Economy

Trade between Germany and the UK has dropped sharply since 2016 and lags behind overall import and export levels in both countries, in a sign that British manufacturing is facing increased hurdles in its interactions with the EU’s biggest economy. German goods exports to the UK fell 3.9 per cent in March compared with the previous month, and were down 0.3 per cent from the same month last year. Compared with March 2019, exports to Britain were down 27 per cent, even though Germany’s overall exports grew by 16 per cent, according to data released on Wednesday by Destatis, the German office for national statistics.The UK was the only major German trading partner reporting a contraction in exports compared with March 2016, three months before the Brexit referendum. Ulrich Hoppe, director-general of the German-British Chamber of Industry and Commerce, said the figures reflected the gradual decoupling of the UK manufacturing economy from the EU single market. “From a German perspective, the UK is to some extent being taken out of EU supply chains . . . because it has become more complex and expensive [to trade with UK] and that has an effect on bilateral trade,” he said. Germany is Britain’s second-largest trading partner after the US, and trade between the two countries supports more than 500,000 jobs in the UK, according to official estimates. But the UK dropped to 13th as a source of German imports in 2021, behind Spain, Switzerland and Austria — down from ninth position in 2016. It also fell to the bottom of Germany’s top 10 trading partners for both exports and imports, with the Czech Republic about to overtake the UK.Hoppe said the chamber’s members cited logistical problems related to Brexit as the biggest concern of German companies in the UK in a 2022 business outlook survey.

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The weakening of bilateral trade is mirrored in the UK’s official statistics. British goods exports to Germany were down 10 per cent last year compared with 2020, while overall UK exports were up 9 per cent. UK goods imports from Germany were also down in 2021, although overall imports were up. Services, which account for just over one-third of UK exports to Germany, and about 14 per cent of imports, were also down last year.William Bain, head of trade policy at the British Chambers of Commerce, said German-UK trade figures “paint a consistently alarming picture”, as volumes are not recovering in the same way as they are for other countries in the wake of the pandemic.“As costs of exporting from Germany to the UK, and vice versa, have gone up since the [EU-UK] Trade and Cooperation Agreement came into effect there has been a clear drop in bilateral trade volumes, particularly among smaller businesses,” said Bain. Sophie Hale, trade economist at the Resolution Foundation, a think-tank, noted that the UK share of Germany’s imports fell significantly in 2021 following the implementation of the TCA, but that it was already on a downward trend in the previous years. “Brexit has clearly had an impact,” she said. The composition of bilateral trade may also have had a negative effect. Cars and other road vehicles, which were hit by pandemic-related supply chain disruption, are the main goods imported into the UK from Germany and have dropped sharply during the past five years, according to ONS data. Similarly, aircraft components comprise a large proportion of British exported goods to Germany and were heavily hit by the pandemic, declining nearly 30 per cent since 2019. However, Hale noted a declining share of UK goods in German imports across most categories of goods and some economists warn that the new trade agreement with the EU will have long-lasting effects.“The erosion of trade ties caused by the Trade and Cooperation Agreement is likely to be permanent, as firms struggle with the additional red tape created by the UK leaving the single market and customs union,” said Thomas Sampson, associate professor of economics at the London School of Economics. More

HONG KONG (Reuters) – Asian shares tracked Wall Street gains on Thursday after the U.S. central bank raised interest rates by 50 basis points but sounded a less hawkish tone than some had feared, lifting investor sentiment but sending yields and the dollar lower.MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.52%, although trading was thin with Japanese and Korean markets closed for public holidays.Crude prices, meanwhile, shot up as the European Union spelled out some of the details of its plan to ban the use of Russian oil, heightening concerns about supply.Early moves in Asia followed a U.S. rally overnight where the Dow Jones Industrial Average rose 2.81%, the S&P 500 gained 2.99%, and the Nasdaq advanced 3.19%. [.N] “Markets appeared to breathe a sigh of relief following the Fed’s 50 basis point hike and Powell’s comment that a 75bp isn’t something the (Fed’s policy committee) is currently considering,” said ANZ analysts.In Asia, the focus shifts to mainland Chinese markets, which return from a three-day break on Thursday with investors watching closely to see if tech-led gains made just before the break hold.Chinese names rallied after Beijing signaled an easing of its crackdown on the once-freewheeling tech sector and pledged policy support for the world’s second-largest economy. This week, Hong Kong stocks have edged lower while the offshore Chinese yuan has been volatile though still stronger than it was last week. (HK)The Federal Reserve raised its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years. Fed Chair Jerome Powell said policymakers were ready to approve half-percentage-point rate hikes at upcoming policy meetings in June and July.However, Powell also said the Fed was not “actively considering” a 75 basis-point rate hike, tempering some market expectations for an aggressive tightening path.That sent the dollar lower, where it stayed in early Asia. The dollar index, which measures the greenback against six peers, was at 102.56, having been as firm as 103.63 on Wednesday.U.S. Treasuries were not trading because of the holiday in Japan, but also fell overnight. The benchmark 10 year yield was last 2.9402%, down from just over 3%.Oil extended gains on Thursday after the European Union, the world’s largest trading bloc, on spelled out plans to phase out imports of Russian oilU.S. crude futures gained 0.5% to $108.36 a barrel and Brent rose 0.6% $110.8. Both benchmarks rose over $5 a barrel on Wednesday. [O/R] More

The base lending rate was hiked by 50 basis points, the banks said in different statements on Wednesday. The decision comes after the U.S. Federal Reserve raised its overnight interest rate by half a percentage point, the biggest jump in 22 years. More

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Société Générale said it expected the war in Ukraine to lead to a rise in costs as more customers defaulted on loans and it exited the Russian market.The French bank also reported a 3.4 per cent rise in net income to €842mn for the first quarter on Thursday, compared to a year earlier, and a 16.6 per cent increase in revenues as it benefited from market volatility and higher interest rates.“The planned disposal, currently being finalised, of our activities in Russia, following the abrupt change in this country’s outlook, will enable the group to withdraw in an effective and orderly manner, ensuring continuity for both its employees and its customers,” said chief executive Frederic Oudea.SocGen increased its cost of risk for the year to between 30 and 35 basis points, or up to €1.9bn, having previously disclosed it would be below 30 basis points.France’s third-biggest bank said its common equity tier 1 ratio — an important measure of its financial strength — would dip 20 basis points from 12.9 per cent as a result of its planned Russian disposal.SocGen announced last month that it was selling its entire 99.98 per cent stake in Rosbank, as well as its Russian insurance operations, to an investment company founded by Russian billionaire Vladimir Potanin.The French bank said it would take a €3.1bn hit after the sale to Potanin’s Interros Capital after coming under scrutiny over its large exposure to the country following Russia’s invasion of Ukraine.SocGen was one of the three western financial institutions with the biggest exposure to Russia, alongside Austria’s Raiffeisen and UniCredit of Italy. The other two have announced they are considering exit strategies. More

LONDON (Reuters) – The Bank of England looks poised to raise interest rates on Thursday for the fourth time since December, the fastest increase in borrowing costs in a quarter of a century as it tries to quell the danger from the leap in inflation.But the BoE must tread carefully to avoid a recession, even with inflation at 7% – more than three times its target – and still rising.Last month Governor Andrew Bailey said he and his colleagues were walking a “very tight line” to steer the world’s fifth-biggest economy through the global post-pandemic inflation surge which has been aggravated by Russia’s invasion of Ukraine. A day after the U.S. Federal Reserve raised its benchmark rate by half a percentage point – its biggest hike since 2000 – to a range of 0.75 to 1.0%, Britain’s central bank is expected to announce a quarter-point increase, taking Bank Rate to 1.0%.It was the Fed’s second increase in borrowing costs since the pandemic whereas the BoE’s expected hike would be the fourth in a row and raise Bank Rate to its highest since 2009.Investors on Wednesday priced in a less than one-in-three chance of a Fed-style, half-percentage-point hike by the BoE.RELUCTANT HIKERSterling has languished around a 21-month low against the dollar on worries about the British economic outlook.”Having been one of the most hawkish central banks at the beginning of the year, the Bank of England has more recently turned into a reluctant hiker,” said Peder Beck-Friis, a portfolio manager at bond trading giant PIMCO.Signs of a slowdown – and even a possible recession – are mounting with consumer confidence close to a record low and retail sales falling two months in a row as the cost-of-living squeeze tightens.”Nevertheless, we expect the Bank of England to continue hiking as long as the labour market remains tight and inflationary pressures are firm,” Beck-Friis said.Like the Fed, the BoE is expected to say on Thursday how it plans to start selling down the huge stockpile of bonds that it has bought since the global financial crisis over a decade ago.Selling hundreds of billions of pounds’ worth of government bonds would be another way for the BoE to tackle inflation, which looks on course to have approached 10% in April.But the BoE might send a signal to investors on Thursday that they are banking on too many future rate hikes.In its previous set of quarterly forecasts in February, the BoE said inflation in three years’ time would be only 1.6%, a long way below its 2% target, if it raised borrowing costs by as much as financial markets expected.Since then, investors’ bets on rate hikes have increased and on Wednesday they were pointing to Bank Rate more than doubling to 2.25% or 2.5% by December. The BoE said after its last meeting in March that “some further modest tightening might be appropriate in the coming months”, having previously said it was likely.Economists polled by Reuters mostly expect Bank Rate to rise to 1.5% by early 2023 and stay there throughout the year.They also expect an 8-1 vote by the BoE’s nine rate-setters at their May meeting for an increase in Bank Rate to 1.0%, with one dissenter, probably Deputy Governor Jon Cunliffe, in favour of leaving rates at 0.75%. More

(Reuters) – National Australia Bank (OTC:NABZY) met expectations for first-half cash profit on Thursday and raised its dividend by more than 20% as strong growth in loan volumes and higher fee income helped offset the impact of stiff competition on its margins.NAB – the country’s No.2 bank by market value and largest business lender – joined peer Australia and New Zealand Banking Group in forecasting benefit from rising interest rates in the country, but warned of higher costs as it chases growth against the backdrop of surging inflation. Australia’s “Big Four” banks enjoyed a boom in home lending amid record low rates and a pandemic-fuelled shift to remote working that buoyed property markets. But their margins are taking a hit from competition and borrowers moving to fixed-rate loans.NAB’s net interest margin declined by 11 basis points to 1.63% in the six months to March.NAB said its agreement with Australia’s financial crime regulator to address concerns around suspected serious breaches of anti-money laundering and counter-terrorism laws would cost the bank between A$80 million and A$120 million annually through fiscal 2024.That, along with a spree of hiring bankers and broader inflation, prompted the bank to raise its annual cost estimate to about 2-3% from broadly flat earlier, and abandon its target to lower absolute costs in the next three years.”The outlook has now shifted to one of higher growth, higher inflation and higher rates, prompting reconsideration of our targets to ensure we are appropriately balancing cost discipline against growth opportunities,” NAB said in a statement.It reported cash earnings of A$3.48 billion ($2.53 billion), compared with A$3.34 billion a year earlier and Refinitiv IBES estimates of A$3.48 billion.NAB’s interim dividend of 73 Australian cents per share was up from 60 cents a year earlier.($1 = 1.3782 Australian dollars) More

The writer is chief economist at Enodo EconomicsFor a long time, foreign investors’ favourite adjective for the Chinese Communist party was “pragmatic”. The CCP would not do anything that would harm China’s economic interests, the argument went, and so short-term glitches in policy would always be ironed out before they made a durable dent in growth. But in Xi Jinping’s China politics overrides everything else. This extends even to the battle against Covid-19. The supreme leader has staked his personal reputation on China’s success in taming the pandemic, and avoiding the deaths and overwhelmed hospitals suffered elsewhere.He is unlikely to change his zero-Covid policy before this autumn’s Communist party congress, when he is all but certain to secure the unprecedented third term for himself that he sees as critical to cementing his legacy.Foreign investors have begun to realise that China is willing to take a significant economic hit rather than relinquish its commitment to its dynamic zero-Covid strategy or roll out the mRNA vaccines developed in the west.Over the past few weeks, the chair of one of Asia’s largest private equity funds has complained privately that the economic impact of zero-Covid is real, and growing. And the head of the European Chamber of Commerce in China has warned Beijing about the disruptions that businesses face.Investors may seek some hope in the series of new stimulus measures Beijing announced over the past few weeks. But this will be misguided. It is critical to realise that since coming to power, Xi has placed importance on economic development but within an all-encompassing context of national security, which trumps all other considerations.He has demonstrated again and again that national security, and this year stability, are top concerns for his administration. The zero-Covid policy has been framed as a matter of stability and national pride. At a recent ceremony celebrating the success of the Winter Olympics, Xi said China deserved a “gold medal” in its efforts to contain coronavirus. Introducing flexibility — to allow, for instance, a higher threshold of asymptomatic spread, or using a different metric for imposing lockdowns — carries the risk of a very public and embarrassing failure in the health system.What does this mean for investors? We will witness an increasingly difficult juggling act as technocrats try to square the zero-Covid policy with Xi’s demands for stability on every other front. Investors should be prepared for a slump in growth and supply chain disruptions, at least until the party congress, as well as more dirigiste government intervention as Beijing tries to keep its economic indicators stable. Policymakers will attempt to defend the value of the renminbi, too, all in the name of stability.All this carries a cost, of course. Attempts to paper over the present impact of zero-Covid policies and Beijing’s return to pump-priming the economy only deepen the structural problems that must be resolved in future. Recent pledges to spur infrastructure investment will result in further debt build-up in an economy already saddled with massive bad loans.Coronavirus has undone the gradual but good work done over the past few years in deleveraging the economy and de-risking the financial system. In our estimate, expected credit losses climbed to between 20 and 27 per cent of gross domestic product in 2021.To be sure, plans outlined on April 10 to build a unified national market will bring efficiency gains, if successful. However, for now domestic protectionism and red tape affect manufacturers in China less than the disruptions of the zero-Covid policy. More importantly, Xi’s focus on the production and distribution side of the economy is a dead end if consumption is not fostered to recover.As a true Marxist-Leninist, Xi sees individual consumption and wealth creation in a negative light. He has embarked on an ambitious but uncharted path as he aims to make good on the party’s promise of a socialist system that does not put the “needs of the few over the needs of the many”. Households remain financially repressed and Xi’s assault on housing wealth has depressed well-off urbanites. Eventually, Beijing will need to find an alternative to its rigid zero-Covid policy but by then the damage it has done to the economy may be too difficult to reverse. This is yet one more reminder that in Xi’s China, politics, ideology and national security come before economic pragmatism. Investors would be wise to take note. More