Economy

FIGHTING* Russian forces fully occupied the eastern Ukrainian city of Sievierodonetsk on Saturday, both sides said, confirming Kyiv’s biggest battlefield setback for more than a month following weeks of some of the war’s bloodiest fighting.* Russian missiles struck a residential building and the compound of a kindergarten in central Kyiv on Sunday, killing one person and wounding five more, officials said, as Moscow stepped up its air strikes on Ukraine for a second day.* Russian missiles struck near the central Ukrainian city of Cherkasy on Sunday, killing one person and hitting a bridge that helps connect western regions with eastern battle zones, Ukrainian officials said.ECONOMY AND DIPLOMACY* U.S. President Joe Biden told allies “we have to stay together” against Russia, as world leaders met on Sunday at a G7 summit in the Bavarian Alps that will be dominated by war in Ukraine and its painful impact on food and energy supplies across the globe.* Russia edged closer to default on Sunday amid little sign that investors holding its international bonds had received payment, heralding what would be the nation’s first default in decades.* British Prime Minister Boris Johnson and French President Emmanuel Macron agreed to provide more support for Ukraine in its war with Russia, Johnson’s office said on Sunday as the leaders met on the sidelines of a Group of Seven summit.* Indonesian President Joko Widodo said on Sunday he will urge his Russian and Ukrainian counterparts to open room for dialogue during a peace-building mission to the countries because “war has to stop and global food chains need to be reactivated”.QUOTES* “At this stage of the war it’s spiritually difficult, emotionally difficult … we don’t have a sense of how long it will last, how many more blows, losses and efforts will be needed before we see victory is on the horizon” – Ukrainian President Volodymyr Zelenskiy.* “We can get through all of this and come out stronger. Because Putin has been counting on it from the beginning that somehow the NATO and the G7 would splinter. But we haven’t and we’re not going to.” – U.S. President Joe Biden. More

The UK is in the throes of the kind of labour unrest not seen for decades. This is visible in the railways, London Underground and British Airways. Teachers and other public sector workers may join in. The explanation for this is clear. Unanticipated inflation delivers losses everybody wants to recoup. This triggers social conflict.Yet if inflation is bad, so is the cure. Unless one believes it will magically disappear, the way to end entrenched inflation is via a period of below trend output and rising unemployment. This will be “stagflation” — a combination of high inflation with weak growth that lasts for some time and might require more than one tightening before it ends.Start with the inflationary process itself: how far is the inflation imported and how far is it due to excessive domestic demand?In the UK, the price level for goods other than energy and food has risen by 8 per cent over the past two years. The comparable figure in the US is 10 per cent. In the eurozone, however, it is only 4.7 per cent. This supports the view that the domestic inflationary dynamic in the UK (and US) has been stronger than in much of the eurozone.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The latest Economic Outlook from the OECD also shows that the inflationary process is now widespread in the UK. Thus, the proportion of goods and services with annual inflation running at over 4 per cent rose from 14 per cent to 66 per cent between April 2021 and April 2022. Finally, the ratio of unemployed workers to the number of vacancies was lower in the first quarter of this year in the UK than in the previous two decades. The US situation is similar.The OECD also forecasts that UK headline inflation will still be running at 4.7 per cent at the end of next year. Inevitably, then, people will seek to recover the large losses in their standards of living. This means that there will be strong pressure for higher wages. This pressure will be further strengthened by a growing lack of confidence in the Bank of England’s ability or determination to hit its inflation target. Contrary to what some in central banking circles believe, inflation targets are not hit because they are credible: they are credible because they are hit. But if wages do indeed catch up with past (and expected) rises in prices, a further spiral of domestically generated inflation will emerge, partly offsetting any diminution in the rate of imported inflation.In sum, in countries like the UK and US, the economy must be weakened enough to eliminate the domestic overheating and remove the likelihood of a destructive wage-price spiral.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

This raises two questions: how big a weakening will be needed and how is it going to be delivered?An optimistic view on the first question is that taking just a little bit of excess from the labour market will be enough to remove the risk of a domestic inflationary spiral. This seems highly improbable. Given the reductions in real incomes that have occurred, workers will expect and receive catch-up increases in wages in any reasonably robust labour market. It is likely that unemployment will have to rise substantially if this is to be limited.The answer to the second question depends on how far such a slowdown is going to happen anyway. The view that it will happen anyway notes the contractionary impact of higher prices of energy and food, fiscal tightening (in part because cash limits will bite in real terms), likely reductions in growth of credit as confidence deteriorates, falling asset prices and the war in Ukraine. Thus, the UK economy will be forced to slow down directly, but also indirectly, because the world economy has slowed. The OECD’s forecast for the UK for next year is for zero growth.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Will even more than this need to happen to bring inflation down to target? Possibly not, particularly if, as seems plausible, actual growth will be even lower than forecast next year. But the longer this inflation continues, the harder it will be to regain the target. It is possible that deliberate policy tightening will need to be greater than now expected.The market currently expects the Bank of England’s short rate to peak at around 3 per cent a year from now. That would still be a substantially negative in real terms rate under any plausible inflation expectations. This looks a mouse of a rate, given the scale of current and prospective inflation overshoots. Central banks have made big mistakes, as Mervyn King has argued. At present, the Bank like other central banks hopes that a very modest tightening will do the trick. If it does, it will be because the economy is going to slow a great deal anyway. Bad times lie ahead. The question is how [email protected] Follow Martin Wolf with myFT and on Twitter More

“We need to fix that. We need British steel to be provided with much cheaper energy and cheaper electricity for its blast furnaces. But until we can fix that, I think it is reasonable for UK steel to have the same protections.”The Sunday Telegraph newspaper said Johnson was seeking tighter quotas for steel imports from emerging economies to protect domestic producers, a move which could breach international trade rules.Britain proposed on Thursday to extend for a further two years an existing package of tariffs and quotas on five steel products to protect domestic steelmakers.However, the Sunday Telegraph said wider measures were being finalised for announcement in the coming week.Johnson said Britain should not to remove tariffs unilaterally without other European countries doing it too. “I don’t think that’s the right way forward. I want another solution. The difficulty is: is that possible to do while staying within our World Trade Organisation obligations? That’s the problem. But these are tough choices that you have to make.”Johnson’s Conservative Party last week lost two by-elections including one in an industrial area which had historically supported the opposition Labour Party. More

The war in Ukraine has led to a downturn in growth in the central European country, as well as more spending on defence and aid for hundreds of thousands of refugees. Fast-rising energy bills are also pushing the government to seeks ways to aid households and companies, costing tens of billions.Stanjura is set to put forward an amended budget next month that he has already said would push the deficit above 300 billion crowns, from a planned 280 billion crown gap.Asked on Czech Television’s Sunday debate show whether a budget gap of around 330 billion was likely, Stanjura said: “I will try so that the deficit will be as low as it can be, and that it will be below 330 billion.”After taking power in December, the centre-right government pledged to cut deficits fuelled by pandemic spending and wage and pension hikes by the previous administration.The deficit hit a record 420 billion crowns in 2021, pushing the overall fiscal gap to 5.9% of gross domestic product, almost twice the European Union-mandated ceiling of 3%.Stanjura told Reuters this month he aimed to keep the 2023 budget deficit target below this year’s original plan and bring the fiscal gap within EU limits by 2024.($1 = 23.4240 Czech crowns) More

G7 leaders meeting for a summit in the Bavarian Alps on Sunday are seeking a deal to impose a “price cap” on Russian oil as the group works to curb Russia’s ability to finance its four-month war in Ukraine.The goal would be for a broad range of countries going beyond the G7 to impose a ceiling on the price paid for Russian oil in order to limit the benefit to the Kremlin war machine of the soaring crude price. It would also cushion the impact of higher energy prices on western economies. The idea has been strongly promoted by the US. Although Germany has long had reservations about it, recent comments by German officials suggest that Berlin is coming around to the idea. Charles Michel, the president of the European Council, said leaders would discuss the oil price cap in the hours ahead, stressing the need for a “clear vision” and awareness of the possible knock-on effects. Such a deal would require the support of all 27 EU member states and officials would need to resolve difficult questions about how it would work and fit in with US, British, European and Japanese sanctions regimes.The EU in May agreed to a phased-in ban on seaborne Russian oil shipments, while permitting temporary carve outs for crude delivered via pipeline. The measures are expected to cut Russian oil exports to the EU by 90 per cent by the end of this year.The G7 leaders are meeting as the fallout from the war in Ukraine casts an ever-larger shadow over the global economy. The blockade of Ukrainian ports has pushed up food prices and Russia’s decision to cut gas supplies to Europe is threatening an energy crunch.As inflation soars and central banks respond with more aggressive interest rate rises than markets expected, economists across the world are downgrading their growth forecasts with some even warning of recession. The meeting, in the luxury Bavarian resort of Schloss Elmau, is being hosted by German chancellor Olaf Scholz. He has been joined by the leaders of the US, UK, France, Italy, Japan and Canada. Argentina, South Africa, Senegal, Indonesia and India have been invited as “partner” countries.G7 leaders announced on Sunday that they would ban imports of Russian gold, part of efforts to ratchet up sanctions against Moscow. “We need to starve the Putin regime of its funding,” said UK prime minister Boris Johnson. “The UK and our allies are doing just that.”A German official said that on Ukraine the G7 would aim to convey a “message of unity” and “signal support” for Kyiv. Ukraine’s president Volodymyr Zelenskyy will join the summit by video link on Monday.Johnson on Sunday reiterated the need to maintain consensus in the face of Russian aggression in Ukraine, warning that there could be “fatigue” among “populations and politicians”.Questioned on whether he was concerned about support for Ukraine weakening, Johnson replied: “I think the pressure is there and the anxiety is there, we’ve got to be honest about that.”The idea of an oil price cap comes at a time when experts are worrying that sanctions against Russia risk backfiring. Despite western restrictions on Russian oil imports, Russia’s revenues from oil exports have not necessarily declined because the price of crude has risen so sharply.Michel said: “We want to make sure that the goal is to target Russia and not to make our life more difficult and more complex. We need to make sure if we take such a decision there is a clear vision, a clear common understanding, of what are direct effects and what could be the collateral consequences.”He said the EU was ready to take a decision with its partners but stressed he was “careful and cautious” on the topic. A senior German official said “intensive discussions” were under way as to how a price cap would be implemented and work with western and Japanese sanctions.“The issues we have to solve are not trivial, but we’re on the right track towards coming to an agreement,” he said.

Under the oil price-capping scheme, Europe would limit the availability of shipping and insurance services that enable the transport of Russian oil around the world, mandating that the services would only be available if the price ceiling was observed by the oil importer. A similar restriction on the availability of US financial services could give the scheme added impact.Scholz has stressed that the concept would require widespread buy-in around the world to be effective. It would also require the EU to amend its ban on insuring Russian crude shipments — introduced in conjunction with the ban on seaborne oil imports — something that needs the buy-in of all 27 EU member states. The UK would need to come on board, given it is the home of the Lloyd’s of London insurance market. The EU and UK already agreed to co-ordinate on an insurance ban, but London has not yet finalised its scheme.At their summit, the G7 leaders will also discuss how to avert a global “hunger crisis”, amid rising food insecurity caused by the Ukraine war. They will also discuss a German proposal for a “climate club” in which participating countries will co-ordinate their efforts to decarbonise their economies. Additional reporting from Jasmine Cameron-Chileshe More

LONDON (Reuters) – Russia edged closer to default on Sunday amid little sign that investors holding its international bonds had received payment, heralding what would be the nation’s first default in decades.Russia has struggled to keep up payments on $40 billion of outstanding bonds since its invasion of Ukraine on Feb. 24, which provoked sweeping sanctions that have effectively cut the country out of the global financial system and rendered its assets untouchable to many investors.The Kremlin has repeatedly said there are no grounds for Russia to default but is unable to send money to bondholders because of sanctions, accusing the West of trying to drive it into an artificial default.The country’s efforts to swerve what would be its first major default on international bonds since the Bolshevik revolution more than a century ago hit an insurmountable roadblock when the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) effectively blocked Moscow from making payments in late May.”Since March we thought that a Russian default is probably inevitable, and the question was just when,” Dennis Hranitzky, head of sovereign litigation at law firm Quinn Emanuel, told Reuters. “OFAC has intervened to answer that question for us, and the default is now upon us.” Whiel a formal default would be largely symbolic given Russia cannot borrow internationally at the moment and doesn’t need to thanks to rich oil and gas revenue, the stigma would probably raise its borrowing costs in future.The payments in question are $100 million in interest on two bonds, one denominated in U.S. dollars and another in euros, Russia was due to pay on May 27. The payments had a grace period of 30 days, which will expire on Sunday. Russia’s finance ministry said it made the payments to its onshore National Settlement Depository (NSD) in euros and dollars, adding it has fulfilled obligations.However, it is unlikely that funds will find their way to many international holders. For many bondholders, not receiving the money owed in time into their accounts constitutes a default.With no exact deadline specified in the prospectus, lawyers say Russia might have until the end of the following business day to pay the bondholders. SMALL PRINT The legal situation surrounding the bonds looks complex.Russia’s bonds have been issued with an unusual variety of terms, and an increasing level of ambiguities for those sold more recently, when Moscow was already facing sanctions over its annexation of Crimea in 2014 and a poisoning incident in Britain in 2018.Rodrigo Olivares-Caminal, chair in banking and finance law at Queen Mary University in London, said clarity was needed on what constituted a discharge for Russia on its obligation, or the difference between receiving and recovering payments. “All these issues are subject to interpretation by a court of law, but Russia has not waived any of its sovereign immunity and has not submitted to the jurisdiction of any court in any of the two prospectuses,” Olivares-Caminal told Reuters.In some ways, Russia is in default already. A committee on derivatives has ruled a “credit event” had occurred on some of its securities, which triggered a payout on some of Russia’s credit default swaps – instruments used by investors to insure exposure to debt against default. This was triggered by Russia failing to make a $1.9 million payment in accrued interest on a payment that had been due in early April.Until the Ukraine invasion, a sovereign default had seemed unthinkable, with Russia being rated investment grade up to shortly before that point. A default would also be unusual as Moscow has the funds to service its debt.The OFAC had issued a temporary waiver, known as a general licence 9A, in early March to allow Moscow to keep paying investors. It let it expire on May 25 as Washington tightened sanctions on Russia, effectively cutting off payments to U.S. investors and entities.The lapsed OFAC licence is not the only obstacle Russia faces as in early June the European Union imposed sanctions on the NSD, Russia’s appointed agent for its Eurobonds. Moscow has scrambled in recent days to find ways of dealing with upcoming payments and avoid a default. President Vladimir Putin signed a decree last Wednesday to launch temporary procedures and give the government 10 days to choose banks to handle payments under a new scheme, suggesting Russia will consider its debt obligations fulfilled when it pays bondholders in roubles.”Russia saying it’s complying with obligations under the terms of the bond is not the whole story,” Zia Ullah, partner and head of corporate crime and investigations at law firm Eversheds Sutherland told Reuters.”If you as an investor are not satisfied, for instance, if you know the money is stuck in an escrow account, which effectively would be the practical impact of what Russia is saying, the answer would be, until you discharge the obligation, you have not satisfied the conditions of the bond.” More

LONDON (Reuters) – The world’s central bank umbrella body, the Bank for International Settlements (BIS), has called for interest rates to be raised “quickly and decisively” to prevent the surge in inflation turning into something even more problematic. The Swiss-based BIS has held its annual meeting in recent days, where top central bankers met to discuss their current difficulties and one of the most turbulent starts to a year ever for global financial markets.Surging energy and food prices mean inflation in many places is now its hottest in decades. But the usual remedy of ramping up interest rates is raising the spectre of recession, and even of the dreaded 1970s-style “stagflation”, where rising prices are coupled with low or negative economic growth.”The key for central banks is to act quickly and decisively before inflation becomes entrenched,” Agustín Carstens, BIS general manager, said as part of the body’s post-meeting annual report Annual Economic Report published on Sunday. Carstens, former head of Mexico’s central bank, said the emphasis was to act in “quarters to come”. The BIS thinks an economic soft landing – where rates rise without triggering recessions – is still possible, but accepts it is a difficult situation. “A lot of it will depend on precisely on how permanent these (inflationary) shocks are,” Carstens said, adding that the response of financial markets would also be crucial. “If this tightening generates massive losses, generates massive asset corrections, and that contaminates consumption, investment and employment – of course, that is a more difficult scenario.” Graphic: Inflation palpitations – https://fingfx.thomsonreuters.com/gfx/mkt/mopanrqrbva/Pasted%20image%201655895473770.png World markets are already suffering one of the biggest sell-offs in recent memory as heavyweight central banks like the U.S. Federal Reserve – and from next month the ECB – move away from record low rates and almost 15 years of back-to-back stimulus measures.Global stocks are down 20% since January and some analysts calculate that U.S. Treasury bonds, the benchmark of world borrowing markets, could be having their biggest losing first half of a year since 1788.CREDIBILITYCarstens said the BIS’s own recent warnings about frothy asset prices meant the current correction was “not necessarily a complete surprise”. That there hadn’t been “major market disruptions” so far was also reassuring, he added.Part of the BIS report published already last week said that the recent implosions in the cryptocurrency markets were an indication that long-warned-about dangers of decentralised digital money were now materialising.Those collapses aren’t expected to cause a systemic crisis in the way that bad loans triggered the global financial crash. But Carstens stressed losses would be sizeable and that the opaque nature of the crypto universe fed uncertainty. Graphic: Central bank digital currencies – https://fingfx.thomsonreuters.com/gfx/mkt/mopanryagva/Pasted%20image%201656161287732.png Returning to the macro economic picture, he added that the BIS didn’t currently expect a period of widespread stagflation to take hold.He also said that though many global central banks and the BIS itself had significantly underestimated how quick global inflation has spiralled over the last six to 12 months, they weren’t about to lose hard-earned credibility overnight.”Yes, you can argue a little bit here about an error of timing of certain actions and the responses of the central banks. But by and large, I think that the central banks have responded forcefully in a very agile fashion,” Carstens said.”My sense is that central banks will prevail at the end of the day, and that would be good for their credibility.” More

Leading economies are close to “tipping” into a high-inflation world where rapid price rises are normal, dominate daily life and are difficult to quell, the Bank for International Settlements warned on Sunday. In its annual report, the BIS, the influential body that operates banking services for the world’s central banks, said these transitions to high-inflation environments happened rarely, but were very hard to reverse. Diagnosing that many economies had already embarked on the process, the BIS recommended that central banks should not be shy of inflicting short-term pain and even recessions to prevent any move to a persistently high-inflation world. Agustín Carstens, BIS general manager, said: “The key for central banks is to act quickly and decisively before inflation becomes entrenched.”Central banks around the world have started to raise rates quickly in response to soaring inflation, with the US Federal Reserve leading the pack, but the action taken so far does not satisfy the BIS. In its report, the bank said that there was a deep, “inherently stagflationary” shock hitting the world from higher commodity prices, supply chain bottlenecks and shortages stemming from Russia’s invasion of Ukraine. This had increased the prices of the goods and services that households noticed the most, reinforcing the salience of price rises. “We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift,” the report stated.Such a shift would mean leaving behind a world where prices have been generally stable, with some things getting cheaper and others more expensive. In this benign world, central banks have been able to ignore temporary surges in oil or natural gas prices because “economy-wide inflation [is] less noticeable [and] also less relevant”. After a move to a high inflationary period, “price changes are much more synchronised and inflation is much more of a focal point for the behaviour of economic agents, exerting a major influence on it”.Inflation is at multi-decade highs in several economies, including the US, eurozone and the UK. The BIS was worried the leading economies of North America, Europe and many emerging markets were near a tipping point. Consumers had noticed price rises, large increases had become broad across most goods and falling real wages would generate attempts to recoup the losses. Ignoring price rises was no longer rational for consumers, the BIS said, which reinforced the danger of a shift to a high-inflation world. “As inflation rises and becomes a focal point for agents’ behaviour, behavioural patterns tend to strengthen the transition,” it added, predicting companies would fight to prevent profit margins being squeezed and workers would defend their wages. The length of most contracts would tend to shrink, it added, because parties on both sides could not guarantee price levels in future. To bring down inflation, the BIS said, “some pain will be inevitable”, but it said ultimately the difficulties of entrenched inflation “far outweigh the short-term ones of bringing it under control”.“This puts a premium on a timely and decisive response,” it told its member central banks, even if none could be certain that they had moved into a high-inflation environment. The BIS added: “The overriding priority is to avoid falling behind the curve, which would ultimately entail a more abrupt and vigorous adjustment. This would amplify the economic and social costs of bringing inflation under control.” More