Economy

The expression is ugly and its content even uglier, but “Ukraine fatigue” is a real risk in western democracies. Their citizens are repulsed by Vladimir Putin’s war of unprovoked aggression and are full of sympathy for the Ukrainian people. Their leaders have surprised even themselves with the strength of their support for Kyiv. But as things drag on, challenges closer to home could increasingly steal their attention.It is easy to see how the cost of living crisis, which is compounded by war and snarled-up supply chains, and which is probably already putting a chill on demand, could erode western leaders’ focus on Ukraine.To let this happen would be an error and a failure. An error, because inflation in the west is to a significant extent made in Moscow. A failure, because it would mean that political leaders had neglected their chief task of preparing the public for the unavoidable hard choices to come.Western politicians must explain to their voters that the cost of living crisis is likely to worsen, and why. This is the sort of speech they could give:“My fellow citizens,“The past few years have been hard. The pandemic brought illness and death, heartache and loneliness, and threats to the livelihoods and businesses of millions among you. Even as we were opening up our economies and thought the worst was behind us, we were hit by rising inflation and more expensive energy.“Since February 24, we have witnessed the horrors of war revisited upon Europe, decades after we swore ‘never again’. We stand with Ukraine against the unjustified assault by Vladimir Putin’s Russia. Our soldiers will not join the battle; we will not enter a third world war unless Russia attacks us. But we will do everything to help Ukraine’s brave people defend themselves, and to weaken Putin’s capacity for unleashing violence in the world.“If we ourselves are not at war, the consequences of war have long since reached us. The price of freedom in Europe is paid by Ukrainians first and foremost, but also by so many of you, who worry how you are going to keep on your lights and heating, buy healthy meals for your children, or keep your businesses running.“Let us be clear: the cost of energy has soared because Russia’s dictator has turned oil and gas into weapons. The price of food is going up because he is laying waste to Europe’s most productive farmland. And our sanctions on Russia inevitably involve economic sacrifice from ourselves.“I wish I could tell you that things will soon get better. But the truth is that they are likely to get worse. Prices of energy, food and commodities could go up further. Our economic growth and our incomes may slow. It is essential that we look this reality in the eye and that we work together to face these coming challenges.“We cannot deny that higher import prices make our economy poorer. Our central banks cannot save a lost Ukrainian harvest or fix global supply chains by raising the cost of credit. And should Putin cut off more of Russia’s gas supply overnight, we cannot pretend that we would not be harmed. “Something like a wartime economy is being imposed on us — not of our choosing, but we must not shrink from it. That requires all of us to put the common good first. “Those with broader shoulders must be prepared to contribute more in taxes. Those most exposed to inflation should expect more help but also accept that help cannot do away with the need to adapt. “We may have to ration some essential goods. Everyone must be patient with more indebted public finances. And we have to help those countries worse placed than us, or their problems will soon be ours.“It is tempting to close one’s eyes to what is right and go with what seems comfortable. But the path of least resistance is both wrong and unwise. Backing down against Putin for some short-term respite in commodity prices would only leave us more at his mercy.“And let us be honest that this crisis forces us to take steps we should have taken long ago for the sake of our grandchildren. The future health of their planet requires an end to fossil energy. Today, our immediate geopolitical security demands the same — starting with Russian fuels.“It is our duty to invest in an energy system that is both clean and safe from democracies’ enemies. Jobs may be lost and consumption curtailed in the process. But like war, this is a task our generation must carry out for the sake of the next.”[email protected] up for Martin Sandbu’s Free Lunch newsletter, ft.com/newsletters More

Spending habits are starting to shift as consumers set their priorities.
Consumer prices have risen at the fastest clip in four decades.
Some companies like airlines have benefitted, while Amazon is seeing a slowdown.

A pedestrian carries shopping bags in the Herald Square area of New York, U.S., on Wednesday, April 13, 2022.
Calla Kessler | Bloomberg | Getty Images

Sandy Magny plans to take her teenage daughter to West Palm Beach, Florida, this summer, even though airfares are surging.
It won’t be cheap, but Magny doesn’t want to miss out on visiting her family. The 40-year-old paralegal, who lives in the Bronx and works in the financial district of Manhattan, is finding there are other things she can do without.

“I do bring lunch more,” she said. “I could make coffee in the office.”
Magny is one of millions of people starting to shift where her dollars go after two years of the Covid-19 pandemic. Consumer prices have increased at the fastest clip in four decades. The cost of everything from housing to a latte is on the rise, begging the questions: When — and where — will consumers cut spending?
Some companies are already feeling the impact as they try to pass higher costs along to customers.
Amazon’s most recent quarterly sales grew at the slowest pace since the 2001 dot-com bust. Netflix lost subscribers in the last quarter for the first time in more than a decade. Video game maker Activision Blizzard, home appliance giant Whirlpool and 1-800-Flowers all reported weaker sales in the last quarter.
Meanwhile, companies from Ford to McDonald’s to Kraft Heinz to United Airlines have reported resilient demand as consumers keep spending in spite of higher prices.

The changes in consumer behavior have some executives on edge.
“We do believe that the consumer is going to be spending,” Macy’s CFO Adrian Mitchell said at JP Morgan’s Retail Round-Up last month. “But are they going to be spending on discretionary items that we sell, or are they going to be spending on an airline ticket to Florida, or travel, or going out to restaurants more?” 
Coca-Cola CEO James Quincey told CNBC last week that customers won’t “swallow inflation endlessly.” 
Consumer spending, as measured by the Commerce Department, rose a seasonally-adjusted 1.1% in March. And spending remains strong even among low-income households with an annual income of less than $50,000, according to Bank of America data. (The data exclude households that do not have access to cards.)
But consumer confidence, a measure of shoppers’ sentiments around market conditions reported by The Conference Board, ticked lower in April.
“We’re not really seeing many signs of slowdown, despite the worries that are happening in the market,” said Anna Zhou, a U.S. economist for Bank of America.
One reason is the amount of money that people socked away during the pandemic. On average, low-income households have $3,000 in their savings and checking accounts – nearly double what they had at the start of 2019, according to the Bank of America’s internal data. That has given consumers a buffer, even as they pay more at the gas pump and grocery store, Zhou said.

Only the good stuff

Many customers aren’t only spending, but are finding themselves increasingly willing to splurge, whether on a higher-end pair of Levi’s jeans or a first-class seat on a Delta Air Lines flight.
Apple on Thursday reported a “record level of upgraders” during the first three months of the year as users opted for its more premium iPhones, but warned about the impact of lockdowns in China. And as automakers raise prices to reflect tight inventory from global supply chain issues, car-seekers aren’t getting scared off.
Ford CFO John Lawler said this week that despite price increases, the company is still seeing exceptionally strong demand for its newest products, ranging from the small Maverick pickup, which starts around $20,000, to the electric Mustang Mach-E crossover, which in higher trims can cost well over $60,000. It’s already sold out for the 2022 model year.
United, Delta and Southwest Airlines are predicting 2022 profits thanks to seemingly insatiable demand from customers after two brutal pandemic years, both for leisure and business travel. Their own staffing constraints are holding them back flying even more.
U.S. round-trip domestic airfare for travel between Memorial Day and Labor Day averaged $526, up more than 21% from 2019, according to Airlines Reporting Corp.’s data from travel agencies.
“The demand environment is the strongest it’s been in my 30 years in the industry,” United Airlines CEO Scott Kirby said in an April 20 earnings release.

Travelers walk through Terminal A at Orlando International Airport on Christmas Day, Saturday, December 25, 2021.
Stephen M. Dowell | Orlando Sentinel | Getty Images

Levi Strauss & Co. Chief Executive Officer Chip Bergh told CNBC last month that in spite of rising prices, consumers weren’t trading down to less-expensive denim. Levi reaffirmed its outlook for fiscal 2022, which calls for revenue to grow between 11% and 13% from the prior year. 
But signs are emerging that consumer appetite might be nearing its limit.
Domestic U.S. airline bookings in the first two weeks of April fell 2% compared with the previous two weeks, the first decline over such a timeframe this year, according to Adobe Analytics. In March, bookings rose 12% from 2019, but customer spending on those tickets soared 28%.
March restaurant traffic fell 1.7%, according to industry tracker Black Box Intelligence. Fine dining, upscale casual and family dining establishments saw the biggest jump in sales growth, but the segments are still trying to claw back from pandemic lows.
Jodi Klobus a 58-year-old mother of three and grandmother of four who lives outside of Albany, N.Y., told CNBC she and her husband, a retired New York City police officer, used to dine out twice a week. Now that their meals, and everything else, cost more, they’ve scaled back to twice a month.
“I feel it in the pocketbook,” Klobus said.

Challenges ahead in 2023

And there are other risks looming that could crimp consumer spending, even if the impact isn’t immediate. Rents are marching higher and property taxes haven’t fully caught up to skyrocketing home values.
The Federal Reserve is aiming to tackle inflation by raising interest rates. That translates to higher borrowing costs for homebuyers and credit card users.
In the fourth quarter, U.S. credit card balances rose by $52 billion, the biggest quarterly jump in 22 years of New York Fed data, but they are still down $71 billion from the end of 2019.
U.S. credit card delinquency rates rose to 1.62% from a more than three-decade low of 1.48% in the second quarter of last year, still far from the 6.6% peak hit in the first quarter of 2009, the tail-end of the Great Recession, according to the St. Louis Fed.
“For this year, consumer spending should remain resilient,” said Zhou, the Bank of America economist. “For next year, it’s a little less certain – and certainly toward the second half of next year, that’s when risk of more of a slowdown in consumer can arise.”

I just complain about the prices.

Cindy Maher
of Bloomfield, Connecticut

Boeing CEO Dave Calhoun on Wednesday said demand for new planes from airlines is recovering thanks to a resurgence of travel demand. Yet it’s unclear whether Americans will keep splurging on trips in the months ahead or will hit a point when they’ll cut back.
“That second year, when inflation begins to take a toll on consumers’ pocket, that is when those numbers really begin to matter to us,” Calhoun said in an interview with CNBC’s “Squawk on the Street.”
For the moment, many consumers, like Cindy Maher, a 58-year-old who owns a leadership development consulting firm and lives in Bloomfield, Connecticut, feel comfortable enough to maintain their spending habits.
“I’m not cutting back,” she said. “I just complain about the prices.”
Maher said she’s noticed nearly $7 loaves of bread and that it costs $70 to fill up the tank of her car. But she said in her two-income household, she can absorb those costs.
“My heart goes out to those who have low-paying jobs,” she said.
–CNBC’s Amelia Lucas and John Rosevear contributed to this article.

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Russia is grappling with the fallout from Western sanctions over what Moscow calls a special military operation in Ukraine to demilitarise its neighbour and rid it of extreme anti-Russian nationalism.The state-backed mortgage scheme that has helped support a construction boom in Russia had been due to expire on July 1. It will now run through the end of 2022 and the rate will be cut to 9% from 12%, the government said on Sunday.The move will make houses more affordable for Russian families and support the construction industry, the government said in a statement.The Russian economy is expected to shrink by 8-10% this year, according to forecasts from the central bank which on Friday cut its key interest rate to 14% in a sharper-than-expected move. More

Will the Fed deliver an extra large interest-rate rise? The Federal Reserve is widely expected to announce on Wednesday at the conclusion of its policy meeting that it will raise its key interest rate by 0.5 percentage points, the first increase of that size since 2000.The aggressive step is just the first of three now anticipated by investors, who believe the US central bank will need to move rapidly to fight inflation that remains at 40-year highs. Fed chair Jay Powell in April said that it was appropriate to “be moving a little more quickly” to tighten monetary policy. Investors are betting that interest rates — which are currently between 0.25 and 0.5 per cent — will be lifted to 2.7 per cent by the end of the year. US government spending has slowed and financial conditions have begun to tighten, but new sources of inflation — the war in Ukraine and fresh lockdowns in China — are likely to keep pressure on prices. Next week, the US labour department is slated to publish jobs figures for the month of April. Economists polled by Bloomberg expect the US to have added 390,000 positions, a dip from the previous month, but still indicative of a robust, stable job market. After the US economy contracted unexpectedly in the first quarter, the pressing question is whether the Fed can raise rates without hurting growth and pushing the US into a recession. Kate DuguidWill the Bank of England drop any dovish hints?The Bank of England is almost universally expected to raise interest rates for the fourth consecutive meeting this week. The question is by how much.Unlike the extra-large increase expected from the US Federal Reserve, markets are pricing in another 0.25 percentage point rise in the UK, taking the BoE’s benchmark rate to 1 per cent.With the cost of living crisis likely to hold back growth, a minority of BoE officials may opt to keep rates on hold, according to analysts at Citi, who expect two members of the nine-strong rate-setting committee to vote for no change, up from one in March.“Markedly higher inflation in the near-term is likely to be juxtaposed with a sharp deterioration in economic momentum though 2022 and 2023, and intense disinflation thereafter,” said Citi economist Benjamin Nabarro. “The risks here seem skewed to the dovish side.” Nabarro expects the BoE to pause its tightening cycle in August, contrary to market expectations of further rises.If the pace of BoE tightening falls further behind the Fed then the pound could come under renewed pressure. It fell to its lowest level against the US dollar in nearly two years last week.The BoE has previously indicated that it will consider beginning to actively sell bonds it bought under its quantitative easing programme, once rates reach 1 per cent. The central bank may offer the first clues about the pace and timing of gilt sales this week, which could weigh down longer-term bonds, Citi said. Tommy Stubbington Will higher Brazilian borrowing costs strengthen the real?Brazil’s central bank has been among the world’s most hawkish in the face of high inflation, lifting its benchmark Selic interest rate from a historic low of 2 per cent to 11.75 per cent since March last year. With price rises in Latin America’s largest economy stuck in the double digits, the institution is widely expected to raise by another full percentage point on Wednesday. The belief was bolstered by a preview reading of April’s inflation data in recent days. Although lower than anticipated, at an annual clip of 12 per cent it was the highest for that month in 27 years. As the war in Ukraine has stoked global inflationary pressures and with the US Federal Reserve in tightening mode, monetary policymakers in Brasília have a fine balance to strike. Despite slightly improving predictions of late, economists surveyed by the central bank recently gave an average forecast of just 0.6 per cent economic growth for Brazil in 2022.Any signals of further rate increases ahead could give support to the Brazilian real. After a torrid 2021, the currency has strengthened 13 per cent against the dollar so far this year as investors have sought higher-yielding assets, but it has lost ground against the greenback in the past month. Michael Pooler More

Covid-19 lockdowns across China are shaking western multinationals’ production lines, snarling supply chains and threatening financial forecasts as Beijing steps up its effort to contain a surge in coronavirus cases. Apple, Coca-Cola, General Electric and Pernod Ricard were among the companies to warn this week of the threat from the spreading lockdowns in the world’s second-largest economy, with many more blaming the strict measures for higher costs, shortfalls in their latest results and more cautious outlooks.An extension of the policies designed to curb the spread of coronavirus has gathered pace in recent weeks, leaving about 345mn people living under full or partial lockdowns across 46 cities, according to estimates from Japanese bank Nomura.The lockdown of Shanghai, China’s business hub and home to the world’s largest port, has deepened the disruption, ensnaring industries from carmakers to consumer goods and tech groups. Although the Covid outbreak began in early March and has started to ease in those areas hit first, results in recent days from US and European multinationals are among the first evidence of the global fallout.“There’s a huge backlog [ships waiting to unload cargo], the supply chain is very much snarled and congested,” said Shiv Shivaraman, Asia region co-leader at international consultancy AlixPartners. “It’s going to get worse, not better”.Conglomerate GE was among those to flag the dangers, saying that both its output and demand for its aviation and healthcare products in China had been hit. “How [the consequences of the lockdowns] play out is not something that we have a handle on. I don’t think anybody really does,” chief executive Larry Culp told analysts.Companies from online retailer Amazon to agricultural trader Archer Daniels Midland noted that obtaining goods from China by ship or air freight now costs more and takes longer because of restrictions at some leading ports and disruptions to internal train and trucking logistics.Wait times for vessels arriving in Shanghai to dock in port have shot up from 12 hours to two days since the start of the city’s lockdown, freight data provider Freightos said, pushing many shippers to divert exports to the port of Ningbo, where congestion has also worsened. The damage inflicted by China’s lockdowns comes as the world economy contends with the consequences of Russia’s invasion of Ukraine, which has sent energy prices soaring and prompted the IMF this month to cut its global growth forecasts. Multinationals are contending not only with strains on supply chains but a slowdown in demand within China. James Quincey, Coca-Cola’s chief executive, said its business in China had started the year strongly, but that the lockdowns, particularly in Shanghai, “took the steam out of things and we ended the quarter negative”. Spirits group Pernod Ricard, which is home to brands including Jameson whiskey and Havana Club rum and makes 10 per cent of its sales in China, cautioned that it had been “very impacted” by the Covid restrictions.Luxury groups from LVMH, which owns brands such as Louis Vuitton and Tiffany & Co, to Kering, owner of Gucci, have said footfall has suffered in recent weeks. According to Jefferies analysts, Shanghai accounts for about 9 per cent of global luxury spending a year, since many tourists visit China’s prime shopping city to buy high-end watches and fashion.With no sign of a quick end to the lockdowns, some companies said they are finding ways to mitigate the disruption. Carmaker Ford has tried to limit the fallout by focusing on expediting freight from the Shanghai region, where it has roughly 50 Tier 1 suppliers. Tim Cook, Apple’s chief executive, said that by working with local officials the iPhone maker had managed to restart its final assembly factories in the Shanghai corridor. Falling cases gave “some reason for optimism”, he said. Multinationals can also draw on two years of experience when tackling coronavirus-related challenges. “We feel better prepared and more resilient for the Covid journey of 2022 in China than we did in 2020,” said Quincey at Coca-Cola.Additional reporting by Peter Wells and Steff Chávez More

HANOI (Reuters) – Japan and Vietnam agreed on Sunday to boost economic and security ties while calling for an end to the war in Ukraine, Japanese Prime Minister Fumio Kishida said during a Southeast Asia tour. “We’ll strengthen bilateral ties in order to put the economies of both nations back on a clear recovery path in the wake of the coronavirus,” Kishida told reporters in Hanoi after meeting with his counterpart, Pham Minh Chinh.Chinh said the two “agreed to boost cooperation in post-pandemic trade, strengthen supply chains and energy transition, in accordance with mutual interests”.Japan is Vietnam’s largest provider of official development aid and third-largest source of foreign direct investment. Bilateral trade rose 8.4% last year to $42.9 billion, according to Vietnam customs data. Kishida and Chinh said they discussed regional responses to Russia’s invasion of Ukraine and to disputes in the South China Sea, where China, the Philippines, Vietnam, Taiwan, Malaysia and Brunei have competing territorial claims. “We agreed that any change in the status quo by force cannot be recognised,” Kishida said, referring to the Ukraine crisis. “We agreed on the need for the war to end immediately.”Kishida said he and Chinh “also agreed to strongly oppose any attempts to change the status quo by force in the South China Sea.”Kishida held similar discussions with Indonesia on Friday. Chinh announced Vietnam’s donation of $500,000 for humanitarian aid to Ukraine via international organisations. He said Vietnam expects to begin exporting longan to Japan in September, followed by other produce such as grapefruit, avocado and rambutan, while opening its market for Japanese grapes. Kishida said Japan will support an energy transition toward sources such as biomass, hydrogen and ammonia in Vietnam, which has committed to becoming carbon neutral by 2050. More

TAOS, N.M. (Reuters) – A drought-driven wildfire in northern New Mexico exploded into a “megafire” of 100,000 acres, or 157 square miles, on Saturday and could still more than double in size, a fire official said.Fueled by ferocious spring winds in parched mountain forests, the Calf Canyon fire is by far the largest and most destructive currently burning in the United States.Around 30 miles (48 km) east of Santa Fe, the fire has destroyed hundreds of properties, triggered thousands of evacuations and on Saturday burned within a few miles of the city of Las Vegas, New Mexico, population 14,000.”It’s already 100,000 acres. It could easily double in size, maybe even bigger than that,” Incident Commander Carl Schwope, told a briefing.The blaze grew about 50% in 24 hours as a giant column of flame collapsed on Friday night, raining embers and starting new fires. Residents of Las Vegas awoke to pieces of charred wood the size of a U.S. quarter coins carpeting the city.Officials feared another “column collapse” at any time.”It’s a big fire and it’s all around us,” San Miguel County Manager Joy Ansley said by phone, adding that authorities were making plans in case Las Vegas was told to evacuate.Firefighters believe the U.S. West faces a grim fire year, with U.S. Department of Agriculture data showing 80% of the area in severe drought.Under the scenario of a two-degrees-Celsius rise in global temperatures, scientists expect U.S. West wildfires to burn twice the area they do now by as early as mid-century.Over a third of the 2,800 firefighters now deployed in the United States were on the Calf Canyon fire, bulldozing firebreaks to defend Las Vegas and fighting ember-sparked “spot fires” creeping towards villages in the Mora Valley.So far this year U.S. wildfires have burned more than twice the area than in the same period of 2021 and about 70% more than the 10-year average, according to the National Interagency Fire Center. More

Chinese regulators have held an emergency meeting with domestic and foreign banks to discuss how they could protect the country’s overseas assets from US-led sanctions similar to those imposed on Russia for its invasion of Ukraine, according to people familiar with the discussion.Officials are worried the same measures could be taken against Beijing in the event of a regional military conflict or other crisis. President Xi Jinping’s administration has maintained staunch support for Vladimir Putin throughout the crisis but Chinese banks and companies remain wary of transacting any business with Russian entities that could trigger US sanctions.The internal conference, held on April 22, included officials from China’s central bank and finance ministry, as well as executives from dozens of local and international lenders such as HSBC, the people said. The ministry of finance said at the meeting that all large foreign and domestic banks operating in China were represented. They added that the meeting began with remarks from a senior finance ministry official who said Xi’s administration had been put on alert by the ability of the US and its allies to freeze the Russian central bank’s dollar assets. The officials and attendees did not mention specific scenarios but one possible trigger for such sanctions is thought to be a Chinese invasion of Taiwan, which China claims as its territory and has threatened to invade it if Taipei refuses to submit to its control indefinitely “If China attacks Taiwan, decoupling of the Chinese and western economies will be far more severe than [decoupling with] Russia because China’s economic footprint touches every part of the world,” said one of the people briefed on the meeting.Andrew Collier, managing director of Orient Capital Research in Hong Kong, said the Chinese government was right to be concerned “because it has very few alternatives and the consequences [of US financial sanctions] are disastrous”.Senior regulators including Yi Huiman, president of the China Securities Regulatory Commission, and Xiao Gang, who headed the CSRC from 2013 to 2016, asked bankers in attendance what could be done to protect the nation’s overseas assets, especially its $3.2tn in foreign reserves. China’s vast dollar-denominated holdings range from more than $1tn US Treasury bonds to New York office buildings. State-owned Dajia Insurance Group, for example, owns the Waldorf Astoria New York.

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“No one on site could think of a good solution to the problem,” said another person briefed on the meeting, “China’s banking system isn’t prepared for a freeze of its dollar assets or exclusion from the Swift messaging system as the US has done to Russia.”HSBC did not respond to a request for comment. Some bankers suggested that the central bank could require exporters to exchange all of their foreign exchange revenues for renminbi to increase its onshore dollar holdings. Exporters are currently allowed to retain a portion of their foreign exchange earnings for future use.

Others suggested a “significant” cut to the $50,000 quota that Chinese nationals are allowed to purchase every year for overseas travel, education and other offshore purchases. When one official asked Chinese bankers if they could diversify into more yen or euro-backed assets, they replied that the idea was not practical. Some bankers present, however, doubted whether Washington could ever afford to cut economic ties with China given its status as the world’s second-largest economy, huge holdings of dollar assets and close trade relationship with the US.“It is difficult for the US to impose massive sanctions against China,” agreed Collier. “It is like mutually assured destruction in a nuclear war.”Additional reporting by Tabby Kinder in Hong Kong More