Economy

Operation shock and awe: June 2022 will most likely be remembered as the month central banks finally decided to bring out the big guns to shoot down soaring inflation.Within 48 hours, the U.S. Federal Reserve made its biggest rate hike since 1994, the Swiss National Bank raised its policy interest rate for the first time in 15 years and the European Central Bank announced fresh emergency tools to support the bloc’s indebted south while it tightens monetary policy. The Bank of England also rose borrowing costs for the fifth time since December and its benchmark interest rates is now at its highest since January 2009 even as the economy lurches into recession.With the glaring exception of the Bank of Japan which has steadfastly stuck to its ultra-dovish policy, the hawks of monetary policy are now clearly running the show globally. A quick look at the state of financial markets gives a pretty clear idea of, as late musician Prince used to sing, what it sounds like when doves cry. The yield of Germany’s bund’s at one point yesterday surged by a whopping 20 basis point, the Swiss franc jumped a rare 2% against the euro and a multitude of equity indexes confirmed a bear market.All in all world stocks are heading for their worst week since the March 2020 pandemic meltdown as investors worry about the economic consequences of fast-rising interest rates. Speaking of which, the Philadelphia Federal Reserve’s manufacturing activity index got its first negative reading since the early months of the coronavirus pandemic and the outlook for the next six months was the lowest since February 2008. Adding to the gloom, U.S. homebuilding fell to a 13-month low in May and permits tumbled, suggesting the housing market was cooling as surging mortgage rates reduce affordability for many first-time homebuyers. GRAPHIC: BOJ and JP CPI (https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrnbyjpm/BOJ%20and%20JP%20CPI.JPG) Key developments that should provide more direction to markets on Friday:- Shanghai’s economy shrinks again in May but at slower pace – Britain’s Tesco (OTC:TSCDY) reaffirms profit guidance despite sales fall – Sweden’s Riksbank policy meeting- U.S. industrial production- Santander (BME:SAN) appoints Hector Grisi as new CEO More

Hungary has blocked progress of the EU’s proposed directive implementing the global minimum corporate tax, in the latest setback to plans for fairer taxation of big multinational companies. Mihály Varga, the Hungarian minister of finance, told fellow EU ministers at a meeting in Luxembourg on Friday that his country could not support the levy at this stage, in part because of the huge pressure economies and companies are under from the war in Ukraine and rising inflation. The move — which reverses previous support for the levy from Hungary — came even as Poland withdrew its own veto and gave the green light for the tax to go ahead. Last year 137 countries backed the introduction of a 15 per cent minimum effective corporate tax rate on large businesses, known as Pillar Two, and Brussels has since been attempting to bring the reform into EU law, which requires unanimous approval of member states. The same agreement also backed the Pillar One reform aimed at forcing the world’s 100 biggest multinationals to declare profits and pay more tax in the countries where they do business. The delay to the EU’s efforts comes as the Biden administration struggles to persuade Congress to approve the tax provisions that would implement both elements of the accord in the US. Hungary’s refusal is a particular setback for France, which as holder of the EU’s rotating presidency has placed heavy emphasis on getting the corporate tax reform through during its six-month stint. The Czech Republic takes over the role from July. Bruno Le Maire, the French finance minister, said he would continue to seek a deal on the tax in the final weeks of the French presidency, describing himself as “lucidly optimistic” about the issue. In the meeting of finance ministers he challenged Hungary over its reasons for withdrawing its support, pointing out that Budapest had previously backed the measure even after the start of the war in Ukraine. The commission believed Pillar Two would be helpful for the EU economy, Le Maire argued, adding that putting an end to “tax dumping across Europe” was a historically important goal. However, Varga said stalling progress on the Pillar One element of the tax deal, which requires an international treaty to come into force, had added to arguments in favour of holding back on Pillar Two because this would harm the “package nature” of the global agreement. The EU has not fallen behind its partners when it comes to implementation, he added. Mathias Cormann, the OECD secretary-general, said last month that the landmark agreement, signed in October 2021, would come into force in 2024 at the earliest. It was originally set for implementation in 2023. Officials had hoped EU approval for the Pillar Two reform would boost global momentum towards the minimum corporate tax. In the US, measures were intended to be folded into Joe Biden’s $1.5tn “Build Back Better” legislation, but this has been stalled on Capitol Hill since December. While Democratic lawmakers and the White House are trying to resurrect portions of the bill before midterm elections in November, it is far from clear that they will be successful. Republican opposition — fuelled by scepticism among lobbyists for corporate America — has hardened in recent months, further complicating the prospects for passage, making it even less likely that the OECD deal will be approved. Janet Yellen, the treasury secretary, has repeatedly defended its merits during a round of congressional hearings this month. The EU has been working to translate the deal on Pillar Two into domestic laws through a directive, which would be enacted this autumn at the earliest if it wins the approval of all member states. EU officials have claimed that Poland had dragged its feet in part because of the European Commission’s earlier refusal to approve its €36bn recovery fund bid. However, this month’s deal on the Polish recovery plan between commission president Ursula von der Leyen and Polish prime minister Mateusz Morawiecki removed that obstacle. Some officials suspect Hungary is also seeking ways of pressuring the commission into approving its own recovery plan, which has been stuck since May of last year because of rule of law and corruption concerns. Expressing his frustration with the latest delay, Le Maire said it added to arguments for the EU to drop the requirement for unanimity on legislation related to tax matters. “We need urgently to speed up procedures in the EU and simplify decision-making processes,” he said. More

Five years since the last summit, six days of increasingly intense negotiations on the shores of Lake Geneva, and around dawn this morning a deal emerged from the exhausted horde of assembled ministers at the World Trade Organization.Let’s be honest: it’s not a great historical pivot point in global governance. The package of deals addresses massive issues — the intellectual property behind Covid vaccines, cutting fishing subsidies to stop the oceans being emptied of life, helping to prevent a global food crisis — but doesn’t do much about them.Its main achievement is actually to show that the institution’s negotiating function is just about intact. Given the disruption from Covid and the political divisiveness of the Ukraine war, this is not trivial. But building on it will require far more effort from governments themselves.The main two deals, creating flexibilities in the WTO’s “Trips” agreement on IP and restricting fishing subsidies, were progressively weakened over the course of the talks.The Trips provisions have been watered down to almost homeopathic levels from the original proposal of a broad waiver of all IP covering all Covid treatments made in 2020 by South Africa and India. What has emerged isn’t really a waiver at all: it’s a clarification of existing flexibilities for overriding vaccine patents in case of a health emergency, with some extra bureaucracy added.You can make a perfectly respectable argument, as the EU has, that large-scale suspension of IP isn’t the real issue with Covid vaccines and other treatments. But if, as the US did, you’re going to claim that IP is a big deal and a waiver is important, you should do something serious about it. The fisheries deal has more substance. It addresses specific categories of subsidies to illegal and unreported fishing, the exploitation of overfished stocks and activities on the unregulated “high seas” beyond national territorial waters. It’s a long way short of a comprehensive deal to address global fishing overcapacity, though it has put down a marker for broader coverage in future talks.The role of the WTO’s own leadership in this is simultaneously impressive and dispiriting, the quality of management input far outshining the substance of the resulting deal. In Ngozi Okonjo-Iweala, the Nigerian former finance minister who took over last year, the WTO has one of the most politically connected directors-general in its history. She has spent months reminding governments of the importance of compromise and keeping the system alive. The fisheries talks have been presided over by one of the most respected and hardest-working chairs of negotiation anyone can remember, the Colombian ambassador Santiago Wills.The modest results must now surely have exhausted the idea that the management of the WTO and the conduct of the talks is the problem. As long as big members such as the US and India are unconstructive, you could install any diplomatic genius you choose from history as director-general — Talleyrand, Metternich, Benjamin Franklin, Maharaja Ranjit Singh, Kublai Khan, whoever — and it wouldn’t fix the issue.The US remains heavily under-engaged at the WTO. It got a lot of domestic credit for supporting the Trips waiver but then sat back and let other governments make the running. It has similarly made lots of vague noises about reforming the WTO, whose dispute settlement system continues to be frozen because of Washington’s refusal to appoint new judges, but come up with no practical proposals. Today’s ministerial statement talks about having the dispute settlement system fully functioning by 2024: that’s going to require a marked change in commitment from Washington.India, as is now traditional at ministerials, made a series of disruptive (and on this occasion increasingly baroque) interventions to posture as a leader of the developing world. The highlight was an aria by commerce minister Piyush Goyal on fishing subsidies, in which he lectured baffled delegates about the role of fish in Indian mythology, religion and culture and mused that “the traditional fishers’ life in India has intertwined with the oceans and seas since times immemorial”. The prose was lyrical but the logic was faulty: India argued for a longer phaseout period for subsidies to commercial fishing operations which are destroying small-scale fishers by depleting stocks.India, with some other developing country allies, even threatened to end a 24-year WTO moratorium on putting tariffs on digital trade (a bizarre suggestion from a global software giant, but there you have it) until it continued to get leeway to use production-distorting agricultural subsidies to build public stocks of food. This was one of the few mentions of agriculture at the meeting despite the global food crisis. But for that grubby little deal, this might have been perhaps the first WTO ministerial ever that actually raised tariff ceilings.So that’s it for now. The next ministerial meeting is due in around eighteen months. This one wasn’t a disaster, and it’s laid some foundations that might be built on. But it remains true, as it has for a long time, that the WTO’s biggest achievement is keeping itself [email protected] More

LONDON (Reuters) – British finance minister Rishi Sunak has toughened his language towards Bank of England Governor Andrew Bailey, a reflection of the political pressure piling on them both as inflation surges towards double digits.On Thursday the BoE stuck to its gradual increases in interest rates, as other central banks took more urgent action, but said it was ready to act “forcefully” if needed to stamp out dangers posed by inflation.The BoE also published an exchange of letters between the governor and finance minister in which Bailey is required to explain why inflation – now at 9% and set to surpass 11% in October, according to the BoE – is overshooting the central bank’s 2% target.Usually, these letters are unremarkable, but this week Sunak adopted a noticeably harder tone in his response to Bailey.”I know and expect that you and the other members of the MPC will take the action necessary to get inflation back on target and ensure inflation expectations remain firmly anchored,” Sunak said in his letter to Bailey.On May 26, as he announced further cost-of-living support for households, Sunak said: “I know the governor and his team will take decisive action” – rather than “know and expect”.Sunak’s new choice of words also contrasts with the passive tone in a similar exchange of letters in March, when Sunak said: “I welcome the Committee’s intention … to take whatever action is necessary.”Some members of Prime Minister Boris Johnson’s Conservative Party have openly criticised the BoE for acting too slowly over the mounting cost-of-living crisis. Public satisfaction with the central bank has hit a record low.Andrew Goodwin, chief UK economist at consultancy Oxford Economics, said he doubted that the BoE faced serious, immediate dissatisfaction from the government over its performance on inflation, which is testing central banks around the world.But it could help Sunak fend off critics who say he has failed to help households sufficiently despite pledging 37 billion pounds ($45.4 billion) of government support since the start of last year, excluding the impact of tax rises for many people.”It gives him cover to effectively say, ‘well I would do more, but (the BoE) can’t get inflation under control so this is tying my hands’ – which is I don’t think is true,” Goodwin said.”But it’s a good narrative to have if you’re clear that you don’t want to expand fiscal policy any more.”Elsewhere in his latest letter, Sunak adopted more urgent language than in previous missives. He told Bailey that he recognised the impact of high inflation on households, “which is why, as you outline, it is imperative to bring inflation back down to target it and keep it anchored there”.”In conclusion, we have the tools and determination we need to reduce inflation and I am confident the Bank will play their part in making that happen,” Sunak said.Judging from its June policy minutes, the BoE itself showed little outward sign of political pressure, HSBC noted.”The BoE still seems determined to paddle its own canoe, worrying more about the growth and unemployment risks – and their implications for inflation – than the risk of second-round effects and high inflation becoming embedded,” said HSBC economists Elizabeth Martins and Simon Wells.”Nor does it seem particularly concerned by being in the spotlight politically.”($1 = 0.8155 pounds) More

“A U.S. CBDC (central bank digital currency) could… potentially help maintain the dollar’s international standing,” Powell said in introductory remarks to a research conference held by the central bank on the international roles of the dollar.The Fed has just finished a four-month public consultation period soliciting opinions on the idea of a digital dollar. Fed Vice Chair Lael Brainard has emerged as a key supporter while Fed Governor Chris Waller has made the case against.”As we consider feedback…we will be thinking not just about the current state of the world, but also how the global financial system might evolve over the next 5 to 10 years,” Powell added.Ten countries have already launched central bank digital currencies and another 105 countries are exploring the option, according to the Atlantic Council, leading to fears the dollar could lose some of its dominance to China.The dollar remains underpinned by key fundamentals, including a commitment to transparency, the rule of law and the full independence of the Fed, Powell noted.In addition, the Fed’s commitment to its price stability mandate contributes to widespread confidence in the dollar as a store of value, Powell said.”To that end my colleagues and I are acutely focused on returning inflation to our 2% objective,” Powell said. The Fed earlier this week delivered its largest interest rate increase in more than a quarter of a century as it tries to stem a surge in inflation. More

State companies made a point of publicly signing deals and many firms had stalls with floor-to-ceiling display screens and glamorous attendants at the 25th St Petersburg International Economic Forum, which aims to rival the global Davos event.But there was a notable lack of the Western investors and investment bankers who turned up in previous years.”New business from the Italian side is just frozen,” Italian businessman Vincenzo Trani told Reuters on the sidelines of a session titled “Western investors in Russia: new realities”.”New investment is just impossible and people are not increasing investments.”Kremlin spokesperson Dmitry Peskov announced a denial of service attack on the forum in a call with reporters, saying that specialists were working to fix the problem. He did not apportion blame but the situation in Ukraine loomed large.As Russian forces moved into Ukraine on Feb. 24, Kyiv called on hacktivists to help. Russia says it is conducting a “special military operation”. There was no immediate reponse from Ukraine to the cyberattack.Western sanctions against Russia over its actions in Ukraine combined with related supply chain issues have starkly altered Russia’s export-import dynamics, with the country now looking to the likes of China and India and turning away from the West.Key banks have lost access to the global payments system SWIFT, Western brands are shunning the country and selling up in a hurry, writing off billions of dollars in assets – and the European Union has promised an embargo on Russian oil.Deputy Prime Minister Dmitry Chernyshenko lamented Russia’s backwardness in technology, and said the “painful process” of Russia switching to its own technology was under way.”You are competing with global companies that have overtaken you by whole generations,” he told an audience of Russian business representatives.BUSINESS OUTLOOK GLOOMYThe CEO of Russia’s top lender Sberbank summed up the situation with grim irony.”They say all is well with business in Russia, there are just small problems: there is no one to buy from and no one to sell too, it’s impossible to pay and impossible to supply,” German Gref said on Friday. “This is a joke, but it reflects reality.”Tadzio Schilling, head of the Association of European Businesses, which groups hundreds of firms inside and outside Russia, said the losses for those doing business in Russia “can be colossal nowadays”.”Short-term prospects for companies are gloomy,” he said.Leonid Mikhelson, chief executive of the Russian energy giant Novatek called for more state support. A global price squeeze in gas had created a window of opportunity that Russia, heavily reliant on its vast fossil fuel exports, needed to seize before it closed, he said.But his company could not commission a compression line – a key part of his industry, without components that are now restricted by sanctions from sale to Russia.”We have to create a domestic liquefaction technology for this,” he said. “A full-fledged localisation program is required, provided with full funding.”‘LOUDLY KEEPING SILENT’Russian companies usually offer interviews and make big announcements at the forum, the main event in Russia’s corporate calendar, but this year speakers were thin on the ground.Many Russian firms are grappling with how to handle their communications, said Ksenia Kasyanova, R&D Director at PR company CROS.She said they were torn between wanting to restore demand and the fear that any comments might not be publicised with as much context as they would like.”Faced with this dilemma, businesspeople are eventually settling on the complicated task of ‘loudly keeping silent’,” Kasyanova said – putting the company in the public field but minimising communications and advertising. Italian investor Trani, who founded one of Russia’s largest car-sharing firms, Delimobil, said Russian and international companies were craving stability. “No company can have aggressive development in this period,” he said. “We have to wait for peace.” More

JAKARTA (Reuters) – The Group of 20 (G20) major economies aims to raise $1.5 billion this year for a fund set up to better prepare for future pandemics, the health minister of current G20 president Indonesia said on Friday.G20 countries have provisionally agreed to set up a multi-billion dollar fund that health officials have said will finance efforts like surveillance, research, and better access to vaccination for lower-to-middle income countries, among others.Indonesian Health Minister Budi Gunadi Sadikin said in an interview the United States, European Union, Indonesia, Singapore and Germany have pledged about $1.1 billion to the fund so far.”If we can get by the end of this year $1.5 billion of fresh funding, we will be very, very happy,” he told Reuters, adding he hopes the group can raise another $1.5 billion next year.Indonesia will host the G20 leaders summit in Bali in November.The World Bank, which will house the fund, and the World Health Organization (WHO), which is advising on the facility, estimated in a report https://thedocs.worldbank.org/en/doc/5760109c4db174ff90a8dfa7d025644a-0290032022/original/G20-Gaps-in-PPR-Financing-Mechanisms-WHO-and-WB-pdf.pdf that the annual funding gap for pandemic preparedness is $10.5 billion.Budi said he will start discussing contributions to the fund with countries like Japan and Britain at a G20 health ministers meeting in Indonesia next week.”Pandemic is a war, and we have to be ready with enough money when war happens,” he said.The United States and Indonesia have been pushing for the establishment of the fund to help the world be better prepared to tackle future pandemics, but the WHO has been concerned the fund could undermine its own efforts and those of other global health mechanisms.But Budi said the WHO will play “a leadership role” in identifying which countries would need the fund or provide other countermeasures. The World Bank has said the fund is expected to be operational this year, and Budi said the structure for the fund could be established in a few months’ time. More

The Bank of England has been accused of going soft on its core mandate after adopting a less aggressive stance on monetary policy than the US Federal Reserve — despite expecting inflation to hit 11 per cent this year.The UK central bank on Thursday dropped guidance that more interest rate rises were likely in the months ahead, even as it warned inflation would reach a high in October. It raised rates by an expected 0.25 percentage points to 1.25 per cent, as three Monetary Policy Committee members who called for a 0.5 percentage point increase were outvoted.The stance reflected its view that the UK economy will barely grow in the next three years and therefore there is less scope — or need — to raise rates as aggressively as elsewhere.By contrast, the Fed had exploded a grenade under financial markets a day earlier with a 0.75 percentage point rise in its benchmark interest rate to a target range of 1.5 to 1.75 per cent, even when the US has a smaller inflation problem than the UK. Fed chair Jay Powell was unequivocal about the intention that lay behind the move. “We’re strongly committed to bringing inflation back down and we’re moving expeditiously to do so,” he said. The BoE’s relative passivity proved contentious, even among former members of its MPC. Andrew Sentance, now a senior adviser at Cambridge Econometrics, said: “Actions speak louder than words. The action from MPC . . . was woefully short of what is needed to curb the biggest inflationary surge for 40 years.”By contrast, professor Danny Blanchflower of Dartmouth College in the US, criticised the BoE for tightening policy at all. Accusing the BoE of “incompetence”, he took to Twitter to say: “We are likely already in recession . . . made worse by the rate rise.”There is no doubt that the two central banks view the outlooks of their respective economies differently. The Fed is involved in taming a policy-induced boom and a high-pressure economy that has blown up into an inflationary period. It wants to cool things down with higher rates and still expects reasonable growth as it lowers the rate of price rises by making borrowing more difficult for Americans. While Powell was clear that the chances of achieving a “soft landing” had slipped and he wanted a “softish” landing, he still expects reasonable economic growth in the US.

The domestic central banks expect annual growth rates to be much weaker in the UK than the USCentral bank forecast202220232024 Bank of England0.7%0.2%0.5%Federal Reserve1.7%1.7%1.9%Year-on-year growth forecast for the fourth quarter of each year. Fed forecasts from June, BoE forecasts from May

The median prediction of the Fed’s interest rate setting committee was that the US economy would expand 1.7 per cent during 2022 and 2023.The BoE’s view, however, is that the UK’s coming period of very slow growth — with multiple quarters of contractions — is needed to get inflation down. It expects inflation to fall back to its 2 per cent target, partly as commodity prices stabilise “albeit at elevated levels” and partly as a result of “the combined impact of weaker real incomes and tighter monetary policy on domestic demand”. The BoE did not update its May forecasts at the meeting this week, but these are much weaker in comparison. Over the same time period, it expects growth to be only 0.7 per cent this year and 0.2 per cent next year. The stance makes life difficult for the UK government and Conservative MPs. Since the central bank thinks it is necessary to keep growth only at a snail’s pace until the next election to control prices, MPs cannot easily demand tax cuts. These would boost spending and potentially force the BoE to move more actively to control prices. Prime Minister Boris Johnson and chancellor Rishi Sunak have both said tax cuts will have to wait until inflation has come down.The passive nature of the BoE’s messaging is also difficult for the central bank itself. It is waiting to see whether companies decide that they feel they want to compensate their employees for rises in the cost of living and whether the UK has moved more persistently into an inflationary environment. It left open the option of acting “forcefully” if inflation did not subside naturally, and increasingly many in the City think it will have to adopt this approach in the months ahead. Steffan Ball, chief UK economist at Goldman Sachs, said: “We do not think the BoE is insulated from the recent swath of hawkish central bank shifts,” predicting that the BoE would be forced to raise rates by 0.5 percentage points at the next two meetings, leaving UK rates at 2.25 per cent by September. More