Economy

BERLIN (Reuters) -German Chancellor Olaf Scholz is to testify in front of lawmakers on Friday over his role as Hamburg mayor in tackling a multibillion-euro tax fraud in a case that threatens to tarnish him even as he battles multiple crises.In the scheme of “cum-ex” or dividend stripping, banks and investors would swiftly trade shares of companies 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 under the mayorship of Scholz at demanding repayment of millions of euros gained under the scheme by local bank Warburg.Warburg, which plays a big role in Germany’s second largest city, eventually paid its tax bill of around 50 million euros ($50.31 million) after the federal finance ministry intervened.The case threatens to undermine the chancellor even as he is trying to hold his fractious coalition together in the face of public discontent over soaring energy inflation.His popularity is already lagging that of his economy and foreign ministers, while just 58% of Germans think he is doing a good job compared to an average of around 70% for his predecessor Angela Merkel during her 16 years in office. His Social Democrat Party (SPD) meanwhile has slipped into third place in polls behind the opposition conservatives and junior coalition partners the Greens.”It all stinks to high heaven and simply cannot have happened without political influence,” Richard Seelmaecker, representative of the opposition conservatives on the committee, told broadcaster NTV.Scholz, who has dismissed suggestions of any impropriety in his handling of the affair, is due to face a Hamburg parliamentary committee of inquiry investigating the matter in a hearing on Friday from 1400 CET (1200 GMT). “This has been an issue for two and a half years now,” Scholz recently told reporters. “Countless files have been studied, countless people have been heard. The result is always: There has been no political influence.”200,000 EUROS IN A SAFEFinance Minister Christian Lindner, from the junior coalition party, the pro-business Free Democrats, which is also lagging in polls, lent the chancellor his support.”I have always understood Olaf Scholz to be a person of integrity, whether I was in the opposition or as now in government – and I have no reason to doubt that now,” Lindner told the Rheinische Post newspaper.Prominent Greens have kept quiet on the affair after criticising Scholz about it while in opposition.Recent headlines that prosecutors probing the scheme in Hamburg discovered 200,000 euros in the safe of a local politician from Scholz’s ruling Social Democrats reignited suspicions of political intervention on the bank’s behalf.Scholz has denied any knowledge of this cash or its origin and said he no longer has contact with the lawmaker involved. The lawmaker did not respond to a request for comment.The chancellor already faced Hamburg lawmakers last year and acknowledged then having a series of meetings with the then chairman of Warburg but said he could not recall details.”He only admits what can be proven,” said Seelmaecker.One of the prosecutors’ recent findings is a discrepancy between the many calendar entries of Hamburg authorities mentioning the Warburg bank and “cum-ex” and the few emails on the topic, Der Spiegel magazine wrote, citing the prosecutors report.”This suggests a targeted deletion(of emails),” Spiegel cited the report as saying.A representative for corruption watchdog Transparency International Stephan Ohme said it was simply implausible that Scholz could not remember his discussions with the Warburg chairman. “Scholz should moreover show what he actively did to tackle Warburg’s involvement in Cum-Ex transactions” he told the Funke media group. “It is his political responsibility.” ($1 = 0.9939 euros) More

LONDON (Reuters) – Britain’s slide towards a recession has gathered momentum after data this week showed inflation jumping above 10%, wages lagging far behind price growth and consumer confidence sinking to a record low.The deteriorating picture for the world’s fifth-biggest economy comes after the Bank of England warned this month of a 15-month contraction from the end of this year, worse than the outlook for other big European economies and the United States. Higher-than-expected public borrowing figures on Friday underlined the hard decisions facing the next prime minister about how to expand help for the poorest households, which has so far fallen short of support given by most other European governments.The stakes were laid bare by a warning from public healthcare providers that Britain faced a “humanitarian crisis” as soaring energy prices put many poorer Britons at risk of physical and mental illness.”Many people could face the awful choice between skipping meals to heat their homes and having to live in cold, damp and very unpleasant conditions,” Matthew Taylor, chief executive of the NHS Confederation, said.The scale of the hit to households from their energy bills will become clearer next Friday when regulators announce the latest leap in the cap on electricity and gas tariffs, which have surged since Russia’s invasion of Ukraine.Already almost double their levels of a year ago, the tariffs could double again by early next year. Next week’s announcement comes against the backdrop of a record fall in wages, excluding bonuses and adjusted for the jump in inflation which has hit 10.1%, its highest level since 1982.Consumers provided some relief from the flow of bad economic news as data on Friday showed retail sales volumes unexpectedly edged up in July.However, the increase was largely driven by online discounts, and real-time figures on spending using debit and credit cards have shown a big drop in spending in early August.Retailers say they are already deep in crisis mode.”For many businesses, 2022 is proving to be every bit as challenging as the pandemic,” Helen Dickinson, chief executive of the British Retail Consortium, said.BANK OF ENGLAND IN A BINDSoaring inflation and the Bank of England’s forecast of a long – albeit relatively shallow recession – have heightened the dilemma facing the central bank.It has already raised interest rates six times since December, slowing momentum in the economy, but signs of broadening inflation pressures have prompted economists to raise their forecasts for further hikes in borrowing costs.Analysts at Investec said on Friday they now expect the BoE to raise rates by half a percentage point for a second time in a row in September followed by a final quarter-point increase in November, before it cuts rates in 2023 to ease the recession.Investors are also ramping up their bets on higher borrowing costs in Britain. Two-year British government bond yields on Friday hit their highest since November 2008, midway through the global financial crisis, and the spread over equivalent German bonds was the widest since March this year. With the BoE determined to show its critics that it will bring inflation under control by raising rates, the focus is turning to whoever wins the race to replace Boris Johnson as prime minister next month.The front-runner, Foreign Secretary Liz Truss, has said she will cut taxes. The other contender, former finance minister Rishi Sunak, says that risks fuelling inflation. He prefers more direct and more targeted support.Samuel Tombs, chief UK economist at Pantheon Macroeconomics, estimates that if Truss wins, the budget deficit could hit 170 billion pounds ($201.18 billion) in the current financial year.That would be up from 144 billion pounds last year and triple its size before the pandemic, but smaller than borrowing of 309 billion pounds in the 2020/21 year during the depths of the coronavirus crisis.Significant extra borrowing looks likely whoever enters Downing Street.Andrew Goodwin, chief UK economist at Oxford Economics, said that provided support measures are temporary they would not hurt Britain’s long-term fiscal outlook.”There’s plenty of room for the next prime minister to offer that support and ultimately if they don’t, that’s a political choice,” Goodwin said. “It’s not something that’s forced on them by the public finances.”($1 = 0.8450 pounds) More

China’s key activity indicators showed the economy unexpectedly slowed in July, raising the heat on policymakers to ramp up measures to cope with headwinds including a resurgence of local COVID-19 cases and a slowing global economy.China will consolidate its economic recovery and keep economic operations within a reasonable range, state media quoted the cabinet as saying after a regular meeting chaired by Premier Li Keqiang.”At present, the economy continues to recover its development trend, but there are still small fluctuations,” the cabinet was quoted as saying.”It is necessary to strengthen targeted financial and monetary policies to support the real economy, further consolidate the foundation of economic recovery, maintain the economic operation within a reasonable range,” it said.Policy insiders and analysts told Reuters that China’s central bank (PBOC) is set to take more easing steps, though it faces limited room to manoeuvre due to worries over rising inflation and capital flight.China is widely expected to lower its benchmark lending rates on Monday, a Reuters survey showed.China will improve its market-based interest rate regime and support a rebound in effective credit demand, the cabinet said, adding that authorities will lower financing costs for enterprises and credit costs for consumers.It also said China would extend an exemption of purchase taxes on “new energy” vehicles to the end of 2023 as part of the measures to boost domestic consumption. More

LONDON (Reuters) – The U.S. dollar index surged on Friday and was on track for its biggest weekly gain since April 2020 on safe-haven demand, as investors worried about a further economic slowdown after Federal Reserve officials reiterated the need for higher rates. The dollar index rose 0.5% to 108.01, its highest since July 15. The gauge is on track for a 2.2% rally this week, which would be its best weekly performance in more than two years. Sterling tumbled 1% to $1.1839 on the day and was set for its biggest weekly decline against the dollar since September 2020, as worries around Britain’s economic slowdown intensified.The euro, down 0.4% to $1.0053, was on course to decline 2% since last Friday, which would be its worst week since July 8. “The U.S. dollar is again on the front foot this morning supported by another round of hawkish Fed speak … the overall tone of Fed officials suggests that the Fed still has a lot of work to do to contain inflation,” said Jane Foley, head of FX strategy at Rabobank in London. St. Louis Fed President James Bullard, San Francisco Fed colleague Mary Daly and Kansas City Fed President Esther George all said continuing to hike rates in a bid to fight inflation would be reasonable.Weakening Chinese data this week and an energy crisis in Europe are raising fears of further economic slowdown, which have also hit European currencies and supported safe-haven flows, Foley added. “We expect another break below parity,” she said. [FRX/]British consumer sentiment in August fell to its lowest since at least 1974, a survey showed, as households feel “a sense of exasperation” about soaring costs as inflation hit double digits.INFLATION WORRIES Official data also showed Britain borrowed more than expected in July, underscoring the challenge facing the country’s next prime minister over how to provide more support to consumers.Money markets now expect the Bank of England to raise interest rates to almost 4% by March. [IRPR]European Central Bank board member Isabel Schnabel fueled inflation worries by saying consumer prices could still accelerate in the short term. Yet despite the Fed chorus on the need for higher rates, the odds of another supersized 75 basis point hike next month have receded to 45% in money markets.Fed Chair Jerome Powell will update the market on his views at the annual Jackson Hole symposium on Aug. 25-27.Against Asian currencies, the greenback was up 0.8% to 137.02 yen, after touching its highest since July 27. China’s yuan slipped to its lowest since September 2020 at 6.8168 per dollar in onshore trading after the central bank set a much-weakened midpoint guidance, with traders expecting further downside due to an economic slowdown.In cryptocurrencies, bitcoin fell 8.7% to $21,437. Ether was down 7.75% to $1,700. “Weakness has seeped into the crypto sphere as speculators retreated from highly risky assets amid expectation that higher interest rates were set to linger for much longer,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. More

The Sept. 15 summit, dubbed “United We Stand,” will bring together officials, faith leaders and civil rights groups and feature a keynote speech by Biden, who will put forward a shared vision for a more united America, White House Press Secretary Karine Jean-Pierre said in a statement. “Even as our nation has endured a disturbing series of hate-fueled attacks, from Oak Creek to Pittsburgh, from El Paso to Poway, from Atlanta to Buffalo, Americans remain overwhelmingly united in their opposition to such violence,” Jean-Pierre said. Biden, a Democrat, is seeking to highlight his recent legislative wins, including a gun safety law he signed in June, ahead of November midterm congressional elections.Most forecasters give Republicans a strong chance of taking the House and see the Democrat-controlled Senate as up for grabs. Republican control of one or both chambers could thwart much of Biden’s legislative agenda for the second half of his four-year term. More

Benchmarks are used by asset managers to pick investments for clients, helping to channel millions of euros into sustainable funds and projects, but the criteria behind them vary widely, leading to claims of “greenwashing”.The absence of clear labelling “raises questions on the inclusion of firms with a negative environmental or social impact in these benchmarks,” the European Securities and Markets Authority (ESMA) said in a statement on Friday.ESMA was responding to a public consultation from the EU’s executive European Commission on updating rules for benchmarks.Specifying minimum methodology standards should underpin an EU quality label, ESMA said.”Further, ESMA believes that the introduction of an EU ESG benchmark label would be an extra supporting tool against greenwashing.”Compilers of ESG benchmarks based outside the EU should comply with EU rules and supervision if they want investors inside the bloc to use them, in order to minimise the risk of greenwashing and regulatory arbitrage, the watchdog said.The commission is expected to set out proposed changes to the rules in due course, which would likely need approval from the European Parliament and EU states. More

LONDON (Reuters) – European stocks fell on Friday and German government bond yields hit multi-week highs after German producer prices saw their biggest rise on record.Asian stocks had struggled to find direction, with concerns about China’s sputtering growth weighing on sentiment. Earlier this week, China unexpectedly cut key lending rates in an attempt to revive demand after data showed the economy unexpectedly slowed in July amid a zero-COVID policy and property crisis.European stocks opened in the red and sentiment was further hit by data showing German producer prices – a leading indicator for inflation – saw their highest ever increases in July, as energy costs continued to surge. Energy prices were up 105% compared with July 2021, mainly due to higher prices for natural gas and electricity. Natural gas prices had hit a record closing high on Thursday.Germany’s finance ministry said on Friday that the economic outlook for Europe’s largest economy is gloomy. Meanwhile, UK consumer sentiment hit its lowest since at least 1974 in August, with households feeling “a sense of exasperation” about the rising cost of living.British retail sales data for July came in higher than expected, driven by a surge in online spending, but volumes are expected to resume their decline as costs rise.The Bank of England has warned that high inflation is likely to tip Britain into a recession later this year.”All three of the world’s major economic engines – the US, Europe and China – are spluttering,” wrote Berenberg economists in a note to clients.”While China struggles with its unsustainable zero-COVID-19 policy and a host of internal financial imbalances, an inflation tsunami is battering the US and Europe.””Consumers across the Western world have seldom been more pessimistic.”At 1040 GMT, the MSCI world equity index , which tracks shares in 47 countries, was down 0.3%.Europe’s STOXX 600 was down 0.4%, on track for a 0.4% weekly decline, too.German bond yields rose, with the 10-year yield reaching a one-month high of 1.202%, as the producer price data was seen as reinforcing fears of “stagflation” – a combination of high inflation and low growth.Wall Street was set to open lower, with S&P 500 futures down 1% and Nasdaq futures down 1.2%.”When market participants start to return from their holidays and look back at the past days and weeks, they will find central banks still far from having achieved their goals of reining in inflation,” ING rates strategists said in a note to clients.”That means a continued tussle between central bank tightening expectations and recession fears.”The threat of higher borrowing costs also hung over markets after four U.S. Federal Reserve officials signaled there was more work to do on interest rates. The U.S. dollar benefited from the Fed’s hawkish comments, and investor caution, hitting a one-month high. The dollar index was up 0.4% at 107.9 and the euro was down 0.3% at $1.0061.The 10-year U.S. Treasury yield climbed higher, close to a one-month high at 2.9335%.Oil prices slipped after two days of gains, set for a weekly drop as traders worried about a global demand slowdown.Bitcoin dropped sharply and hit a three-week low of $21,404.Next week, investors will be paying close attention to minutes from the European Central Banks’ July meeting, as well as comments by U.S. Federal Reserve Chair Jerome Powell when he addresses the annual global central banking conference in Jackson Hole on Aug. 26. (LINK)China is widely expected to lower its benchmark lending rates on Monday, a Reuters survey showed, with a vast majority of participants predicting a deeper cut to the mortgage reference to lift the ailing property sector.UK and euro area “flash” PMI data is due on Aug. 23. More

High levels of inflation will ensure a large overshoot in government borrowing this year, economists said on Friday, as the deficit was again higher than expected in July Although the UK public finances improved in July from a particularly weak reading in June, the data from the Office for National Statistics was still significantly worse than the fiscal watchdog had expected for the month.The figures will put further pressure on the Conservative party leadership candidates, Liz Truss and Rishi Sunak, to explain how they will finance their plans for large tax cuts when the public finances are deteriorating. Public sector net borrowing came to £4.9bn last month, an improvement of £800mn compared with July 2021 and far better than the £20.9bn deficit in June, according to the ONS. But the decline between June and July was expected because the government did not have big debt interest bills to pay last month, and the level of borrowing was still £4.7bn higher than the Office for Budget Responsibility, the spending watchdog, had forecast for the month. Martin Beck, chief economic adviser to the EY Item Club, said the government was set to continue missing OBR forecasts for the rest of the financial year, which ends next March. “This is likely to reflect the slowdown in economic activity in the first half of 2022, while on the expenditure side the impact of much higher-than-expected inflation on debt interest payments has been key,” he said. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the OBR’s forecast of £99bn public borrowing in 2022-23 was likely to be revised higher to £150bn, mostly reflecting the higher cost of inflation-linked debt. He also noted that the current bout of inflation would not help to boost government coffers much because it was the “wrong type” for the public finances because food is zero rated for VAT, and electricity and natural gas consumption incurs only a 5 per cent rate of VAT. “As a result, the reallocation of households’ expenditure from other goods and services towards food and energy will act as a drag on overall tax receipts,” Tombs said.Ministers will be relieved that tax receipts held up well in July, with the government collecting £78.2bn in revenues over the month — £6.1bn more than a year earlier. But Chancellor Nadhim Zahawi acknowledged that high inflation was “putting pressure on the public finances by pushing up the amount we spend on debt interest”. The Treasury cautioned that there was not much comfort to be taken from July’s figures being stronger than June’s because at a time of elevated inflation there would be significant volatility in the monthly data.Alison Ring, public sector and taxation director for the Institute of Chartered Accountants in England and Wales, said: “The UK’s deteriorating fiscal situation will make it hard for the new prime minister to deliver on promised tax cuts, invest in energy resilience and support struggling families and businesses over the winter without breaching fiscal rules intended to ensure the long-term health of the public finances.”Both Truss and Sunak have promised an emergency Budget to flesh out the energy price support and tax cuts they will offer soon after one of them is elected to be the new UK prime minister.

Sunak’s leadership campaign said the public finance figures highlighted “why gripping inflation must be the priority. “The figures show that inflation is causing the economy to slow and the deficit to increase. Permanent and unfunded tax cuts now would make both of these problems a lot worse,” a spokesperson said.Officials at the Treasury and the OBR have indicated that they will be ready to provide new medium-term forecasts to inform any emergency Budget, which will prove uncomfortable reading if independent economists’ predictions for the public finances are an accurate guide to the fiscal watchdog’s thinking. Additional reporting by Sebastian Payne More