Economy

Egypt’s central bank governor has resigned as the Arab state struggles with a foreign currency shortage and the economic repercussions of Russia’s invasion of Ukraine, according to state-run media. President Abdel Fattah al-Sisi had accepted Tarek Amer’s resignation and appointed him as a presidential adviser, Egyptian state media reported. There was no announcement on who would replace him, with the bank due to hold a monetary policy committee meeting on Thursday. Amer had held the post since 2015 and was appointed for a second term four years later. But he had come under increasing pressure after foreign investors withdrew $20bn from local debt markets and global food and energy prices soared after Russia invaded Ukraine. In March, Egypt turned to the IMF for additional financial support and those negotiations are continuing. It is already one of the fund’s biggest borrowers, securing a $12bn loan in 2016 and about $8bn in loans during the coronavirus pandemic.The government was credited for making tough fiscal reforms to secure the IMF loan in 2016, including allowing the Egyptian pound to devalue, with the currency losing half its value. But Sisi’s regime has been criticised for expanding the role of the military across all spheres of the economy, putting off foreign investors and crowding out the private sector.Economists have also expressed concern about its dependence on foreign investor inflows to help finance its current account, and the central bank’s determination to keep the pound stable to attract portfolio investors.“Amer has maintained a stable currency to make sure foreign investors don’t make any losses, which has created a massive moral hazard trade where investors can just go in and know they aren’t going to make any FX losses,” said a banker. “And when things get tough they just withdraw their money. It happened in 2018 and in 2020 during coronavirus and again this year.”Greater exchange rate flexibility is believed to be one of the IMF conditions for a new loan package. The banker added that the central bank had also imposed new regulations that meant importers have had to use letters of credit. But banks have lacked the capacity to process all the letters of credit, causing a backlog that has created a shortage of some imported raw materials and luxury goods, the banker said. Jason Tuvey, an economist at Capital Economics, said that Amer’s resignation “points to a growing tension within policymaking circles on the best way to address the country’s external imbalances”.

“The fact that talks with the IMF have dragged is probably a sign that some officials are reluctant to follow through on the fund’s demands and would prefer to rely on support from the oil-flush Gulf economies,” Tuvey said. Gulf states, including Saudi Arabia and the United Arab Emirates, have pledged billions of dollars of investment and financial support to their traditional ally.Farouk Soussa, economist at Goldman Sachs, said that overall Egypt, the Arab world’s most populous nation and the planet’s biggest importer of wheat, had weathered the global downturn “much better than many other countries”.He added that it had benefited from high gas prices as an exporter, and that tourism, another important source of foreign currency earnings, had held up well. “But where Egypt has fallen down is on the financial side. It’s a victim of financial contagion, it’s a victim of a loss of confidence by the investor community and outflows from the financial system,” Soussa said. “What the foreign currency shortage has resulted in is the inability of the economy to finance imports and investment and that’s a real problem for them.”In a note, Amer said he resigned “to leave room for new blood to take responsibility and push forward Egypt’s successful development process under the leadership of the president”. according to state-run Al-Ahram media group. More

Toyota and Apple supplier Foxconn are among the companies that have suspended plant operations in south-west China as the region is buffeted by hydropower shortages caused by droughts and heatwaves.Sichuan, a province of 84mn people that generates the bulk of its electricity from hydropower, announced it would suspend energy supplies to factories in a number of cities as it braced for a week of temperatures that were forecast to hit highs of more than 40C, according to a government statement.Toyota said it had suspended operations in the province from Monday until Saturday, in line with the provincial restrictions. Foxconn, the world’s largest contract electronics manufacturer, also confirmed it had closed its Chengdu plant, which manufactures Apple Watches, iPads and MacBooks. The impact on production was “not significant so far”, the company added. Chinese media reported that electric vehicle battery maker and Tesla supplier CATL closed its Sichuan plant for the same period. CATL did not immediately respond to a request for comment.“Laptop and iPad or tablet makers, there [are] a lot in Sichuan and what we heard was [the eastern province of] Jiangsu was also facing some restrictions,” said Dan Nystedt, vice-president at TriOrient Investments, an Asia-based private investment company. Sichuan is also an important hub for lithium mining as well as production of solar panels. The power rationing has led to production halts at about 20 steel mills, while energy-intensive aluminium and zinc smelters have curtailed output, according to data provider Shanghai Metals Market.The Yangtze River, China’s largest and most important waterway, last week hit its lowest level on record for this time of year, according to the water resources ministry.The ministry said rainfall in the Yangtze basin had been 40 per cent lower than normal since July and that in some areas there had been more than 20 days without significant rainfall. China Three Gorges Corporation, the operator of the world’s largest power station, declined to comment on how water shortages were affecting its dam. It said on its website that it would seek policy support to mitigate the adverse impact of “the fluctuation of water inflow” on its operations.

The outages come as growth is slowing in the world’s second-largest economy. China’s gross domestic product expanded just 0.4 per cent in the second quarter as its strict zero-Covid policy — which institutes lockdowns as soon as outbreaks are discovered — hammered demand and closed businesses.Chinese premier Li Keqiang on Wednesday chaired a meeting with some provincial leaders, calling on them to shoulder responsibility for the country’s economic recovery at a “critical juncture for economic rebound”.Zhang Lilei, a tea farmer on an island in Lake Tai, one of China’s largest freshwater lakes in the eastern commercial hub of Suzhou, said villagers had resorted to buying pumps or carrying water in buckets from rivers and puddles to water their crops.“But we cannot pump water up to the hill of over 100 metres,” Zhang said. “If it isn’t raining anytime soon, all the tea trees on the hill will die. It will be all gone.” Additional reporting by Harry Dempsey in London More

Short-term UK government bonds sold off sharply on Wednesday as blistering inflation data lifted expectations for Bank of England rate rises, sending a measure of concern over Britain’s economic outlook to the highest level since 2008.Two-year gilt yields, which are sensitive to expectations for monetary policy, soared 0.24 percentage points in morning action to 2.39 per cent. Longer-term bonds came under softer selling pressure, with the 10-year yield rising 0.11 percentage points to 2.23 per cent.The moves left two-year yields trading more than 0.15 percentage points above their 10-year counterparts, the biggest “inversion” of Britain’s yield curve since the 2008 global financial crisis.James Athey, investment director at Abrdn, said the sell-off in two-year bonds “is telling us the market thinks the bank rate needs to go higher”. He added that “the reality is positioning has exacerbated this a lot . . . [due to] the not particularly hawkish stance of the Bank of England and the notion of a peak inflation stance”, where those who believed that the UK had already hit peak inflation were now selling their holdings on fears of a situation worse than expected.Investors typically demand higher borrowing costs for the risk of buying bonds maturing long into the future, meaning yield curves normally slope upward.An inverted curve is a sign that investors are expecting the BoE will need to increase interest rates sharply in the near term to tame inflation, something that is expected to trigger a contraction in future economic output.Following data on Wednesday that showed UK consumer prices climbed at an annual rate of 10.1 per cent in July — the highest inflation rate in more than 40 years and greater than economists’ consensus forecast — traders are now expecting 2 percentage points of BoE rate increases by May next year, with traders expecting a 0.5 percentage point increase at the next BoE meeting in September.A day earlier, markets were pointing to 1.6 percentage points of rate rises. The central bank has already increased its main interest rate from 0.1 per cent in November 2021 to 1.75 per cent this month.“Unless wage growth and hence underlying inflationary pressures moderate on their own without a rise in unemployment, UK policymakers are stuck between a rock and a hard place,” said Mike Bell, global market strategist at JPMorgan Asset Management. More

The UK’s rate of inflation jumped to 10.1 per cent in July, the first time it has registered a double-digit annual increase in more than four decades.Consumer price inflation, driven by higher food prices, rose from 9.4 per cent in June to its highest level since February 1982. The double-digit rate exceeded economists’ expectations that the rate would edge up to 9.8 per cent. With broad rises in prices across the UK economy in July, resulting in an inflation rate greater than in other G7 countries, the figures on Wednesday highlighted the difficult task the Bank of England faces to bring inflation down.The Office for National Statistics said that July’s increase in prices — 0.6 per cent in the month alone — was unusual because prices generally fall in July at a time of high street sales. Inflation last month was at its highest rate for any July since comparable monthly measures started in 1988, the statistical agency added.Grant Fitzner, chief economist at the ONS, said a “wide range of price rises drove inflation up again this month”.He noted that bread, dairy products, meat and vegetables were the goods that contributed the most to the increase in inflation; a knock-on effect was higher prices for takeaways. With chaos at airports and restricted supply of flights, the price of package holidays also rose much faster this year than in 2021.Food price inflation hit 12.7 per cent in July, the highest rate in the category for more than 20 years.The core rate of CPI inflation, excluding energy and food prices, also exceeded expectations in July, rising by 6.2 per cent, ahead of economists’ expectations of a 5.8 per cent rate.Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said this reflected “near-term momentum” in price rises and not falls in prices a year ago.While all advanced economies have seen a rise in inflation, it has been stronger in the UK than in other G7 countries and most European nations.This reflects the country’s greater use of gas, the underlying strong growth in spending last year, pay growth in the private sector rising above 5 per cent and the ease with which companies expect to pass on higher costs to customers.Many economists on Wednesday said the upward surge in inflation — along with robust wage growth in the second quarter — would stiffen the Bank of England’s resolve, encouraging the central bank to raise interest rates further and faster.

Luke Bartholomew, senior economist at Abrdn, said: “Given the strength of underlying inflation pressure, we continue to expect the Bank[of England] to deliver another 0.5 per cent interest rate increase at its next meeting.”With the BoE likely to raise rates, pressures on households will increase in the autumn as energy prices are set to leap again in October, although there has been some relief as a result of lower petrol costs this month.The BoE expects the rate of inflation to rise to more than 13 per cent in the final quarter of this year and stay high through most of 2023. Separate ONS analysis showed that poorer households were facing greater rates of inflation than those with higher incomes because they spent a bigger proportion of their budgets on energy and food, which were rising fastest in price. The hit to household living standards would take its toll on economic growth, economists said.Jamie O’Halloran at Pro Bono Economics, an organisation that advises the charitable sector, said the rapid rise in prices was “driving a punishing cost of living crisis, with the threat of recession looming ever nearer”. More

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Forty years ago today, former Salomon Brothers economist Henry Kaufman helped start one of history’s great bull markets. Known then as “Dr Doom” for his bearish views, he roused investors by changing his stance and forecasting a fall in interest rates after a punishing Federal Reserve campaign to tame inflation.Now 94, Kaufman remains focused on financial affairs and in a recent interview was sufficiently spry to hold forth at length on his book of last year, The Day the Markets Roared, which recounts his fateful rate call on August 17 1982. Asked how he was doing, he answered cheekily: “So far, so good.” His views on US monetary policy are less sanguine. He fears that today’s Fed under Jay Powell is failing to combat inflation with the resolve displayed by Paul Volcker, who aggressively raised interest rates while leading the central bank in the 1970s and 1980s.“I am still waiting for him to act boldly — ‘boldly’ means he has to shock the market,” Kaufman said of Powell. “If you want to change someone’s view, if you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face.”Kaufman said the Fed chair erred after he made his pivot on inflation last November. Months passed between the time Powell warned of “persistently higher inflation” and the start of Fed interest rate increases in March.“His forecast was right, his inaction was wrong,” Kaufman said.As a result, markets are facing a far different situation than they were when Kaufman distributed his legendary Salomon memo predicting that interest rates would head lower.“Today, the inflation rate is higher than interest rates. Back then, interest rates were higher than inflation rates. It’s quite a juxtaposition,” he said. “We have a long way to go. Inflation has to come down or interest rates will go higher.”Interest rates had already started falling before Kaufman issued his celebrated 1982 forecast, but it was his prediction of a sustained decline that moved the markets. His impact stemmed from his status as the late-20th century equivalent of a social media influencer. Kaufman was so renowned for his pessimism that once investors learned of his new view, stocks soared. Having touched a cyclical bottom only days before, the Dow Jones Industrial Average rose 38.81 points, or 4.9 per cent, to 831.24, its biggest point gain in history at that time. The 1980s bull market followed and — with several notable interruptions — stocks have climbed higher in the decades since. The Dow closed on Tuesday at 34,152.01.

“I had bearish views for a long time . . . When I changed my mind, it induced a reaction,” Kaufman said, adding it was hard to imagine a private-sector forecaster having that kind of impact today. “There were not many economists around. That gave me a distinct advantage.”Looking ahead, Kaufman’s inflation concerns make it harder for him to be as certain as he was in August 1982.“I wouldn’t say I’m bearish,” he said, noting that US equity prices “are not really far away” from their peak of last year and could be buoyed by further progress in the global fight against Covid-19. Rather, he said, it was difficult to make predictions in such “diffuse” circumstances.“Today, monetary policy is somewhat behind the curve,” Kaufman said. “Back then, monetary policy under Paul Volcker was ahead of the curve . . . He was in the process of turning around market expectations.” More

The landmark US climate, tax and spending law signed by president Joe Biden on Tuesday holds potential to spark an explosion of new renewable power projects across the country. Clean-energy executives, climate advocates and scholars have praised it, saying it is the first serious legislative attempt to tackle emissions that fuel global warming. But a host of obstacles may stand in the way. They range from tariffs and import controls that are driving up the cost of solar panels to state land-use laws over which the federal government has no control. The new law is “absolutely game changing”, said Jos Shaver, chief investment officer at Electron Capital Partners, a renewables-focused asset manager with $2.8bn under management. “[But] it’s an energy transition, not an energy switch. It’s not going to happen overnight and there’s going to be a lot of bumps in the road.” The Inflation Reduction Act will pump a record $369bn into clean energy. The Biden administration predicted that the law would allow the country to slash greenhouse gas emissions by 40 per cent from 2005 levels by the end of the decade, putting it within striking distance of its commitment to cut emissions by 50-52 per cent by 2030 under the Paris climate accord. Modelling by think-tanks broadly lines up with the administration’s estimates of emissions impact. For the most part these do not account for external forces that could delay projects, however. “The models generally assume that if something is economic, it will get built,” said Robbie Orvis at Energy Innovation, a climate policy think-tank. “And we know that in the real world there can be some friction in the system.”At the heart of the bill are tax credits to spur investment in and production of renewable power. While some of credits are not new they are long-dated with a 10-year horizon, while previous versions of credits repeatedly expired, requiring extensions at the eleventh hour. Now, the 10-year credits will give developers an unprecedented ability to make long-term plans for new projects, while a “transferability” mechanism that allows the credits to be bought and sold will expand options for financing projects. “It really opens the floodgates for us to expand the rollout massively of the pipeline of projects with a planning horizon that gives us certainty,” said Tom Buttgenbach, chief executive at 8Minute Solar, one of the biggest utility-scale developers. Some developers fret that other efforts to catalyse a domestic green energy manufacturing industry may slow the torrent. A Department of Commerce investigation into tariff circumvention by parts makers in south-east Asia — the source of most panels — is due this month. While the president has said any tariffs would not be enacted for at least two years, a lack of clarity makes it hard to plan ahead. The potential for retroactive tariffs along with supply chain snags drove down solar installations in the last quarter to their lowest level since the start of the coronavirus pandemic, according to Wood Mackenzie, a consultancy.“I need to know what my supply chain looks like in four to five years,” said Buttgenbach. “And the current environment is tariffs this week and investigation next week. It’s just a nightmare when you’re working on these billion dollar infrastructure deals.” Another new US law that bars imports linked to forced labour in China — a leading source for solar panels and components — has also caused confusion as customs agents have impounded some parts. Executives in the US’s nascent offshore wind power sector are anxiously eyeing a separate piece of legislation that would require them to use only American vessels and crews when installing turbines. That is a “real issue right now”, said Pedro Azagra, chief executive of Avangrid, which owns utilities and one of the biggest US wind developers. “It’s something that is not realistic. You do not have them and it will take some time to build them, some time to train the crews.”But most developers support the approach taken in the new climate law, which creates incentives for buying locally rather than forcing the issue. That will allow the development of a local industry over time. “When you have critical mass and you need things, it comes naturally,” Azagra said. The development of solar and wind farms at a scale that decarbonises the economy will require construction on vast swaths of land. A Princeton analysis found that meeting Biden’s goal of net zero emissions by 2050 would entail wind farms with a “visual footprint” on a land area equivalent to Illinois and Indiana combined, at a minimum. For solar farms, land at least the size of Connecticut would be needed.

Already, states such as New York that have aggressive renewable electricity targets have encountered resistance from some residents living near energy projects. In less renewables-friendly Ohio, lawmakers last year passed a law empowering counties to block solar and wind farms, with one saying that wind turbines “ruin the character” of a place. A recent study in the journal Energy Policy found that 53 utility-scale wind, solar and geothermal projects had been delayed or blocked between 2008 and 2021.Building new long-distance transmission lines will be needed to deliver electricity from remote wind and solar farms to urban areas. However, states also have power to block interstate transmission projects. A $1bn project to deliver Canadian hydroelectricity to Massachusetts recently hit the ropes, despite being federally permitted, after opposition in the state of Maine.Lengthy federal permitting procedures and lawsuits can also slow down transmission and other energy projects. As part of his crucial support for the climate bill, West Virginia senator Joe Manchin won commitments to pursue reforms to what he called a “broken” permitting process. With billions in incentives about to flood the market, some investors see states moving to ease onerous permitting rules. “Certain states will, I believe, as a result of this bill, seek to improve their processes because capital is mobile,” said Pete Labbat, managing partner at Energy Capital Partners, a private equity firm. “Our capital will seek to invest or to be invested in those areas where the permitting can be done in a streamlined manner or the environmental approvals can be obtained in a relatively straightforward way.” More

TOKYO (Reuters) – Japanese manufacturers’ business confidence improved in August after last month’s stall, while service-sector firms’ mood rose for a second month to the highest point in nearly three years, the Reuters Tankan poll showed.Although commodity inflation continues to squeeze profits, demand is returning, according to the surveyed companies in the world’s third-largest economy, which posted a rebound in April-June gross domestic product on Monday.The prospect for further recovery, however, is subdued on inflationary pressures, a domestic COVID-19 relapse and a murky supply outlook for key components like semiconductors.Manufacturers expected a slight improvement in the next three months, and service companies’ outlook index was flat in the Aug. 2-12 poll, which tracks the Bank of Japan’s (BOJ) closely followed “tankan” quarterly survey.”Economic reopening is under way and consumption appears to be picking up, although we’re not without the risk that more and more price hikes could chill consumers,” said a food manufacturing firm manager in the poll of 495 big and mid-sized companies, of which 256 responded.The Reuters Tankan manufacturers’ sentiment index advanced to 13 in August from 9 in the previous month, marking a seven-month high. The service-sector index rose to 19 from the prior month’s 14 and hit its highest point since October 2019.(For a detailed table of the results, click)Sub-indexes for manufacturers dealing in raw materials such as chemicals and oil refinery/ceramics saw double-digit increases, thanks to robust demand for semiconductor-related goods. Textiles/paper industries’ mood was down by 20 points on prolonged cost increases.The sub-index for transport equipment manufacturers was unchanged at minus 38, with some citing automakers’ production cuts and chip shortages as reasons for the stalling recovery.Among service-sector businesses, transport/utility firms and wholesalers led the improvement, in which multiple respondents said a weak yen is boosting overseas profits.The reading for “other services”, a category that includes restaurants and hotels, fell by 10 points, as face-to-face services took hit from Japan’s rapid COVID-19 resurgence late last month, although the government has not reinstated any restrictions.On the three-month forward outlook, manufacturers expected their mood to rise 2 points to 15 in November, whereas services firms projected that sentiment would remain steady at 19, the poll showed. More