Economy

Jay Newman was a senior portfolio manager at Elliott Management, and is the author of Undermoney, a thriller about the illicit money that courses through the global economy.Investors in emerging market sovereign debt are junkies — addicted to the illusion of higher yields. Truth be told, they’re also addicted to the adrenaline rush that comes from sitting at the high table to negotiate restructuring terms after a default.For decades it has been past time for an intervention that recognises this addiction and helps us break the cycle of imprudent borrowing, feckless lending, and repeated restructurings that result in a race to the bottom: with sovereign debt being renegotiated and large chunks forgiven repeatedly until, magically, it disappears.We are on the brink of an epidemic of emerging market defaults, the scale and scope of which will rival the debt crisis of the 1980s. Rate increases by Western central banks, fallout from the COVID pandemic, surging food and fuel prices resulting from the economic fallout of the war between Russia and Ukraine, mismanagement, and outright corruption all are contributing factors. No matter the causes, we will soon be in the thick of it.

Consider the warning issued recently by one of the biggest promoters of this sketchy asset class. According to JPMorgan, Sri Lanka, the Maldives, the Bahamas, Belize, Senegal, Rwanda, Grenada, and Ethiopia are all “at risk of reserve depletion” — aka the cash drawer is empty. Let’s not leave out Lebanon, Egypt, Pakistan, Russia, the inevitable renegotiation of Ukrainian debt, or, for that matter, the 27 countries with bonds that yield more than 10 per cent — always a sign of trouble.But, with all due respect to Kenneth Rogoff and Carmen Reinhart: this time is different, because we are about to witness the first full-blown emerging market sovereign debt crisis in which a single lender — China — holds the whip hand.China, because of the vast sums it has lent and invested through its Belt and Road Initiative, controls the destiny not only of countries that have taken its money, but the IMF and private sector lenders as well.Sri Lanka is a case in point. In 2019, the World Bank classified Sri Lanka as an upper-middle income country. Today, it has over $50bn in debt, but has depleted all its reserves, and its people are queueing for kerosene, food, and medicine. There are plenty of explanations, but, not least, is the debt trap laid by China, which has in cahoots with the government saddled Sri Lanka with white elephants: uneconomic, ill-conceived projects like Hambantota Port and the empty Mattala Rajapaksa International Airport. When Sri Lanka, predictably, found itself unable to satisfy the debt, China sprang the trap, insisting on repayment, offering to exchange debt for further concessions and vast tracts of land, and offering additional cash to help tide the political class over.

The China-financed Hambantota Port in Sri Lanka © Bloomberg

If China was a run-of-the-mill commercial creditor, excessive borrowing would get sorted out. But it’s not. The size, scope, and terms of China’s BRI deals are state secrets. From all appearances, China not only intends to keep it that way, but to insist upon seniority — possibly even to loans made by international financial institutions like the IMF and the World Bank.What, then, is to be done? In the ordinary course, the IFIs, Western government, chuckleheaded NGOs, and the international press will call upon private sector creditors to offer Sri Lanka concessionary terms — to forgive a large percentage of their claims and extend maturities on rollover debt for decades.Why do that? Unless a debtor demonstrates a willingness and capacity for reinvention, and unless all creditors — including China and the IFIs — agree to disclose the entirety of their claims and agree to negotiate a resolution on commercial terms, any restructuring will fail.

In place of such a flawed, conventional approach, private creditors should heed the mantra that has been good advice for addicts in every walk of life: just say no.Just say no: to negotiating before the debtor has a comprehensive, sustainable fiscal plan. Why would any creditor negotiate with a debtor that doesn’t have a credible plan to solve its fiscal problems?Just say no: to negotiations until a comprehensive, good faith analysis of debt sustainability has been completed. Until Argentina broke the mould, negotiations over the level of debt that could be sustained over the long-term was a given.Just say no: until any debtor that has been victimised by decades of corruption undertakes a radical effort to identify the culprits and recover ill-gotten gains. There is good reason to believe that, in nearly every sovereign debt crisis over the past forty years, countries could have been put on a sound financial footing if even a small portion of stolen money had been recovered.Just say no: to negotiating before international financial institutions, like the IMF, indicate precisely how their own claims will be treated.Just say no: until there is a semblance of political stability. It’s not too much to ask whether the people sitting across the table will be there in six months — or six years. There’s no point in cutting a deal with a government that won’t survive beyond the signing ceremony.Just say no: to signing up for loan documentation that fails to provide robust legal rights and enforcement protections to creditors. The biggest failure of the most recent Argentine debt restructuring was that, rather than present the government with contractual terms that would have provided enforceable rights, creditors opted to forgive half the debt without any quid pro quo. For Argentina, repayment of its external debt has become optional, despite it being possible to create a “super” bond with dramatically stronger protections in the event of default. To date, bondholders have simply been too timid and fearful to try.Just say no: to any negotiations in which China and similarly-situated lenders, like India, fail to produce complete sets of documentation for their loans and investments — and agree to participate in restructuring negotiations as commercial creditors with rights no greater or lesser than those of any other lender.

Sound like a dream? Well, the first step in recovery from any form of addiction is reality testing: you’ve got to recognise that you have a problem, and accept that doing the same old thing over and over again will not produce a different result.It won’t be easy. The geopolitical incumbents — sovereign states, IFIs, NGOs — have for too long viewed private sector lenders as the first flock to be fleeced when a default occurs, rather than as partners in devising durable solutions. Not only that, some of the world’s largest money managers seem to have decided that their first allegiance is to some vague Davos-inspired notion of collegiality, rather than protecting their investors.But there is really nothing to lose — or to fear. Unless and until debtors plagued by weak institutions and by corruption are held to account, a dollar borrowed will continue to be a dollar gained. They will suck in as much money as they can, whenever they can — whether from markets, from bribes, from the IMF, or from China — and hide behind the notion that events spiralled beyond their control.In the end, there is only one rational, functional response to the implicit argument that there is no dishonour in default. If you’re invited to participate in a process that is fundamentally flawed and corrupted: just say no. More

Amid market sell-offs and surging inflation, central banks in the US and Europe are searching for a sweet spot in monetary policy — to make enough rate rises to dent inflation but not push economies into brutal recessions. In Asia, central bankers are in a very different place. In China, private lenders have recently cut their main mortgage interest rate by the most on record. The Bank of Japan also has maintained its vow to keep yields at zero by buying bonds, if necessary. In a climate as uncertain as this one, no one knows where the tightening cycle in the western hemisphere — and the loosening one to the east — will end up. But if we take monetary policymakers at their word, the gaps between borrowing costs in the world’s major economies look more substantial than they have been for decades. Right now the US Federal Reserve thinks its Goldilocks, or neutral, benchmark borrowing rate — where output is close to potential, inflation is around 2 per cent and everything is just right — is somewhere between 2 and 3 per cent. At the Bank of England, they’re aiming for between 1.25 and 2.5 per cent. In the eurozone, policymakers are taking neutral to mean from 1 to 2 per cent. While the Fed plans to get within that range fast, ECB president Christine Lagarde has said policymakers in the eurozone prefer a more moderate approach. It is only expected to raise rates for the first time in more than a decade in July, when the deposit rate is set to rise to minus 0.25 per cent. By the beginning of August, the US benchmark federal funds rate is likely to be just shy of 2 per cent and the BoE will have likely embarked on its sixth increase in a row. The divergences beyond the coming months could be greater still. Officials in the US are becoming increasingly concerned that shifting to neutral will not be enough. The Fed may have to slam on the brakes, raising borrowing costs beyond 3 per cent to what last Wednesday’s FOMC minutes dubbed a “restrictive” policy stance, should inflation prove stickier than expected. In Europe, the fears are more of the sort that even the most moderate of tightening cycles will widen the spread between Germany’s borrowing costs and those of sovereigns with higher debt-to-GDP ratios, notably Italy’s. If the spread does indeed widen, expect the ECB to stall on tightening. The eurozone and the UK are more exposed to the economic repercussions of Russia’s invasion of Ukraine too. Meanwhile, Japan and China are pushing their foot down on the accelerator, not removing it. The consequences for markets are myriad. Many expect a further strengthening of the dollar, for one. “I’m in the camp of people who think we’re going to get a mini version of the 80s, where we had a few years in a row where the dollar was strengthening against everything else,” says Adam Posen, president of the Peterson Institute think-tank, who used to sit on the Bank of England’s Monetary Policy Committee. More worrying for policymakers in Beijing, already bruised by the impact of Covid-induced lockdowns on growth, is the likelihood that the gulf in interest rates crushes demand for domestic financial products. “Of course China isn’t going to completely open the current account up,” Posen says. “But the greater the interest rate differential — the more pressure grows for capital outflows. Chinese economists and officials are already conscious of that.” Another side effect could be that emerging markets and companies feeling the pinch from higher US rates borrow in other currencies instead. This so-called reverse-yankee trade last gained prominence in 2015 when the ECB finally launched quantitative easing, just as the Fed was considering higher rates. However, as Hyun Shin of the Bank for International Settlements notes, there may be a reluctance to take on the associated foreign exchange costs in such an uncertain environment. He says if investors want to borrow dollars for a few years, they might come out ahead if they borrow in euros and then do the currency transaction. But the danger is that this would leave investors potentially on the hook if currency markets move against them. “It doesn’t strike me as terribly realistic that this sort of transaction will take off in a big way now,” he says. Whatever the repercussions, intended or otherwise, it would be wise to bet that in the topsy-turvy world of the new normal, central banks will look far different to one another than they did before. [email protected] More

Oil prices have renewed their rise in the most sustained ascent since Russia’s invasion of Ukraine as a fuel supply crunch adds pressure to a market that had already been disrupted by the coronavirus pandemic. The disturbance to flows of oil and related products from Russia has rippled through energy markets as refineries are racing to pump out petroleum products to meet the needs of a global economy that is still emerging from the shock of Covid-19. The supply and demand imbalances pushed the price of Brent crude, the global benchmark, up by more than 10 per cent last month in the biggest rise since January. Brent for July delivery hit a high of $123 on Tuesday compared with less than $80 at the start of this year. The rise underscored persistent supply challenges in the market for refined products such as gasoline and diesel, which had been building even before Russia’s invasion of Ukraine in late February. “The crude oil price is $120 per barrel but the product price — what you and I pay for petrol and diesel — is much, much higher. The overarching theme is the lack of investment,” said Amrita Sen, founding partner and chief oil analyst at Energy Aspects. “We are in this for the long haul: potentially a decade.”Oil analysts said that a shortage of processing capacity had compounded an extreme squeeze on the availability of products such as diesel, gasoline and jet fuel, incentivising refineries to lift output and thereby increase demand for crude. The closure of 2.8mn barrels per day of refinery capacity in the last two years on the grounds that it was surplus to requirements during the coronavirus pandemic — and for environmental reasons — has left the oil processing sector struggling to meet demand during the current maintenance season. Compounding the situation, China has restricted fuel exports at a time of record low inventories in certain parts of the world.Crude remains well below its 2008 all-time high of $147.50 a barrel, but prices at the pump have hit unprecedented levels because consumers pay to cover the margins of refineries that process crude into fuel and the distributors and retailers that market them. There is a bigger shortfall in diesel and gasoline markets than crude, so prices for refined products have climbed faster. The gas oil contract in Europe, a proxy for diesel and other distillates, is trading close to record levels near $1,250 a tonne.Refineries have vowed to ramp up throughput, thereby boosting crude prices and narrowing the difference between crude and refined product prices that had widened to record levels. The increased demand for crude comes as the oil market faces other upwards pressures on demand. China is easing lockdown restrictions in Shanghai and the summer uptick in travel demand is picking up pace.Rick Joswick, head of global oil analytics at S&P Global Commodity Insights, said that “it is a race between demand increasing seasonally and refiners increasing their operations to produce the fuel”.Oil markets also face fresh threats to supply after Iran seized two Greek tankers last week, dimming the possibility of any breakthrough on the Iranian nuclear deal, which would pave the way for a return of the country’s oil supplies to global supply chains. The move may additionally curb the free flow of oil out of the Middle East by other producers such as Iraq.“And in the background, we are concerned about Russian supply,” said Caroline Bain, chief commodities economist at Capital Economics.The EU struck a deal late on Monday to ban seaborne Russian oil imports. But Lars Barstad, chief executive of tanker company Frontline, said on an earnings call that 2mn barrels of oil were already being diverted daily, equivalent to 6 per cent of the global seaborne oil trade.Russian crude oil has managed to find plenty of willing buyers in China, India and Turkey and exports have even increased over prewar levels. However, Russian exports of refined products slumped to a 22-month low in May, according to Vortexa, leading local refineries to cut production. About 1.3mn b/d of Russian refinery capacity are expected to be offline through to the end of 2022, JPMorgan estimates, although other analysts say a seasonal drop in Russian fuel exports is nothing unusual.The uncertainty over the ability of Russia to get its crude to market — particularly after the UK and EU agreed a co-ordinated ban on insuring ships carrying Russian oil — has left prices vulnerable to volatile upswings. Bank of America has predicted that a sharp contraction in Russian oil exports could trigger a “full-blown 1980s style oil crisis” and push Brent crude prices above $150 a barrel.Some are less bullish on prices in the longer term. Amy Myers Jaffe, managing director of Climate Policy Lab at the Fletcher School at Tufts University, said that the potential removal of Russian oil from the market evokes memories of the 5mn b/d loss of Iraq and Kuwaiti oil from global markets in 1991.She added that the rise in prices would eventually lead to a “cataclysmic drop” because of demand destruction, a recession or government action towards alternative energy sources — which was not a feasible option during previous oil shocks.“It’s a cycle and it’s still a cycle. Cycle means it’s going to come down,” she said.But Giovanni Staunovo, commodity analyst at UBS, said an immediate recession seems unlikely with the easing of Covid restrictions igniting fervour for travel among consumers.“The only negative element I see is the pandemic limiting the demand,” he said. “Potentially prices need to go even higher to rebalance the market.” More

Manufacturers suffered the brunt of cyber attacks last year, overtaking financial services and insurance as the most targeted sector. As the Covid-19 pandemic exposed the vulnerability of the long, complex supply chains favoured by global manufacturers, hackers bet on the ripple effects that disruption would cause for them.More than 45 per cent of the attacks were on vulnerabilities that victim organisations did not, or could not, fix using software updates, according to IBM’s latest Security X-Force Threat Intelligence Index.These findings underline the increased threat to industrial companies as they grapple with the challenge of securing decades-old legacy systems.Increasingly interconnected supply chains have only raised the stakes — with several global manufacturers reporting incidents. Earlier this year, Toyota shut down all of its plants across Japan after a suspected cyber attack on one of its suppliers.Attacks are also increasing at a time when companies are integrating greater computing power, and more connectivity, into their production facilities.So-called smart factories promise to improve quality and efficiency in manufacturing, as well as cutting response times. But they create new points of cyber vulnerability, especially if poorly implemented. Manufacturers are “not as mature as the financial services sector, which has had these attacks for a number of years and is therefore ahead of the curve in terms of its protections”, points out Del Heppenstall, cyber security partner at KPMG in the UK.They are vulnerable to attacks on several fronts, too.“From a ransomware perspective, manufacturers are quite exposed to time-driven critical processes, Heppenstall notes. “So, if you can cause a disruption, manufacturers are perceived to be more prone and therefore more likely to pay a ransom. Companies don’t run dual manufacturing processes.”

A further challenge for industrial companies is their reliance on what is often older technology to run the machinery in their manufacturing operations — whether that is making parts for a customer or building an entire product. Challenges arise when this operational technology is then connected to the company’s corporate IT infrastructure.All of these issues need to be addressed as manufacturers look to transform the way they operate to take advantage of interconnected systems and the “internet of things”.While a lot of research is going on into smart factories and what they should look like, the reality on the shop floor is still very different, warns Gareth Williams, vice-president of Secure Communications and Information Systems at French group Thales.He says setting up a fully connected factory is not that simple, “unless you are building a brand-new greenfield factory from scratch”.A lot of clients, adds Williams, are in “that middle stage” — where they want to make the factory smart, to connect all their IT systems and make better use of the data but they have an “existing factory infrastructure that they spent many years and many millions of pounds building”.“Some of it is very old, some of it doesn’t even recognise the internet,” he explains.While the question for larger companies is how they can protect themselves as they move along the path towards greater digitisation, the challenge for small and medium-sized companies is more often about getting the right level of support and expertise.In its latest cyber readiness report, the UK-listed insurer Hiscox found that small- and medium-sized enterprises have borne the brunt of recent attacks. Companies with revenues of $100,000 to $500,000 now get as many attacks as those in the $1mn to $9mn bracket.At the same time, however, IT spending by SMEs has fallen, leaving many exposed, the report reveals.Ted Plummer, principal product manager at industrial 3D printing company Markforged, which counts companies from a wide range of industries among its customers, says SMEs and the “small machine shops are starting to realise how important maintaining around this digital thread is”.They need tools to “make it easy to be secure”, he argues, because “people will do what is most convenient”.

Leanne Connor, business manager at the National Digital Exploitation Centre in Wales, warns companies: “You are only as good as your weakest link.”The centre — a joint venture investment launched by Thales, the Welsh government and the University of South Wales — is situated on the site of a former steelworks in Ebbw Vale and provides training and support to companies to test and develop their digital concepts. Connor says the key is to “get SMEs up to the right standard . . . the standards we expect from our supply chain are going up all the time”. KPMG’s Heppenstall sees a “significant amount of third party supplier assurance taking place” as executives test the resilience of their organisations. “Continuity of service is just as important as data,” he adds.And, while digital transformation may be the ultimate goal for many, Heppenstall cautions that executives should not lose sight of what they are trying to achieve by going down this path. “We found a lot of companies start with the technology and work backwards to apply it,” he says. “You should reverse the sequence and build the technology to meet the outcome you are looking to achieve by doing this digital transformation.” More

For the best part of a decade the potash market struggled with overcapacity and low prices. But as sanctions throttle supplies of the fertiliser from Russia and Belarus, which account for almost 40 per cent of global supply, buyers are scrambling for cargoes and warnings are growing of a global food crisis.In Brazil, an agricultural powerhouse, prices have surged 185 per cent over the past year hitting records above $1,100 a tonne, according to commodities consultancy CRU. In Europe they are up 240 per cent to €875 a tonne.Mined from underground deposits formed during the evaporation of ancient seabeds, potash is a mineral rich in water-soluble potassium, one of the three essential nutrients required for crop growth. Crucial to the production of food staples such as corn, soy, rice and wheat, a sudden plunge in supply threatens to devastate global crop yields.Producers are now looking to capitalise on the surge in potash prices and geopolitical tensions that have upended traditional trade flows and highlighted the importance of security of supply.BHP is weighing whether to bring forward production from Jansen, a $5.7bn potash project in the western Canadian province of Saskatchewan, to 2026 rather than 2027.

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The world’s biggest miner has also started studies into a second-phase expansion of the project, which would double potash production to 8mn tonnes a year. “The tragic events of recent months have highlighted the higher than usual potential for supply-side disruption in this market,” BHP chief executive Mike Henry told investors at conference in Miami last month. “This has positively reinforced the decision we’ve taken to enter potash.”Backers of a delayed $2.5bn potash mine in the Amazon rainforest that would be the largest in the region have renewed a push for authorisation. To obtain the necessary environmental licences, Brazil Potash must consult local indigenous people. “Subject to securing the required funding, the company will then start construction ideally at this year end,” said Matt Simpson, chief executive of the company, which is owned by Toronto-based merchant bank Forbes & Manhattan. “Assuming construction starts at this year end, potash production could commence three to four years later.” Smaller exploration companies, meanwhile, are raising money to start or complete new projects in politically stable jurisdictions.Highfield Resources, an Australian-listed company that plans to start development of a potash project in Spain this year, is close to securing a €312.5mn financing package from a consortium of European banks and has started talks with potential partners. “We’ve seen a huge difference in the level of interest since the war in Ukraine,” said its chief executive Ignacio Salazar.On the other side of the Atlantic, Canada’s Western Potash has just secured a C$85mn loan from Appian Capital, a London-based private group, to fund development of its Milestone project in Saskatchewan, while shares in Aim-listed Emmerson, which owns the Khemisset project in Morocco, have jumped 30 per cent this year.

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“If you’re an exploration development company at the moment, you’re spending every cent you can get your hands on touring around Wall Street and Toronto and London, trying to talk to hedge funds and private equity and others, trying to raise money,” said Allan Pickett, head of fertiliser analysis at IHS Markit.The current surge in potash prices is mainly a result of Belarus not being able to find a way into international markets because of EU and US sanctions and after neighbouring Lithuania blocked access to its railways and ports. Belarus is currently selling about 5 per cent of its normal volumes, mostly to China, although it is likely to work out a way to access Russia’s Baltic ports, according to Pickett. “There are countries that will not necessarily be squeamish about buying from Belarus. At which point there is [volume] bounce back in the market and pricing comes down and a lot of heat disappears,” he said.

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But while the potash market has a history of boom and bust dating back to the 1960s, analysts and industry executive believe that even if prices cool, they will remain above the long-term average. At a recent conference Germany’s K+S said a new floor price of $500 a tonne was possible — half the current spot price but double the average price of the previous decade.In a presentation published last year, BHP forecast “future achievable” potash production of 86mn tonnes in 2030, up from 76mn tonnes in 2020. Now, however, analysts reckon that estimate will be hard to achieve because most of the new supply was expected to come from Russian and Belarus.“If those projects are delayed or even cancelled outright because of issues around access financing then maybe you can see a situation where supply is certainly tighter for a more prolonged period,” said Humphrey Knight, head of potash analysis at CRU.Belarusian group Slavkaliy was forced to suspend development of its 2mn-tonnes-a-year Nezhinsky mine because of difficulties obtaining a loan. Analysts say there are also question marks over the funding of Talitsky, a project being developed by Russia’s Acron.Projects such as Highfield’s Muga are relatively small-scale so not big enough to make a difference globally, although they could help balance regional supply and demand. “Europe is realising it needs to be self sufficient and is starting to look at projects,” said Salazar, who reckons Muga could eventually produce 1mn tonnes a year of potash, equivalent to a third of the volume Europe currently imports from Russia and Belarus.The war in Ukraine has underlined the importance of self sufficiency for Brazil, the world’s largest buyer of fertilisers which relies on imports for about 85 per cent of its needs. Verde Agritech, a Toronto-listed Brazilian maker of potassium-based fertiliser, has announced it will increase production. Brazil’s president Jair Bolsonaro, meanwhile, has pushed for indigenous territories in the Amazon rainforest to be opened up for potash mining — to the consternation of environmentalists.Knight said the current crisis made it easier to understand why BHP was bullish about Jansen, which could eventually produce 16mn-17mn tonnes of potash a year across all four stages of development.“But there are lots of risks around the market outlook . . . the principal one being that Russian and Belarus are unlikely to be out of the market forever.” he said. “This is one thing that could change very quickly.” However, it will be difficult to replace Russian and Belarusian supply in the short-term, particularly given most of the world’s attractive potash deposits were already developed during the China-driven commodities boom of the early 2000s.“Supply will respond to high prices. It happened in the supercycle and that’s why the market was depressed for such a long time,” said BHP chief economist Huw McKay. “But if demand grows the hangover eventually passes. That’s where we are now — at the start of a new cycle but without many attractive options in the industry’s collective hopper.” More

In 2020 and 2021, when the coronavirus pandemic forced much of the world’s population to spend more time at home, Chinese exports of laptops recorded double-digit percentage growth.The boom was one example of how China’s economy benefited from shifting global demand as governments around the world imposed Covid-19 restrictions, crippling spending on restaurants, travel and other services and encouraging purchases of goods.But this year, China’s shipments of laptops have slumped 16 per cent year on year, reflecting a trend of weakening growth in its exports, which may now even be on course to decline.Amid the easing of Covid measures around the world and supply chain disruption from domestic lockdowns, Chinese exports grew just3.9 per cent in April in dollar terms. It was their weakest level since July 2020.The trend is part of a sweeping reversal of fortunes for China’s wider economy, which bounced back from the initial shock of the pandemic to outperform the rest of the world in 2020 but is now grappling with the lockdowns in Shanghai and other cities and a property sector crisis.China has set a 5.5 per cent target for GDP expansion this year, the lowest in three decades, but Premier Li Keqiang told officials last week it could struggle to achieve positive growth at all in the current quarter.“Given the big shock the economy’s just been through plus the headwinds on the export side, I think it’s quite challenging just to get positive growth at all this year,” said Julian Evans-Pritchard, China economist at Capital Economics who expects “quite a significant outright decline in export volumes”.Evans-Pritchard estimated that exports accounted for almost half of China’s 18.3 per cent year-on-year gross domestic product expansion in the first quarter of 2021, but expected it to make a negative contribution to growth from the third quarter of this year onwards.

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The export slowdown has removed a source of support for the economy that Chinese policymakers have relied on throughout the pandemic. It has also come just as zero-Covid policies are causing rising unemployment and a collapse of activity in many cities.“Reopening [globally] is not good for China’s exports,” says Ting Lu, chief China economist at Nomura.Lu estimated that about 80mn people worked in China’s export sector in 2020, meaning a single percentage point decline in its activity could hit hundreds of thousands of jobs.Chinese trade data hint at changing global consumption trends over the past year. Exports of textile yarn and fabric products, including face masks, were up by just 0.9 per cent year on year in April, compared with 22 per cent growth in the same month of 2021. Lu said exports of electronic products associated with homeworking fell 5 per cent in April, compared with a 10 per cent rise in March.

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Meanwhile, from January to April this year, furniture exports rose just 2 per cent, after soaring 70 per cent in the same period of 2021.Data from other major economies also point to shifting consumer behaviour. In the UK in March last year, real output in the recreation and entertainment sectors was still down by a quarter against a year earlier, while accommodation and food services were down 62 per cent, according to data from the Office for National Statistics.However, by March this year, both sectors had rebounded to pre-pandemic levels following the easing of Covid restrictions.Similarly in the eurozone, inflation-adjusted retail sales, which mainly reflect purchases of goods rather than services, peaked at 6 per cent above pre-pandemic levels in November last year and have fallen since.

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Data on spending on services is not available for the eurozone as a whole, but Eurostat data for certain countries point to a pivot in spending from goods to services. In Italy, spending on restaurants and hotels grew by an annual rate of 23 per cent in value terms last year, nearly 6 times faster than spending on food and non-alcoholic beverages.Lockdowns in Shanghai and other Chinese cities have caused serious supply chain problems for exporters. But Louis Kuijs, chief Asia economist at S&P Global Ratings, said export challenges were not limited to China. “After the huge bounce in exports [in] much of 2020 [and] 2021, we should expect to see global demand slowing this year,” he said. “That’s true for China, it’s also true for other countries — the other exporting powerhouses like Taiwan and South Korea are facing the same problem.”Meanwhile, the global backdrop of higher inflation might have masked the extent of the hit to Chinese exports, Kuijs said.

“If you look at export numbers in US dollar terms they are still quite good, but a large part of that is price increases,” he said. Lu at Nomura said the lockdowns in Shanghai and other cities would put Chinese suppliers at a disadvantage to international rivals.“Manufacturing in other parts of the world will return to normal, so China’s exports will be faced with more competition,” Lu said, adding that the restrictions would prompt buyers of Chinese exports to shift some orders elsewhere. “I don’t know the scale, but I believe it’s happening.” More

WASHINGTON (Reuters) – President Joe Biden is planning a media blitz to lift his sagging opinion poll numbers before November’s congressional election, promoting his management of America’s recovery from the coronavirus pandemic and efforts to cool spiraling inflation.Biden’s meeting with Federal Reserve chair Jerome Powell to discuss inflation on Tuesday was the first event in a multi-week agenda, a White House official said.Through June, the official said, the White House plans to emphasize the historic levels of job creation and low unemployment rate seen through Biden’s first 17 months in office, his pledge to respect the Fed’s independence and coming efforts to “put more money in the pockets of working families.” Biden will speak on the jobs numbers on Friday, and Cabinet members including Treasury Secretary Janet Yellen, Commerce Secretary Gina Raimondo and economic advisers Jared Bernstein and Heather Boushey plan dozens of television spots and other in-person events. The prospects for Biden’s Democratic Party to maintain control of Congress in the Nov. 8 election may hinge on how successfully he can craft a positive economic narrative around what has become an increasingly sour mood.On the surface, working families have been doing well. Unemployment is at levels more akin to the boom years of the 1950s and 1960s, wages for many lower-skilled occupations are rising, and bank accounts, on average, are still flush with cash from coronavirus support programs. Recent Fed reports and surveys reported households on average in a strong financial position.But confidence has waned, and in a recent Reuters/Ipsos poll the economy topped respondents’ list of concerns. Biden’s approval rating has fallen to 36%, the lowest of his presidency.Inflation has hit a 40-year high, persisted longer than policymakers expected when it first rose last year, and in recent months has prompted the Fed to unleash what may prove one of its fastest ever efforts to tighten monetary policy.The opposition Republican Party, enmeshed in a civil war over former President Donald Trump’s 2020 election falsehoods, has united around hammering Biden on inflation.”What the Democrats have to do is resist the urge to explain how inflation got caused and just go completely into like, here’s what we’re gonna do about this,” said Rodd McLeod, a Democratic political consultant in Arizona, a state that can swing toward either major party.Responses to a commentary that Biden wrote about his inflation-fighting plans in the Wall Street Journal Tuesday underscored the size of the challenge he faces.By mid-day, the vast majority of more than 1,000 comments in one of the country’s few national newspapers dismissed the prescription drug pricing and clean tax credit plans Biden laid out, while advocating instead for lower taxes and more oil drilling and dismissing Biden’s ideas as fiction.Taming inflation will require not only adept central bank decision-making, but no small degree of luck. Global prices are buffeted by such events as the Ukraine war and the coronavirus pandemic, and whether another surge could tamp down China manufacturing again.The best case for Biden at home is that tighter Fed monetary policy slows the economy just enough that spending cools, and companies cut back on job openings without actually cutting into jobs. The alternative, should the Fed find inflation more persistent, is for the central bank to move interest rates so high the economy tips into recession with a significant rise in unemployment. September is expected to be a pivotal month, with the Fed expected to take stock and decide whether to become even more aggressive. More

SEOUL (Reuters) – South Korea’s exports grew at a faster pace in May than a month earlier as a rise in shipments to Europe and United States more than offset disruptions to trade with China from its strict COVID restrictions.Exports rose 21.3% from a year earlier to $61.52 billion, trade ministry data showed on Wednesday, beating the forecast for 19.3% growth in a Reuters poll and well ahead of a 12.9% rise in April.South Korea’s monthly trade data, the first to be released among major exporting economies, is considered a bellwether for global trade.Shipments to the United States jumped 29.2% from a year earlier, above than April’s 26.6%, while exports to the European Union gained 23.5%.Lockdowns in China have snarled logistics and supply chains, hammering trade in the region.Exports to China grew just 1.2% in May from a year earlier after declining 3.4% in April. Imports, meanwhile, jumped 32.0% to $63.22 billion. That brought the trade balance to a $1.71 billion deficit, after logging a $2.51 billion deficit in April.”May this year had more working days compared to last year. Exports to the U.S. and Europe continue to be strong, although China-bound exports and shipments to Hong Kong remain weak amid their COVID policies,” said Park Sang-hyun, an analyst at HI Investment & Securities.”Going forward, the biggest risk to South Korea’s exports cycle would be China.”Wednesday’s trade data comes as the Bank of Korea delivered back-to-back interest rate hikes last week to bring consumer inflation down from 13-year highs.The central bank also downgraded the country’s growth forecast for this year to 2.7% from an earlier forecast of 3.0%, as it sees slower global demand hurting South Korea exports in the second half. More