Economy

UK inflation, at a 30-year high of 7 per cent, is bad news for consumers. Bad for shops too, reckons the nation’s biggest grocery store. Tesco is guiding for flat or falling retail operating profits this year — from £2.65bn to between £2.4bn and £2.6bn — as the consumer squeeze hits.Tesco, with a 27 per cent share of the UK grocery market, is rightly cautious but mildly disingenuous too. Historically, inflation boosts supermarket profits. Food staples are Giffen goods of sorts — higher prices boost rather than dent spending for these. As the market leader, with a share almost the size of the next two biggest stores, Sainsbury and Asda combined, Tesco has leverage with suppliers. It has learnt from the last crisis. Back then, it protected profit margins and sent customers to discounters.Still, shopping behaviour will change — fewer treats as well as shifts to cheaper own-brands and discounters such as Aldi and Lidl. Tesco faces its own rising bills from suppliers, transport and labour. Higher heating costs impact everything from chicken to cucumbers.It cuts where it can: shifting almost 90,000 containers off gas-guzzling lorries and on to trains and trialling fully electric HGVs. But some inputs are harder to pare back. The “substantial new pay deals” agreed with workers will add £200mn to labour costs. These have climbed £400mn over four years to £6.4bn in fiscal 2021, even after shedding a quarter of the full-time equivalent staff — partly reflecting the sale of its Thai operation.For Tesco, inflation is a political hot potato; minting big profits during a cost of living crisis is not a good look. Campaigners are gaining sway, pointing out the disproportionate impact on poorer households. Even plugging average spends on food, energy and the rest into the Office for National Statistics’ newly launched DIY inflation calculator generates a rate 0.4 percentage points above the current level. Tesco tackles this with discount ranges and price-matching with discounter peer Aldi. Inflation notwithstanding, Tesco brags that some items are cheaper than a decade ago: two litres of milk now costs £1.25 versus £1.58 in 2010.Tesco’s wariness makes sense. But the odds are that inflation causes less pain to shops than shoppers. More

Brussels is widening the number of European goods with protected status, from food and drink — including the likes of parmesan cheese and Parma ham — to products such as Donegal tweed and Limoges porcelain. The new rules would mean only producers in specific regions using agreed processes could sell goods across the EU by the protected name to avoid cheap competition.The European Commission believes it would cover at least 800 products including Solingen cutlery from Germany and Delft pottery from the Netherlands.“Europe has an exceptional legacy of world-renown crafts and industrial products. It is time that these producers benefit from a new intellectual property right, like food and wine producers, that will increase trust and visibility for their products, guaranteeing authenticity and reputation,” Thierry Breton, internal market commissioner, said on Wednesday.“Today’s initiative will contribute to the creation of skilled jobs especially for SMEs and to the development of tourism also in the more rural or economically weak areas.”While protected food and drink products are recognised by the World Trade Organization craft products do not yet have global protection.However, 38 countries, including Mexico, Tunisia and those in the EU, have signed an agreement at the World Intellectual Property Organization to recognise protected products.EU officials say they will make the recognition of these products a condition of future trade deals and could update existing deals with the rules. About 16 EU countries had domestic schemes certifying protected products and these will now end, with regulation falling under the EU Intellectual Property Office in Spain.The designation, which will use the same logo as the geographical indicator for food, will apply to craft and industrial products such as natural stones, jewellery, textiles, lace, cutlery, glass and porcelain.Products must originate in a specific place, have a quality, reputation or other characteristic that is attributable to that place and have at least one production step taking place in the defined geographical area.The EU already protects more than 3,400 names, from agricultural products to fish, wines and spirits, under its quality schemes. Last month it launched a review of the system to make it easier to use and provide greater controls on online sales.Brussels goes to great lengths to defend food producers. Last year it declared victory in a long-running battle to force Egypt to accept feta cheese. Cairo had treated the crumbly Greek delicacy as a health threat because of its yeast content but changed its rules after heavy pressure from the commission. More

The writer is Director-General of the World Trade OrganizationSupply chain disruptions have been painful for companies and consumers alike. They have created headaches for governments and central banks everywhere and the war in Ukraine is adding to the strain. For small businesses, particularly those from developing economies, the consequences for growth, job creation, and poverty reduction could be catastrophic.With dramatic increases in freight rates diverting shipping capacity towards the most lucrative routes, smaller businesses risk finding themselves locked out of global supply chains. And despite growing economic uncertainty, the private sector, governments and international organisations are not working together to deliver the solutions needed to make trade flows more efficient and more resilient.We at the World Trade Organization recently convened more than 20 leading CEOs and leaders from ocean carriers, port operators, logistics companies and financial institutions to look at the supply chain crisis and possible responses.Delays and shortages still inhibiting global trade are primarily due to consumers diverting spending during the pandemic from services to durable goods. But it’s not just strong consumer demand and booming ecommerce that cause soaring freight costs. One clear message from business leaders was that structural weaknesses were pressuring supply chains even before the pandemic. These problems have only become worse, and we need to tackle them.Shipping carriers say congestion on land is a major driver for surging freight rates, with competition for containers and port logjams now locking small businesses and developing economies out of trading networks — and that this has been building for years. Carriers have dramatically expanded the number and size of vessels in their fleets but infrastructure has lagged, with many ports unable to accommodate new supersized vessels.Offloading and forwarding cargo from ports is crippled by acute labour shortages as seafarers, truck drivers, longshore and warehouse workers in some key hubs reject the low pay, unsociable hours and tough working conditions on offer. Businesses report paying to keep container terminals open overnight only for only a handful of truckers to show up. Autonomous trucks and unmanned cranes are already improving efficiency and working environments at some ports. Private-sector investments in further automation could help plug some labour gaps but most importantly labour conditions for workers must be improved too. Public and private investment is desperately needed, and port operators and shipping carriers want governments to fast-track planning approval processes. Freight forwarders say hinterland road and rail infrastructure — already straining in many countries from growth in domestic ecommerce — also needs investment, especially in developing and landlocked economies.In addition to physical infrastructure and labour shortages, digital infrastructure and connectivity require attention — and investment. Traders often don’t know about upstream or downstream disruptions until it is too late to reroute or reschedule cargoes. This has made the current supply crunch even harder to manage.Beyond such structural problems, process issues such as red tape and paper-based customs protocols add unnecessary delays and costs to trade transactions. Implementing the WTO’s Trade Facilitation Agreement and investing in streamlined systems will cut unneeded bureaucracy, accelerate customs clearance and reduce trading costs. Governments have shown they can simplify border processes quickly to enable rapid delivery of essential goods. Developing countries have most to gain.Last, but perhaps most significantly for the future, climate change poses a long-term threat to supply chains and global trading networks. Developing and small island states are most at risk, but no country or business will be unaffected. The long term decarbonisation of shipping and logistics will need major breakthroughs and may lead to higher transportation costs.To avoid a further rise in inflationary pressures, we need bold, co-ordinated action. Every actor must play their part to fix the structural weaknesses underlying supply chain disruptions, even as we work to bring supply and demand back into balance. Otherwise, the global economy will pay the price — consumers, small businesses, and vulnerable countries most of all. It’s in everyone’s interest to address these problems and there is strong goodwill: we must act now. More

Ask a cheerleader for the EU why its trade and regulatory policy is better than America’s and back comes a familiar answer. The US, it seems, cares only for power, leverage and mercantilist market access, whereas Europe is about values.Even before Russia’s invasion of Ukraine, this claim was open to well-founded charges of hypocrisy. But as Brussels expands its ambitions at a time when trade remains one of its strongest policy tools, it’s going to find the tension between principles and power growing ever bigger. The commitment to values means trade access to the EU’s huge and lucrative market has increasingly been loaded up with conditions on human rights, labour standards and the environment. Sometimes these concerns are evidently genuine, whether they will achieve their aims or not. The EU spent a long time in 2020, for example, agonising about exactly which trade preferences to withdraw from Cambodia because of human rights abuses by the state, weighing its uncertain political influence on the government against certain job losses in the garment export industry.Sometimes they look more like disguised protectionism. French beef farmers, not known for their principled environmental activism, took a strong interest in Amazonian deforestation when the EU’s draft trade deal with Mercosur threatened their domestic market share by admitting cheaper imports from Brazil.And increasingly, trade conditions are vulnerable to even darker motives. The EU, while cynically putting its restrictive migration policy under the rubric of “protecting our European way of life” (an outcry rightly forced it to change the label) has shown repeated disregard for international law and human rights, with illegal pushbacks of asylum seekers and other migrants across the EU’s external borders.It agreed a pretty sordid fix during the migration crisis of 2015-16 by paying Turkey to take refugees heading for Europe, and an even more morally reprehensible deal with Libya — this has involved thousands of migrants disappearing into “black prisons” where rape, torture and murder are common.Now trade policy has also been pressed into service to enforce immigration rules. As the FT revealed last week, the European Commission has proposed removing trade preferences from countries that do not accept asylum-seekers whose applications to remain in the EU have failed. The rationale is that their origin countries (Mali, Senegal and Guinea chief among them) need the best and the brightest to stay at home and boost growth there.This rationale is transparently self-serving and based on the outmoded concept of a “brain drain”: the smarter development economists are attempting to retire it as a pejorative and counterproductive idea. (The argument was also traditionally used by Brexiters opposing central and eastern European emigration to the UK — odd company for the Commission to be keeping.) Remittances, knowledge transfer and other benefits from emigrants help their origin countries far more than trapping productive workers in a dysfunctional economy. Some members of the European Parliament are trying to strip out those asylum seeker conditions. They deserve to succeed. This is not joined-up trade and migration policy. It’s the misuse of trade to pander to domestic anti-immigration sentiment. You can justify trying to get countries to take back failed asylum seekers: after all, it is the law. But you cannot dress up the coercive threat of withdrawing market access as an international development strategy and expect to be taken seriously.As and when the EU starts to fill out the geopolitical mantle it has ambitiously draped around its scrawny frame, it will encounter more such tensions. The most obvious is the Commission’s quixotic plan (joined by several member states) rapidly to admit a post-conflict Ukraine to the EU.The strategic logic is undeniable, establishing Ukraine within the EU’s orbital pull without the full military implications of joining Nato. But under normal circumstances, there’s no way Ukraine would get into the EU without years, perhaps decades, of painful reform. Despite already having very good trade access, Ukraine remains poor and deeply corrupt. Before the Russian invasion provided a strategic motive, you can just imagine the frothing in a rightwing tabloid like Germany’s Bild about admitting another subsidy-hungry eastern European country with shaky adherence to the rule of law.True, various member states are resisting Ukraine’s application. It’s not clear how things will turn out. But either way the EU will have to choose between strategic influence and consistency of values.Hypocrisy often accompanies power. The US spent the cold war proclaiming its adherence to democracy while installing and propping up governments headed by a global rogues’ gallery of thieves and mass murderers. Maybe the EU will continue to proclaim one thing and do another, to relabel cynical self-interest as “European values” as it has over migration and to prioritise security against Russia over democracy and good governance. Maybe, at least in the case of the latter, that’s the best thing to do. But it might help the clarity of debate if European leaders admitted the contradiction. And even if it does not, there’s no reason any of us should stop pointing out such two-facedness for what it [email protected] up for Trade Secrets, the FT’s newsletter on globalisation More

European equities fell on Wednesday, while US stock futures rose, as traders weighed the latest inflation data releases and prepared for the start of US earnings season.The regional Stoxx Europe 600 index edged down 0.3 per cent, while Germany’s Dax fell 0.7 per cent and France’s Cac dipped 0.4 per cent. London’s FTSE 100 edged up 0.1 per cent.Futures contracts tracking the US’s benchmark S&P 500 index and the Nasdaq 100 on Wednesday added 0.5 per cent and 0.6 per cent, respectively.These moves followed swings on Wall Street in the prior session. The S&P and tech-heavy Nasdaq Composite share gauges initially rose after a March inflation release showed that US consumer price growth increased 8.5 per cent on an annual basis, slightly above analysts’ expectations. However, so-called core inflation, which strips out volatile food and energy prices, came in lower than forecast.US stock markets subsequently ended the day lower, after oil prices surged by more than 6 per cent, reigniting inflation concerns. “The big news in the March [inflation] report was that core price pressures finally appear to be moderating,” said Andrew Hunter, senior US economist at Capital Economics, adding that goods supply shortages and congestion at ports were showing signs of easing.Energy prices, a key driver of inflation, were expected to ease over the rest of the year, he added. But he said the US Federal Reserve was unlikely to stray from its widely trailed plan to raise interest rates by 0.5 percentage points at its May meeting. “Having been slow to realise that the initial surge wasn’t transitory, Fed officials are now being a bit too pessimistic about how quickly inflation will drop back,” said Hunter. With US earnings season under way, JPMorgan on Wednesday reported a 42 per cent year-on-year drop in profit, while also setting aside nearly $1bn in loan-loss reserves amid rising inflation and the war in Ukraine.In government debt markets, the yield on the 10-year US Treasury note, a proxy for global borrowing costs, was broadly flat at 2.73 per cent, up from about 1.6 per cent at the start of the year. The yield on the two-year note, which closely tracks interest rate expectations, was also steady at 2.39 per cent.The yield on the 10-year German Bund, which underpins European borrowing costs, traded flat at 0.8 per cent, close to its highest level since 2015. Data on Wednesday showed that UK inflation rose to a fresh 30-year high last month, led by the rising cost of fuel. Consumer prices increased 7 per cent year on year in March, up from 6.2 per cent the month before. Economists polled by Reuters had expected prices to rise by 6.7 per cent. Martin Beck, chief economic adviser to the EY Item Club, predicted that prices would peak at 8.5 per cent in April before cooling later in the year as energy prices and supply chain bottlenecks ease. “After some high readings for inflation this year, the pace of price rises could head well below the Bank of England’s 2 per cent target in late 2023 and early 2024,” he said in a note.Oil prices extended their gains on Wednesday, with international benchmark Brent crude up 1.8 per cent to $106.50 a barrel. The US oil marker West Texas Intermediate added 1.9 per cent to $102.49 a barrel. In Asia, Hong Kong’s Hang Seng index added 0.3 per cent and China’s CSI 300 fell 1 per cent. Japan’s Topix increased by 1.4 per cent and South Korea’s Kospi gained 1.9 per cent. More

At first, I assumed that the senior investment banker I was meeting for lunch at his posh private members club in Mayfair was joking. “There are no chief executives in Germany,” the specialist in merger and acquisitions advisory quipped.I wondered if he was referring to the fact that the current crop of German CEOs tends to be more humble and less buccaneering than earlier generations of corporate leaders. Towering figures such as Volkswagen’s Martin Winterkorn, Deutsche Bank’s Anshu Jain and Daimler’s Jürgen Schrempp were often larger-than-life characters who defined the whole culture of their corporate empire, and not necessarily in a good way.But my lunch date really meant it. “I’m dead serious,” he said, “German CEOs are not real chief executives and that’s a real problem for the German corporate sector.” The banker then embarked on an extensive lament on the sorry state of German blue-chips, with many members of the Dax 40 embroiled in corporate crisis, and management being unable to adjust swiftly disruptive change.For instance: Germany’s auto industry has for years struggled with the evolution to electric cars, software maker SAP is fighting to fend off threats from more agile rivals, pharma and agri group Bayer is bogged down by its botched takeover of Monsanto, Deutsche Bank is battling to stay relevant as a global investment bank while being under threat by nimble fintechs, Thyssenkrupp has for years failed to put its steelmaking operations on a sustainable footing, and BASF is overly dependent on Russian gas supplies.While all these corporate crisis have different causes, they also have a common feature, the banker argued — a woeful management failure, caused by ossified governance structures that has taken companies hostage.Historically, German corporate leadership in postwar Germany has been a team effort. With the exception of the Winterkorns, Jains and Schrempps, CEOs have been less powerful than in the US or the UKThat was one of the big lessons learnt from the political, ethical and economic catastrophe of the Third Reich, which was defined by the opposite: a strict “Führer” principle in all areas of society, where subordinates were expected to execute orders from higher-ups.Now, under the country’s two-tier board system, German CEOs are not even consulted on the hiring decisions of fellow board members. The appointment and dismissal of executives is a key competency of the supervisory board, where half the seats are held by union representatives.Moreover, the executive board is a collective body: under German law, its members are jointly responsible for the company’s decisions. A German CEO cannot compel a fellow board member to do certain things — if the head of product has a fundamentally different view from the boss, and cannot be swayed by the power of the argument, there is little the CEO can do, apart from lobby the chair or threaten to resign. Because the chair has to balance the interests of investors and workers, it is not necessarily straightforward for the supervisory board to resolve the situation, and the consequence more often than not is gridlock.For decades, consensual decision-making and the “social partnership” between owners and workers has served German companies well. As workers and managers treat each other with mutual respect, acrimonious labour unrest with long walkouts have been rare. The country’s employers invest heavily in the education of young apprentices and are rewarded with a loyal and well-educated work force.Yet, in a world with ever-faster structural change, disruptive innovation and new global competitors, the built-in stability has become a burden for Germany’s corporate world, the banker argued. Disruption always creates losers, and under German corporate governance, managements have ample opportunity to fight change tooth and nail in an attempt to avoid painful adjustment for as long as possible. Executives in charge of divisions that are in structural decline can forge alliances with union representatives who are keen to block large-scale job cuts, and hence become an almost insurmountable roadblock to change.Addressing that issue will be a stretch, given that shifting a corporate governance system that has evolved over decades is anything but easy. The problem can be aired over a nice lunch, but finding ways to fix it will surely take much [email protected] More

A full EU embargo on Russian energy would trigger a major recession in Germany, sending output down 2.2 per cent next year and wiping out more than 400,000 jobs, according to the country’s top economic institutes.The new forecast released on Wednesday was more pessimistic than most earlier economic studies and could give cover for Chancellor Olaf Scholz’s government to push back against calls for an immediate ban on Russian oil and gas imports, on which Germany is heavily reliant.The EU last week agreed to ban coal imports from Russia from August. Some member states have called for the bloc to go further by banning oil and gas imports, but Berlin has resisted such a move, arguing that it would be too economically damaging for German businesses and consumers. Five of Germany’s top economic research institutes predicted that if all energy supplies from Russia were cut off instantly, growth in Europe’s largest economy would slow sharply from 2.9 per cent last year to 1.9 per cent this year, before shrinking 2.2 per cent in 2023.“If gas supplies were to be cut off, the German economy would undergo a sharp recession,” said Stefan Kooths, vice-president of the Kiel Institute for the World Economy. The forecast contraction would be less severe than the 4.6 per cent drop in gross domestic product caused by the fallout from the coronavirus pandemic in 2020. But the economists said the cumulative impact over two years would be greater.“You can also calculate it like this: Germany would forfeit €220bn in economic output in 2022 and 2023, which is equivalent to 6.5 per cent of GDP,” added Kooths.Marcel Fratzscher, head of the German Institute for Economic Research, said an immediate Russian energy embargo would “have a much longer lasting impact and cause more collateral damage to the economy than the pandemic, when people were rehired quite quickly”.“The major concern is that this would permanently erode the competitiveness of German industry, particularly in sectors like chemicals, but also steelmaking and fertiliser production,” Fratzscher told the Financial Times. The institutes forecast that an immediate end to Russian energy imports would drive up the number of unemployed people in Germany from 2.37mn this year to 2.79mn next year. Inflation would hit a full-year record of 7.3 per cent in 2022, before dropping to 5 per cent next year, they estimated.

Pressure is mounting on the government after three German backbench MPs who chair the parliamentary committees on foreign affairs, defence and Europe called for an embargo on Russian oil as soon as possible after visiting Ukraine on Tuesday.However, a survey by the Allensbach Institute published on Wednesday found that 30 per cent of Germans expressed support for an immediate ban on all Russian energy imports and only 24 per cent agreed with the statement: “We can freeze for freedom.”Half of German gas and thermal coal imports last year came from Russia, which also supplies a third of the country’s oil imports. Berlin plans to diversify away from Russian oil by the end of this year and from its gas in two years.Even if Russian oil and gas imports continue to flow, the institutes said Russia’s invasion of Ukraine, supply chain bottlenecks caused by the pandemic and soaring inflation would weigh on output. They cut their baseline forecast for German growth this year to 2.7 per cent — down from their October forecast of 4.8 per cent.The new projections were submitted to the government by the German Institute for Eco­nomic Research, the Ifo Institute, the Kiel Institute for the World Economy, the Halle Institute for Economic Research and RWI.Earlier studies, including those published by the German National Academy of Sciences Leopoldina and Econtribute, forecast that cutting off Russian energy supplies would be “manageable” for the economy and would knock 0.5 per cent to 3 per cent off Germany’s GDP. More

While some factory owners try to tough it out through “closed loop” management that keeps workers isolated inside, some said that is becoming harder to sustain given the extent of local COVID-19 curbs aimed at heading off the Omicron variant, complicating efforts to procure materials or ship products.Foxconn Interconnect Technology, a unit of Taiwan-based Foxconn that makes data transmission equipment and connectors, has kept a plant open in Kunshan, which borders Shanghai, in a closed loop but is only able to run at 60% of capacity, a person familiar with the matter said. Foxconn did not respond to a request for comment.On Wednesday, more than 30 Taiwan companies, many making electronics parts, said that COVID-19 measures in eastern China had led them to suspend production until at least next week.A day earlier, German auto parts giant Bosch said it suspended output at sites in Shanghai and Changchun, while putting two other plants under “closed-loop” operation. Also on Tuesday, Taiwan’s Pegatron Corp, which assembles Apple Inc (NASDAQ:AAPL) iPhones, halted operations in Shanghai and Kunshan.Sven Agten, Asia Pacific CEO of Rheinzink, a German maker of zinc construction materials, said logistical challenges make a closed-loop unworkable at his Shanghai warehouse and manufacturing facilities, and expects to have zero sales during April and possibly May.”We need somebody in the warehouse and the manufacturing facility to do the work, and we need a truck and a driver. These are the two key components, and both are impossible,” he told Reuters. China’s zero-tolerance approach to COVID-19, despite low case numbers and even as the rest of the world tries to live with the coronavirus, is proving unwieldy given the extreme infectiousness of the less-deadly Omicron variant. The zeal to cut-off virus transmission chains means localised curbs extend far beyond virus hotspots Shanghai and Jilin province in the northeast. An April 7 study by Gavekal Dragonomics found that 87 of China’s 100 largest cities by GDP have imposed some form of quarantine curbs. On Saturday, electric vehicle maker Nio (NYSE:NIO) said it had to suspend production at its Hefei factory – even though there were no local-level curbs – because suppliers from other areas had stopped work.TRUCKERS’ BLUESTruck transport has been especially hard hit, causing long queues and delays and driving up prices. The normal rate to book a truck from Shandong province to Shanghai had more than quadrupled from 7,000 yuan ($1,100) to 30,000 yuan, said an executive at a trucking firm who declined to be identified.”It has become extremely difficult for our company to find available trucks near Shanghai in the past two weeks as many truck drivers were either stuck on the highways or locked down in the cities,” he said, adding that he was subcontracting orders – at a loss – to keep goods moving.The city of Xuzhou, a logistics hub, on April 8 began requiring truck drivers to produce negative PCR test results taken within 48 hours to take more tests upon arrival. They cannot exit their trucks.Some drivers have become stuck on highways after visiting areas like Shanghai, which meant their smartphone health codes were automatically invalidated. Last week, state media reported on a truck driver who lived in his truck for seven days after traveling to Shanghai. CLOGGED PORTS, GLOBAL IMPACTForeign business groups have been especially vocal about their concerns, with the European Chamber of Commerce in China sending a letter to the government last week noting that about half of German firms in the country were experiencing supply chain problems.China has tried to cushion the impact of the curbs by keeping ports and aiports running and encouraging closed-loop manufacturing.But the number of container vessels waiting off Shanghai – the world’s busiest container port – and nearby Zhoushan has more than doubled since the start of April to 118, nearly three times the number a year ago, Refinitiv data showed.Danish shipper Maersk on Monday recommended to clients that they divert from congested Shanghai port to other Chinese destinations. Economists have cut growth forecasts for China on the back of such disruptions, with Beijing’s official growth target of around 5.5% this year seen as increasingly difficult to reach. ING last week downgraded its GDP forecast for China to 4.6% from 4.8% previously.On Wednesday its chief economist for China, Iris Pang, warned that China’s COVID crisis could impact growth rates around the world.”A problem in China could be a problem for the global economy,” she said. Chen Xin, who runs a family-owned embroidery and garment painting factory in Guangdong province, said that since late March he has been unable able to ship roughly 70-80% of orders because customers can’t receive them.”The current situation is, the impact of the policy is greater than the epidemic,” he said. ($1 = 6.3651 Chinese yuan renminbi) More