Economy

Joe Biden is set to meet Jay Powell for the first time since his nomination to a second term as chair of the Federal Reserve, highlighting the US president’s concern about high inflation and threat it is posing to the recovery. According to the White House, the US president and Powell will gather on Tuesday as the Fed and Biden administration battle rising consumer prices, supply chain disruptions, the energy shock triggered by the war in Ukraine and the enduring pandemic. Biden chose to reappoint Powell for a new four-year stint as head of the Fed last year, bucking progressive calls for him to tap a Democrat for the job rather than a Republican who was elevated to the helm of the central bank by former president Donald Trump. Powell was confirmed by the Senate for a second term on May 13, with strong bipartisan support. A White House official said Biden would congratulate Powell “on his confirmation and the confirmation of the president’s other nominees to the Fed”. The official added that the pair would “discuss the state of the American and global economy, and discuss the president’s top economic priority — addressing inflation to transition from a historic economic recovery to stable, steady growth that works for working families”.Unusually for a president in an election year, with midterm elections due in November to determine control of Congress, Biden is supporting the Fed’s turn towards tighter monetary policy to fight inflation, underscoring just how problematic high prices are becoming both economically and politically for the White House and Democrats. “While I’ll never interfere with the Fed’s judgments, decisions, or tell them what they have to do . . . I believe that inflation is our top economic challenge right now, and I think they do too,” Biden said earlier this month. “The Fed should do its job and it will do its job, I’m convinced, with that in mind,” Biden said. Even though the Fed is an independent institution, US presidents have periodically held both public and private meetings with sitting chairs of the central bank. Biden last met Powell in November, when he nominated him for a second term as central bank chair. Trump met Powell and Janet Yellen, the Fed chairs during his tenure, and Barack Obama invited Yellen and Ben Bernanke, a former Fed chair, to the White House during his presidency. The meeting with Powell will give Biden a chance to demonstrate that the fight against inflation is his top priority ahead of the midterm elections, with polls showing voters are rebuking his handling of the economy because of soaring prices even while job growth has been very strong. The burden of high inflation, particularly with respect to petrol and food costs, will have been even more apparent over the Memorial Day holiday, one of the busiest travel weekends of the year. Biden and top officials in his administration have insisted that they are using every tool at their disposal to fight inflation, though they are still debating whether to reduce tariffs on Chinese imports in order to reduce some price pressures. Ultimately, however, they have increasingly pointed to the Fed as the agency with the greatest influence and responsibility for curbing inflation. More

Rishi Sunak has just unveiled a £15bn support package to help households as average UK energy bills are predicted to hit £2,800 a year. Even with the chancellor’s help, plenty of people will still be feeling the pinch — but the latest Money Clinic podcast episode is packed with practical tips and advice to help you save on your energy bills. Presenter Claer Barrett hears from Bella who is renting a draughty Victorian flat and wants to know her rights before she tackles her landlord. Homeowner Sam has seen his bills skyrocket and wonders if insulating his property would be a wise investment.On hand with tips for Bella and Sam are Gemma Hatvani, founder of the Facebook group Energy Support and Advice UK, and Brian Horne, a senior adviser at the Energy Saving Trust.

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If you would like to be a guest on a future episode of Money Clinic, email us [email protected] or send Claer a DM on social media — she is @ClaerB on Twitter, Instagram and TikTok. More

The writer is global head of G10 FX Options Trading at Goldman Sachs, and author of ‘Foreign Exchange — Practical Asset Pricing and Macroeconomic Theory’Foreign exchange markets have this year been jolted by a sudden increase in volatility. There are many reasons for this, but at the heart of the shift is deglobalisation.To understand why, consider first the opposite. In a hypothetical, perfectly globalised world, there would be no barriers to international trade, meaning goods could be produced in one country and transported to the other without cost or friction.Let us focus on Japan and the US in our hypothetical world, and suppose that each country produces goods called widgets of identical quality. In such a world the real foreign exchange rate cannot deviate from 1.0. That is because if the cost of a Japanese widget expressed in dollars were cheaper than a US-produced version, traders in international goods markets would buy more Japanese widgets, put them on ships and sell them in the US. The traders would continue until the arbitrage opportunity is competed away, forcing the real foreign exchange rate back to 1.0. Therefore there is little, if any, volatility in the real exchange rate.Since the coronavirus pandemic hit in 2020, the world we have been moving towards resembles our hypothetical world much less. The Global Supply Chain Pressure index produced by the Federal Reserve Bank of New York measures global transportation costs and other supply chain pressures. It has moved to the highest levels that we have seen.This is just one component of what is broadly being labelled “supply constraints”. Correspondingly, we are seeing somewhat dramatic variations in the real exchange rate.The yen may weaken and Japan may continue to run with lower inflation than the US. But with transportation costs so high, and with Covid-19 and other supply chain disruptions, it becomes more difficult for traders and business to take advantage of a cheap yen exchange rate. With such reduced demand, the yen is more vulnerable. The trade-weighted level of the yen has weakened by about 10 per cent in 2022 in real terms (after accounting for inflation), and by 20 per cent since the start of 2020. Our hypothetical world would not have seen such volatility. A second source of the high currency volatility we are experiencing comes from divergence in central bank policy rates, which are in turn driven by divergent international economies.The pandemic-driven economic collapse in 2020 and vaccine-driven recovery in 2021 were internationally shared experiences. During this period, there was broadly no reason for central banks across developed market economies to take different policy paths. But, this year, a divergence has begun.This is normal after a crisis: economies should be expected to react and cope with their respective debt burdens in different ways. However, the energy price shock — spurred on by the war in Ukraine — has created further divergences, with energy importers such as Europe, Britain and Japan suffering a negative impact, while energy-neutral countries such as the US have fared better.Markets are pricing in a total of 250 basis points of rate rises by the US Federal Reserve in 2022, compared with 100 basis points from the European Central Bank, 180 basis points from the Bank of England and potentially none at all from the Bank of Japan.Even in our hypothetical world, in which real foreign exchange rates are fixed, such divergence would cause volatility in nominal spot rates. The reason is that more interest rate rises bring down inflation expectations, thereby lifting the future purchasing power of the currency. With the Federal Reserve leading the way, it is no surprise that contracts to exchange the euro, sterling and yen at a future date have all moved substantially in favour of the dollar. And spot rates are trading at even higher premiums than usual to these forward rates because of higher US interest rates.This has been the lesson from history. Foreign exchange volatility remained broadly contained relative to what was seen in equity, interest rate and credit markets during the 2008-10 financial crisis. Yet between 2011 and 2017, we saw numerous idiosyncracies, such as the European sovereign debt crisis, Abenomics and the Brexit referendum.In 2017, currency fluctuations eased. But we are once again in a period of macro divergences. Until globalising forces re-emerge, the post-pandemic world will remain one of high foreign exchange volatility. More

The decision by Airbus to boost jet production is one of the strongest signals yet that the aviation industry is recovering from the pandemic — but it will be a key test on the health of its supply chain.For an industry still recovering from the Covid-19 crisis, China’s lockdown disrupting supplies of goods and materials and inflationary pressures forcing up costs, the ramp-up in production comes at a critical time.It is also a significant industrial and logistical challenge. Each Airbus aircraft is made up of roughly 3mn parts and the company receives more than 1.7mn every day at its plants across the world from roughly 3,000 suppliers for all of its civil programmes.But the European manufacturer, whose A320 family of aircraft dominates the market for single-aisle aircraft, is confident it can meet its bold pledge to raise production by 50 per cent to 75 planes a month by 2025 and move to a rate of 65 by next summer.

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It says there is demand for new narrow-body jets as airlines renew their fleets after the pandemic and that it will be able to meet the higher rates by adding production capacity at its existing industrial sites, including the building of a second final assembly line at its US operations in Mobile.Stepping up production will require a careful balancing act between meeting resurgent demand for new, more energy efficient planes from airlines under pressure to reduce carbon emissions, while ensuring thousands of suppliers can deliver after cut backs during the crisis.In addition, concerns over the availability of raw materials such as aluminium and titanium following the war in Ukraine and a shortage of skilled workers risk further strains.Dominik Asam, chief financial officer at Airbus, admits that “right now there is tremendous pressure on the supply chain. Everything is tight”.

An Airbus A320neo aircraft. The company is using a ‘supplier watchtower’ to anticipate bottlenecks in the supply chain © Guillaume Horcajuelo/EPA-EFE

Worries over the bold production targets have already been raised, with aircraft lessors warning the supply chain was fragile as they pushed back against the higher rates when Airbus first floated them last year.Although the company last month secured an extension to vital engine supply contracts, this was only until 2024. Some industry executives fear risks still remain.John Plueger, chief executive of aircraft lessor Air Lease and one of Airbus’s biggest customers, told the Financial Times in a recent interview that he believed there is “significant risk going to 75 a month despite the demand”. “All of our single-aisle A321 and A320neo aircraft this year are already delayed from one to four months. In addition to supply constraints and labour . . . we always remain focused on quality in the production process and taking delivery.”Airbus said it had made “some adjustments in view of the current environment for a variety of reasons” but added that it was still “working towards” its previous guidance to deliver 720 aircraft by the end of the year.“Demand is not an issue,” said Rob Morris, head of consultancy at Ascend by Cirium. But there are “big challenges”, notably getting the “engine suppliers on board”.Morris points out that CFM International, the joint venture between Safran and GE Aviation, supplies engines to both Airbus’s A320 programme and to Boeing for its 737 Max family.Boeing is building at a slower rate as it is still trying to clear its backlog of stored jets following two deadly crashes of the Max, but this could change in the coming months, adding additional strains to the industry’s supply chain. “If Airbus does [increase its] rate at 75, given CFM’s lead on the A320 programme, they will be doing more than this rate, given they also provide engines to Boeing,” Morris said.Asam said the company was in talks with the engine providers and that the “tone has changed from half a year ago”, when they initially cautioned about the ramp-up. “I trust as we move ahead and prove strong demand from customers . . . I am pretty confident there will be support from them.” Most of the parts for the planes are assembled gradually by suppliers in the various tiers of the supply chain before arriving at the group’s final assembly lines around the world, from Toulouse to Mobile in Alabama.The company is using what it calls a “supplier watchtower” initiative to anticipate and help to mitigate bottlenecks and other risks that might come up among its 12,000-plus direct commercial aircraft suppliers. The initiative does not specifically track suppliers but risks such geopolitical ones.Critical to aid the ramp-up, according to Philippe Mhun, Executive Vice President Programmes & Services at Airbus, is that the company has given suppliers visibility.“We are having open book discussion with our suppliers,” he said, adding that Airbus has given companies “certainty that what we are ordering is firm”.It is also procuring some raw materials, including aluminium and titanium, for some suppliers to help with sourcing as well as pricing.The aerospace industry has relied heavily on Russian-produced titanium, but both Airbus and Boeing have in recent months said they are looking to find alternative supplies. Airbus has previously said it has enough titanium stockpiled to last the short and medium-term.

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One uncertainty is China and the lockdowns in the country that has complicated the logistical challenge, notably in terms of deliveries of planes to airline customers. About 20 per cent of Airbus’s annual deliveries go to China on average.“Around 50 per cent of delivery commitments in China are through the leasing companies. That is dampening the impact of the slowdown,” said Mhun.Some of the European company’s Chinese customers are still able to send people to Toulouse to take delivery of planes, according to people familiar with the matter.Airbus has also managed to hand over some aircraft using “e-deliveries”, which simplify the contractual transaction process.One unavoidable reality of today’s environment is cost inflation across the aerospace industry.Christian Scherer, Airbus chief commercial officer, said the company was able to maintain its pricing through the pandemic, but admits that pricing pressures from inflation are a “cause of concern for us as an industrial enterprise”. “Those inflationary pressures are a reality that the ecosystem will have to absorb,” he said.Despite the various challenges, Scherer insists that the rate of 75 is the right one. “What we have dialled here is a right flight level for a sustainable period of time.”  More

These are disorientating times for people my age. For most of my adult life, inflation has been weak and wage growth weaker. Now, inflation in the UK is 9 per cent. Last week, unionised drivers for the manufacturer JCB secured a 9.5 per cent pay rise. Rail unions are planning to strike. Britain’s policymakers, like their counterparts in other countries, are fretting about the possibility of a wage-price spiral.Are we going back to the 1970s? I read the Financial Times archives for a flavour of how the last bout of high inflation played out. In 1974, the paper reported, the cost of living rose 19 per cent while the basic wage rate rose 26 per cent. Wage threshold agreements, aimed at compensating people for inflation, were “fuelling the fires” by creating a “built-in twist in the wage-price spiral”. At the end of that year, the National Institute of Economic and Social Research warned that pay settlements were anticipating inflation and creating a “self-fulfilling prophecy”.It is hard to overstate how fundamentally the labour market has changed since then. The unions that negotiated those pay settlements have shrunk in size and power. At their peak in the 1970s, roughly half of employees were union members. Now the figure is just 23 per cent — and they are clustered disproportionately in the public sector. For large parts of the economy, the idea that pay rises are the result of bargaining between unions and employers is a relic of a previous era: only 13.7 per cent of private sector employees now have their pay set this way.Even in the public sector, where unions have held out the longest, their power to push up pay has waned. Indeed, average annual total pay growth in the public sector was just 1.6 per cent in January to March this year, compared with 8.2 per cent in the private sector.Alongside these changes in the size and role of trade unions, more people have struck out on their own. The proportion of workers who are self-employed almost doubled between 1975 and 2019 to about 14 per cent. This rise was driven by the “solo self-employed” who on average earn less than employees.In other words, the 21st-century UK labour market is far more individualistic than it was the last time the country faced a serious bout of high inflation. That doesn’t make a wage-price spiral impossible. But if it does happen, it won’t unfold in the same way. Outside pockets of union strength like train drivers, it would have to be driven by individuals’ market power to secure higher pay for themselves, which in turn would force employers to push up prices to protect their profits, and so on.On most metrics, workers have more market power than they have had for a long time. Employers are hungry for staff. The number of job vacancies has outstripped the number of unemployed people for the first time on record. People are switching jobs at higher rates than usual. And nominal pay is indeed on the rise.But employers are doing their best to make sure this does not become entrenched. They are offering pay top-ups in the form of bonuses, golden hellos and temporary “market supplements” in an attempt to avoid increasing the base rate of pay. The latest wage data for the first quarter of the year suggests average total pay rose 1.4 per cent in real terms thanks to bonuses. Without the bonuses, regular pay fell 1.2 per cent in real terms.Averages also conceal a lot. Analysis by the Institute for Fiscal Studies shows that the employees in the UK who have secured the biggest pay rises over the past two years are the ones who were paid most to begin with. In the latest quarter, pay grew fastest in finance and business services, thanks partly to high bonuses.Strangely, the IFS has found that the occupations with very high levels of job vacancies such as cleaning have not experienced the highest pay growth. This is in stark contrast to the situation in the US where the lowest-paid workers have secured the biggest pay rises. Xiaowei Xu, a senior IFS economist, says it is possible that UK employers in these sectors have felt unable to raise prices to sustain higher pay, unlike those in financial services.Andrew Bailey, governor of the Bank of England, suggested earlier this year that to help keep inflation under control, workers shouldn’t ask for big pay rises. It is more realistic to expect people to protect themselves against inflation by securing higher wages if they can. The question is who has that power in today’s atomised labour market, and who does not. We might well see a wage spiral for some and a price spiral for [email protected] More

Stuart Hignell, who runs Bristol Gas Supplies, has known many of his customers in the English city of Bristol for years — he has a Polaroid photo of one of his elderly clients on the corkboard behind his desk — and is conscious that many are on fixed incomes. But as petrol prices rise and the costs of delivering gas canisters around the city grow, Hignell is being forced to make a difficult choice: put up the prices for his customers or protect them by absorbing ever increasing costs.“How can I turn around to these people and tell them their prices are going up?” he asked. “But something’s got to give — you can’t just keep sucking it in and sucking it in”.Many small business owners are, like Hignell, struggling to absorb the impact of spiralling prices as UK inflation hits a 40 year high. Rising costs for energy and goods and services have become the top two concerns of businesses throughout the UK. In June last year, only 30 per cent of UK businesses with 10-49 employees reported above normal input prices to the Office for National Statistics. By March of this year, the proportion had jumped to 57 per cent. Many can no longer hold off passing these increases on to customers. Aleksis Gailans, who runs a costume hire company on the outskirts of Bristol, struggled to think of any product or service that his business uses which hasn’t gone up in price. While his company has “tried to hold off for as long as we can”, he said, it has had to begin passing on costs. Gailans is not alone: around 41 per cent of UK businesses with between 10 and 50 employees indicated in late April that they have already begun increasing prices. Aleksis Gailans, who runs a costume hire company, has had to begin passing on costs. © Charlie Bibby/FTMatt Griffith, director of policy at Business West, the chamber of commerce for England’s western region, is in close contact with many enterprises in the area and is clear that they need to start recouping costs. Increasing prices is “the only route left” for many, he said. “Financially they have nowhere else to go.”Vicky Lee, who heads the Bristol City Centre Business Improvement District, agreed. Many of the companies that she works with in the city centre cannot keep their costs down. They don’t have “the buying power, the strength to reduce cost per unit by purchasing on a larger scale”, she said.She added that the shadow of the pandemic continues to affect many small businesses in the area. While they have managed to “bounce back quickly”, they had to borrow to keep going during the crisis. Debt repayments on these loans have further tightened margins and pushed businesses to raise prices. Passing the increased costs on to customers has not been an easy decision for many small business owners, despite the challenges of the current environment, said Chris Jenkins, who has worked in Bristol’s wholesale fruit market for most of his life. In the face of steep transport costs, his company tried to become more efficient.Vicky Lee, who heads the Bristol City Centre Business Improvement District, said companies don’t have ‘the buying power, the strength to reduce cost per unit by purchasing on a larger scale.’ © Charlie Bibby/FT“We’ve got no excess staff whatsoever. All of us are working flat out all the time. And, we’ve just got no fat. It’s just been cut, cut, cut everywhere we can go to try and minimise costs”, he said, adding that there was “nothing else they can do” to keep prices down. The knock-on effect of rising prices on consumer spending is another worry. Jeremy Kynaston managing director of No1 Harbourside, a bar, restaurant and live music venue situated on Bristol’s historic harbour, and two other venues in the city, acknowledged that people are just beginning to feel the increase in prices, but is hoping that they will continue to eat out.Chris Jenkins, who works in Bristol’s wholesale fruit market, said the outlook was bleaker than ever before © Charlie Bibby/FT“When people go out, they know it’s going to cost a little bit more, and it’s up to us to make sure we’re clever about our quality and standards”, he said. However, Kynaston is worried about the impact the increase in the energy price cap in the autumn will have on his business. Ofgem predicts that household energy prices will increase by around 42 per cent in October, after a 54 per cent rise in April. “It’s daunting — the October price rises. But we do have a plan at least. It’s better than having no plan at all,” said Kynaston. To address the impact of spiralling energy prices on the cost of living, UK chancellor Rishi Sunak last week introduced a £15bn package of support. It included a one-off payment of £650 to around 8mn households in receipt of welfare payments. Jeremy Kynaston, managing director of No1 Harbourside, is worried about the impact the increase in the energy price cap in the autumn will have © Charlie Bibby/FTBut those further up the supply chain, such as Jenkins, are nervous that even with the extra government support, increasing energy prices will suck demand out of the local economy. “Come November, December, they’re [households] really going to feel it,” he said. He added that the pressure on household budgets in the coming months may see the fruit he sells to retailers become “more of a luxury”. Most economists acknowledge that price pressures may get worse before they get better, but predict that the energy shock, pandemic supply chain impacts and higher interest rates will taper off quite rapidly from the start of next year onwards. However, for Jenkins hope that a brighter period may lie ahead is hard to find.“I’ve been in the job for all my life. I was born into it,” he said. “In all that time, you’ve always been able to see the light at the end of the tunnel. You can’t seem to see it now.” More

TOKYO (Reuters) -Japan’s factories posted a sharp fall in output in April as China’s COVID-19 lockdowns and wider supply disruptions took a heavy toll on manufacturers, clouding the outlook for the trade-reliant economy.Separate data showed retail sales posted the largest rise in nearly a year as consumers stepped up spending after the government eased pandemic curbs, withstanding pressure from wider price rises that threaten to hurt demand.Factory output dropped 1.3% in April from the previous month, official data showed on Tuesday, on sharp falls in the production of items such as electronic parts and production machinery.It was the first fall in three months and much weaker than a 0.2% decline expected by economists in a Reuters poll.The data comes a day after Toyota Motor (NYSE:TM) Corp, the world’s largest automaker by sales, missed its global production target for April after output fell more than 9% year-on-year.Toyota’s output slump last month came after the Japanese carmaker on Friday cut its global production plan for June and signalled the possibility of lowering its full-year output plan of 9.7 million vehicles.”Japan’s production is likely to keep stalling in the short term as disruptions in the global supply chain continue,” said Kazuma Kishikawa, economist at Daiwa Institute of Research.A full recovery of goods transportation from China would likely take time even after Shanghai ends its strict COVID-19 lockdown from Wednesday, Kishikawa said, adding that it was likely to weigh on Japanese output.”Logistics won’t be restored in a day,” he added.While activity in Japan’s services sector is picking up as the pandemic subsides, the country’s manufacturing sector has been pressured by supply disruptions and higher material prices caused by Russia’s war in Ukraine.”The soft activity data for April suggest that the Q2 rebound may disappoint, though it’s worth noting that they don’t tell us anything about the recovery in the service sector,” wrote Tom Learmouth, Japan economist at Capital Economics, in a note.Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to return to growth in May, gaining 4.8%, followed by a 8.9% advance in June.While output would be on course for a strong rebound this quarter if those forecasts are realised, firms’ production plans have been far more overly optimistic than usual since supply shortages started to take a toll, Learmouth added.Separate data showed retail sales grew 2.9% in April from a year earlier, marking their sharpest gain since May 2021. That was bigger than the median market forecast for a 2.6% rise.The jobless rate stood at a more than two-year low of 2.5% in April from the previous month’s 2.6%. More

BEIJING (Reuters) – China’s non-financial outbound direct investment (ODI) in the first four months of the year rose 4.5% from a year earlier to $35.88 billion, the commerce ministry said on Monday.In yuan terms, ODI grew 2.5% in the January-April period from a year earlier, the ministry said in a statement. More