Economy

The writer is director of the Open Society European Policy Institute and one of the authors of the International System Change Compass, written with Systemiq and the Club of RomeThe EU has a commendable story of leadership on climate, having made legally binding commitments to climate neutrality and created an ambitious policy framework to meet them. Unlike the US and other global players, Europe has put its money — and its policies — where its mouth is.But this story will start to look less praiseworthy if the EU does not address the worldwide implications of its transition, as set out in the recently published International System Change Compass. To put it bluntly, the EU cannot be a green island in a dirty world. Unless its trade, aid and other external policies help other regions to achieve their own green transitions, the EU’s ambitions will fail.There is only one climate, so emissions reductions on one continent do not help if it continues importing products made with dirty energy elsewhere in the world. By 2030, the EU is likely to be responsible for less than 5 per cent of global emissions, thanks to its “Fit for 55” package. But European demand drives a big chunk of the other 95 per cent of emissions because of the CO₂ embedded in imports from other regions.Carbon emissions are not the only problem. The EU is a massive importer of virgin resources that are extracted in other parts of the world. Global extraction of natural resource materials tripled over the past 50 years, according to the UN’s International Resource Panel, while global material productivity has declined and material consumption is forecast to double by 2060. To avoid outsourcing the emissions and ecological damage from that consumption, high-income countries need to use resources much more efficiently by moving to a circular economy.Resource efficiency has grown more urgent now that Europe’s decarbonisation drive is pushing up demand for critical raw materials, such as lithium for batteries. If the US and Europe were to maintain the same levels of consumption, currently known resources or planned mines could supply only about 50 per cent of the lithium and 80 per cent of copper needed for humans to move to electric mobility and renewable energy generation, according to the International Energy Agency.Renewables buildout is Europe’s solution: it is the best way to decarbonise the economy and provide long-term energy security, far better than finding new sources of oil and gas. Renewables are freedom fuels because sun and wind are abundant and well distributed across the globe. But the critical raw materials to make solar panels and other clean tech are concentrated in specific places, and most of the supply is controlled by just one country — China. Shortly after Europe’s huge effort to escape reliance on Russian hydrocarbons, it will find itself more dependent on China. Moreover, the mining boom for renewable tech could start new resource conflicts. A significant challenge for the next phase of the European Green Deal is to develop a comprehensive plan to ensure good governance of natural resources.The EU has to drive forward its investments in the demand side as well as the supply side. Along with the US and China, the EU needs to see the move to more efficient use of materials as a security imperative, both for energy security but also as a conflict avoidance strategy. A circular economy would be more resilient because higher reuse and recycling of materials means less vulnerability to external supply chains. It would also mean less competition for virgin resources among these three big economies.However, the EU needs to cushion the impact on its lower-income trade partners of cuts to imports and the introduction of climate-motivated trade barriers. Before introducing the carbon border adjustment mechanism planned for 2026, the EU needs to bring in parallel commitments for finance and technology transfer to help its lower-income trade partners to develop their own sustainable industries and move up the value chain.Europe’s global reputation is at stake. To be a leader on climate, the EU has to avoid starting a new era of extractivism reminiscent of its colonial past, and instead make its own economy more resource and energy efficient. It needs to help other regions to change their economic systems, not only threaten them with measures that they see as protectionism in a green wrapper. The European Green Deal will succeed only if it fosters a global green deal that advances Europe’s trade partners along their own paths to sustainability. More

Sales rose 0.9% in April, just below the 1% estimate, according to numbers that are not adjusted for inflation.
April’s gains were powered by a 4% gain from miscellaneous retail and a 2.1% jump in online sales.
A separate report showed that industrial production rose 1.1% in April, well above the 0.5% estimate.

A woman pushes a shopping cart through the grocery aisle at Target in Annapolis, Maryland, on May 16, 2022, as Americans brace for summer sticker shock as inflation continues to grow.
Jim Watson | AFP | Getty Images

Consumers kept spending in April, with retail sales rising about in line with Wall Street expectations despite an ongoing surge in prices.
Monthly sales rose 0.9% overall, just below the Dow Jones estimate for a 1% increase, the Commerce Department reported Tuesday. Excluding autos, sales increased 0.6%, which was better than the 0.4% estimate.

The numbers are not adjusted for inflation, so they are indicative both of sustained spending as well as the fastest acceleration in prices the U.S. economy has seen in about 40 years.
“Retail sales in April show that the consumer is weathering the inflationary headwinds, rising for the fourth consecutive month,” said Jeffrey Roach, chief economist at LPL Financial. “Core categories show signs that consumers are likely dipping into savings to offset the decline in real wages. If pricing pressures can moderate enough to relieve some of the pressure on consumers, we expect a rebound in economic growth in Q2.”
In addition to the solid showing in April, March’s spending was revised substantially higher, from the original estimate of a 0.5% increase to a 1.4% gain. Ex-autos sales were revised sharply higher as well, to a gain of 2.1% in March against an original 1.1%.
On a year-over-year basis, sales were up 8.2% on the headline number, and 10.9% excluding autos.
April’s gains were powered by a 4% gain from miscellaneous retail and a 2.1% jump in online sales. Bars and restaurants also showed a solid 2% increase. All three categories posted larger gains than in March.

The increases came despite a 2.7% decrease at gasoline stations as energy prices declined during the month. Excluding gas stations, sales increased 1.3%. Even with the monthly decline, gasoline sales soared 36.9% from a year ago.
Bar and restaurant sales rose 19.8% from a year ago, when the economy was still struggling with Covid-related restrictions.
The sales data are largely consistent with an economy that continues to grow despite inflation pressures. Prices overall increased 0.3% in April and 0.6% excluding food and energy. On an annualized basis, the consumer price index rose 8.3% on headline and 6.2% on core in April.
Gross domestic product fell 1.4% on an annualized basis in the first quarter, but most economists expect growth to pick up through the year.
A separate report Tuesday showed that industrial production rose 1.1% in April, well above the 0.5% Dow Jones estimate, according to Fed data. Capacity utilization, or the level of potential output being realized, increased to 79%, slightly ahead of the 78.6% estimate.

WATCH LIVEWATCH IN THE APP More

Sentiment fell 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
Of the index’s three components, current sales conditions fell 8 points to 78, and sales expectations in the next six months dropped 10 points to 63. Buyer traffic fell 9 points to 52.
“Housing leads the business cycle, and housing is slowing,” said NAHB Chairman Jerry Konter, a builder and developer in Savannah, Georgia.

Contractors work on concrete slabs in the Cielo at Sand Creek by Century Communities housing development in Antioch, California, on Thursday, March 31, 2022.
David Paul Morris | Bloomberg | Getty Images

Builder sentiment in the market for single-family homes fell sharply in May, as mortgage rates shot higher and building material costs showed no relief.
Sentiment fell an outsized 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Readings above 50 are considered positive, but this is the fifth straight month that builder sentiment has declined.

It’s the lowest reading since June 2020, when builders had a brief, quick negative reaction to the beginning of the Covid pandemic before rapidly bouncing back. As the economy shut down, demand for single-family homes with outdoor space in the suburbs skyrocketed. Builder sentiment hit a record high of 90 by November 2020.
Taking out that pandemic effect, this month’s reading is the lowest since September 2019, when the U.S. trade dispute with China was taking a hard toll on building material supply chains.
“Housing leads the business cycle, and housing is slowing,” said NAHB Chairman Jerry Konter, a builder and developer in Savannah, Georgia.
Of the index’s three components, current sales conditions fell 8 points to 78, and sales expectations in the next six months dropped 10 points to 63. Buyer traffic fell 9 points to 52.
Buyers in April saw the average rate on the 30-year fixed mortgage jump from 4.88% to 5.41% and then hit a high of 5.64% in the first week of May, according to Mortgage News Daily. The rate started this year at just 3.29%. At the same time, builders saw inflation hit their costs hard.

“The housing market is facing growing challenges,” said NAHB chief economist Robert Dietz. “Building material costs are up 19% from a year ago; in less than three months mortgage rates have surged to a 12-year high, and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family.”
Entry-level buyers are being hardest hit by rising rates, but the drop in demand is showing up across all levels. Some surveys are also showing an increase in cancellation rates for new construction.

“We’re seeing an inflection point,” housing analyst Ivy Zelman said in an interview on CNBC’s “Closing Bell” on Monday.
“Our survey did see a pickup in cancellation rates,” Zelman said. “We did see a tick up in incentives, and some of the cancellations, we’ve heard from some of the hotter markets, were actually private investors.”
Regionally, on a three-month moving average, builder sentiment in the Northeast was unchanged at 72. In the Midwest, it fell 7 points to 62, and in the South it fell 2 points to 80. In the West, sentiment fell 6 points to 83.

WATCH LIVEWATCH IN THE APP More

In his general election campaign of 2019, Boris Johnson promised the country that he would “get Brexit done”. He has failed. Once again he is planning a law to allow him to repudiate parts of the UK’s Brexit deal on Northern Ireland, on which he campaigned. This would destroy the UK’s reputation for keeping its word, invite a parallel EU repudiation of its free trade deal with the UK, enrage the Biden administration and divide the west.At the time of the referendum campaign in 2016, the then Irish foreign minister remarked to me that the EU is a “peace project”. It was true of France and Germany. It was also true of Ireland and the UK. The fact that the Republic and the UK were members of the EU had made borders almost irrelevant. This had facilitated the peace process and might even be what made it possible.“You break it, you own it”, as the late Colin Powell told George W Bush before the invasion of Iraq. This possibility did not seem to cross the minds of Brexiters. Brexit would disrupt the EU ties between the two countries, which had facilitated the Good Friday Agreement. The Leave campaign ignored this issue. Remainers mostly did, too. But they had the excuse that they were not proposing to wreck the relationship.To their credit, Tony Blair and John Major, joint progenitors of the Good Friday Agreement, warned of the consequences of Brexit in a visit to Londonderry in June 2016. Blair argued that the only alternative to controls on the land border “would have to be checks between Northern Ireland and the rest of the UK, which would be plainly unacceptable as well”. Major warned it would be “a historic mistake” to do anything that risked destabilising the Good Friday Agreement. They were both correct. Alas, they were ignored.After the referendum, the Brexiters insisted that their narrow victory mandated them to choose the hardest possible Brexit, whatever its cost. They rejected the single market. They also repudiated Theresa May’s withdrawal agreement, which would have kept the UK in the customs union. Only last week, May reminded the House that “I put a deal before the House that met the requirements of the Good Friday Agreement and enabled us not to have a border down the Irish Sea or between Northern Ireland and the Republic of Ireland. Sadly, the Democratic Unionist party and others across the House chose to reject that.” Among those “others” was the ambitious Johnson.Once in power, Johnson made his deal to “get Brexit done”, the one he now wishes to change unilaterally. Then he said that “Northern Ireland has a great deal. You keep free movement and access to the single market but you also have unfettered access to GB.” But he was determined to take access to that very single market from the rest of the UK. He also insisted his “great deal” would not mean border controls in the Irish Sea, though it obviously would. What he should also have known is that the greater the divergence between the UK and EU — over phytosanitary regulations, for example — the more onerous those border checks would have to be. Is he unable to admit these self-evident realities even to himself?In a recent speech justifying unilateral repudiation, Lord Frost, Johnson’s negotiator, argued that “The detail of the protocol’s provisions was essentially imposed under duress because we had no ‘walk away’ option.” As a matter of fact, we did. But it would have been too costly to exercise. In these negotiations the EU was (and is) in a stronger position, because it matters far more to the UK than them. This is power, which matters in international relations. Who knew? Not Frost, it seems.Having disrupted Northern Ireland, the leader of the Brexiters blames the predicament on EU recalcitrance. Yet the difficulty lies not with the deal’s substance: the Northern Ireland economy is outperforming the UK’s, which is, predictably, performing poorly post-Brexit. Nor is it with majority opinion in Northern Ireland: 56 per cent of its voters rejected Brexit in the 2016 referendum. The May 2022 elections to the Northern Ireland Assembly have also delivered 53 members in favour of the protocol and only 37 against. The problem is with the unionists. But the unionist parties together only received 40 per cent of the vote in May. Unionist parties had favoured Brexit in 2016. But what, one wonders, did these people expect to follow? Why did they welcome so risky a choice? Ironically, our government, which treated the votes of 16.1mn Remainers with contempt when it chose almost the hardest and most damaging possible version of Brexit, wishes to give fewer than 350,000 unionist voters in Northern Ireland and a vastly smaller number of potential trouble makers the power to break the withdrawal agreement with the EU, even though this would damage the prospects of the rest of the country. “It is time”, Frost says, “to put our own interests first”. Indeed, we should. The interest of the British people lies in the best and most stable possible relations with the EU, our biggest trading partner and closest neighbour. It is not to risk a deeper decline in UK trade in response to threats of violence from a tiny minority of British people.The UK government must engage cooperatively in efforts to make trade with Northern Ireland smoother. But the EU should also engage, recognising that Brexit has been helping it to make far faster progress than it would have done if the UK had remained a member. Gratitude for removal of this obstacle should encourage it to be conciliatory. But the decision is ultimately for the UK. Europeans are eternal neighbours, share values and have common foes. The UK has to keep its promises. This depressing version of Groundhog Day must now [email protected] Martin Wolf with myFT and on Twitter More

COLOMBO (Reuters) – Sri Lanka’s parliament reconvened on Tuesday for the first time since violence flared last week and the prime minister quit, as his replacement warned that the country was in a precarious economic situation and down to its last day of petrol supplies. Ranil Wickremesinghe, the new prime minister, said in a televised address on Monday that the island nation had to face “unpleasant and terrifying facts”.”At the moment, we only have petrol stocks for a single day. The next couple of months will be the most difficult ones of our lives,” he said.Foreign reserves had come close to zero from $7.5 billion in November 2019, he added, with the country requiring $75 million in the next few days to keep the economy running. Essential medicines had run out.Power cuts could extend to as much as 15 hours a day because of the lack of fuel, which is mostly imported.Wickremesinghe said he planned to ask for foreign assistance, privatise SriLankan Airlines and seek parliamentary approval to increase Treasury bill issuance to 4 trillion rupees ($11.27 billion) from 3 trillion.”For a short period, our future will be even more difficult than the tough times that we have passed,” he said. More than a month of predominantly peaceful protests against the government’s handling of the economy turned deadly last week when supporters of former Prime Minister Mahinda Rajapaksa stormed an anti-government protest site in the commercial capital, Colombo. Days of subsequent clashes between protesters, government supporters and police left 9 dead and over 300 injured.Rajapaksa then resigned, leaving his younger brother Gotabaya Rajapaksa to rule on as president.Sri Lanka’s economic crisis, unparalleled since its independence in 1948, has come from the confluence of the COVID-19 pandemic, rising oil prices and populist tax cuts by the Rajapaksas.The chronic foreign exchange shortage has led to rampant inflation and shortages of medicine, fuel and other essentials, bringing thousands out on the streets in protest in the Indian Ocean nation, where China and India are battling for influence. Wickremesinghe’s four cabinet appointments to date have all been from the Rajapaksas’ Sri Lanka Podujana Peramuna party, to the dismay of protesters, who want to exile the family from the nation’s politics. He is yet to announce key portfolios including the crucial post of finance minister, who will negotiate with the International Monetary Fund for financial help.Former Finance Minister Ali Sabry had held preliminary talks with the multilateral lender, but he quit along with Mahinda Rajapaksa last week.($1 = 355.0000 Sri Lankan rupees) More

With inflation soaring to a record high of 7.5% in the euro zone last month, well above the ECB’s 2% target, policymakers are increasingly advocating a rapid unwinding of stimuli, and several want a rate hike as soon as July.”If it (normalisation) is done with the sustainability that we all want, and the ECB is working on it, it will mean increased intervention capacity of the central bank in the short and medium term,” the Bank of Portugal chief told reporters.Centeno said the decision on monetary policy will be collective, and that the ECB should communicate coherently the reasons behind its decisions to people and businesses.”Making very peremptory statements (about monetary policy) before we all have the same information can only result in noise,” he said, without specifying whose statements he was referring to.Dutch central bank chief Klaas Knot said earlier on Tuesday the ECB should raise its key interest rate by 25 basis points in July but should keep the door open to a 50-bps move if incoming data over the next few months suggests that inflation is “broadening further or accumulating”. More

A top European Central Bank official has raised the prospect of a half percentage point interest rate increase in July if inflation continues to climb, the first time such an aggressive shift has been mooted.Tuesday’s comments by Dutch central bank chief Klaas Knot, one of the more hawkish members of the ECB’s rate-setting body, sent ripples through financial markets, as the euro rose 1.1 per cent against the US dollar to $1.0546 and eurozone government bond prices fell.ECB president Christine Lagarde has signalled that the bank’s first rate rise for more than a decade is likely to occur at July’s governing council meeting. But she and many other policymakers have stressed they will move only “gradually” — indicating any change to rates will be in quarter-point increments.Knot’s comments make him the first ECB governing council member to say it could raise its deposit rate by half a percentage point in July. That would take the rate from minus 0.5 per cent to zero in a single move.“Based on current knowledge, my preference would be to raise our policy rate by a quarter of a percentage point — unless new incoming data in the next few months suggests that inflation is broadening further or accumulating,” he told Dutch TV programme College Tour. “If that is the case, bigger increases must not be excluded either.”Knot added: “In that case a logical next step would amount [to] half a percentage point.” Eurozone inflation for April reached 7.5 per cent — well above the ECB’s target rate of 2 per cent — and price pressures are continuing to build due to the fallout from Russia’s invasion of Ukraine and China’s coronavirus lockdowns.“This is the first such statement challenging the ECB’s commitment to gradual tightening,” said Frederik Ducrozet, a strategist at Pictet Wealth Management. “Now this is also a proposal that the doves can oppose. I would watch their reaction closely in coming days.”The ECB last raised rates in 2011, a move subsequently considered a mistake by many economists, since it prefigured the EU’s debt crisis. This time around, many of its officials — particularly southern European “doves” — emphasise the importance of proceeding with caution due to the risk of a eurozone recession.European government bonds declined in tandem with the euro’s rise following Knot’s comments, with the 10-year German Bund yield up 0.08 percentage points at 1.02 per cent. Expectations for ECB rate rises also ticked up, with money markets signalling expectations that the central bank will raise rates by 1 percentage point this year, from about 0.93 percentage points the previous day, according to Bloomberg data. The single currency has come under intense pressure this year on expectations the US Federal Reserve will tighten monetary policy much more quickly than the ECB and some eurozone policymakers worry that a weaker euro will fuel more inflation by raising import prices. The Fed raised its benchmark policy rate this month by half a percentage point for the first time since 2000 and sent a strong signal that it intended to increase it by the same amount at the next two meetings. But other monetary authorities, such as the Bank of England, have been more cautious in raising rates by a quarter percentage point at a time. Lagarde said last week that given growing uncertainty about growth, the ECB would pursue “gradualism concerning the pace of monetary policy adjustment”. More

NEW YORK (Reuters) – On one side is a president questioning the integrity of the electoral system. On the other, a challenger warning he could roll back the country’s biggest privatization in decades.But investment bankers are sanguine about the impact of Brazil’s presidential election this year on investor appetite for upcoming deals.They say investor attention is focused on global risks such as higher U.S. interest rates and inflation or the war in Ukraine, executives say, making a presidential contest between two familiar faces seem like a manageable concern.”Given the global outlook, Brazil represents an attractive opportunity for investors as a global commodity provider, likely overriding any potential short term political uncertainty,” said Max Ritter, managing director at Goldman Sachs & Co (NYSE:GS) responsible for Latin America.Former President Luiz Inacio Lula da Silva has stuck to proven left-wing rhetoric while riding a healthy lead in the polls. However, bankers see his choice of centrist former Sao Paulo Governor Geraldo Alckmin as a nod toward the market-friendly policies he adopted on taking office in 2003.Ricardo Lacerda, founder and CEO of Brazilian investment bank BR Partners, acknowledged the risk that far-right President Jair Bolsonaro and his supporters could challenge the election result, after casting doubts on Brazil’s electronic voting system.But he said interest in mergers and acquisitions remains strong in Brazil, even as appetite for new share offerings has waned. “Some investors are looking at Brazil again after the sharp interest rates hikes boosted the real,” Lacerda said.The head of Latin America at Citigroup (NYSE:C), Eduardo Cruz, said there may be a window for renewed share issues by the end of the year, although he expects mostly listed companies selling new stock rather than a new wave of initial public offerings.Even the bankers on a deal publicly criticized by Lula say there is little sign of cold feet.Bolsonaro’s government is racing to privatize state power company Centrais Eletricas Brasileiras SA, or Eletrobras, with a share sale diluting the government’s stake and raising more than $6 billion before the October election.Lula has warned “serious business leaders” to steer clear of the deal, telling supporters at a rally that buyers taking part in privatizations under Bolsonaro “will have to talk to us.”Three bankers involved in the Eletrobras deal, who requested anonymity to speak freely, said they continue to see strong interest in Eletrobras among foreign investors. They called the comments from Lula overheated campaign rhetoric.”There are not many assets available worldwide with a strong upside potential as Eletrobras after the privatization”, one of them said. More