Economy

At the end of this month, household negotiations over buying a PlayStation 5 will enter their 600th day of deadlock. Arrival at this milestone may well bring all parties back to the table, but a breakthrough still feels a long way off.Part of the delay is that global economic forces are playing havoc with stock, of course. But this is by no means our first version of this argument. As each enchanting generation of console (particularly those of Sony and Nintendo) has come along, the question of the new machine’s cost-to-justifiability ratio blazes around several talking points. Is it really that much better than the one you’ve already got? (Absolutely, yes, the existing model is now decade-old tech and just look at game X.) OK, but is it worth $500 when the games also cost $60? (Well, yes. See previous answer.) Really? And yet you whinge about the cost of the kids’ trainers. (Yes, but that’s totally different.) And so on. The support, this time, of a naggy 12-year-old in my lobbying effort has been useful, though not decisive.

But the core difference between this and previous iterations of the argument has been the PS5 itself. In Japan, Sony’s home turf, its games machine has been very difficult to buy from a mainstream retailer. Normally, there is an initial post-launch stampede and ensuing shortages that all form part of the hype (and fun). Within a year, though, the casual buyer can generally find one without too bruising a quest. Not so with this iteration of the PlayStation. Launched in November 2020, despite the well-known headwinds of a global semiconductor shortage, it has been buffeted by supply chain difficulties. Sony, which has a real battle on its hands against Microsoft’s Xbox, has been funnelling its machines to particular markets, principally the US, where it believes victory will be decided. Japan supplies have thus been unusually thin and, since the start of the year, there have only been three weeks where Sony sold more than 30,000 units here. In one extraordinary week in May, Sony sold only 2,693 PS5s in Japan — an indication, say analysts, that the supply crisis could actually be getting worse. Those Japanese gamers determined to secure a machine are left relying on store lotteries, luck or a secondary market where “as new” used PS5s trade at 70 per cent above the official retail price.

This absurdity has killed the debate in our house. Since its launch, the PS5 has sailed through two Christmases and multiple Lewis family birthdays both hotly desired and defiantly unpurchased.It may be that Sony has an interest in keeping its Japan sales low. Calculated globally, it makes little money on the hardware sales of PS5 units — no problem, given that the real money is made on the software. In Japan, says one analyst who has covered the company for decades, it is probably making a loss of about ¥2,000 on every machine sold.Pelham Smithers, another veteran Sony-watcher, suspects the spew of red ink could be even more severe, with material costs rising significantly amid global inflation and high energy prices, and with the yen plunged to a 20-year low. That combination, says Smithers, could mean that Sony is losing about ¥15,000 on every PS5 it sells in Japan. That could be an incentive for it to ensure that stores and online retailers are not flooded with machines. Sony’s gaming chief did recently announce “a significant ramp-up” in PS5 production this year, but for now, I’ll have to make do with our PS4 — itself the result of a successful round of household negotiation. Leo Lewis is the FT’s Asia business editorFollow @FTMag on Twitter to find out about our latest stories first More

When Christine Lagarde on Thursday sets out the European Central Bank’s plans to end eight years of bond-buying and negative interest rates, she can count on the support of the vast majority of her fellow rate-setters. Record-high inflation in the eurozone has left even the most dovish of the 25 members of the governing council supporting the need for higher borrowing costs in the coming months. However, the president will be aware of the scale of the challenge facing the ECB, hoping to regain control of prices without tipping the economy into recession or triggering a bond market panic in the more vulnerable countries of southern Europe. “Lagarde is in the hot seat and she is feeling it,” said Klaus Adam, an economics professor at the University of Mannheim who advises Germany’s finance ministry. “The ECB seems to think it can bring inflation back to target with relatively timid increases in rates. But what if that doesn’t work?” Only one of the ECB’s 25 governing council members — Klaas Knot — was on the rate-setting body the last time the bank raised rates in 2011. Lagarde had just become president of the IMF.Concerns abound among economists that the council lacks the economics expertise to get the balance right between fighting inflation and avoiding an economic and financial meltdown. Lagarde, a lawyer by training and France’s finance minister before making the switch to Washington, has relied on ECB chief economist Philip Lane for guidance. But he has been criticised for being too slow to predict the recent surge in inflation, which shot above 8 per cent in May, quadruple the ECB’s target. Other western central banks, such as the US Federal Reserve and Bank of England, have already raised rates and stopped buying bonds. “Who can she rely on now?” said Adam. “She is no expert herself and her chief economist has been so wrong on inflation.”While the council members, meeting in Amsterdam for a change from Frankfurt this week, are in unison on the need for rate raises — and to commit to a backstop for bond markets — there is less consensus on the pace of tightening. Lagarde and Lane have signalled rate rises of a quarter of a percentage point as the benchmark for its meetings in July and September — the two that follow the June decision. But the pace at which price pressures have intensified over recent months has left hawks calling for a more aggressive pace of tightening, in line with the Fed’s strategy of hiking by 50 basis points at a time. “The hawks smell blood,” said a more dovish council member.Most economists still think the ECB is likely to stick to a quarter-point rate rise in July, partly because of the worry that a more aggressive move could trigger a sell-off in the bond markets of heavily indebted countries, such as Italy.Paul Hollingsworth, chief European economist at BNP Paribas, said a 50-basis point rate rise “would be a hawkish surprise and could increase risks for peripheral bond markets earlier than the ECB would like”.The spread between Italy’s 10-year borrowing costs and those of Germany, a key measure of perceived financial risk in the euro area, has recently risen to its highest level since the start of the pandemic. “Some investors are fretting about where spreads could go once the ECB starts to remove its stimulus,” said Annalisa Piazza, fixed-income analyst at MFS Investment Management. The ECB has already said it expects to raise the rate at which it lends to many banks by half a percentage point this month. It will end the special discount rate of minus 1 per cent on three-year loans made under its quarterly targeted longer term refinancing operations, or TLTROs. This rate will return to the deposit rate of minus 0.5 per cent.Oliver Rakau, an economist at Oxford Economics, said the TLTRO change could make the ECB reluctant to compound the impact by also raising its deposit rate by half a percentage point in July. “We are already seeing a tightening of bank lending conditions in the eurozone and [the ECB] would risk a steeper tightening than they can stomach, particularly in weaker countries,” he said.At this week’s meeting, the ECB will also issue new forecasts. They are expected to outline slower growth and higher inflation over the next three years. Its 2024 forecast for inflation is likely to rise to its 2 per cent target — fulfilling a key criteria to raise rates.For now business surveys, as well as data on exports, industrial production and retail sales, indicate the eurozone is heading for a slowdown rather than a recession this year. However, the bloc is being hit particularly hard by the fallout from Russia’s invasion of Ukraine, which has sent European energy and food prices soaring, crimping the spending power of consumers whose wages have risen more slowly. Goldman Sachs economist Sven Jari Stehn warned that if the war deepens and Russian gas supplies to Europe are cut off, it could plunge the region into a “short, but sharp, recession”. This stagflation scenario of a shrinking economy with persistently high inflation is one that worries many rate-setters. “It is not going to be easy for the ECB,” said Hollingsworth. “There are a number of hurdles for them to overcome.”This story has been amended to reflect the fact that one of the ECB’s current governing council members had joined the council when interest rates were raised in July 2011. More

Europe is at risk of energy rationing this winter, particularly if cold weather coincides with resurgent economic demand in China, the head of the world’s watchdog for the sector has warned.In some of the toughest comments yet about the possible scope of energy shortages in the wake of Russia’s invasion of Ukraine, Fatih Birol, executive director of the International Energy Agency, said rationing could be introduced for industrial gas users and others if steps were not taken quickly to improve efficiency. “If we have a harsh winter and a long winter and if we do not take [demand side measures] . . . I wouldn’t exclude the rationing of natural gas in Europe, starting from the large industry facilities,” he said in an interview with the Financial Times.Birol said governments needed to drive down energy demand by improving efficiency, but added that potential gas shortages would be less severe “if the Chinese economy doesn’t perform at the usual pace”. In recent months restrictions imposed as part of Beijing’s zero-Covid policy have slowed economic growth and cut energy demand but the country is now reopening.Many continental European nations are heavily dependent on Russian gas and are concerned the Kremlin is using energy to put pressure on countries that back Ukraine. Gazprom, the state-controlled Russian energy giant, has already cut off countries including Poland, Bulgaria and Finland, and as of last week, the Netherlands and Denmark, for allegedly failing to comply with its demands to use a new rouble payment mechanism.

Birol, pictured in 2020, says rationing could be introduced for industrial gas users © Simon Dawson/Bloomberg

The IEA chief’s comments about possible rationing for Europe follow moves by Germany and Austria. Germany said in March that if there was an acute shortage it would cut off parts of industry from the gas network to ensure that households retained energy. Birol’s warning was amplified by Denmark’s climate minister Dan Jørgensen, who said in an interview that emergency plans, which could include energy rationing, might become necessary if Europe stopped importing Russian gas. Kadri Simson, the EU’s energy commissioner, has also said the bloc is developing contingency plans for a complete halt to Russian gas imports, which people familiar with the proposals said would include rationing for industry. At an IEA conference in Denmark attended by ministers and government representatives from at least 20 countries, the agency said the world could reduce yearly energy consumption by 2030 by the equivalent of China’s current annual use through steps such as better building insulation and other efficiencies including better air conditioning.

Birol said that energy security should be achieved through increased efficiency, more use of renewable energy and “making the most of existing [oil and gas] fields” — rather than new, large fossil fuel projects, which could last into the 2040s and 2050s and could mean “saying goodbye to our international climate policy”.But he warned sky-high oil prices were likely to cause pain for many economies. The price of Brent crude jumped close to its high of the year at the end of May after the EU announced a ban on most Russian oil imports, and has remained elevated since. More

The west’s mobilisation to address the global food crisis caused by the war in Ukraine is recognition that millions could face starvation in Africa, the Middle East and Asia, as the conflict shakes commodity markets and leaves vulnerable grains importers on the verge of catastrophe. But it is also a tacit acknowledgment of the geopolitical risks of letting Moscow blame sanctions for surging food prices.Those versed in the complex process of co-ordinating international initiatives say western allies have shown solidarity and resolve to tackle food insecurity and possible social unrest in poorer countries. The US and European governments have announced various initiatives and measures alongside spending commitments from multilateral organisations. Germany, which holds the G7 presidency, and the World Bank are co-ordinating those efforts under the Global Alliance for Food Security. More details will be outlined ahead of the G7 heads of state meeting in Germany this month to address the immediate financial and humanitarian needs of poorer countries as well as longer term measures for sustainable agriculture.“There has been an unprecedented amount of political attention to the food security impact of the war,” says Caitlin Welsh, director of global good security at the Center for Strategic and International Studies.Easing food insecurity has become paramount for European countries, which faces the possibility of hunger-related migration from the African continent and the Middle East, where countries including Tunisia and Lebanon rely on the Black Sea region for food staples — especially wheat. But partly western countries are also seeking to win over hearts and minds of nations concerned about their wheat inventories and which have mostly been reluctant to pick a side since Moscow’s February invasion of Ukraine.Apart from mitigating a food crisis among poorer countries, and to show that the west is standing in solidarity with affected countries, a co-ordinated initiative “is also a means by which we make clear: We have not caused this crisis, it is caused by Putin and his war on Ukraine”, says a German development ministry official.After a meeting with Vladimir Putin last week, Senegal’s president Macky Sall, also chair of the African Union, called for the lifting of western economic sanctions against Russia. He embraced Moscow’s narrative that Russia was ready to “facilitate the export of Ukrainian cereals” and was “ready to ensure the export of its wheat and fertiliser” even though Ukrainian ports are under a Russian blockade.“Some countries are saying ‘we don’t care [who is to blame for the war], we just want the wheat and to feed our people’,” said David Laborde, senior research fellow at International Food Policy Research Institute.

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In presenting the international measures, policymakers also need to avoid being seen as window dressing. After the 2007-08 crisis which was caused by a spike in energy prices and droughts in crop-producing countries, the G8 and G20 announced a $22bn aid package. However, there was widespread scepticism over the amount of new money provided for food security. Much of the funding was recycled, some aid agencies said.In order to widen backing, G7 countries have invited Indonesia, India and African countries as well as NGOs to participate in the GAFS discussions. Another big question is whether the measures can take effect before crunch time for poor food importers, especially those in Africa, which will see their inventories depleted around September. Some including Cameroon and Kenya have been leading a hand-to-mouth existence, only buying when it is absolutely needed, say grain traders. Ukrainian farmers also need to empty their silos before the next harvest next month.In parallel with the G7 measures, the EU and UN have been trying negotiate with Putin to create a humanitarian corridor for the passage of wheat. But the mistrust runs deep between Russia and Ukraine and its western allies.Even if there were to be some sort of compromise to shift food out of Ukraine both sides may not strike an agreement until the last minute. The danger is that it turns into a game of chicken, says Ilana Bet-el, political analyst and senior fellow at King’s College London. “At a certain point, with so [many countries] depending on grain out of Ukraine, [the west] will have to take the risk and [come to an agreement with Russia].” More

Bridgewater is betting on a sell-off in corporate bonds this year as the world’s biggest hedge fund takes a gloomy view on the trajectory of the global economy.The wager against US and European corporate debt underscores Bridgewater’s assessment that recent weakness across major financial markets will not be shortlived. “We’re in a radically different world,” Greg Jensen, one of Bridgewater’s chief investment officers, told the Financial Times. “We’re approaching a slowdown.”Jensen, who helps lead investment decisions alongside co-CIO Bob Prince, warned that inflation would be far stickier than economists and the market currently predict, which could pressure the US Federal Reserve — the world’s most influential central bank — to raise interest rates higher than expected by many on Wall Street.He added that if Fed policymakers were committed to bringing inflation down to its target of 2 per cent, “they may tighten in a very strong way, which would then crack the economy and probably crack the weaker [companies] in the economy”. He added: “We think nominal growth will hold up. The real economy will be weak, but not a self-reinforcing weakness.”Bridgewater had already been positioning for a sustained sell-off in the $23tn US government bond market, and has similarly wagered on Wall Street equity prices falling — even after they have already collectively lost $9tn in value this year. High-grade US corporate bonds are down about 12 per cent this year on a total return basis, while those in Europe have fallen 10 per cent in local currency terms, according to ICE Data Services indices. Higher interest rates have led to a jump in mortgage rates for consumers and higher borrowing costs for companies securing new debt. Should companies fail to clinch fresh financing they could fall into financial distress or face bankruptcy, and Jensen said the bearish position on corporate bonds reflected Bridgewater’s belief that “it’s going to start to get much more expensive to borrow money”.Top Fed officials have signalled their intent to slow the economic expansion as they attempt to rein in the highest inflation registered since the 1980s. To do that, policymakers have started to aggressively raise interest rates from historic lows and this month they will begin to reduce the size of the Fed’s nearly $9tn balance sheet.Jensen said the Fed’s decision, coupled with tighter policy from a panoply of central banks across the globe, would drain liquidity from the financial system. In doing so, he said the prices of many assets that rallied last year would come under pressure.“You want to be on the other side of that liquidity hole, out of assets that require the liquidity and in assets that don’t,” he said.Bridgewater in April used baskets of credit derivatives in Europe and the US to make the bet against corporate bond markets, according to people familiar with the trade. The spread on the main high-yield CDX index, which tracks insurance like products that protect against defaults on riskier corporate bonds, has surged from around 375 basis points at the beginning of April to 475 basis points this month, indicating an increased cost to protect against issuers reneging on their debts. Jensen declined to say how Bridgewater had structured the short bet on credit or how large the position was.Even with the Fed’s current hawkish rhetoric, Jensen said he ultimately believed that the Fed would blink and accept inflation above its 2 per cent target. Policymakers, in his view, will be unable to tolerate a stock market sell-off and the high unemployment that would probably result from raising rates high enough to bring inflation down to that threshold. Otherwise he estimated stocks could “crash” a further 25 per cent from current levels if the Fed was unrelenting in its push to tackle inflation.The year’s earlier investments have paid off handsomely for Bridgewater, which is best known for its global macro approach in which it attempts to profit by making bets based on economic trends. The fund managed $151bn in assets at the start of the year and its flagship Pure Alpha investment fund is up 26.2 per cent this year through the end of May, according to a person familiar with the matter, compared with a 13.3 per cent decline for the benchmark S&P 500 over that period.Jensen blamed current volatility in the US stock market in part on the Fed’s conclusion of quantitative easing. Without the central bank in place to absorb the large supply of Treasury bonds, other investors have had to step in, and in doing so, sold off other holdings such as stocks. “So you’re seeing this see-saw between bonds selling off or equities selling off,” he said. As for areas where the fund is bullish, Jensen said he favoured commodities and inflation-indexed bonds. Both asset classes would, he said, benefit in a stagflationary environment — a toxic combination of low growth and rising prices. More

European manufacturers say Brussels is adding to their supply chain crisis after it rejected requests for a big increase in the amount of steel they can import without paying punitive 25 per cent tariffs.Despite high prices for steel amid supply constraints, the European Commission has opted for only a small rise in quota-free imports for the next 12 months, from 3 per cent of annual demand to 4 per cent. Business groups say factories could be forced to relocate from Europe if the tariffs are not scrapped soon.The EU’s “safeguard tariffs” were imposed in 2018 after then US president Donald Trump hit many countries with duties of 25 per cent on steel imports and the EU feared a price collapse as it was swamped with steel diverted from US markets. Steel consumers wanted a big increase in the tariff-free quota now and abolition of all duties next year. Automotive-grade steel in the EU recently hit almost €1,500 a tonne, three times the price two years ago. Most western steelmakers are still enjoying healthy profits after recording their best year in 2021 following a decade of plant closures and lower demand. The economic recovery after the coronavirus pandemic helped boost demand for steel. “The slight liberalisation margin is simply not sufficient to ensure a fair access for European manufacturers to competitive steel,” said Paolo Falcioni, director-general of Applia, which represents Europe’s white goods makers. Calling for the removal of tariffs, he said they “risk promoting industrial delocalisation through imposing additional manufacturing costs”.ACEA, which represents carmakers in the EU, said the increase was “completely insufficient”. It added that “domestic steel producers are still incapable of satisfying the needs of EU automakers”, while the safeguards “artificially maintain record prices”. Around 90 per cent of EU car production used steel made in the bloc. Euranimi, an association of steel importers, filed a legal case against the commission at the EU’s General Court in June 2021, when the safeguard measures were extended for three more years.The annual review sets the level of quota, and member states will vote on the commission proposal on Wednesday, with the changes taking effect from July 1. Next year the commission will decide whether to extend the tariffs beyond 2024.Euranimi’s case, which has yet to be heard, said the commission should have taken into account the rebound in prices. In parts of Europe, hot-rolled coil, a widely traded product that is often seen as a benchmark for steel prices, jumped to €1,400 a tonne in April, according to commodity data provider Argus Media, though it has since fallen back to below €950 a tonne. “We are faced with massive inflation,” said an executive at one carmaker who declined to be named. “Steel is a big part of the price of a car. Having a car is no longer going to be affordable for the man on the street, only the most wealthy.”They added: “If things remain difficult our management will say we prefer to produce in Asia and import and pay the 10 per cent [vehicle import] tariff. It is still cheaper.”The situation is another problem for carmakers, many of which reduced production because of a shortage of semiconductors. Chips and other car components such as batteries are increasing in price.Eurofer, the European steel producers’ association, declined to comment before the member states’ vote on the annual tariffs on Wednesday. The trade body, however, has previously countered calls to completely remove the import safeguards. It argued that such calls do not “consider the real function of the steel quotas, which is to avoid serious disruption from sudden import surges without micromanaging supply or prices”.Chris Bandmann, steel analyst at CRU Group, said EU steel imports had been strong since the outbreak of the war in Ukraine in February as users had looked to source material from other countries. Imports from Ukraine have fallen heavily, while those from Russia have dropped off entirely as a result of EU sanctions in March. “The main story here is the change in sourcing. The loss of Russia as a trade partner following the import ban has forced diversification — with countries like India and South Korea benefiting from this gap in availability,” said Bandmann.The commission declined to comment because of the pending court case. More

The Atlanta Federal Reserve’s GDPNow tracker is now pointing to an annualized gain of just 0.9% for the second quarter, down from an estimated 1.3% increase less than a week ago.
With first-quarter growth down 1.5%, a second consecutive quarter of negative growth meets a rule-of-thumb definition for recession.
The National Bureau of Economic Research, the official arbiter, says a recession can include two straight negative GDP prints, but that’s not necessarily the case.

Federal Reserve Chairman Jerome Powell testifies during the House Financial Services Committee hearing titled Monetary Policy and the State of the Economy, in Rayburn Building on Wednesday, March 2, 2022.
Tom Williams | CQ-roll Call, Inc. | Getty Images

A widely followed Federal Reserve gauge is indicating that the U.S. economy could be headed for a second consecutive quarter of negative growth, meeting a rule-of-thumb definition for a recession.
In an update posted Tuesday, the Atlanta Fed’s GDPNow tracker is now pointing to an annualized gain of just 0.9% for the second quarter.

Following a 1.5% drop in the first three months of the year, the indicator is showing the economy doesn’t have much further to go before it slides into what many consider a recession.
GDPNow follows economic data in real time and uses it to project the way the economy is heading. Tuesday’s data, combined with other recent releases, resulted in the model downgrading what had been an estimate of 1.3% growth as of June 1 to the new outlook for a 0.9% gain.

Personal consumption expenditures, a measure of consumer spending that is responsible for nearly 70% of gross domestic product, saw a cut to a 3.7% gain from a previous 4.4% estimate. Also, real gross private domestic investment now is expected to shave 8.5% off growth, from the previous 8.3%.
At the same time, an improvement to the trade outlook resulted in a mild boost to the estimate.
The U.S. trade deficit with its global partners fell to $87.1 billion in April — still a large number by historical standards but down more than $20 billion from March’s record. On net, trade is expected to subtract 0.13 percentage point from GDP in the second quarter, from a previous estimate of -0.25 percentage point, according to the Atlanta Fed.

Talk of recession has accelerated this year amid surging inflation that has put a damper on corporate profit outlooks. Many on Wall Street are still expecting the combination of resilience in consumer spending and job growth to the keep the U.S. out of recession.

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“Right now, it looks like any talk of a recession is a 2023 story. It’s not this year,” said Joseph Brusuelas, chief economist at consulting firm RSM. “We would need to see future shocks to the business cycle. My sense is the economy is going to slow, but only really back to its long-term trend growth rate of 1.8%.”
To be sure, while the notion of two consecutive negative GDP quarters is often considered a recession, that’s not necessarily true.
The National Bureau of Economic Research, the official arbiter of recessions, says that rule of thumb often holds true but not always. For instance, the recession of 2020 saw just one quarter of negative growth.
Instead, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
“Most of the recessions identified by our procedures do consist of two or more consecutive quarters of declining real GDP, but not all of them,” the NBER says on its site. “There are several reasons. First, we do not identify economic activity solely with real GDP, but consider a range of indicators. Second, we consider the depth of the decline in economic activity.”
However, there has never been a period with consecutive negative-growth quarters that did not entail a recession, according to data going back to 1947.
One major source of inflation fears is the Federal Reserve, which is on a rate-hiking cycle in an effort to quell runaway inflation. Chair Jerome Powell said last month he sees “a good chance to have a soft or softish landing,” even with policy tightening.
“It’s not going to be easy. And it may well depend, of course, on events that are not under our control. But our job is to use our tools to try to achieve that outcome, and that’s what we’re going to do,” Powell said.
Earlier Tuesday, Treasury Secretary Janet Yellen told a Senate panel that “bringing inflation down should be our No. 1 priority” and noted that attempts to bring down the cost of living are coming “from a position of strength” in the economy.

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TOKYO (Reuters) – Japan’s current account surplus shrank sharply in April as record imports overwhelmed exports, swinging the trade balance into the red, data showed on Wednesday, stoking some concerns about the country’s long-term purchasing power.Japan’s current account surplus stood at 501 billion yen ($3.77 billion) in April, the data showed, down 628 billion yen from the same month a year earlier.It was the third straight month of a surplus and broadly in line with economists’ median forecast for a surplus of 511 billion yen in a Reuters poll.Surging fuel purchasing costs pushed up overall imports by 32.8% year-on-year to a record amount, outpacing export growth led by steel and car shipments.The current account data underscored the change in Japan’s economic structure as the country earns hefty returns from its portfolio investment and direct investment overseas, which have replaced trade as a main driver of its current account gains.Some analysts are concerned that Japan’s current account surplus may keep shrinking although it is backed by hefty returns on investment overseas, for now.The current account surplus has been declining for four fiscal years in a row to March 2022.Although a weak yen helped inflate the cost of imports, its boost to exports was not as great as it once was due to an ongoing shift of exporters’ production abroad.($1 = 132.7800 yen) More