices) drag on, the harder it will be on them,” says Naohito Umezaki of the Higashiosaka Chamber of Commerce.He added that the city’s social fabric was already fraying as family-owned companies shut down for good; a top priority is finding people to take over and preserve the manufacturing tradition.At Aoki, 22-year-old Yuto Miyoshi sought advice from the CEO about whether to succeed his father in running the family welding business in a neighbouring city.”My father is often warning me of the hardships of running a business,” Miyoshi told Aoki.But he added that on one rare occasion his father had a bit too much to drink, and let slip what a succession plan would mean to him.”He said: ‘I would be so happy if you took over,'” Miyoshi said.($1 = 136.1100 yen) More

TOKYO (Reuters) – The Bank of Japan will likely cut its economic forecasts at its next quarterly review in October, as slowing global demand and a resurgence in COVID-19 infections hurt exports and consumption, the bank’s former top economist Seisaku Kameda said on Monday.Japan’s economic recovery is at a “critical juncture” as consumption appears to have stalled during the summer, dashing policymakers’ hope households will boost spending with savings accumulated during the pandemic, Kameda told Reuters.”There’s a chance consumption will stall or only barely grow in the third quarter,” as a renewed increase in COVID-19 cases and rising living costs hit households, he said. “The economy’s recovery from the pandemic may be under threat.”Kameda said the Bank of Japan (BOJ) may cut its growth forecast for the fiscal year ending March 2023 to 2% or lower, from the current forecast of 2.4%, made in July.The central bank may also slash its growth forecast for next fiscal year from the current 2.0% due to heightened prospects of a global economic slowdown, he said.Having headed the BOJ’s research and statistics department until April, Kameda is well versed in the bank’s crafting of its quarterly forecasts. He is now executive economist at a think tank affiliated with Japanese non-life insurer Sompo Holdings.On the price outlook, Kameda said Japan’s core consumer inflation may briefly reach 3% later this year due to soaring fuel and food costs.While inflation will moderate next year as the effect of energy costs dissipate, it may still hover around the central bank’s 2% target longer than expected as companies continue to pass on rising raw material costs to households, he said.”What we’re seeing is pure cost-push inflation, which could last longer than initially thought,” Kameda said. “It’s far from the kind of demand-driven inflation the BOJ is aiming for.”While Japan’s fragile economy will justify keeping monetary policy ultra-loose, the BOJ may see scope to make minor tweaks to its massive stimulus programme in the future, he said.Any such tweak could involve the BOJ’s interest rate targets and guidance on the future policy path, to give itself more flexibility to adjust monetary policy, Kameda said.”Moving interest rates a little bit won’t have a major impact on the economy,” he said.Under a policy dubbed yield curve control, the BOJ pledges to guide short-term interest rates to -0.1% and the 10-year government bond yield to around 0%. More

With its oversized industry heavily exposed to Russian gas, Germany is among the most vulnerable to any cut off in energy supplies and soaring costs are already weighing on output with more pain expected. “Declining economic output in the winter months has become much more likely,” the central bank said. “The high degree of uncertainty over gas supplies this winter and the sharp price increases are likely to weigh heavily on households and companies.”Russia has been curtailing gas exports in response to Western sanctions over its war in Ukraine and many if not most economists now see a German recession as an inevitability.High prices and a shortage of gas are already forcing Germany to curtail consumption, with energy intensive sectors from metal output to fertilizer production suffering heavily. Energy costs will meanwhile keep pushing inflation higher and a peak is unlikely before the autumn at around five times the European Central Bank’s 2% target.”Overall, the inflation rate could reach 10% in autumn,” the Bundesbank said. “The upside risk for inflation is high, in particular in the event of a complete stoppage of gas supplies from Russia.”This then raises the risk of rapid wage increases, especially given record low unemployment, which could perpetuate high inflation via a wage-price spiral, the Bundesbank warned.The ECB raised interest rates from record lows last month to fight off inflationary pressure but further hikes are almost certain as the price growth outlook is failing to improve. More