Economy

This week, the economic mood music changed into a more anxious minor key, as recent shocks to developed world economies have echoed longer and louder than had been expected. Whatever you thought about the economy a week ago, you should be a little more worried than you were.Inflation has been grinding up for a while — largely a sign of post-pandemic economies running a little out of kilter. Real household incomes fell sharply in many big economies at the end of last year. But following the war in Ukraine and China’s recent lockdowns, the latest US consumer price inflation rate stands at 8.5 per cent. It is at 6.2 per cent for the UK and estimated at 7.5 per cent for the eurozone.Forward-looking economic indicators had hinted at the risk of a slowdown for some time already — particularly as households found their salaries would go less far. What started as a shock to prices was expected to lead to a hit to spending. But, one-by-one, indicators are now turning red. New manufacturing orders in Germany fell 4.7 per cent in March. Shipping companies fear a dip. First-quarter economic growth numbers showed stagnation or outright contraction in several European economies. The US economy, too, shrank in the first quarter. The Bank of England forecasts a contraction this year. Central banks, therefore, face a terrible set of circumstances. They need to get to a tighter monetary policy: rates are still very low and are stimulating activity even as inflation in the UK, for example, is expected to hit double digits. But the odds are rising that they will end up trying to lower the tempo on economies that are already shrinking. This week, both the Fed and BoE raised rates and signalled that more is to follow. In the UK, the central bank also forecast a severe fall in household incomes and economic contraction. The problem right now is not just that rate rises into a weak economy can cause a lot of misery. Making unpopular decisions is part of the job; it is why central bank independence is so important. It is also that the right pace of normalisation is particularly hard to call.This is a time of incredible complexity: each week has thrown up a new shock or revealed that the problems we saw coming were bigger than we thought. Markets whiplashed back and forth this week in response to the Fed’s announcements, as participants tried to work out how to weigh the swirl of information and to position themselves in a still-expensive stock market. As Jay Powell, chair of the Fed, said this week: “It is a very difficult environment to try to give forward guidance 60, 90 days in advance.” He is right: 90 days ago, the world was still just anxiously eyeing up a Russian build-up on Ukraine’s borders and Shanghai was yet to discover the ill-fated local coronavirus outbreak. The staccato of recent crises has created astonishing uncertainty. We do not know what China’s response to further outbreaks will be. We have yet to see how far the still-thickening sanctions net for Russia will sideswipe other economies. We do not yet know the full effects of disrupting food supplies from Ukraine and Russia for the world’s poorest nations. Inflation — and the need to guard the vulnerable from it — will upend politics in lots of states. And no one can say when this will all be over. Central banks need to be nimble. Investors should be clear that policymakers’ signals about what they intend to do in the future cannot be very trustworthy when the future is so murky. And all leaders should be honest that, right now, they cannot stick rigidly to their sheet music. All that anyone can do is play it by ear. More

The writer is professor of finance at the University of Chicago’s Booth School of BusinessA perfect economic storm engulfs industrial countries. Even before the pandemic, US-Chinese geopolitical rivalry impeded global trade and cross-border investment. The pandemic skewed demand towards bicycles and away from gym memberships. Then rolling lockdowns across the world disrupted production of those bicycles. Ordinarily, the rise in prices of bicycles would have quelled demand, but the enormous fiscal and monetary response to the pandemic in advanced economies kept household spending power strong. Even as jobs came back to cater to this demand, workers became harder to find, because older workers decided to retire and immigration slowed. The mix of strong demand and limited supply ignited inflation, which has spread well beyond the narrow set of goods that set it off. The war in Ukraine and spreading lockdowns in China add to the turmoil. Both slow growth, while the war fuels food and energy inflation and the Chinese lockdowns drive goods price inflation. Of course, the war could spread further in catastrophic ways.Spare a thought for developing countries, where matters are, if anything, worse than in industrial countries. Public spending in the pandemic has been very constrained. Many middle-class households have lost livelihoods and slipped into poverty. Now they face higher energy and food prices that threaten to reduce consumption below subsistence levels. With interest rates rising, their governments are hamstrung by past borrowing and do not have the capacity to help. All this presages more protest and political conflict across the developing world, and more emigration to safer climes.On current trends, the future looks challenging. Sustained growth depends on innovations that allow us to produce more at lower cost. While the pandemic has forced firms to rethink work processes — working from home saves time on dressing below the waist and on commuting — substantial gains will probably come only when the impediments to delivering services at a distance are reduced; telemedicine will not grow if local licensing requirements stand in the way of doctors prescribing at a distance. Absent reforms, productivity growth is unlikely to be higher than the pre-pandemic pace.Similarly, population ageing will continue shrinking the labour force, further slowing growth. Deglobalisation through reshoring and friend-shoring, and the consequent fall in global trade and investment, will make it harder for developing countries to grow and substitute their demand for falling industrial country demand. Military spending will increase everywhere, but that will detract from much-needed investment, most importantly in combating climate change. Variants of secular stagnation therefore loom once the storm passes — no wonder 10-year real rates in the US are still around zero.At best, if central banks raise rates enough that everyone believes inflation will come under control, but not so much that the economy craters, they will slow demand gently. The labour market will come off the boil, even while supply chains stabilise. We will land softly, but into growth lower than before the pandemic. At worst, we will have a recession augmented by financial stress, as the world chokes on high rates and high levels of debt. Central banks cannot get us out of our predicament.To get better outcomes, we need to revitalise growth through policies to raise investment and productivity. Ending this destructive war would be a first step, but let us discuss what comes after.The easiest solution economically, and the hardest politically, is to reverse the trend to deglobalisation. By all means, firms should diversify every element of their supply chain. They should also embed flexibility so they can minimise chokepoints. But firms and governments should not aim to do business only among friends. And the IMF and the World Trade Organization should work on rules of conduct and penalties for violation that will protect global trade and investment even as the world divides into political blocks.Indeed, we should find ways to enhance global trade in services that the pandemic, Zoom and other technologies have made possible. That will require negotiations in areas such as licensing requirements, data privacy and protection, and dispute resolution, but can bring competition and productivity gains to sectors that have long been resistant to change. A collateral benefit is that this could reduce income inequality within countries and across the world.Perhaps most important, we should band together to fight a war we are losing, against climate change. Much of the world’s emission-heavy capital needs to be replaced. Embarking on this task can be the boost the global economy needs to jump start its way out of stagnation. The world’s major economic powers need to come together, with clear plans for their own actions over the next decade and for the ways they will allocate responsibility for financing climate responses in the developing world.More generally, we need bold policy action, breaking free of growing political constraints that limit our ambition. It will not be easy, but it is necessary, perhaps to our very existence. More

WASHINGTON (Reuters) – U.S. House of Representatives Speaker Nancy Pelosi said the House will set a minimum annual pay for its staff at $45,000, months after a non-profit report found that over 12% of congressional staffers did not have a living wage.”I am pleased to announce that ….. the House will for the first time ever set the minimum annual pay for staff at $45,000,” Pelosi said in a letter to lawmakers dated Friday.The step would go into effect from September, she added.A report from a non-profit earlier this year found that one in eight congressional staffers in Washington, DC, are not paid a living wage.The report had compared staff salaries in Congress to the living wage in Washington, D.C., which is $42,610 for an adult without children, according to the Massachusetts Institute of Technology.In her letter on Friday, Pelosi also acknowledged that young staffers “often earn the lowest salaries.” The letter was first reported by Punchbowl News.”This is also an issue of fairness, as many of the youngest staffers working the longest hours often earn the lowest salaries”, Pelosi said.Last year, over 100 U.S. lawmakers, led by Representative Alexandria Ocasio-Cortez, had called for higher wages for congressional staffers in order to better retain employees working for members of Congress.(This story refiles to fix typo in paragraph 1) More

According to Refinitiv Lipper data, U.S. investors offloaded $5.52 billion worth of bond funds in a 17th straight week of net selling. Graphic: Fund flows: US equities, bonds and money market funds – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwgeggvo/Fund%20flows%20US%20equities%20bonds%20and%20money%20market%20funds.jpg The U.S. benchmark 10-year Treasury yield hit nearly a 3-1/2-year high of 3% this week after reports last week showed rising U.S. consumer spending in March and surging labour costs in the first quarter.After an expected 50-basis-point hike to the central bank’s benchmark overnight interest rate on Wednesday, Fed Chair Jerome Powell ruled out raising rates by 75 basis points in a coming meeting, although he made clear the rate increases the Fed already has in mind were “not going to be pleasant.”Investors sold U.S. taxable bond funds worth $3.82 billion and municipal funds worth $1.75 billion.U.S. short/intermediate investment-grade funds witnessed net selling of $5.46 billion in a 17th straight week of outflows. Loan participation funds, however, obtained inflows of $0.83 billion, the largest amount in three weeks.Graphic: Fund flows: US bond funds – https://fingfx.thomsonreuters.com/gfx/mkt/byvrjnaomve/Fund%20flows%20US%20bond%20funds.jpgMeanwhile, U.S. equity funds’ weekly outflows eased to a four-week low of $3.76 billion.U.S. value funds posted their first weekly inflow in seven weeks, worth $854 million, while growth funds saw net selling of $3.93 billion, although that was the lowest outflow in four weeks.Graphic: Fund flows: US growth and value funds – https://fingfx.thomsonreuters.com/gfx/mkt/akpezyrdovr/Fund%20flows%20US%20growth%20and%20value%20funds.jpg Among sector funds, tech and financials lost $724 million and $593 million, respectively, in net selling, while utilities saw net buying of $542 million. Graphic: Fund flows: US equity sector funds – https://fingfx.thomsonreuters.com/gfx/mkt/zgvomleqkvd/Fund%20flows%20US%20equity%20sector%20funds.jpg U.S. money markets drew net purchases of $2.63 billion, although there was a 94% drop in inflows compared with the previous week. More

(Reuters) – Wall Street’s main indexes were set for a lower open on Friday as a stronger-than-expected jobs data amplified investor concerns over bigger interest rate hikes by the Federal Reserve to tame surging prices.The Labor Department’s report showed nonfarm payrolls increased by 428,000 jobs last month, while economists polled by Reuters had expected 391,000 job additions.Unemployment rate remained unchanged at 3.6% in April, while average hourly earnings increased 0.3% against forecast of a 0.4% rise. The data underscored the economy’s strong fundamentals despite a contraction in gross domestic product in the first quarter.”Certainly if you are sitting there worrying about a recession, at least initially, I don’t think there’s anything in here that would say the economy is in the tank,” said Matthew Tuttle, chief investment officer, Tuttle Capital Management in Greenwich, Connecticut”The unemployment rate being 3.6% after 12 months in a row of adding over 400,000 jobs, to me that’s an economy that’s cranking. I’m in the camp of ‘worried about a recession'”.The main indexes plunged on Thursday, reversing all gains from a relief rally on Wednesday, as investors feared bigger rate hikes might be needed as inflation runs at a four-decade high. Traders see 83% chance of a 75 basis point hike at the Fed’s June meeting, despite Fed chief Jerome Powell ruling out such a rate hike.[IRPR]The Nasdaq tumbled 5%, its biggest one-day percentage decline since June 2020, as rate-sensitive growth stocks were hammered.The S&P 500 growth index is down nearly 20.3% year-to-date as compared to a 4.9% fall in its value counterpart, which houses economy-sensitive sectors like energy, banks and industrials.Megacap stocks were mixed on Friday, with Microsoft Corp (NASDAQ:MSFT) down 0.6% in premarket trading. Wells Fargo (NYSE:WFC) led declines among big banks with a 0.4% fall. At 9:01 a.m. ET, Dow e-minis were down 174 points, or 0.53%, S&P 500 e-minis were down 27.75 points, or 0.67%, and Nasdaq 100 e-minis were down 120 points, or 0.93%.Among stocks, DoorDash Inc rose 3.4% as the food delivery firm raised its full-year forecast for core growth target after reporting upbeat quarterly revenue. Under Armour Inc (NYSE:UAA) slumped 16.0% after the sportswear maker forecast downbeat full-year profit, as it grapples with higher transportation costs and a hit to its business from renewed COVID-19 curbs in China.Shares of rival Nike Inc (NYSE:NKE) slipped 2.3%. More

WASHINGTON (Reuters) – U.S. job growth increased more than expected in April, underscoring the economy’s strong fundamentals despite a contraction in gross domestic product in the first quarter.Nonfarm payrolls rose by 428,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Data for March was revised slightly lower to show 428,000 jobs added instead of 431,000 as previously reported. Economists polled by Reuters had forecast payrolls rising by 391,000 jobs. Estimates ranged from as low as 188,000 to as high as 517,000. The unemployment rate was unchanged at 3.6%.”It is ambiguous whether larger employment gains would be a cause for concern for the Fed or a source of relief,” said Lou Crandall, chief economist with Wrightson ICAP (LON:NXGN) in Jersey City.”Stronger growth that reflects a willingness by individuals to return to the workforce would tend to dampen labor costs, while growth induced by higher wage offers by employers pinched by labor shortages would have the opposite effect.” The Federal Reserve is trying to tighten monetary policy to bring down inflation without tipping the economy into recession.The U.S. central bank on Wednesday raised its policy interest rate by half a percentage point, the biggest hike in 22 years, and said the Fed would begin trimming its bond holdings next month. It started raising rates in March. Fed Chair Jerome Powell told reporters that “the labor market is extremely tight, and inflation is much too high.”Last month’s job gains underscored the economy’s strong fundamentals despite output shrinking in the first quarter under the weight of a record trade deficit.There were a record 11.5 million job openings on the last day of March, which widened the jobs-workers gap to an all-time high of 3.4% of the labor force from 3.1% in February. Average hourly earnings increased 0.3% after advancing 0.5% in March. That lowered the year-on-year increase in wages to a still-robust 5.5% from 5.6% in March. Compensation for American workers logged its largest increase in more than three decades in the first quarter, helping to keep domestic demand supported.Though Powell on Wednesday said a 75 basis points rate hike was not on the table, some economists believe the Fed could raise its benchmark interest rate above its neutral rate, estimated between 2-3%. More

BEIJING/SHANGHAI (Reuters) -Beijing residents fretted on Friday over tightening COVID curbs in its biggest district and dozens of new cases reported daily as China’s leaders reiterated their resolve to battle the virus and threatened action against critics of their strict measures. Incurring a heavy economic cost and facing rare public criticism on its tightly-policed internet, China is increasingly out of step with the rest of the world where COVID restrictions are being abandoned and vaccines relied on to protect people.Internationally, industry organisations have complained that China’s ‘zero-COVID’ policies have global economic reverberations. At home, the population worries about painful, long-term restrictions.In the latest ratcheting up of restrictions, Beijing authorities on Friday said all non-essential services in its biggest district Chaoyang, home to embassies and large offices, would shut. Mass testing will also resume in at least four districts over the weekend. Meanwhile, organisers of the Asian Games, scheduled to take place in September in Hangzhou, southwest Shanghai, postponed them until 2023, because of COVID, defying a global sporting calendar that has largely returned to normal.The Chinese capital is racing to avoid an explosion in cases like the one that forced the commercial hub of Shanghai into an almost complete lockdown for more than a month, taking a financial and psychological toll on its residents.”We will try to cooperate,” said 42-year-old Beijing finance worker Hu, giving only her surname.”But I also hope that the government can introduce some policies that will not affect the overall life of citizens. After all, we all have mortgages and car loans.”After a meeting of the highest decision-making body, the Standing Committee of the Communist Party’s politburo, state media reported late on Thursday that China would fight any comment or action that distorted, doubted or repudiated its COVID policy.Relaxing COVID controls, which are in place in dozens of cities across the world’s second-largest economy and affecting hundreds of millions of people, would lead to large-scale infections, it warned.On Friday, the Communist Party’s official People’s Daily newspaper hit out in an editorial against accusations China’s COVID policy was disrupting the global economy and trade.”Some U.S. politicians have frequently attacked and smeared China’s epidemic prevention and control measures and tried to throw the blame on China for the so-called disruption of global supply chains,” it said without identifying anyone.’PERSISTENCE IS VICTORY’China was putting “life first”, and although pressure on its economy has increased, it could overcome difficulties, it said.China’s yuan weakened to its lowest level against the dollar since November 2020, while stocks slumped. Iron ore prices also fell on fears about the impact of the restrictions on demand from China, the world’s top consumer of the steel-making ingredient.The government and central bank have promised more policy support for the economy.Shanghai vice-mayor Wu Qing said “the epidemic has come under effective control” but warned of risks of a rebound and promised the city would not deviate from a zero-COVID strategy, which involves mass testing, mandatory quarantine and sweeping lockdowns.”We cannot relax, we cannot slack off: persistence is victory,” he said.Despite the announcement that the outbreak was under control, most of the city’s 25 million people are unable to leave their housing compounds or are allowed out only briefly.Many residents grumble about different community officials applying rules in different ways.One large, central residential complex announced on Friday that it was relaxing curbs within the compound and scaling back the number of volunteers helping to deliver food. But its residents could still not get out through its locked gates.’ISN’T THAT INSANE?’The capital has reported dozens of new cases a day for about two weeks since its outbreak emerged, faring better than Shanghai was on the 14th day of its outbreak.But getting around the city is cumbersome with weekly COVID tests now needed to get into offices and public venues and take subways or buses, the state-backed Beijing Daily reported.Some residents complained they never received test results on a mobile app that tracks their COVID tests, while others were inexplicably prompted by the app to re-take theirs.”I couldn’t enter the office building … even though I tested negative within 24 hours. Isn’t that insane?” said a resident surnamed Wang. Goldman Sachs (NYSE:GS) analysts said regular testing could be a compromise to allow cities to identify and isolate cases quickly with much lower costs than city-wide lockdowns.It “would not be a panacea, but would help limit disruption to a large part of China’s manufacturing and overall economic activity for a protracted period”, they said. More