Economy

There are no atheists in foxholes, and there are no subsidy hawks in a supply chain crisis. A crunch in semiconductor production, a food shortage, a general sense that the global trading system is unreliable: suddenly, the fiscal valve is wrenched open and the public cash starts to pour.Having spent several years attempting to craft new rules to restrain trade-distorting industrial subsidies (aimed very obviously at China), advanced countries have rather undermined their own arguments by lining up lavish handouts themselves. The US and EU each have their own Chips Act to encourage semiconductor production, with a combined public spending boost target of about $100bn, after big spending programmes by Japan, South Korea and Taiwan. After years of trying to use the World Trade Organization and other forums to inoculate economies from the subsidy disease, Washington, Brussels and Tokyo have caught the bug themselves. The Global Trade Alert monitoring service says that even before the pandemic, 62 per cent of global goods trade was in products and on trade routes where subsidised American, Chinese, and European firms compete: the number of subsidy programmes has only increased since.The EU and US insist that their semiconductor subsidies will meet WTO rules. But even if a subsidy is legal, doesn’t mean it’s wise. The surge of spending might have been a good time to revise and tighten WTO rules: it has not been taken.Meanwhile, the global guardians of probity are sufficiently alarmed to have lumbered into collective action. The World Trade Organization, OECD, IMF and World Bank issued a joint report recently on using international co-operation to restrain distorting handouts. It correctly admits that clear definitions and undisputed taxonomies are elusive. Many subsidies are entirely sensible, indeed planet-saving, but the exact design is highly important. Paying households to install solar panels, which in effect compensates for the benefits of the carbon emissions saved, is totally justifiable: shelling out money to boost domestic solar cell production less so.The problem right now is that crises have a way of making bad subsidies look like good ones, at least in the short term. India, for example, supported by other developing countries, has been at odds with rich countries for years at the WTO over the support it gives to farmers. The government buys grains, particularly rice and wheat, above market prices and puts them into public stocks, some of which it distributes cheaply to households. So far, so cumbersome, compared with simply giving families income support. But also so relatively non-distorting of international trade as long as the stocks don’t get sold abroad. If they do, the government purchases begin to count as an illegal export subsidy.Yet there’s currently a shortage of wheat in food-importing countries, particularly in Africa, thanks to the disruption of sales from Ukraine and Russia. India has made hay, as it were, with the argument that it would love to sell its stocks abroad but the WTO is stopping it. In the longer term, it makes total sense to encourage efficient and competitive production and sustainable food security rather than create periodic gluts through distortive handouts. But presentationally it does look odd for India to be keeping food off the global market in a crisis just to stick to rules written for normal times. (To be fair, it would help if India accurately reported its subsidies, as required under WTO transparency guidelines.)The same is true for agriculture as for industrial subsidies: there are few big players innocent enough to take a principled stand. The EU and US have been increasing their own domestic agricultural subsidies in recent months and years. In the EU’s case, its recent sudden push to ramp up production is a reasonable enough short-term response to the global food crisis, and its planned spending remains well within legal WTO limits. But the US shelled out vast production-distorting subsidies for years to shield its farmers from the effects of Donald Trump’s US-China trade war, and before that has a long history of dumping agricultural surpluses on world markets in the name of humanitarian aid. Fishing faces the same problems. WTO members are trying to negotiate reductions in the fishing subsidies that are emptying the world’s oceans of life. Again, India is busy trying to exempt itself and other developing countries from new rules. But the EU in this case has its standing in the debate undermined by its own desire, under pressure from Spain and France, to hang on to fuel subsidies for long-distance fishing boats.In the face of all of this, the idea of effective international restraint to prevent trade-distorting subsidies remains, like the Spanish trawlers, well over the horizon. There’s unlikely to be a meaningful WTO deal on fisheries or farm subsidies soon. The EU and US are promising to use the bilateral transatlantic Trade and Technology Council to co-ordinate — or at least be transparent about — their semiconductor production subsidies. But realistically most constraints will come from unilateral means via traditional anti-subsidy duties or perhaps the EU’s new “foreign subsidies instrument” which in effect extends European domestic state aid restrictions to overseas companies competing in the EU single market.What is it that ultimately stops spirals of production subsidies? After the industrial interventions of the 1970s in rich economies, it was governments running out of money and a clear feeling that the handouts hadn’t worked. So, mark your calendars for let’s say a year or two from now, when public borrowing has probably got more expensive, the pressure on public spending in rich countries more acute and the billions thrown into semiconductor production looking less strategically brilliant. Until then, it’s a question of hoping that at least some of the public money lands on fertile [email protected] up to the Trade Secrets newsletter, published every Monday More

As it ratchets up sanctions on Russia’s economy, the European Commission has proposed kicking the country’s biggest bank off the Swift global payments system that facilitates trillions of dollars worth of trade every day.Under the plans, Sberbank — along with two other banks, Credit Bank of Moscow and Russian Agricultural Bank — would be disconnected from Swift, which acts as an interbank messaging service.The announcements were made on Wednesday as part of a proposed package of sanctions that included a phased-in ban on imports of all Russian oil to the EU in retaliation for Moscow’s invasion of Ukraine. “We hit banks that are systemically critical to the Russian financial system and Putin’s ability to wage destruction,” European Commission president Ursula von der Leyen told the European parliament in Strasbourg. “This will solidify the complete isolation of the Russian financial sector from the global system.”The moves followed the decision by the EU in March to remove seven other Russian lenders — including VTB, the country’s second-biggest bank — from Swift. In total, the 10 banks account for more than 60 per cent of Russia’s banking market — with Sberbank controlling a third of the sector.But while the western sanctions are aimed at destabilising Russia’s economy and choking off funds to Vladimir Putin’s war machine, the latest measures against the financial system will have limited impact, according to people within the sector.Crucially, they say, Gazprombank — the country’s third-largest lender and a subsidiary of the state-owned energy company Gazprom — will be allowed to stay on Swift. The bank, which accounts for 7 per cent of Russia’s banking market, is the biggest player in facilitating payments for Russian oil and gas exports.“Logically this means Gazprombank’s role in facilitating oil and gas payments will become stronger — this is the only Russian infrastructure bank now not under sanctions,” said a Russian banking executive.Gazprombank has avoided being placed under EU sanctions. It was added to the UK’s sanctions list in March, but the British government has since granted a licence until the end of May that allows the bank to continue receiving payments to allow the flow of Russian gas to the EU.The EU would still have the option of removing Gazprombank from Swift at a later date and this would cause the biggest financial damage to Russia’s exports, analysts said. But this is seen as a nuclear option in Brussels as Europe relies on Russia for more than 40 per cent of its natural gas supply and 26 per cent of oil.Swift, a Brussels-based organisation that is owned by its members and overseen by the G10 central banks, plays a crucial role in global banking, with more than 11,000 financial institutions using the system. Yet being removed from Swift at this stage would not hit Sberbank too badly, according to the Russian banking executive. “Given Sberbank is already under sanctions, with only a limited number of payments coming from outside Russia, I don’t see this as a big issue,” they added.The state-controlled lender, which traces its roots back to a decree in 1841 from Emperor Nicholas I, is Europe’s second-biggest bank by number of customers with 102mn, almost all of whom reside in Russia. While Sberbank once harboured ambitions to expand internationally, it has had to refocus on dominating its domestic market after being hit by a series of sanctions in recent months. In the hours following Russia’s invasion of Ukraine, Washington cut off Sberbank and 25 subsidiaries from the US financial system and restricted its access to US dollar transactions. The measures led to a run on customer deposits at Sberbank’s foreign subsidiaries and the bank’s Austrian business was put into orderly liquidation on Wednesday.The Austrian unit was the first bank to fail following sanctions on Russia, having been placed under special measures by Austria’s deposit guarantee scheme in March.

The bank employed more than 3,800 people and operated 187 branches across central Europe, with assets of €12.9bn and 770,000 customers, according to its last public corporate filings. Sberbank did not respond to a request for comment.Even removing Sberbank and other banks from Swift would not prevent them from carrying out cross-border transactions, but doing so would become more costly and arduous. Foreign dealings would rely on the use of less efficient communication tools, such as email and telex.The Russian central bank has also prepared for such measures in recent years by setting up an alternative messaging system, which is widely used in Russia and by a small number of foreign lenders.However, one worry for western bankers and financial regulators is the potential for reprisal cyber attacks on the Swift network in response to Sberbank — and potentially Gazprombank — being removed. Last month, a senior executive at a European bank told the Financial Times: “We model for cyber attacks on institutions like the Fed, but we think a hit on Swift is more likely in retaliation for Russian banks being kicked off it. That would have huge consequences for the global banking network.” More

KATHMANDU (Reuters) -Nepal should engage in monetary tightening including interest rate hikes to bolster its dwindling foreign exchange reserves, without resorting to import curbs that could push up prices and hamper economic growth, a senior International Monetary Fund (IMF) official said on Wednesday. The government must address inflationary pressures and growing external imbalances while safeguarding the economic recovery, Robert Gregory, head of an IMF team that held week-long discussions with government officials, said in a statement.Nepal, a landlocked country between China and India, has banned luxury goods imports until mid-July to rein in capital outflows as foreign exchange reserves fell over 18% to $9.6 billion as of mid-March from mid-July – enough to last the country around six months.Following a sharp rise in the cost of imports due to soaring global crude oil and other commodity prices after Russia’s invasion of Ukraine, Nepal’s international reserves “have declined more than anticipated,” the IMF statement said.However, a prudent budget, as suggested under its financial support programme, along with monetary tightening would help address the inflationary pressures and growing economic imbalances, the statement said. Consumers in the Himalayan nation of 29 million people are facing tough times as annual retail inflation hit a five-year high of 7.14% in the month through mid-March, pushed up by rising fuel and food prices, while household income levels are still below pre-pandemic levels.The IMF team praised the government’s recent steps to tackle external pressures by gradually exiting from a pandemic-related expansionary monetary policy and said forex reserves were adequate for now.The World Bank said on Wednesday it would provide $150 million for the “Finance for Growth” Development Policy Credit (DPC) to strengthen financial sector stability, diversify financial solutions, and increase access to financial services in Nepal.Nepal Finance Ministry official Ishwari Aryal said the IMF team’s comments “will be addressed accordingly.” More

About $216 million in first-quarter sales from the COVID pill through a partnership with Roche, which sells the drug outside the United States under brand name Ronapreve, helped Regeneron (NASDAQ:REGN) limit the setback from no sales in the United States– its biggest market.Regeneron in February warned it will record zero sales from the pill in the United States for the first quarter after the U.S. Food and Drug Administration limited its use due to lack of effectiveness against the Omicron coronavirus variant.The drugmaker is now working on experimental “next generation” antibodies that are tailored against variants including those of Omicron-lineage.It was the revenue from Roche collaboration that helped in the topline beat, Wells Fargo (NYSE:WFC) analyst Mohit Bansal said in a note.Shares of Regeneron were marginally up at $668 in premarket trade, after the company said its overall sales grew 17% to $2.97 billion in the first quarter, which was higher than the average analyst estimate of $2.72 billion, as per Refinitiv IBES data.Eczema treatment Dupixent and macular degeneration drug Eylea recorded sales growth of 11% and 43%, respectively.They have been key drivers for the company’s earnings growth, and the company and analysts are both optimistic about further growth for the two drugs.Regeneron’s French partner Sanofi (NASDAQ:SNY) SA, which records the sales from Dupixent, raised its peak sales target for Dupixent to more than 13 billion euros ($14.3 billion) in late March.Regeneron’s net profit in the quarter ended March 31 fell 13% to $974 million from a year earlier. More

Private payrolls increased by just 247,000 for April, payrolls processing firm ADP reported.
That was well below the estimate for 390,000 and a significant decline from March, which saw an upwardly revised gain of 479,000.
The report serves as a precursor to Friday’s nonfarm payrolls count, though the two can differ by wide margins.

A “We’re Hiring” sign hangs on the front door of a toy store in Greenvale, New York, on Sept. 30, 2021.
John Paraskevas/Newsday RM via Getty Images

Companies added far fewer jobs than expected in April as the struggle to find workers to fill open positions continued, payrolls processing firm ADP reported Wednesday.
Private payrolls increased by just 247,000 for the month, well below the 390,000 Dow Jones estimate. That was a big decline from March, which saw an upwardly revised gain of 479,000.

A drop-off in small business hiring was the primary culprit for the disappointment, as companies with fewer than 50 workers saw a decline of 120,000. The issue was particularly acute in those with fewer than 20 employees, which lost 96,000 workers on the month.
“In April, the labor market recovery showed signs of slowing as the economy approaches full employment,” said ADP’s chief economist, Nela Richardson. “While hiring demand remains strong, labor supply shortages caused job gains to soften for both goods producers and services providers.”
Big businesses with 500 or more workers compensated for some of the decline, adding 321,000.
Leisure and hospitality businesses led job creation with 77,000 additions. Professional and business services grew by 50,000 and education and health services contributed 48,000 to the total.
Information services was the only sector to report a decline, losing 2,000 workers.

In all, services-related industries comprised 202,000 of the total while goods producers added 46,000, led by manufacturing’s 25,000, while construction grew by 16,000. (The totals are rounded.)
The ADP report serves as a precursor to Friday’s more closely watched nonfarm payrolls count from the Bureau of Labor Statistics.
That report is expected to show growth of 400,000 and a decline in the unemployment rate to 3.5%. If that forecast for the jobless rate is correct, it will match the pre-pandemic level, which was the lowest since December 1969. Payrolls increased by 431,000 in March
March ended with a gap of 5.6 million between open positions and available workers. That has caused wages to spike, though they have still failed to keep up with inflation running at its fastest pace in more than 40 years.
Correction: Payrolls increased by 431,000 in March. An earlier version misstated the month.

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KYIV/BRUSSELS (Reuters) -The EU proposed its toughest sanctions yet against Russia on Wednesday, including a phased oil embargo, as Kyiv said Moscow was intensifying its offensive in eastern Ukraine and close Russian ally Belarus announced large-scale army drills.Nearly 10 weeks into a war that has killed thousands, uprooted millions and flattened cities and towns in eastern and southern Ukraine, Ukraine’s defence ministry said Moscow had carried out nearly 50 air strikes on Tuesday alone.”Russia’s military command is attempting to increase the tempo of its offensive operation in eastern Ukraine,” Ukrainian Defence Ministry spokesman Oleksandr Motuzyanyk said.Russia also stepped up attacks on targets in western Ukraine in strikes it said were disrupting Western arms deliveries.A new convoy of buses began evacuating more civilians from the devastated southeastern port city of Mariupol, which has seen the heaviest fighting of the war so far and where Moscow said remaining Ukrainian forces remained tightly blockaded.Piling pressure on Russia’s already battered $1.8 trillion economy, the European Commission proposed phasing out supplies of Russian crude oil within six months and refined products by the end of 2022. The price of Brent crude jumped 4% to more than $109 a barrel after the news.The plan, if agreed by EU governments, would be a watershed for the world’s largest trading bloc, which remains dependent on Russian energy and must find alternative supplies. “(President Vladimir) Putin must pay a price, a high price, for his brutal aggression,” Commission chief Ursula von der Leyen told the European Parliament in Strasbourg, to applause from lawmakers.Hungary and Slovakia want to be exempted from the ban for now, sources said. An official familiar with the talks said there was no immediate deal, with EU envoys expected to move closer to agreement when they meet again on Thursday.Von der Leyen also announced sanctions targeting Russia’s largest bank Sberbank, two other lenders, three state broadcasters as well as army officers and other individuals accused of war crimes.The EU has yet to target Russian natural gas, used to heat homes and generate electricity across the bloc.The Kremlin said Russia was looking at various options in response to the EU plans, adding that the sanctions would greatly increase costs for European citizens. ‘WE ARE READY’On the war front, Russia’s Defence Minister Sergei Shoigu said the United States and its NATO allies were continuing to pump weapons into Ukraine and reiterated a warning that Moscow would seek to hit those shipments.The Russian defence ministry said earlier its forces had disabled six railway stations in Ukraine used to supply Ukrainian forces with Western-made arms in the country’s east. It said they also had hit 40 military targets including four depots storing ammunition and artillery weapons.Ukraine’s defence ministry said Russian strategic bombers had fired 18 rockets at targets in Ukraine “with the aim of damaging our country’s transport infrastructure.”Russia published what it said was video footage of two Kalibr cruise missiles being launched from the Black Sea and said they had hit unspecified ground targets in Ukraine.Announcing the surprise military drills, Belarus’s defence ministry said they posed no threat to its neighbours, but Ukraine’s border service said it could not exclude the possibility that Belarusian forces might join Russia’s assault.”Therefore, we are ready,” spokesman Andriy Demchenko said.Some Russian forces entered Ukraine via Belarus when the invasion began on Feb. 24 but Belarusian troops have not so far been involved in what Moscow calls a “special military operation” to disarm Ukraine and defend it from fascists.Kyiv and its Western backers say Moscow’s fascism claim is an absurd pretext for an unprovoked war of aggression that has driven five million Ukrainians to flee abroad.The Kremlin on Wednesday dismissed speculation that Putin would declare war on Ukraine and decree a national mobilisation on May 9, when Russia commemorates the Soviet Union’s victory over Nazi Germany in World War Two. Putin is due to deliver a speech and oversee a military parade on Moscow’s Red Square.’WE ARE NOT AFRAID’The convoy leaving Mariupol, organised by the United Nations and the International Committee of the Red Cross, was heading for the Ukrainian-controlled city of Zaporizhzhia, Donetsk Governor Pavlo Kyrylenko said.He did not say how many buses were in the convoy or whether any more civilians had been evacuated from the vast Azovstal steel works, where the city’s last defenders are holding out against Russian forces that have occupied Mariupol.The first evacuees from Azovstal arrived by bus in Zaporizhzhia on Tuesday after cowering for weeks in bunkers beneath the sprawling Soviet-era steel works.The mayor of Mariupol, Vadym Boichenko, said heavy fighting was underway at Azovstal on Wednesday and that contact with the Ukrainian fighters there had been lost. More than 30 children are among the civilians there awaiting evacuation, he added.Russia now claims control of Mariupol, once a city of 400,000 but largely reduced to smoking rubble after weeks of siege and shelling. It is key to Moscow’s efforts to cut Ukraine off from the Black Sea – vital for its grain and metals exports – and link Russian-controlled territory in the south and east.Moscow has deployed 22 battalion tactical groups near the eastern Ukrainian town of Izium in a possible drive to capture the cities of Kramatorsk and Severodonetsk in Donbas, British intelligence said. Reuters could not verify the report. The cities are in the eastern Donbas region – Russia’s main target along with Ukraine’s southern coastline since Moscow failed to take Kyiv, the capital, in the weeks after it invaded.Ukraine remains defiant despite the unrelenting assault.”Russia struggles to advance and suffers terrible losses. Thus the desperate missile terror across Ukraine. But we are not afraid and the world should not be afraid either,” Ukrainian Foreign Minister Dmytro Kuleba said on Twitter (NYSE:TWTR).”More sanctions on Russia. More heavy weapons for Ukraine. Russia’s missile terrorism must be punished.” More

FRANKFURT (Reuters) – Wage growth in Europe is still barely visible but underlying pressures are intense and the European Central Bank may already have left it too late to stop strong income growth from seeping into record-high inflation. The ECB has been curbing stimulus by the smallest possible increments despite record inflation, arguing that wage growth, a precondition for durable inflation is absent, so prices are bound to moderate once the energy shock passes.That argument is on increasingly shaky ground, however, and the ECB can ill afford to wait for hard data as they need to preempt and not react to runaway wages, analysts and policymakers argue.Indeed, conditions for a surge in wages are already set and there is evidence that a rise is happening, even if government agencies will need time to collect the data.”The data are backward-looking and we need to pursue a forward-looking monetary policy,” ECB board member Isabel Schnabel said this week.”So we can’t afford to wait until a wage-price spiral has already set in before responding,” she told German newspaper Handelsblatt. “We need to act.”The evidence so far is patchy but all point in the same direction, making the case for rapid ECB action.On Tuesday, most unions of Amazon (NASDAQ:AMZN)’s French arm rejected a 3.5% wage increase offer, demanding 5% instead. And Germany’s IG Metall, an influential trade union, last week tabled an 8.2% wage rise demand to offset the huge rise in inflation.ECB chief economist Philip Lane has long argued that wage growth of 3% would be consistent with inflation settling at the bank’s 2% target and recorded increases have been well below 2%. But JPMorgan (NYSE:JPM)’s Greg Fuzesi sees wage growth already rising to 2.3% in the first quarter, before big wage negotiations take place and even this figure is at risk of coming in higher. Marco Valli, an economist at UniCredit, meanwhile, said that his models indicate a surge in negotiated wage growth to over 4% this year.Sharp (OTC:SHCAY) increases in inflation have caused the cost of living to jump across the euro area, making it a hot issue politically. Trade unions who were willing to forego big wage demands during the early months of the pandemic now need to recoup their members’ lost purchasing power.A key additional reason for the expected jump in wages is that the euro zone labour market is in its best shape in decades. Unemployment is at a record low 6.8% with further drops expected, and employment, at nearly 162 million, is higher than it has ever been. “There is anecdotal evidence that companies are already paying some kind of inflation compensation on top of collectively agreed pay,” Deutsche Bank (ETR:DBKGn) said. “There is a clear risk that our current forecast of an annual 3.5% rise in 2022 effective (German) wages might be too low.”With underlying inflation excluding food and fuel prices already at almost 4%, waiting for wage growth to take hold risks fuelling even more inflation. This could then entrench high price growth in a difficult-to-break spiral. ECB chief Christine Lagarde has already warned that the longer inflation stays high, the more likely it is to factor into wage negotiations. Longer-term inflation expectations are at 2.5%, indicating market doubts about the ECB’s willingness to rein in prices. Policy tightening will not lower energy prices but will confirm the ECB’s commitment to its 2% target, a signal to firms and unions as they negotiate pay.But policymakers agree with Schnabel that talk is no longer enough, so the ECB must end bond purchases within weeks and start raising rates, getting back at least to zero by the end of the year. [L8N2WM08Y]”Like the Fed, the ECB is behind the curve and thus is playing catch up, even if the ECB is unlikely to move as quickly or as far as the Fed,” BNP Paribas (OTC:BNPQY) said. “Wage growth is quickly gathering momentum.” More

The Treasury said it was trimming issuance, but by smaller increments than in previous quarters, based on projected borrowing needs that include recent strong tax receipts and potential redemptions of Treasury securities by the Federal Reserve. The Treasury said additional reductions may also be necessary, depending on developments in its projected borrowing needs. The U.S. government had increased auction sizes in 2020 to pay for coronavirus-related spending. The Treasury said it expects to cut the size of 2-, 3- and 5-year note auctions by $1 billion each per month over the coming quarter, while 7-year auctions will be cut by $2 billion per month in the same period.New and reopened 10-year note and 30-year bond auctions will also be reduced by $1 billion, while the 20-year bond auctions will be cut by $2 billion.The Treasury also said it expects to maintain the size of its May reopening auction of 10-year Treasury Inflation-Protected Securities (TIPS) at $14 billion. It will increase the size of the June five-year TIPS reopening auction by $1 billion to $18 billion and increase the July 10-year TIPS new issue auction by $1 billion to $17 billion. The Treasury said it will sell $45 billion in three-year notes, $36 billion in 10-year notes and $22 billion in 30-year bonds next week.The U.S. Treasury said on Monday it expects to pay down $26 billion in debt the second quarter, down from a January borrowing estimate of $66 billion, primarily because of an increase in receipts. The second-quarter estimate assumes an end-of-June cash balance of $800 billion. More