Economy

The four biggest EU countries have announced more than €80bn of measures to shield consumers and businesses from soaring energy prices exacerbated by Russia’s invasion of Ukraine — but economists warn many of these measures could prove counterproductive.Germany, France, Italy and Spain have responded to the surge in energy prices by announcing plans to cut taxes or to fund rebates on fuel, electricity or natural gas, in an attempt to shield their economies from surging costs for companies and a drop in consumers’ disposable income.Yet by softening the blow of higher energy prices, governments may aggravate the problem by reducing the incentive for households and businesses to reduce their consumption of electricity and fuel, while making it harder to wean off their dependence on Russian fossil fuels.“This is terrible economics,” said Rüdiger Bachmann, economics professor at the University of Notre-Dame. “You want the price mechanism to have its effect, by signalling that a good is scarce, so people decide if they want to change their behaviour.” Many European countries are transferring money to vulnerable groups to help them cope with higher consumer energy prices, which have risen 45 per cent in the eurozone in the past year mainly as a result of tighter supplies. The Bruegel think-tank found only three of the 25 countries it assessed were not making such payments. But Bruegel found that 17 countries were also cutting taxes or duties on energy, while 10 countries were regulating retail energy prices and three were regulating wholesale prices.The French government has gone further by capping the increase in household electricity bills. EDF, the French state-owned energy group, estimated the cap would reduce earnings by €10bn when combined with a requirement to sell its nuclear power below wholesale rates.“The subsidy on household energy is crazy — it reduces the incentive to reduce energy consumption,” said Klaus Adam, economics professor at the University of Mannheim. “Give everyone an amount each month and let them decide if they want to use it to pay the higher gas prices or if they want to save energy consumption and spend it on something else.”Veronika Grimm, a member of the council of economic experts which advises the German government, criticised the latest package of measures announced by Berlin last week to help businesses with high energy prices. The package will include “a time-limited and narrowly defined cost subsidy” for companies whose electricity costs have at least doubled since last year. “It is very unfortunate to subsidise the use of fossil fuels by directly subsidising energy consumption,” Grimm told Die Welt newspaper. “Ultimately, this keeps the gas price high on the exchanges.”As part of Spain’s €16bn “shock plan” to address the fallout from the Ukraine conflict, it plans to cut fuel price costs in an attempt to defuse an unofficial transport strike that started last month. Spain is also working on a new scheme with Portugal to cap gas prices.France last month announced a scheme to give a €0.15-per-litre rebate on fuel for four months from this month, while Germany’s €16bn plan to help households include a three-month cut in fuel prices by €0.30 per litre for petrol and €0.14 for diesel. Italy said in February it would spend about €6bn to help cut levies on energy bills, after already spending about €10bn trying to reduce consumer power costs.By keeping demand high, economists say such measures could undermine an EU-led push to transition away from Russian energy imports. Brussels recently agreed a ban on Russian coal imports from this August and is debating a similar embargo on oil imports while working towards a plan to cut gas imports from the country by two-thirds over the next year. Germany is resisting calls for an immediate EU embargo of all Russian energy imports. Five German economic institutes warned recently that such a move would cause a major recession in the country, sending output down 2.2 per cent next year and wiping out more than 400,000 jobs.Lower household energy usage could be a key part of this shift away from Russian imports. “Household gas consumption offers substantial savings potential, for instance in heating, at a low economic cost,” said Katharina Utermöhl, senior economist at Allianz. If all German households cut their room temperature by three degrees during colder months, Utermöhl estimated it would lead to a savings in gas consumption equivalent to the amount used by the country’s basic metal and food products sectors, which employ about 1mn people. More

Deripaska, founder of Russian aluminium giant Rusal, has been sanctioned by the United States, European Union and Britain. He has previously called for peace.A Reuters witness saw the 73-metre (239.5 foot) yacht Clio arrive off the coast of Gocek in the Aegean coastal province of Mugla on Saturday. The Cayman Islands-flagged vessel remains in a bay off Gocek.The arrival of Clio in Turkish waters comes after two superyachts linked to Russian billionaire Roman Abramovich, who made a surprise appearance at Ukraine-Russia peace talks in Istanbul this month, docked in Turkish ports.World governments are seeking to isolate President Vladimir Putin and his allies over Russia’s invasion of Ukraine, which the Kremlin calls a “special military operation”.NATO member Turkey shares a maritime border with Ukraine and Russia in the Black Sea, has good ties with both and mediates in the conflict. It has supported Kyiv, but also opposed sanctions on Moscow, including measures against Russian billionaires.Ankara relies heavily on Russian energy imports and tourists and has emerged as a safe haven for Russians fleeing sanctions, and many have invested in Turkish property.On Friday, a Ukrainian diplomat said Ukraine is working with Turkey for more support and understands – though it is not happy with – the reality of Ankara’s parallel ties to Moscow. More

BEIJING (Reuters) – China is expected to report a sharp deterioration in economic activity in March as COVID-19 outbreaks and lockdowns hit consumers and factories, although first-quarter growth may have perked up due to a strong start early in the year.Data on Monday is expected to show gross domestic product (GDP) grew 4.4 in January-March from a year earlier, a Reuters poll showed, outpacing the fourth-quarter’s 4.0% pace due to a surprisingly solid start in the first two months.But on a quarterly basis, GDP growth is forecast to fall to 0.6% in the first quarter from 1.6% in October-December, the poll showed, pointing to cooling momentum.Separate data on March activity, especially retail sales, is likely to show an even sharper slowdown, analysts say, hit hard by China’s strict efforts to contain its biggest COVID outbreak since the coronavirus was first discovered in the city of Wuhan in late 2019.Analysts say April readings will likely be worse, with lockdowns in commercial centre Shanghai and elsewhere dragging on. Some economists say the risks of a recession are rising.The government is due to release the Q1 and March figures on Monday at 0200 GMT, with investor speculation mounting over whether there will be more moves to stimulate the economy.Late on Friday, China’s central bank said it would cut the amount of cash that banks must hold as reserves for the first time this year, releasing about 530 billion yuan ($83.25 billion) in long-term liquidity.The move was largely expected after the State Council, or cabinet, said on Wednesday that monetary policy tools – including cuts in banks’ reserve requirement ratios (RRRs) – should be used in a timely way.Policymakers need to ensure nothing goes wrong before a twice-a-decade meeting of the ruling Communist Party in autumn, when President Xi Jinping is almost certain to secure a precedent-breaking third term as leader, policy insiders said.But Beijing’s strict zero tolerance policy on COVID-19 is taking an increasing toll on the world’s second-largest economy, and is starting to disrupt supply chains globally ranging from cars to iPhones.”In the run-up to the Party Congress, we think the central bank will prioritise growth, especially as the COVID battle drags on and housing markets fail to rebound,” analysts at Barclays (LON:BARC) said in a note.Retail sales, a gauge of consumption which has been lagging since COVID-19 first hit, likely shrank 1.6% in March from a year earlier. That would be the worst showing since June 2020, reversing a 6.7% rise in the first two months, the poll showed.Industrial output likely grew 4.5% in March from a year earlier, slowing from 7.5% in the first two months, while fixed-asset investment may have expanded 8.5% in the January-March, slowing from 12.2% in the first two months.The Reuters poll forecast China’s growth to slow to 5.0% in 2022, suggesting the government faces an uphill battle in hitting this year’s target of around 5.5%.Barclays estimates that the second-quarter GDP growth could dip to 3%, dragging 2022 growth to 4.2%, if Shanghai’s extended lockdown were to last for one month and partial lockdowns in the rest of the country remained in place for two months.Reflecting weakening domestic demand and COVID-related logistical snarls, China’s imports contracted in March, while exports — the last major growth driver — are showing signs of fatigue.The government has unveiled more fiscal stimulus this year, including stepping up local bond issuance to fund infrastructure projects, and cutting taxes for businesses.But analysts are not sure if rate cuts would do much to arrest the economic slump in the near term, as factories and businesses struggle and consumers remain cautious about spending. More aggressive easing could also trigger capital outflows, putting more pressure on Chinese financial markets.”I don’t think this RRR cut (on Friday) matters that much for the economy at this stage,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, noting it was less than markets had expected.”The main challenge the economy faces is the Omicron outbreaks and the lockdown policies that restrict mobility. More liquidity may help on the margin, but it doesn’t address the root of the problem. Manufacturers face the daunting risk of supply chain disruptions.”Unless we see effective policies to address the mobility problem, the economy will slow. I expect GDP growth in Q2 to turn negative.” More

China’s economic outlook was already challenging at the beginning of the year, as the effects of President Xi Jinping’s crackdown on property and other high-growth industries rippled through the world’s second-largest economy.But the view has deteriorated ahead of the National Bureau of Statistics’ April 18 release of its estimates for first-quarter gross domestic product growth. Meanwhile, Xi’s administration is grappling with a Covid-19 nightmare that has gripped some of the country’s largest cities over the past month.Monday’s statistical release will capture only a small sample of the upheaval stemming from the lockdown in Shanghai, China’s most populous city and its most important financial and manufacturing centre, which did not become a full-blown crisis until the end of March. Previously, large-scale disruptions were concentrated in the northern city of Xi’an, which had a surge in cases in January, and more recently in Jilin province, an important agricultural producer and automotive centre.The knock-on effects of the Shanghai lockdown have been far greater than those in either Xi’an or Jilin, so no matter how badly the first quarter numbers come in, they will probably only get worse in coming months. Here are five things to look out for with Monday’s release.How realistic is the government’s official annual growth target of 5.5 per cent?When Premier Li Keqiang announced the 5.5 per cent target at the opening of China’s annual parliamentary session on March 5, it struck most analysts as aggressive, especially in light of his repeated pledges not to resort to “flood-like stimulus” while also “keeping the [national] macro leverage ratio generally stable”. China’s economic output expanded 4 per cent year on year over the last three months of 2021, down from 4.9 per cent in the previous quarter.Vice-premier Liu He, Xi’s most trusted financial and economic adviser, has staked his reputation on maintaining discipline and not letting debt levels blow out as they did during an investment binge unleashed by Beijing in the wake of the 2008-09 global financial crisis.But both Li and Liu are now clearly worried about the health of the economy. Liu made a rare intervention in March to boost confidence in the economy and stock markets, which had been rattled by a combination of Covid lockdowns and the inflationary effects of Russia’s invasion of Ukraine.Vice-premier Liu He © Andrew Harrer/BloombergWill zero-Covid politics trump concerns about the economy?The success of China’s zero-Covid approach to managing the pandemic in 2020 and 2021 has become a central part of Xi’s political legacy, and a justification for his pursuit of a third term as head of the party, state and military.Xi has repeatedly said that local officials should achieve zero-Covid while ensuring minimal disruption to the economy and people’s lives. Shanghai initially tried to achieve this by locking down one half of its population for five days, followed by five days for the other half.But the compromise approach could not contend with the infectiousness of the Omicron variant. As Shanghai’s daily case count raced past 20,000, a de facto citywide lockdown followed with no clear exit strategy.Other cities with negligible daily case counts are now resorting to pre-emptive restrictions and all-out lockdowns. Ernan Cui at Gavekal Dragonomics, a Beijing consultancy, estimated that almost three-quarters of China’s 100 largest cities, accounting for more than half of national GDP, are enforcing Covid-related restrictions.Barring a clear signal from Xi that zero-Covid zealousness has gone too far, the economy will continue to bear the brunt of its consequences. On Wednesday, Xi reiterated that there would be no significant relaxation of the policy.How big a hit is consumption taking?Lockdowns make it difficult for people to go out and buy consumer goods, cars and even flats, with predictable consequences for the economy.Car sales were suffering before Shanghai announced its partial lockdown on March 26, and ended the month almost 12 per cent down year on year. Prospects for a rebound in April are not bright given the restrictions in Shanghai and Jilin, both big automotive centres.Property sales were also stagnating before China’s March lockdowns. New home prices declined slightly in February compared with January, despite measures taken by local governments across the country to boost sales, as well as the first cut in China’s benchmark mortgage lending rate since 2020.Will the government resort to covert stimulus measures to boost the economy? Total social financing, a broad measure of credit in the Chinese economy, soared 38 per cent year on year in March to Rmb4.65tn ($730bn), compared with previous expectations of an 8 per cent rise.It was a repeat of March 2020, when shortly after the pandemic erupted in central China, total social financing reached Rmb5.18tn.Chinese banks also extended loans totalling Rmb3.1tn in March, about 2.5 times the February figure.Is foreign investor patience approaching breaking point?This week, Jörg Wuttke, head of the European Chamber of Commerce in China, warned that the recurring outbreaks and authorities’ strict responses were “eroding foreign investors’ confidence in the Chinese market”.According to recent surveys of German investors in China, half of respondents reported that their supply chains had been “completely disrupted or severely impacted”, while a third said their manufacturing operations had been similarly hit.“The Omicron variant,” Wuttke said, “is posing new challenges that seemingly cannot be overcome by the old toolbox of mass testing and isolation.” More

The ultimate arbiter of a sovereign default is an open question but markets may have the final word.WASHINGTON — Russia is ambling toward a major default on its foreign debt, a grim milestone that it has not seen since the Bolshevik Revolution more than a century ago and one that raises the prospect of years of legal wrangling and a global hunt by bondholders for Russian assets.The looming default is the result of sanctions that have immobilized about half of Russia’s $640 billion of foreign currency reserves, straining the country’s ability to make bond repayments in the currency the debt was issued in — dollars. Girding for a default, Russia has already pre-emptively dismissed it as an “artificial” result of sanctions imposed by the United States and its allies, and it has threatened to contest such an outcome in court.The coming fight, which would probably pit Russia against big investors from around the world, raises murky questions over who gets to decide if a nation has actually defaulted in the rare case where sanctions have curbed a country’s ability to pay its debts.Russia does not appear likely to take the declaration of a default lightly. If that should occur, it would raise Russia’s cost of borrowing for years to come and effectively lock it out of international capital markets, weighing on an economy that is already expected to contract sharply this year. It would also be a stain on the economic stewardship of President Vladimir V. Putin that would underscore the costs Russia is incurring from its invasion of Ukraine.At stake for Russia, which has already suffered the abrupt rupture of decades of crucial business ties with the United States, Europe and other nations, is one of the underpinnings of economic growth: the ability to smoothly borrow money from outside its borders.Since Russia’s predicament is so unusual, it remains something of an open question who is the ultimate arbiter of a sovereign debt default.“This points to the squishiness and patchwork nature of sovereign debt markets,” said Tim Samples, a legal studies professor at the University of Georgia’s Terry College of Business and an expert on sovereign debt. “I think this is set to be convoluted and disputed for a variety of reasons.”Mr. Samples suggested that there could be a “cascade” of events that brings Russia to a default.The most direct verdict could come from the big credit ratings agencies, which have already signaled that Russia’s credit worthiness is eroding and that a default could be on the horizon.This past week, Moody’s warned that Russia’s payment of about $650 million of dollar-denominated debt in rubles on April 4 could be considered a default if it does not reverse course and pay in dollars by May 4, when a 30-day grace period concludes. That followed a similar warning earlier in the week by S&P Global, which placed Russia under a “selective default” rating.But it is not clear how the ratings agencies will weigh in if Russia fails to make payments after its grace periods run out because of European Union sanctions that have restricted the agencies from rating Russia. Spokesmen from Moody’s and S&P did not comment. A Fitch spokesman said he could not offer any comments on Russia’s creditworthiness in light of the sanctions.The Biden administration put additional pressure on Russia earlier this month when the Treasury Department started blocking Russia from making debt payments using dollars held in American banks. That new restriction was intended to force Russia to choose between draining the remaining dollar reserves it has in Russia or using new revenue (from natural gas payments, for example) to make bond payments and avoid defaulting on its debt.Russia can still make payments on Russian sovereign debt as long as it is not trying to use funds from Russian government accounts that are held in American financial institutions.After the grace period on the foreign currency bond payments expires on May 4, the next key moment will be May 25. That is when American bondholders will no longer be able to accept Russian debt payments under a temporary exemption that the Treasury Department has allowed.The Russian central bank’s offices in Moscow. A default would raise Russia’s cost of borrowing and effectively lock it out of international capital markets.The New York TimesWhile the verdict of the ratings agencies carries significant weight, bondholders will determine the consequences of Russia failing to make payments that were due or that violate the terms of its contracts. The bondholders could take a wait-and-see approach or declare that the bonds are immediately due and payable, which could cause other bonds with “cross default” provisions to also be in default.Another potential arbiter of default is the Credit Derivatives Determination Committee, which is a panel of investors in the market for default insurance, or credit-default swaps. The committee is deliberating whether Russia’s payments in rubles constitute a “failure to pay,” which would kick-start insurance payouts. The panel already ruled that the state-owned​​ Russian Railways JSC was in default for missing a bond interest payment.To some analysts, that decision and the payments in rubles mean that Russia already is technically in default.“If Russia doesn’t pay on time, doesn’t pay in the currency in the contract, that’s a default — it’s crystal clear,” said Timothy Ash, a senior sovereign strategist at BlueBay Asset Management. “For all intents and purposes, Russia is already in default.”The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

It gave no reason for the restrictions.Ukraine, a major agricultural producer, used to export most of its goods through seaports but since Russia’s invasion has been forced to export by train via its western border.APK-Inform said restrictions on the movement of goods to Poland through Yahodyn have been put in place from April 16 to April 18.There are also restrictions on the transportation of cereals, oilseeds, grains and other food products through Izov to the Polish towns of Hrubeszew and Slawkov.From April 16 until further notice, there are restrictions on the export of grain and seeds to Romania through the Dyakovo and Vadul-Siret crossings, the consultancy said.The railway company was not available for immediate comment.Ukrainian agriculture minister Mykola Solskyi said this week the main task of the ministry was to find alternative ways to export Ukrainian grain. The country has millions of tonnes of various commodities available for exports.Solskyi also said 1.25 million tonnes of grain and oilseeds were on commercial vessels blocked in Ukrainian seaports and may soon deteriorate.Before the war, Ukraine exported up to 6 million tonnes of grain and oilseed a month. In March, exports fell to 200,000 tonnes. More

This year’s hawkish change in tack from central banks is close to ending the era of negative-yielding debt, shrinking the global tally of bonds with sub-zero yields by $11tn.Bond prices have tumbled this year as central banks move to end large-scale asset purchases and raise interest rates in their battle with soaring inflation, pushing yields in many big economies to their highest levels in years. As a result, bonds worth $2.7tn currently trade at a yield of less than zero, the lowest figure since 2015, and a sharp plunge from more than $14tn in mid-December, according to the Bloomberg global aggregate bond index — a broad gauge of the fixed income market. Wiping out negative yields entirely would mark a return to normality for a broad range of big investors.“Central banks are belatedly trying to get ahead of this inflation shock, so the bond market has abruptly priced in a big shift in interest rates,” said Mike Riddell, a senior portfolio manager at Allianz Global Investors.Negative yields were once considered inconceivable, then as a novelty, and later as an established feature of global markets. They mean that prices for debt are so high, and interest payments so low, investors are certain to lose money if they hold their bonds to maturity. They reflect a belief that central banks would keep interest rates at rock bottom and have become entrenched in large quantities of debt in Japan and the eurozone in recent years.That assessment has shifted dramatically in recent months, particularly in the euro area, where the European Central Bank on Thursday reiterated plans to end its bond-buying programme this year, and traders are betting that interest rates will return to zero for the first time since 2014 by December.An end to ultra-low or negative yields is a “double-edged sword” for bond investors, according to Riddell. “On the one hand people are nursing losses on the bonds they hold. But the flipside is that positive risk-free rates mean future returns arguably look better.” He added that would be “good news” for investors such as pension funds that need to hold large quantities of safe assets like government bonds but also need to earn sufficient returns to meet future payouts.The dwindling stock of negative-yielding debt also reflects high levels of inflation, which has driven investors to demand greater compensation for rising prices, according to Salman Ahmed, global head of macro at Fidelity International.“Yes, nominal yields are moving up but long-term investors should really care about real returns. It’s what’s left after inflation that counts, and inflation is very high right now,” he said.The eurozone has been the big driver of the reduction in debt trading at sub-zero yields. In December, the currency bloc accounted for more than $7tn of such bonds, including all of Germany’s government bonds. That figure has declined to just $400bn. Japan, where the central bank has so far resisted the global shift towards tighter monetary policy, now accounts for more than 80 per cent of the world’s negative-yielding bonds.Negative yields are likely to multiply again in the euro area, unless the ECB delivers the interest rate rises already priced in by markets. The central bank will struggle to lift rates much from the current level of minus 0.5 per cent given the threat to the region’s recovery posed by Russia’s invasion of Ukraine and the resulting rise in energy prices, Ahmed said.“I think the ECB has missed the window to normalise policy because the growth shock from Ukraine will be much more severe in Europe,” he added. “In our view they aren’t getting back to zero this year, and that means negative-yielding bonds are not about to disappear.” More

(Reporting in Kyiv by Pavel Polityuk; Writing in Melbourne by Lidia Kelly; editing by John Stonestreet) More