Economy

KARACHI, Pakistan (Reuters) -Pakistan on Thursday announced it will hike fuel prices so that it can resume receiving aid from a $6 billion package signed with the International Monetary Fund (IMF) in 2019, the country’s finance minister said.Prices will rise by 20% starting Friday, causing long lines to form at filling stations as the news spread. The new price of petrol will be 179.86 rupee per litre and diesel will be 174.15 rupee, said the minister, Miftah Ismail, in a tweet. Reuters reported earlier on Thursday that the IMF and Islamabad had reached a deal to release over $900 million in funds, once Pakistan removed the fuel subsidies and hiked prices, according to a Pakistani source directly involved in talks in Qatar. “When we raise fuel prices, the deal will be done. We have worked out the outlines of a deal,” the source said in a text message after the end of the talks in Doha.The price hike has been the main issue between Pakistan and the IMF as part of an agreement to withdraw subsidies in oil and power sectors to reduce the fiscal deficit before the annual budget is presented next month. Ousted Prime Minister Imran Khan had given the subsidy in his last days in power to cool down public sentiments in the face of double-digit inflation, a move the IMF said deviated from the terms of the 2019 deal.In addition to the $900 million, if IMF clears the seventh review as a result of the talks, it will also unlock other external financing for the cash-strapped South Asian nation, whose foreign reserves cover less than two months of imports. About half of the funds out of the $6 billion deal are yet to be released, and it is not clear when the IMF review would take place. BACK ON TRACKThe IMF has said that a considerable progress had been made in the talks, but emphasized the urgency of Pakistan removing fuel and energy subsidies to get back on track. The IMF representative in Pakistan did not immediately respond to a Reuters request for comment. Pakistan’s new government, which took charge in April, has been reluctant to remove the fuel price caps. The Pakistan government convened a joint session of parliament on Thursday to discuss the economic situation after the talks, according to an order seen by Reuters. Pakistan’s consumer price index rose 13.4% in April from a year earlier. A removal of fuel subsidies would likely have political consequences for the new coalition government, with elections expected within 16 months. More

All of the Fed’s policymakers agreed to hike interest rates by half a percentage point at the May 3-4 policy meeting to counter rampant inflation and most participants said further hikes of that magnitude in June and July could be appropriate.But the minutes also showed the Fed grappling with how best to reduce inflation without causing a recession or pushing the unemployment rate substantially higher – a task that several participants said would prove challenging.The central bank would likely pause its tightening in September, leaving its benchmark overnight interest rate in a range of 1.75% to 2% if financial conditions worsened, BofA strategists said in a note.”We have recently seen a tenuous but remarkable change in Fed communications, where some Fed officials suggest the option of downshifting or pausing later in the year as they reach 2% given the challenging macro backdrop, tightening of financial conditions, and potentially softening inflation,” they said.Inflation, by the Fed’s preferred measure, is currently running at more than three times the central bank’s 2% target.Fed funds futures traders on Thursday were pricing in 50-basis-point rate hikes at each of the central bank’s June and July meetings and another 25-basis-point hike in September.While noting that it was not its base case scenario, BofA said the central bank may see a federal funds rate at 1.75%-2% as providing “a normalization of policy which then offers an opportunity to pause and assess the impact on jobs and inflation.”A pause in tightening could lead to lower rates across the U.S. Treasury yield curve, the strategists said.The benchmark 10-year U.S. government bond yield hit its lowest level since April on Thursday. It has fallen from 3.2% on May 9, as the bond market sees the economy slowing and expects inflation to lose momentum.Other analysts, however, do not see the Fed as having shifted to a more dovish stance.Strategists at TD Securities said they expected the central bank to hike rates above the neutral rate, the level which neither stimulates nor constricts economic growth, but at a more gradual pace after the June and July policy meetings. Fed policymakers estimate the neutral rate to be roughly between 2% and 3%.”The views expressed in the minutes are about all they could say at the start of an aggressive tightening cycle where no one really knows how far rates have to go,” investment bank Brown Brothers Harriman said in a note.”The Fed is facing a very complicated situation and so is trying to burnish its hawkish credentials while trying not to pre-commit to any rate path”, it said. More

In his brief statement to the House of Commons on the UK’s cost of living crisis, Rishi Sunak managed to alleviate two economic problems, but at the cost of aggravating a third.The good news is that his actions are likely to lower the peak rate of inflation this year and will help UK households deal with immediate cost of living problems. But they will also deliver the hottest of inflationary potatoes straight into the lap of the Bank of England. The chancellor also left hanging huge questions over what will happen to support for households next year. The first effect of the measures is likely to be mechanical, reducing the expected increase in inflation, and potentially avoiding the dreaded rise above 10 per cent this autumn. If household energy bills rise to roughly £2,400 a year on average rather than the £2,800 level Ofgem this week said was likely, inflation is not likely to rise as high as previously expected. This is not certain because the Office for National Statistics has not announced whether it will classify the support as a rebate, which would limit the rise in inflation, or as support for income, which would have no impact on the measured inflation rate. Although this difference is mostly semantic — since a rebate and income support both make households better off to the same extent — most economists think the ONS will rule that the package will lower the rate of inflation. Ben Nabarro, chief UK economist at Citi, said he expected the £400 rebate to reduce the peak inflation rate in October by 1.3 percentage points from where it would otherwise be. He said this would mean that “consumer price inflation would peak at an annual rate of 9.5 per cent” and retail price inflation at 11.5 per cent. This would lower the cost of servicing the government’s £500bn of debt, which is linked to RPI. But while households will be helped by the universal support, alongside more targeted assistance for those on means-tested benefits, pensioners and the disabled this financial year, economists noted that on average households would still be worse off.Paul Dales, chief UK economist at Capital Economics, estimated that average real household disposable income would now drop by 1 per cent in 2022, although this is an improvement on the 2 per cent drop expected before the chancellor delivered his statement. The big question is whether the package will increase consumer spending and encourage companies to raise prices, which would fuel inflation next year, leaving households ultimately no better off at all.An aide to the chancellor accepted that the stimulus offered by the package might be seen as inflationary, but said the net support was not that large. Instead, Sunak passed the difficult job of controlling the level of inflation to the central bank. “I know the governor and his team will take decisive action to get inflation back on target and ensure inflation expectations remain firmly anchored,” he said.

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Economists agreed that Sunak’s actions would act as a stimulus, making it more likely that the BoE would raise interest rates faster and further than previously expected, but they disagreed on the extent of the monetary tightening needed to offset this fiscal boost. Kallum Pickering, senior economist at Berenberg Bank, described the chancellor’s package as “misguided” because it “will add to demand at a time when private wages are surging . . . and most households have excess savings accumulated during lockdowns”.“Keep this up and, eventually, the BoE will be forced to bring inflation under control by raising rates well above neutral and triggering a recession,” he added. But Robert Wood, chief UK economist at the Bank of America, said the package would require the BoE only to impose “modestly higher interest rates” because tax revenues were also rising unexpectedly quickly. Nabarro, who also thought the package would put only marginal pressure on the central bank to raise inflation, said hints of further tax cuts in the autumn Budget were more worrying in terms of the likely impact on interest rates. “The question now is whether the Chancellor comes back for more before the end of the fiscal year. This seems increasingly plausible”, he said. Economists also disagreed on the exact level of stimulus that Sunak had delivered. He told the House of Commons that the package would cost £15bn, offset by a £5bn windfall tax on North Sea profits. But some economists said the chancellor underestimated the total stimulus in his package because he failed to count the scrapping of his February plan to claw back £40 a year over five years from a £200 loan to help households pay their energy bills.Sandra Horsfield, economist at Investec, said: “The true fiscal support now relative to what was put on the table in February [is] some £5bn higher [than £15bn].”The chancellor could plausibly claim that in future the windfall tax will continue to raise roughly £5bn a year until its sunset clause is activated at the end of 2025. He said that would happen only if energy prices remained high, although he failed to specify the price threshold at which the tax would be phased out. The chancellor himself noted that the problem of inflation was becoming more broad-based, with price rises exceeding 3 per cent in four out of five categories of goods and services. As a result, economists and financial markets now expect interest rates to be significantly higher. Allan Monks, chief UK economist at JPMorgan, said the package would help “steer the economy away from recession,” in the short term, but would come at a price of interest rates higher than the current 1 per cent rate. “That would imply the BoE keeps on hiking at every meeting until November, taking rates up to 2 per cent by year end and then up to 2.75 per cent by next August,” he said. More

Rishi Sunak, the UK chancellor, has bowed to pressure and announced a £15bn package of measures to help households struggling with energy bills, funded by a windfall tax on oil and gas producers. More help will be directed to those on the lowest incomes, but the government has also looked to help the “squeezed middle”, with a range of universal and targeted measures. FT Money offers a guide to what assistance is available. What new help has been announced this week? All UK households with an electricity meter will receive a one-off grant of £400, which will be automatically applied to bills from October and does not need to be repaid. This replaces previous plans for a £200 “heat now, pay later” scheme that would have been clawed back over five years. More than 8mn households on means-tested benefits (including universal credit, tax credits and pension credit) will additionally be eligible for a one-off £650 “cost of living payment” to be paid in two stages: the first in July and the second this autumn. The Department for Work and Pensions and HM Revenue & Customs will make these payments directly. The money is tax-free, will not count towards the benefit cap and will not have any impact on existing benefit awards. What extra help will pensioners receive? More than 8mn pensioner households that receive the winter fuel payment will additionally receive a one-off £300 “pensioner cost of living payment” this winter that will be paid directly to them. This will be per household, not per pensioner, and will be paid on top of any help they are already entitled to, such as pension credit or disability benefits. It is not taxable and does not affect eligibility for other benefits. In his speech, the chancellor recognised that not all households that were entitled to claim pension credit were doing so. If you are unsure of your entitlement, use the government’s checking tool gov.uk/pension-credit/eligibility.What about those with disabilities?A separate £150 “disability cost of living payment” will be made in September to people who already receive benefits, including disability living allowance, the personal independence payment and attendance allowance. The government said this was to reflect additional costs, such as powering specialist equipment and increased transport costs. Some disabled people will also be entitled to the main £650 cost of living payment — but only if they are on means-tested benefits, which has prompted criticism from campaigners. “The Tories have now given disabled people a one-off £150 payment for the cost of living crisis — having removed many disabled people’s annual £150 Warm Home Discount,” Dr Frances Ryan, the author and disability rights campaigner, said on Twitter. “You’ve almost got to respect the nerve.”When will the £150 council tax rebate be paid? In England, all properties in council tax bands A-D are entitled to a £150 rebate on top of the measures announced today. Many local authorities have already made this in the form of a reversed £150 direct debit, but households that do not pay by direct debit will have to apply to their local council to receive it. Households that do not qualify for this and other benefits can additionally apply for a share of their local authority’s Household Support Fund for help with the rising cost of food, energy and water bills. On Thursday, the chancellor announced a further £500mn of funding. I don’t need this money. Can I opt out? It is not possible to opt out of the winter fuel payment, pensioner cost of living payment or £400 grant applied to energy bills — but you could donate it to charity. The #donatetherebate campaign on social media shows that many people are donating to fuel poverty charities such as Fuel Bank Foundation and National Energy Action, as well as local food banks — and eligible taxpayers can boost the value of their donation by adding Gift Aid. More

The writer is professor of finance at the Shanghai Advanced Institute of FinanceRecent swings in global financial markets have occurred partly because the market is unsure of the direction of post-Covid economic policy in the US and China. While inflation is probably the most daunting challenge facing the US Federal Reserve, growth has become the focal point of the People’s Bank of China’s deliberations. Given that “stability” is the keyword for China’s economic policy in 2022, some investors have been surprised that the PBoC’s monetary policy has not been as active as they might have hoped. And such sentiment has grown stronger after a number of Chinese cities went into lockdowns of varying degrees of severity in response to the spread of the Omicron variant of Covid-19. Earlier this week, China’s premier, Li Keqiang, warned that the world’s second-largest economy could struggle to record positive growth in the current quarter. “We will try to make sure the economy grows in the second quarter,” he said. “This is not a high target and a far cry from our 5.5 per cent goal.”Some argue that the slowdown of the Chinese economy is so alarming that aggressive monetary easing aimed at stabilising growth at all costs is urgently needed. In fairness to the central bank, the art of balancing multiple policy objectives has never been easy, even in a “normal” economic environment and calmer market conditions. The PBoC faces a range of challenges, from stabilising the renminbi exchange rate overseas to pushing forward with financial reform domestically. Such objectives do not always align well with each other and may even come into conflict from time to time. If anything, Covid has made the central bank’s balancing act even more delicate. On the one hand, the pandemic-induced economic slowdown, coupled with China’s continuing transition to a more sustainable growth model, poses a challenge to the PBoC as it seeks to maintain growth and ensure employment. On the other hand, surging inflation is forcing central banks around the world to taper stimulus programmes and raise interest rates much faster than previously expected. Such moves by its international counterparts limit the PBoC’s room for manoeuvre. Further easing may lead to a weakening of the renminbi. While a weaker yuan would probably help China’s export and trade balance, it would also make it less attractive for foreign investors to hold yuan-denominated assets. Domestically, a strong dose of monetary easing may achieve the desirable goal of boosting short-term growth. But it would risk inflating stock and housing bubbles. To make things more challenging still, it is not certain that further monetary easing would even achieve its intended goal. The effects of previous rounds of stimulus dissipated quickly and failed to turn around the tepid demand in borrowing in the real economy, especially by small and medium-sized enterprises. Covid did not cause many of the problems in the Chinese economy — but it did make them more acute. Many of the difficulties the PBoC faces can be traced back to the Rmb4tn fiscal stimulus programme of 2009. House prices and debt levels have since climbed sharply, with echoes of the credit-fuelled economic boom and bust in Japan in the late 1980s and in the United States before the global financial crisis. What would have helped in the US and Japan back then, and what the PBoC needs to focus on today, is better expectation management. The deeply rooted and widespread belief that the Chinese government will always do whatever it can to guarantee breakneck growth and rapidly growing asset prices has itself become a serious risk. The irresponsible borrowing, aggressive investment, surging housing prices and leverage that followed the 2009 stimulus subsequently constrained the PBoC’s ability to act during the Covid pandemic. Chinese leaders have expressed concern that an overly optimistic mentality could eventually lead to financial crisis and systemic risks. And such worries may also be tying the PBoC’s hands when it comes to rolling out more aggressive monetary stimulus in response to recent lockdowns. In the PBoC’s defence, China’s broader economic policy arguably already took an important, if subtle, turn well before the pandemic struck. With policy priorities transitioning from the old high-speed growth model to a more sustainable, inclusive and ecologically friendly high-quality model in the future, it should probably come as no surprise that Beijing’s monetary policy would adjust accordingly. More

When Volodymyr Zelensky addressed the World Economic Forum via video link this week, he issued a heartfelt appeal to the west: use the assets seized from the Russian central bank and country’s oligarchs to fund the estimated $500bn cost of rebuilding Ukraine. “If the aggressor loses everything, then it deprives him of his motivation to start a war,” he said. “Values must matter when global markets are being destabilised.”Many western leaders seem to agree. Josep Borrell, the EU’s chief negotiator recently suggested there is “logic” in using Russian foreign exchange reserves to rebuild Ukraine. And Ursula von der Leyen, European Commission president, responded to Zelensky’s appeal in Davos by noting that Russia “should also make its contribution” to reconstruction. This makes for rousing political rhetoric. However, the dirty secret at this week’s WEF meeting is that these public appeals are causing private angst for many of the Davos corporate and financial elite, from the west and its allies.This is not because of a lack of sympathy for Ukraine’s plight; nor a failure to recognise that the postwar reconstruction bill will be vast. Instead, the issue is the lack of due process. While most think there is an overwhelming moral case to help Ukraine — and punish Russia’s aggression — freezing assets is quite a different matter from dispersing them. If either is done without a consistent and transparent framework, western governments will either face years of costly lawsuits or end up smashing apart the trust that underpins their political economies. As Zelenksy himself noted, “values” matter now, more than ever — particularly when markets are destabilised.“We have been told for decades that the west upholds the rule of law, and we invested in the west on that basis,” one leading non-western sovereign wealth investor observes. “Is that being ripped up now? What are we supposed to think?” Of course, many western observers — and Ukrainians — might argue this is now a second-order question, given the horrors of Russia’s invasion. But I think that those worrying about due process have a point. So, how should this be resolved? Leaders are scrambling for solutions. von der Leyen told the WEF this week “our lawyers are working intensively on finding possible ways of using frozen assets”. Separately, western lawyers sympathetic to Ukraine are studying existing legislative tools to see whether they can be repurposed to this end.One idea floating around is to use America’s extensive civil tort laws to enable Ukraine to claim for “damages” from oligarchs’ US assets. A variant of this might be attempted by plaintiffs in France and the Netherlands too, I am told. Another idea is to use arbitration processes linked to some little-known direct investment treaties signed between Russia and the Ukraine in the 1990s, which create a way to impose damages in cases of economic harm.Separately, the US administration could seek express legislative authority from congress for introduce new legislation enabling Russian currency assets to be seized. Or the US president might use the International Emergency Economic Powers Act of 1977 to redeploy assets in American banks, possibly drawing on precedents established in the 1980s in relation to Iran. One of the most interesting ideas of all has emanated from Kyiv, which has quietly drafted a memo calling for a new UN commission for “constitutional, legal, transparent and effective” blocking and seizing of assets belonging to those connected with armed aggression. While the current war in Ukraine is being cited as the pilot project, the idea — or hope — is to create a global framework to be used in other conflicts too. The good news is that this shows Kyiv’s recognition of the need for due process. Some Ukrainian business figures are thinking the same way: Rinat Akhmetov, the Ukrainian billionaire, said this week that he would sue Moscow for “appropriate reimbursement for all costs and lost revenue” from the destruction of his assets in Mariupol, such as the Azovstal steel plant.The even better news is that Ukraine’s ideas are likely to be welcomed. “The underlying concept of having an international framework covering sanctions could potentially lead to an improvement over the current rather ad hoc imposition of sanctions,” says one western lawyer, who has seen the draft memo. But the bad news is that Russia’s veto in the security council will make it hard to establish a UN commission. The idea of deploying the 1977 US emergency powers act is legally controversial, and passing any American legislation swiftly is likely to be difficult. Unless the concept of due process and property rights is overturned, Russian assets will probably remain frozen for many years or endless legal battles will ensue.None of these prospects are remotely appealing. But the latter two are arguably the least bad. Unless, of course, von der Leyen can now find a legal process or, better still, the UN embraces Ukraine’s sensible ideas. Either way, the one certainty is that lawyers will soon be reaping fat fees. Therein lies the reality of kinetic and economic war in the 21st century. [email protected]  More

First-quarter GDP declined at a 1.5% annual pace, worse than the 1.3% Dow Jones estimate and a write-down from the initially reported 1.4%.
The pullback in gross domestic product represented the worst quarter since the pandemic-scarred Q2 of 2020.
Initial jobless claims totaled 210,000, a decline of 8,000 from the previous week.

A ‘We’re Hiring!’ sign is posted at a Starbucks in Los Angeles, California.
Mario Tama | Getty Images

The U.S. economic contraction to start the year was worse than expected as weak business and private investment failed to offset strong consumer spending, the Commerce Department reported Thursday.
First-quarter gross domestic product declined at a 1.5% annual pace, according to the second estimate from the Bureau of Economic Analysis. That was worse than the 1.3% Dow Jones estimate and a write-down from the initially reported 1.4%.

Downward revisions for both private inventory and residential investment offset an upward change in consumer spending. A swelling trade deficit also subtracted from the GDP total.
The pullback in GDP represented the worst quarter since the pandemic-scarred Q2 of 2020 in which the U.S. fell into a recession spurred by a government-imposed economic shutdown to battle Covid-19. GDP plummeted 31.2% in that quarter.
Economists largely expect the U.S. to rebound in the second quarter as some of the factors holding back growth early in the year subside. A surge in the omicron variant slowed activity, and the Russian attack on Ukraine aggravated supply chain issues that had contributed to a 40-year high in inflation.
CNBC’s Rapid Update survey shows a median expectation of 3.3% growth in the second quarter; the Atlanta Fed’s GDPNow tracker also points to a rebound, but at a more subdued 1.8% pace.
“This year will be mixed. Declines should not be repeated, but growth will not match what has been seen since the economy began reopening,” said Scott Hoyt, senior director at Moody’s Analytics. “With the Federal Reserve seemingly totally focused on bringing inflation back down, recession risks are uncomfortably high, although perhaps more for next year than this.”

One factor helping to propel growth is a resilient consumer fighting through inflation that accelerated 8.3% from a year ago in April.
Consumer spending as gauged by personal consumption expenditures increased 3.1%, better than the first estimate of 2.7%. That has come as the labor market has continued to be strong and wages are increasing rapidly, though still below the pace of inflation.
Initial jobless claims for the week ended May 21 totaled 210,000, a decrease from the previous 218,000, the Labor Department reported.
Continuing claims, after holding around their lowest level since 1969, edged higher for the week for the week ended May 14 to nearly 1.35 million.
Correction: An earlier version listed an incorrect figure for weekly jobless claims.

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When the chancellor of the exchequer sat down after what wasn’t apparently an emergency Budget, announcing what wasn’t called a windfall tax, the top item on the Treasury website was still about his Spring Statement two months ago.That’s fitting. It was obvious then that Rishi Sunak would need to offer more help, with energy prices set to push typical bills to £2,800 this autumn, more than double the regulatory price cap a year before.Much of the time since has been spent explaining why what the UK government announced on Thursday was a bad idea. Sunak repeatedly said a windfall tax on oil and gas profits from the North Sea, while “superficially appealing”, would hurt investment. Instead, the government has created what it terms a new energy profits levy, adding complexity to address worries that this was “unconservative”. It aims to raise £5bn from oil and gas producers. There may be decent ways to gather taxes on genuine windfall gains, but this isn’t it.Sunak has a poor record with policy complexity. Who remembers the convoluted and contentious successor scheme to furlough announced in 2020, which never became a reality because another Covid-19 wave required an extension of the original? See also Thursday’s statement. Out goes February’s energy bills rebate, which expressly was not a loan and offered households £200 off their energy bills to be repaid over five years. Instead, the support will be bigger and simpler, with a universal £400 off household bills and significant help in direct welfare payments to low-income households, pensioners and the disabled. The £15bn package rightly aims support at those that most need it: three-quarters will go to what the Treasury defines as households in vulnerable circumstances.The oil and gas sector got the complexity instead. It is perfectly possible to argue that, actually, tax on North Sea oil and gas had been at quite low levels historically. At 40 per cent, including the 10 percentage point supplementary charge, it was double the standard rate of corporation tax. But within the past decade, the tax rate on fields approved before 1993 has been double that again.It’s also possible that, as Stuart Adam from the Institute for Fiscal Studies argues, North Sea oil and gas is slightly different from other windfall tax candidates. You can’t pack up your oil rig and move it elsewhere. The fact that the supplementary charge has gone up and down over time — it was cut in 2015 after the oil price plummeted — suggests that an element of this should be baked into a cyclical industry’s thinking.But the government didn’t make that case. Instead, it created a 25 per cent levy, with upfront investment incentives (beyond what’s already on offer in the supplementary charge) to circumvent criticisms it had itself been making of the idea. The levy — unlike Labour’s “blunt” proposal, said Sunak — seemed to have been drummed up to show fiscal responsibility, despite raising perhaps £5bn against spending of £15bn, and dressed up to encourage more investment, which it probably won’t.Near-term investment has always been a bit of red herring. As BP’s chief executive Bernard Looney said, a windfall tax wouldn’t change plans, which are already agreed and committed. Similarly, an industry that works on long-lead times probably won’t drag forward much spending to take advantage of a short-term doubling in tax-relief.

The question was whether the government could tax the extraordinary gains being made by the oil and gas companies, without damping their longer-term inclination to invest in renewable energy and green infrastructure that the UK (and every other country) desperately needs. Meanwhile, the Treasury has just started work on a longer-term plan to boost ailing business investment across the economy, after its two-year super deduction fell slightly flat. The Office for Budget Responsibility in March halved its estimate for the investment brought forward under the policy.The problem with windfall taxes has always been how you convince people this is a one-off (and it hasn’t been in oil and gas at least) that is targeted on a very particular set of gains. It’s hard to maintain that pretence, given the government’s talk about hitting electricity generators, another sector where huge investment is needed in the energy transition.It seems the only reason that didn’t come on Thursday was that the task of prising apart the genuinely excess profits in a sector that hedges pricing and operates on a bewildering array of contracts was a task too obviously fraught even for [email protected]@helentbiz More