Economy

In the last decade, the geopolitical club known as the Group of Twenty (G20) has seemed like an idea that is worthy — but dull. During the 2008 financial crisis, the doughty group (which represents 80 per cent of the global economy) briefly found fame and relevance by forging a collective response to quell the crisis. Since then, it has championed sensible reforms in areas such as financial regulation.But the club is so big and consensus-driven that it has become unwieldy. And its meetings — and communiques — tend to be achingly bland, particularly when the finance ministers get involved. This is no longer the case though. Later this month, on April 20, G20 finance ministers are supposed to meet in Washington. However a spicy drama is currently erupting of the type that might more normally be found in a high school canteen. Most notably, on Wednesday Janet Yellen, the US Treasury secretary, told Congress that “we will not be participating in a number of [G20] meetings if the Russians are there”. This is in protest at Moscow’s invasion of Ukraine and means that she might boycott the April 20 event. That is deeply “awkward” — as a teen might say — for Indonesia, which currently holds the rotating presidency, and thus decides who to invite or disinvite. There are no formal founding rules for the G20, which was created in 1999. But it has hitherto been assumed that a member can only be expelled if everybody else gangs up against them. This, after all, is what has previously happened with the more exclusive Group of Seven club. In 1998 the G7 brought Russia into their ranks, creating the G8; but in 2014 the seven founding members teamed up to exclude it, following the Russian invasion of Crimea. But the problem for Indonesia is that some G20 members, including China, do not want to “ghost” Russia right now. And Vladimir Putin, Russian president, apparently wants to attend a G20 summit later this year. To defuse the row, the Indonesian government might end up having to scrap the joint communique on April 20 altogether. But this leaves the G20 looking impotent. “Compared with its vital role in the global financial crisis, the G20 and its various offshoots can hardly function as the key club for global co-operation given cyber interference, war, possible crimes against humanity, and general superpower struggle,” says Paul Tucker, the former British central banker, who has a forthcoming book on these issues. “That doesn’t rule out its being a useful forum . . . but it won’t be easy because it requires some degree of candour, trust and reliability,” he adds. More bluntly as one former finance minister notes: “The G20 could die.” Should investors care? Yes, for both symbolic and practical reasons. The body was created to forge 21st-century collaboration — and globalisation — when it became clear that the 20th-century Bretton Woods institutions were ill-suited for a post-cold war world. If the G20 now dies that would underscore the reversal of globalisation, and show we face what Ian Bremmer, the political analyst, calls a G-Zero world — one in which nobody is in charge. That is alarming.More tangibly, the G20’s work is badly needed right now. As Yellen herself noted this week, “spillovers from the crisis are heightening economic vulnerabilities in many countries that are already facing higher debt burdens and limited policy options as they recover from Covid-19”. US rate hikes will make those “vulnerabilities” far worse. Consider, by way of example, the issue of sovereign debt restructuring. This is the type of dull-but-important topic the G20 was created to address. Two months ago, it seemed that 2022 could be the year that the group finally started to create a more workable system for restructuring poor countries’ debts. This is urgently needed, since (as I noted recently) the Paris Club system for restructuring debt no longer works well because China sits outside it — at the same time that it has extended two-thirds of low-income country loans. Worse still, the risk of disorderly defaults is rising fast. The crisis now erupting in Sri Lanka (in which China accounts for a big chunk of the country’s loans) is a case in point.The Indonesian government previously seemed in a good position to push for reform, not least because of its ties to China, and lobbying had started for joint commitments to debt transparency. But this has now been derailed. At the very same moment that the G20’s work in preventing disorderly defaults is needed more than ever, it could all fall apart. In pointing this out, I am not arguing that the west is wrong to exclude Russia from the G20; every possible sanction is needed to halt the onslaught on Ukraine. But the key issue is this: if the group now becomes impotent, Washington urgently needs to find other ways to co-operate with emerging market players. Action around the agenda on sovereign debt restructuring would be a good place to start. Moreover, if this type of collaborative initiative does not emerge soon, investors should pay attention. Pouting, ghosting and gossiping are deadly tactics for grown-up governments. Particularly when the global economy is in disarray — and countries like Sri Lanka are suffering from the fallout. [email protected] More

European Central Bank policymakers were split last month over how to tackle soaring inflation with some wanting interest rates to rise this summer, setting up a more heated debate when they meet again next week.A number of ECB rate-setters pushed for “a firm end date” on its net bond purchases to prepare the ground for raising interest rates in the third quarter, warning that otherwise the bank risked “falling behind the curve” on inflation, according to the minutes of the governing council’s March meeting. But others argued for a “wait-and-see” stance because of uncertainty over the economic impact on the eurozone of Russia’s invasion of Ukraine. They feared the war could “result in a technical recession”, which is defined as two consecutive quarters of negative growth rates.The ECB decided on a “balanced compromise” to scale back its bond purchases more quickly and to end them in the third quarter unless a sharp downturn occurs, while deferring the decision on potentially raising interest rates.Analysts said the minutes showed ECB policymakers were shifting in a more “hawkish” direction in favour of more quickly removing its monetary stimulus. “The hawks have the upper hand,” said Frederik Ducrozet, a strategist at Pictet Wealth Management.Since last month’s meeting, annual inflation has hit a new eurozone record of 7.5 per cent. The figure for March is likely to strengthen calls from the hawks for the central bank to bring an end to nearly eight years of bond purchases and negative interest rates.Investors are pricing in 0.6 percentage points of rate rises by the ECB before the end of this year, which would take its main deposit rate back into positive territory for the first time since 2014, up from its current all-time low of minus 0.5 per cent.Several ECB policymakers have said they expect the central bank to raise rates this year and some, such as Klaas Knot of the Netherlands and Pierre Wunsch of Belgium, have said it could do so twice this year.Policymakers have been sparring ahead of their meeting next week. Joachim Nagel, president of Germany’s central bank, said soaring inflation “worries us all” and predicted “savers may soon be able to look forward to higher interest rates again”.But ECB executive board member Fabio Panetta said most eurozone price pressures came from energy markets and other factors outside the central bank’s control, so it would “have to massively suppress domestic demand to bring down inflation”. Tightening monetary policy too soon would “would mean considerably lowering real activity and employment, knocking down wages and income,” Panetta warned, reflecting the views of more dovish council members.While some policymakers questioned the reliability of ECB forecasts showing that inflation would fall back below 2 per cent in 2024 as “puzzling”, others said that “in the new environment resulting from the war, bold steps were even less justified and could further dent confidence,” according to the minutes.Christine Lagarde, the ECB president, tweeted on Thursday that she had tested positive for Covid-19, adding she had “reasonably mild” symptoms and would work from home in Frankfurt until fully recovered. If Lagarde is still testing positive next week, she is expected to join the governing council meeting and press conference via video link. More

Jobless claims totaled 166,000 last week, the lowest since late 1968.
The decline of 5,000 from a week ago reflected revisions in the way the Labor Department calculates the initial filings numbers.

The labor market tightened further last week, with initial jobless claims falling to their lowest level in more than 53 years, the Labor Department reported Thursday.
Initial filings for unemployment dropped to 166,000, well below the Dow Jones estimate of 200,000 and 5,000 under the previous week’s total, which was revised sharply lower. The department noted that it revised claims from 2017 to 2021 and changed the seasonal factors it is using to calculate the numbers.

Last week’s total was the lowest since November 1968.
The numbers nevertheless reflect a jobs market that is subject to a severe worker shortage. There are about 5 million more employment openings than there are available workers, a situation that has driven up wages and contributed to spiraling inflation.
Federal Reserve officials are raising interest rates to try to constrict outsized demand that comes amid ongoing struggles in supply chains.
Despite the economy’s various obstacles, hiring has remained brisk, with nonfarm payrolls climbing by nearly 1.7 million in the first quarter of 2022.
Continuing claims, however, rose, totaling 1.52 million, according to data that runs a week behind the headline number.

The total of those receiving benefits under all programs declined to 1.72 million. The number was 18.4 million a year ago, when the government was providing enhanced support to workers displaced by Covid. The pandemic’s renewed spread over the winter showed little impact on the overall jobs numbers.
Correction: Jobless claims totaled 166,000 for the week ended April 2. An earlier version misstated the number.

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Nearly half of UK businesses expect the Russian invasion of Ukraine to result in lower sales and a growing proportion say rising energy and input prices are prompting them to curb their investment plans, according to official data published on Thursday.Of the nearly 3,000 companies interviewed for a Bank of England survey in March, 48 per cent said they expected the Russia-Ukraine war to hinder their year-ahead performance, with an average impact of 3 per cent lower sales.More than one in four businesses are also worried about rising input costs and a similar proportion is concerned about higher energy prices, sharply up from February, March data published by the Office for National Statistics showed on Thursday.Jack Sirett, head of dealing at the global financial services company Ebury, said that businesses were enduring “a perfect storm” as a series of cost increases kicked in, including a rise in energy bills and national insurance contributions. He added that “simply keeping the lights on will take a larger toll than usual on all businesses”.The government announced on Thursday an energy security strategy to tackle soaring prices and reduce reliance on Russian oil and gas.But Stephen Phipson, chief executive of Make UK, the manufacturers’ organisation, said: “These projects cannot be delivered quickly and at a time of spiralling energy costs and a myriad of other financial burdens on business, industry desperately needs urgent action on the part of government to reduce energy prices in the short term.”In the three months to March, businesses forecast that average inflation for the year ahead would rise to 5 per cent, up from 4.6 per cent in the previous three months and the highest since records began in 2017, according to the monthly decision maker panel survey run by the BoE with academics from Stanford University and the University of Nottingham.Businesses also reported widespread supply chain disruption, absences due to sickness and trading difficulties.Over a quarter of businesses experienced global supply chain disruption in the past month, a proportion that rose to 52 per cent among manufacturers, ONS data showed. More than one in five also reported lower than normal levels of exports, with additional paperwork, higher transport costs and new customs duties among the top challenges faced by exporters. Another one in six businesses also said they were paying sick leave for employees with Covid-19. Struggling with high inflation, supply chain disruption and worsening sales expectations, businesses have cut their investment intentions, which could limit future economic and living standards growth. In March, businesses expected investment to be 5.3 per cent lower than normal levels in the second quarter, sharply down from a minus 1.3 per cent forecast only the previous month, the BoE data showed.Separate official statistics showed that business investment failed to grow since 2016 and was still 9 per cent below pre-pandemic levels in the last quarter of 2021. More

The author is economics professor at Kozminski University in Warsaw and a former finance minister of PolandRussia’s invasion of Ukraine takes its toll. Most tragic are the terrible loss of life and human suffering, but the material destruction too is enormous. Before the war, the IMF forecast an increase this year in Ukraine’s gross domestic product of as much as 3.6 per cent. Now the Economist Intelligence Unit assumes that it will drop in real terms by an alarming 46.5 per cent.According to Ukrainian prime minister Denys Shmyhal, taking into account the damage already done and the expected fall in production in coming years, the losses will exceed $1tn, of which the destruction of infrastructure amounts to $120bn.In the current phase of the crisis, humanitarian and military aid is most urgent. There will come a time, however, when the shots will cease. The day after, not only immediate help but long-term support will be essential. Understandably, Ukraine aspires to join the EU. It should be admitted over time, but not by any extraordinary procedure or express path. Ukraine must meet the conditions of membership, as is expected of other countries that are candidates for entry. In the case of Ukraine, the de-oligarchisation of the economy is of fundamental importance. For years, corrupt economic and political structures have held back the country’s development. In purchasing power parity, Ukraine’s per capita GDP in 2021 was only 74 per cent of the 1989 level.To support Ukraine’s reconstruction, the EU should create a special long-term financial vehicle — a European Fund for the Reconstruction of Ukraine. Successive multibillion-euro tranches should finance infrastructure investments and human capital development. Launching such a fund, to which the European Commission should invite the UK, Norway and Switzerland, will not be easy. It will prove far more expensive than supplying weapons to fight the Russian aggressor.The EU plans to spend hundreds of billions of euros in financing the bloc’s economic recovery from the pandemic. No less costly will be the energy transformation and transition to renewable energy sources. The EU must not turn away from the arrangements made at last year’s COP26 summit to combat global warming. Even in such an extraordinary situation as the war, it must not be forgotten that climate change is the greatest challenge facing humanity.The second instrument of aid for Ukraine should be deep cuts in its foreign debt. I know from experience how much this matters. In 1994, as Poland’s finance minister, I signed an agreement with the London Club to halve the debt to private banks. This amounted to $6.3bn, which was then 5.7 per cent of our GDP. It was a boon to the public finances but, more crucially, allowed access to world capital markets and opened Poland to western investments.Ukraine’s public debt at the end of 2021 amounted to about $94bn, or 61.7 per cent of GDP. Of this sum, foreign debt is about $57bn. The west can afford a far-reaching reduction in these obligations, or even their complete cancellation. Ukraine’s partners should declare their intention to help, linking stage-by-stage debt reduction to progress in de-oligarchisation and the building of a social market economy in place of corrupt state capitalism.The third form of assistance to Ukraine requires Chinese involvement. A decade ago, Ukraine was not asked to join the so-called “16+1” mechanism, the eastern European part of China’s Belt and Road Initiative. Now, as soon as a ceasefire is announced, President Xi Jinping should call President Volodymyr Zelensky, invite Ukraine to join the group and declare his readiness to help rebuild the shattered economy.Such an act would not be anti-Russian, anti-EU or as a sign of Chinese expansionism, but an expression of China’s willingness to join the process of overcoming the Ukrainian crisis. It could also revive the somewhat rickety course of the BRI in our part of the world. China has significant overcapacity in the construction industry and is looking for opportunities to use it abroad. It has extensive experience in infrastructure investments, including roads, bridges, tunnels, ports, airports, railway lines, power grids and internet networks. Chinese companies have shown they can adapt to the most diverse conditions abroad, from south Asia, the Middle East and Africa to some European countries. Taken together, a European fund, debt cancellation and Chinese assistance would give a tremendous boost to Ukraine’s recovery from the war’s destruction. As soon as political conditions permit, Ukraine must be helped economically, because it cannot cope on its own. More

The economic crisis in Sri Lanka is deepening. The rupee has plunged to record lows against the dollar on the back of blackouts, food shortages and sky-high prices. The country may have as little as $500mn left in foreign reserves though a $1bn bond repayment is due in a few months. With the IMF ready to intervene, there is hope that the situation may stabilise. But fears are growing that Sri Lanka could be the first in a series of emerging markets to descend into economic turmoil.The war in Ukraine represents another shock which, on the back of the pandemic, could be enough to send multiple countries into debt distress. The scope of the problem is likely to be global, so solutions need to be of a similar size and scope. Unfortunately, garnering enough international political will to fix holes in the world’s framework for sovereign debt relief looks to be a Herculean task.Russia’s war in Ukraine leaves developing countries facing a twofold shock. Spiralling oil and grain prices have put importing economies under pressure, with countries such as Egypt facing the prospect of drastically lowering their foreign currency reserves in order to pay for them. On top of this comes the prospect of monetary tightening in the developed world.In 2013, the merest hint from the US Federal Reserve that it would scale back quantitative easing — the so-called taper tantrum — was enough to move money out of emerging markets. What happens in the event of a significant unwinding of the Fed’s balance sheet remains to be seen. The prospects, however, are not good: rates will rise, and some developing economies could find that their debt burdens become unsustainable.The path from there could be grim. Spending cuts are likely to be made in an effort to meet bond repayments as they become due. This kind of fiscal retrenchment tends to exacerbate poverty, cut off growth paths and cause unpredictable social upheaval.This course of events is not inevitable, though. To start with, the IMF should dust-off its pandemic playbook and offer rapid loans to vulnerable economies. This could be accompanied by less stringent conditions to match the urgency of the situation, ensuring that countries spend what is required to meet the challenges of the moment.In the medium term, gaps in the world’s approach to sovereign debt relief must be fixed. It is no longer sufficient to concentrate on the old Paris and London clubs of lenders — long gone are the days of emerging market creditors being concentrated in this group. China now represents the biggest bilateral lender to developing countries by far and bonds have also been sold to a range of private investors. According to the World Bank, at the end of 2020, low and middle income countries owed five times as much to commercial creditors as they did to bilateral ones.These lenders will need to co-operate if there is to be any hope of significant, proactive debt relief to emerging markets. The common framework agreed by the G20 in November 2020 offers a potential vehicle, but the will to make use of it is lacking. Creditors still fear that their agreement to offer concessions will just become a covert means of redistribution to other lenders unwilling to play ball.At a time of increasing division, and with priorities lying elsewhere, hope for rectifying these issues with the world’s sovereign debt framework may fade. It would be a great shame if this were so. Economic turmoil in emerging markets does not need to result in serious crises. It is clear what needs to be done. The task now is to find the necessary political will to do it. More

Right now, the dollar is the world’s most popular reserve currency by some margin. It plays a vital role in facilitating world trade and global finance, enabling the US to use it as a mightily effective weapon against those who stand against the aims of its foreign policy. Yet some think the weaponisation of the dollar against Russia will hasten the dollar’s demise. Countries at odds with Washington will start switching their war chests of reserves into other currencies, they argue. Add this to the long-term trend of America’s declining share of global output and trade and the dollar’s future would seem dark. Yet, shifting the composition of your reserves is easier said than done. While the dollar’s appeal has waned, the switch to other currencies has only been slight — as the IMF’s latest Cofer figures show: History offers some clues on how things might shake out. As a note published by Goldman Sachs’ Cristina Tessari and Zach Pandl last week points out, a nation’s reserve currency status often lingers longer than other facets of its global dominance. The Goldman note looks to the example of the UK, from whom the US inherited its reserve currency crown. Here’s the back-story: There were two major reasons for the predominance of the pound as an international currency in the latter part of the 19th century. First, there was the overwhelming predominance of the United Kingdom in world trade. The UK absorbed more than 30% of the exports of the rest of the world in 1860 and 20% in 1890. Moreover, between 1860 and 1914 probably about 60% of world trade was invoiced and settled in sterling. Although the UK ran a deficit on merchandise trade before first world war, net income from shipping, insurance, interest, and dividends were more than sufficient to produce a substantial current account surplus. Intimately connected with these trading activities, there was also a large export of British capital to the rest of the world. A continuous net export of capital between 1848 and 1913 brought up UK’s total net external assets to the amount of nearly £4,000 million by 1913, which represented 166% of nominal GDP. Sterling was not only used when invoicing, financing, and settling trade-related transactions, but also as a buffer against future needs, ie, as a reserve. In 1899 the share of pound in known foreign exchange holdings of official institutions was more than twice the total of the next nearest competitors, the franc and the mark, and much greater than the dollar.Sounds familiar to the dollar’s role in global finance today right? So what comes next? Well a drop in the UK’s economic influence did not immediately lead people to ditch sterling. While Britain’s share of world trade began to decline during the 1920s, the pound remained the reserve currency of choice up until the second half of the 1950s, when it was finally overtaken by the dollar.

Goldman Sachs argues that the dollar today faces many of the same challenges as the pound in the early 20th century. Those include a small share of global trade volumes relative to the currency’s dominance, a deteriorating net foreign asset position, and adverse geopolitical trends. At the same time, there are important differences — among them less severe domestic economic conditions than those the UK faced in the 1950s. Which leads to this conclusion: If foreign investors were to become more reluctant to hold US liabilities — Eg because of structural changes in world commodity trade — the result could be dollar depreciation and/or higher real interest rates in order to prevent or slow dollar depreciation. Alternatively, US policymakers could take other steps to stabilise net foreign liabilities, including tightening fiscal policy. The bottom line is that whether the dollar retains its dominant reserve currency status depends, first and foremost, on US’s own policies. Policies that allow unsustainable current account deficits to persist, lead to the accumulation of large external debts, and/or result in high US inflation, could contribute to substitution into other reserve currencies. Interesting indeed. However, we think there are other important differences between then and now that the note neglects to mention. Chiefly the question of dollar substitutes. Right now the biggest threat to Washington’s dominance, both militarily and economically, is Beijing. Yet there remain a dearth of yuan-denominated assets that investors can purchase. This isn’t necessarily about China needing to turn its current account surplus into deficit and create the equivalent of the US Treasury market. As the Goldman note rightly points out, the UK often ran current account surpluses during the period when the pound was the most popular global currency.

Yet it will need to open up access to its capital markets far more than it has done so far. For all the talk of ending the dollar’s hegemony, Beijing is only letting the renminbi become more convertible on its own terms. Which happen to be rather slower than international investors would like. Secondly, money is as much a legal construct as an economic one. The dollar’s dominance works because people largely trust things like New York law, and institutions like the Federal Reserve (no sniggering at the back please). And there is relatively little difference between them and the legal framework of England and Wales (and the workings of the Bank of England). Certainly when one sets them against the decision-making process in Beijing. However, that does not mean that the dollar’s dominance is entirely unassailable. We imagine most people reading this would rather have the US as the world’s financial policeman than China. But the reality is that many in positions of power in places like India, or Brazil, may not share that view. The greenback’s reserve status reflects many things — including how willing other countries are to align themselves with US foreign policy. And how powerful those countries that do share Washington’s views are on the global stage. Which leads us to conclude that rather than trying to work out whether the dollar will be toppled, a more probable course may be a move to a multipolar world of two economic systems. One where the greenback remains top dog, another where it is supplanted by the renminbi. More

The rouble’s recovery has been wrongly used as evidence of Russia shrugging off the west’s sanctions. But there are signs that the country’s financial sector is finding its feet after the initial barrage from the sanctions.The Institute of International Finance’s economists Elina Ribakova and Benjamin Hilgenstock rightly point out that the rouble’s bounce should not really surprise anyone. Imports have been crushed, interest rates have been doubled, harsh capital controls have been put in place, and Russia’s oil and gas sales means it continues to accumulate foreign earnings. Those revenues are absolutely monstrous. The IIF estimates that Russia made more than $1b a day in March, which — absent further action on oil and gas sales — will help make up for chunks of its central bank reserves being frozen by the west:While the CBR’s reserve operations have been limited due to sanctions, historically-high current account surpluses —$39bn in January-February, likely an additional $30-40bn in March, and possibly above $250bn for the full year (absent an energy embargo) — Russia should be able to regain “lost” reserves in a relatively short period of time. The domestic banking sector also seems to have stabilised, after bank runs in the initial days of the war. The need for central bank liquidity has faded sharply and the commercial banking sector as a whole could soon end up having surplus deposits with the CBR, the IIF notes.

The IIF therefore concludes that if the west wants to maintain the pressure on Russia, let alone ramp it up, then sanctions will have to be continually calibrated and expanded, such as by cutting more Russian banks off from Swift. The next big step, however, would be an embargo on oil and gas exports, which the IIF seems to think might be coming. FT Alphaville’s emphasis below:Western sanctions have largely focused on the financial sector so far, even if some sanctions have de facto become trade sanctions, partially due to self-sanctioning by international companies. However, as Russia’s economy and financial sector adapt to a new equilibrium of capital controls, managed prices, and economic autarky, it is not surprising that some of the domestic markets stabilise. Furthermore, due to the policy response and likely large current account surplus, sanctions have become a moving target and will require adjustments over time to remain effective. We believe that the likely next steps will be a further tightening of financial sector sanctions, potentially the disconnecting of additional Russian institutions from SWIFT. Finally, while resistance to an energy embargo remains substantial in many European countries, including but not limited to Germany, it is increasingly unlikely that this position can be upheld for much longer should more evidence of Russian war crimes emerge. More