Economy

Portugal’s finance minister has vowed to remove his country from the “podium” of the three most indebted economies in Europe to protect families and businesses from the impact of higher interest rates.Fernando Medina said it was vital to reduce more quickly the country’s public debt – the highest in the eurozone after Greece and Italy – to prevent higher government borrowing costs hitting the wider economy.“Faced with rising inflation, evident signs of a slowdown in central and eastern Europe and the prospect of higher interest rates, we cannot afford to introduce an additional risk factor,” he told foreign journalists.Medina’s pledge to make debt reduction a “strategic objective” follows a sharp rise in the spreads of eurozone government debt as the European Central Bank prepares to introduce interest rate rises as early as July.In separate meetings with the foreign media and economists late last week, Medina stressed that alleviating the debt burden would have a positive impact on banks, companies and families at a time of global uncertainty caused by the war in Ukraine and supply chain bottlenecks in China.His goal is supported by Mário Centeno, governor of the Bank of Portugal, who at the same economists’ conference cited IMF projections forecasting that Portugal’s public debt-to-GDP ratio would fall below those of France, Spain and Belgium by 2025. “This trajectory will determine the success of the Portuguese economy,” Centeno said.The government has not set out specific debt targets beyond this year, but the IMF projects Portugal’s debt-to-GDP ratio could fall from 127.5 per cent in 2021 to 104.5 per cent by 2027.Economists see reining in public spending as the biggest challenge, with Centeno warning that a big increase in public sector hiring over the past two years could not all be attributed to the pandemic. A large influx of EU recovery funds, however, will significantly reduce the cost of public investment over the medium term.After delays caused by a snap election in January, parliament is expected to give final approval this week to the government’s 2022 budget, which targets a drop in the debt-to-GDP ratio to 120.7 per cent. Debt reduction should remain a goal for “the next five budgets”, urged Centeno.In line with other EU countries, Portugal has seen yields on its short-term debt turn from negative to positive in about two months. “Yields have increased faster than expected,” said Filipe Silva, investment director at Banco Carregosa. “In December, most analysts expected it would take a year for them to move as much as they have already.”Italy’s 10-year yield spread against Germany, seen as a benchmark of economic and political risks in the euro area, has climbed above 200 basis points. Among highly indebted eurozone countries, however, Portugal had succeeded in distancing itself from Italy, Silva said. Its spread against Germany is about 120bp, close to that of Spain.The renewed determination of the Socialist party (PS) government to pursue fiscal prudence comes after years of steady progress in reducing public debt were interrupted by the pandemic. When Covid-19 hit, “the debt mountain began to rise again”, said Medina. In 2020, the debt-to-GDP hit a record 135.2 per cent. The austerity measures Portugal endured during the European sovereign debt crisis more than a decade ago have also cast a long shadow, making fiscal prudence a high priority for many voters, according to opinion polls, as well as politicians.Medina’s debt-cutting ambitions have been buoyed by a robust recovery from the pandemic. The European Commission forecasts annual GDP growth of 5.8 per cent this year, the highest in the EU. Lisbon is also in full compliance with the bloc’s deficit and debt rules and determined to remain so, the minister said, even though they have been suspended for another year. “The aim is positive, but we’ll need to see the results,” said Silva. “The real test will be holding down public spending.” More

Anthony Albanese’s Labor party was edging closer to securing a majority government on Sunday as the full extent of the losses suffered by Scott Morrison’s rightwing Coalition government in Australia’s federal election were laid bare.Labor took the lead in a number of seats with tight margins including Bennelong, the Sydney seat once held by conservative Liberal party former prime minister John Howard. It also led in Boothby, which has been held by the Liberal party since 1949, a result that would push it closer to the 76 seats needed to form a government without crossbench support. Albanese’s supporters were euphoric on Saturday night after Morrison conceded defeat in an election that was fought over the economy and national security but swung to Labor and independents as a protest against the Coalition’s climate and social policies. However, the incoming government will have a tough task delivering on its election commitments to improve wage growth and productivity. The soon-to-be 31st prime minister of Australia will face a cost of living crisis driven by a steep increase in inflation and rising interest rates that have undermined Morrison’s claim that his government was a better steward of the economy. Josh Frydenberg, the outgoing Liberal treasurer who is set to lose his seat to an independent, defended his record on Sunday, pointing to the lowest unemployment rate in half a century and the fastest improvement in the “budget bottom line in more than 70 years” as the economy bounced back from the pandemic. But Stephen Koukoulas, who was an economic adviser to former prime minister Julia Gillard when she was in office, said that the new treasurer Jim Chalmers would be receiving some “ugly news” in the coming days during discussions with the treasury and Reserve Bank of Australia. “Jim has been handed the proverbial shit sandwich,” he said.Shane Oliver, chief economist at AMP bank, said inflation was running at its highest level since the early 1990s, pushing up interest rates. This coincided with record high household debt-to-income levels, soaring budget deficits and the risk of a wage-price spiral. “Gone are the days of fiscal largesse that was made easy by very low inflation and very low interest rates. To take pressure off inflation and interest rates, the new government really needs to significantly speed up the pace of deficit reduction, or budget repair, and to commence significant economic reform in the areas of industrial relations, tax, competition policy and education to boost productivity,” he added.Saul Eslake, founder of Corinna Economic Advisory, said that Labor might be inheriting an economy “with a head full of steam” but it could be hampered in its attempts to deal with inflation and any further deterioration in relations with China, its biggest trading partner. “It will do so with limited room to deploy fiscal policy forcefully in response to any shocks, given the deterioration in Australia’s public finances during the pandemic.” Albanese has a very narrow mandate after running a safe campaign that shied away from promising big reforms. “Bearing in mind that no first-time Australian government since 1931 has failed to secure a second term, Labor needs to be laying the groundwork for a more expansive mandate at the 2025 election if it is to make a lasting difference to Australia’s medium-term prospects,” Eslake added.Those problems pale in comparison to those of the Liberal party, whose coalition with the rural National party is on course to record its worst result since 1983 when Labor’s Bob Hawke was swept to power.

The Liberal party could be left holding only three seats in Melbourne based on the latest projections and none in Adelaide or Perth after suffering huge swings to Labor. It lost heartland urban seats in Sydney and Melbourne to “teal” independents, a new generation of climate-focused female candidates standing in affluent seats, and unexpectedly lost ground in Queensland to the Greens.Results in the senate, Australia’s upper house, have also been grim for rightwing parties, which ceded territory to their progressive rivals ranging from the Greens to single issue groups including the Legalise Cannabis party. David Pocock, a former Australian rugby union player for the Wallabies standing on an independent ticket, is close to taking a Canberra senate seat from Zed Seselja, who was the minister for the Pacific in Morrison’s government. That would mean there would be no Liberal senators representing the nation’s capital for the first time. Meanwhile, Pauline Hanson, the firebrand rightwing senator for One Nation who has opposed climate change policies, could lose her Senate seat to the Greens in Queensland.Albanese will probably need to rely on support from the Greens or independents in the Senate to pass legislation. On Monday, he will fly to Tokyo to attend the leaders’ meeting of the “Quad” security grouping in his first act as prime minister as the final election results play out.There he will meet Joe Biden, the US president, Fumio Kishida, Japan’s prime minister, and India’s PM Narendra Modi. “It’s an opportunity for us to send a message that there is a change of government and that there will be a change of policies on things like climate change,” Albanese said on Sunday. That message rippled out to the Pacific, to which Albanese has promised to devote more attention. Frank Bainimarama, prime minister of Fiji, celebrated Albanese’s climate focus. “Of your many promises to support the Pacific, none is more welcome than your plan to put the climate first,” he wrote on Twitter. Mike Cannon-Brookes, the software billionaire and climate activist, told the Financial Times on the eve of the election that Albanese’s climate targets were not overly ambitious but that it was positive that he was a step ahead of the Morrison government, which had turned the country into a “climate criminal on the international stage”. More

“The early morning of May 21 was extraordinarily warm for the time of year in much of the centre and south of the peninsula,” national weather agency AEMET wrote on Twitter (NYSE:TWTR).It issued warnings of high temperatures in 10 Spanish regions for Saturday, where temperatures were forecast to reach the high 30s. On Friday, May temperature records were broken in the city of Jaen, Andalusia, which logged 40C. AEMET said average temperatures in Jaen were 16C higher than normal for this time of year. Elsewhere in Spain, temperatures were at least 7C higher than usual. In Madrid, street sweeper Rocio Vazquez, 58, was out working in the direct sun, wearing a face mask. “This year it seems to have gone directly to summer, but we have to keep going,” she said. “It’s scorching but it’s our job and has to be done.” AEMET spokesperson, Ruben del Campo, said earlier this week that, if officially confirmed, it could be the first ever heatwave recorded in May.”This episode is very unusual for mid-May and could be one of the most intense episodes in the last 20 years,” he said. In Cordoba, Andalusia, a group of women who had come from Madrid for a hen party were feeling the heat, one dressed as a pink flamingo. “It is really hot, we’re (battling it) with a lot of water,” said bride-to-be was Bea Ovejero, 31. More

The UK will celebrate the 70th anniversary of Queen Elizabeth II’s accession to the throne with a public holiday in a couple of weeks. Britain has changed in many ways since 1952 — the empire has been unstitched and society has become more tolerant — but inflation is running at much the same rate.Metrics and data collection methods have been through multiple iterations. So too have the 700-odd components that make up price indices. The 1950s shopping basket — very probably a wicker one — contained foodstuffs such as ox liver, lard, canned fruit and veritable shoals of fish. Rationing, which lingered on after the end of the second world war, kept some goods out of that receptacle. A prevailing culture of thrift meant many more relied on home-grown vegetables.Import restrictions were an issue and food price rises outpaced those in wage packets. That nasty state of affairs meant households were spending a third of their net income on food.Today, the figure is 10 per cent, and larders are infinitely more varied, including such items as vegetarian sausages. That is the result of rising living standards, intensive farming and the muscle of supermarkets. Adjusting for inflation, new potatoes cost much the same as they did at the time of the coronation.Some goods and services are cheaper. Thanks to technology, a lot less money goes on keeping in touch: WhatsApp and other apps have supplanted trunk calls. In telecoms, postwar costs were rising faster than today’s iPhones, though reasonably so, reckoned the then Earl De La Warr. “I do not know how many of your Lordships are engaged in trade or industry,” he appealed to the House of Lords. “But I should like to know how many of you are selling goods at only 50 per cent above prewar [prices].”Other purchases have galloped ahead. Leading the pack: houses and school fees. The Nationwide house price index puts the average price of a house in 1952 at under £2,000. Today it is comfortably in excess of £250,000. That is more than six times the inflation-adjusted equivalent and will barely buy you a shoebox-sized apartment in London.For sure, more people are better off. A fifth of the workforce now fills professional jobs, up from about 8 per cent in the 1950s. Automation also means fewer clerical jobs, down from one in eight to one in 10. But wealth remains unequally divided. As historian John Burnett put it, “poverty persists in the midst of general plenty”. Chances are this will remain the case when the next 70 years are up too.The Lex team is interested in hearing more from readers. Please give us your view on inflation — preferably over the very long term — in the comments section below. More

The World Economic Forum defines its mission as improving the state of the planet. Yet when it gathers 2,500 of the global elite in the Swiss mountain resort of Davos from Sunday, the backdrop will be war in Ukraine, an unresolved pandemic, growing climate risks and a rapidly souring economic outlook. Even WEF founder Klaus Schwab acknowledged the question hanging over this year’s annual meeting at a briefing this week: “How can Davos make a positive contribution to all those challenges in a world which is deeply stuck in crisis management?” The meeting is the WEF’s first since January 2020 after aborted attempts to gather its usual array of policymakers and executives through the first two years of the Covid-19 pandemic. That period has shaken the system Davos represents and injected a rare note of self-doubt. One theme running through the sessions is whether the system of globalisation and collaboration for which it stands still works. Here’s what to watch for at what Schwab is billing as the most consequential annual meeting since the WEF’s creation in 1971.Reconstructing UkraineHistory books will record Russia’s attack on Ukraine as “the breakdown of the post-World War II and post-Cold War order,” Schwab predicted earlier this week. He has barred Russian politicians and executives from the meeting, which Ukraine’s president, Volodymyr Zelensky, will address via video on Monday.Other Ukrainian ministers will meet western leaders including Nato secretary-general Jens Stoltenberg, European Commission president Ursula von der Leyen and German chancellor Olaf Scholtz. The big question will be whether delegates can make progress on Marshall plan-style investments in Ukraine’s eventual reconstruction. Expect talks on further sanctions, how to handle Ukrainian refugees, and how to stem a food crisis spreading from the traditional “bread basket” of Europe. Economic gloomWe are in the throes of a worrisome moment for the world economy.European Central Bank president Christine Lagarde, US commerce secretary Gina Raimondo and about 50 finance ministers will be under pressure to deliver new solutions to the challenges of soaring inflation and recession fears.Rising interest rates and spiking energy costs are exacerbating long-term Davos concerns including the need to tackle inequality and to provide workers with new skills. Look for initiatives to drive “a jobs recovery”. Averting climate changeThe top concerns in the WEF’s global risks report this January, as in early 2020, captured elites’ fears that governments, businesses and financiers are doing too little to avert irreversible climate change.Spiking energy prices following the invasion of Ukraine have added a new fear: that countries trying to wean themselves off Russian gas will fall back on coal. Chinese climate envoy Xie Zhenhua will meet his US counterpart John Kerry. But with relations between Washington and Beijing tense, can they build on pledges made at November’s COP 26 climate summit? Amid warnings that net zero pledges have not delivered the surge in investment needed to cut emissions, delegates will be pushed to show more action. Preparedness for future pandemics At the WEF’s last in-person meeting in January 2020, delegates knew that China was in the grip of a novel coronavirus, but few of them could imagine how Covid-19 would affect them. Davos 2022 is anxious to avoid a repeat, scheduling several meetings on preparedness. Expect announcements on new monitoring systems, and a focus on providing more vaccines to the poorest, least immunised populations. A new consortium — bringing together ministers, executives and international organisations — will “accelerate collective action across key resilience drivers for the global economy”.Capitalists confront sceptics Executives’ concerns this year range from the “great resignation” to how to make supply chains less vulnerable. Overlaying such issues, though, are questions about the direction in which capitalism will head.The WEF believes the system can adapt to meet the challenge of climate change. But with investors warming again to oil stocks, and sceptics like Elon Musk declaring ESG “a scam”, many doubt that is the case. This year’s meeting will try to ground what most Davos-goers see as good intentions in more demanding metrics. Will Davos still be Davos? Winter Davos features an icy Promenade, fondue dinners and heaving corporate parties. There will be no snow on the ground in May and smaller delegations from banks and once feted crypto businesses. Some larger parties, held by the likes of JPMorgan and McKinsey, are not happening.One recurring theme, though, will be protests outside the security perimeter, and suspicion about what goes on inside it. A new book called Davos Man lambasts executives who advocate a positive social role but then lobby for lower corporate taxes. The WEF has also been trying to hose down fresh conspiracy theories about its influence, spreading on sites such as 4chan. “They were not suddenly taken up: we saw a lot of amplification of them by state actors,” one WEF executive said this week.Schwab himself seems unswayed by the questions over his creation. Davos, he argued, is the place to understand the world “in its systemic complexity”. More

The said that the maritime initiative will use satellite technology to create a tracking system for illegal fishing from the Indian Ocean to the South Pacific by connecting surveillance centers in Singapore and India.U.S. President Joe Biden is visiting Japan to attend the meeting of the Quad group of countries – Australia, India, Japan and the United States in Tokyo- which have increased cooperation in the face of China’s growing assertiveness.According to the Financial Times report, the maritive initiative will enable these countries to monitor illegal fishing even when the boats have turned off the transponders which are typically used to track vessels.The U.S.-Indo Pacific coordinator Kurt Campbell had said earlier this month that United States will soon announce plans to battle illegal fishing in the U.S. Several countries in the Indo-Pacific region chafe at China’s vast fishing fleet. They say its vessels often violate their exclusive economic zones and cause environmental damage and economic losses. More

The EU’s decision to suspend its deficit and debt rules for an extra year is not an excuse for member states to persist with loose spending policies, Germany’s finance minister Christian Lindner has said, in a call for more fiscal discipline.“The fact that member states are now able to deviate from the Stability and Growth pact doesn’t mean they actually should do that,” Lindner told the Financial Times. The Stability and Growth Pact, which enshrines the EU’s fiscal rules, was put on hold early in the Covid-19 pandemic as economic output in Europe crashed. The European Commission was expecting to reimpose the rules at the beginning of next year as a post-pandemic economic recovery took hold. But the war in Ukraine and the consequent surge in energy prices has led Brussels to extend the suspension for another year.Speaking on the sidelines of a meeting of G7 finance ministers in the Rhine town of Königswinter this week, he implied fellow EU countries should take a leaf from Germany’s book. “We will not be taking advantage of the general escape clause [but] will return to our national debt brake, which is anchored in our constitution,” he said, referring to Germany’s strict ceiling on deficits.The pact, which aims to keep member states’ borrowing under control, stipulates that public debt should not exceed 60 per cent of gross domestic product and budget deficits should not top 3 per cent. Some member states have been advocating for reform, saying certain kinds of strategic government spending — such as investment in defence or mitigating climate change — should get preferential treatment.But Lindner made it clear he opposed that, and warned against treating the suspension as an opportunity to rethink the whole EU rule book. “The decision to extend the escape clause shouldn’t be seen as a precedent or a prelude to reform of the fiscal rules,” he said. He acknowledged that there was scope for “more flexibility” in the way they are applied, but insisted the EU needed a “long-term reliable path towards reducing state debt . . . In terms of our ultimate goal we should become tougher, not softer”.With inflation on the rise across the G7 group of leading economies, Lindner argued that swift action was needed to return to macroeconomic stability and what he described as a “neutral fiscal stance”. “There is a real danger of stagflation,” he said. “That’s why we have to act urgently.”

Lindner, leader of the liberal and pro-business Free Democrats, has the reputation of a fiscal hawk, though one with strong pro-European sympathies. He is an ardent proponent of returning to the debt brake as quickly as possible.He has often warned that some countries in Europe had accumulated too much debt in the course of the Covid-19 crisis and must now make efforts to repair their public finances, especially against the backdrop of rising inflation in the eurozone. “If you take a look at the data, you see that we need to stop our expansive fiscal policies and stop intervening in the market economy with these big state spending programmes,” he said. “We have to reduce our budget deficits and . . . send supply side signals for more growth.” Lindner also said he was opposed to the EU raising new debt to cover Ukraine’s financing needs, along the lines of the €800bn EU Next Generation Fund, which was designed to help member states rebuild from the economic crisis brought on by the pandemic.“That was a one-time decision,” he said. “Germany does not support the idea of repeating the joint issuance of debt.”He drew a distinction between calls for a new round of joint borrowing and the €9bn of financial aid the EU is discussing for Ukraine, describing the latter as “a different tool we’ve used in the past, based on national guarantees that are then used to jointly support third countries”.Lindner also touched on a proposal that EU capitals should consider seizing Russia’s frozen foreign exchange reserves to cover the costs of rebuilding Ukraine after the war, which was floated earlier this month by Josep Borrell, the EU’s high representative for foreign policy.He said Germany was “open” to the idea, but “we still need to figure out the legal issues and the consequences for the international rules-based order”. Lindner said he was against seizing the private assets of Russian oligarchs, however. “Countries based on the rule of law guarantee private property,” he said. “The hurdles for confiscating it are very high.”He proposed that private actors such as oligarchs should be persuaded to “contribute towards reparations for Ukraine, on a voluntary basis”. “There should be a political discussion about that . . . which I would like to be part of,” he said. More

“Tonight I have spoken to the Leader of the Opposition and the incoming Prime Minister, Anthony Albanese, and I’ve congratulated him on his election victory this evening,” Morrison said at a televised speech in Sydney.Morrison added that he would stand down as leader of the Liberal party.The capitulation ends eight years and nine months in power for Morrison’s conservative coalition. Morrison became prime minister in 2018 after several leadership changes. More