Economy

The writer is chief economist of G+ EconomicsCentral banks have made heroic efforts to achieve a rhetoric of normality in bringing rates up from emergency lows. But this comes in a world still gripped by the Covid pandemic, while coping with a war in Europe and dislocated commodity markets.This is a Herculean task, beyond the capacity of most central bankers, to avoid economic disaster and enable a soft landing into a new normality.Much more is asked of central banks today than in the early days of Covid. Back in 2020, their policies could focus on the objective — without any reliable forecasts — of achieving a speedy bounce in global nominal gross domestic product to a self-sustained, full-employment recovery.But now, after the global vaccination programmes and waves of new virus mutations over the past year, the banks face the unenviable task of feeling their way towards a “new different” for economies. Bankers wish to avoid stifling a self-sustained recovery without allowing accelerating inflation to take hold.A margin of error was inevitable. So great was the early Covid economic shock — and the costs to society and public finances — that central banks felt compelled to calibrate policy to restore growth potential.This remained the aim, even as the social effects of government Covid mitigation and supply-chain disruptions wreaked havoc on consumption and investment across sectors and geographies. Inflation volatility followed, matching the stop-go growth shocks.Lack of visibility about the duration of the pandemic — or what typical labour markets and trade links would look like — meant policy needed to lean toward risk mitigation.After all, higher inflation can be an interim policy choice when central banks have plenty of room to respond by raising rates. Also, in a young recovery, higher prices can act as an economic rebalancing mechanism to incentivise expansion of supply capacity and broaden the growth base from consumption to investment. While hardly a risk-free strategy, interest rates are a tool that’s available.Secular stagnation, however, does not offer a policy choice. The depression-size pandemic shock was preceded by a decade of weak investment and productivity growth, following the global financial crisis and the last great recession. Moreover, policy interest rates already sit at zero, after a decade of quantitative easing, making it hard to provide the necessary stimulus.The magnitude of the risks that central banks face as a result of Russia’s war on Ukraine, however, is of a very different order, both for long-term inflation and growth potential.The west’s unprecedented sanctions against Russia have taken the largest exporter of energy, plus key industrial and agricultural raw materials, off the financial grid of the world.Boycotts by western consumers, businesses and governments mean banks have stopped financing Russian trade, while ports refuse to unload cargoes.As physical disruptions appear, coping with higher-for-longer energy costs will become as important to managing economies’ health as managing supply. In effect, these cost surges amplify the stagflationary shock of Covid supply-chain distortions.Surging global supply costs mean central banks now have even less power to bring down decade-high consumer price readings. They also cannot easily provide stimulus to businesses further down supply chains that are forced to ration production. Finally, it is harder to restore the spending power of consumers enduring a speedy erosion of their pandemic savings and living standards.Rerouting Russian exports, and global commodities trade, will dictate new, longer supply routes, and new, higher global trade prices — in a word, deglobalisation.That means a lasting shift towards a higher equilibrium for raw material prices, and a structural step change in what businesses and households spend on energy, metals and food.With oil prices already far above all major central banks’ targets for price stability, the only way to lower inflation is via demand destruction.But this means an impossible trade-off, at a time when government budgets face surging financing costs and households struggle with their own finances.With the global financial system becoming ever more fragile in a high inflation, high debt and geopolitically insecure world, managing in the “new different” while avoiding extreme economic volatility will be policymakers’ greatest challenge yet. More

It seems a long time ago that world markets were riding high on a wall of new money created by central banks, sustained by enthusiasm for the efficiencies and advantages of global trade.Many bulls in markets reasoned that we were in a golden era, where countries and companies would specialise at what they were best at, and countries would remove more of the remaining barriers to allow free and fair trade between the five continents.New fleets of huge container ships, new deep water ports and large-scale plants sprang up to make the global trade vision more of a reality. China became the factory of the world while the US was the champion of the internet, data and social media.Now everything seems to have changed. Donald Trump, the former US president, was the first to mount a serious challenge by pointing out that China did not play by the rules when it came to respecting intellectual property and granting fair access to its own market. He raised doubts by stressing the need for the advanced democracies to keep sufficient control of the essentials for survival and for defence. Then the Covid pandemic ripped apart supply chains and closed factories that people relied on for just-in-time deliveries; airliners were parked given the restrictions on travel.This year, Russia’s unprovoked invasion of Ukraine has led democracies to reappraise their dependence on Russian oil and gas as they worry about their purchases financing the war. President Joe Biden now leads demands for moral and political issues to shape the pattern of trade.For some time I have been examining the consequences of the pursuit of greater national and regional economic self reliance. The US has “Made in America”, the EU is auditing its digital and resource needs, and China has long followed an economic model where it secures many of its essential supplies from home production or friendly sources. Overall world output and efficiency will drop compared with a pure free trade model, but there will be new winners as some countries and regions succeed in building new capabilities to replace imports.

This major shift in strategic aims underpins the world outlook as markets seek to adjust to three major sets of changes. The digitalisation movement races on, accelerated by lockdowns. Today, more countries wish to regulate the leading tech companies and ensure they have sufficient access to the winning technologies of the digital revolution.There is also a rush into providing more microprocessor production capacity in a world short of electronic chips. The green revolution seeks to replace hydrocarbons as a prime source of energy against a background of countries wishing to remove Russia from their oil and gas purchases. The environmental, social and governance (ESG) investment movement wishes to reward companies which behave well, while some leading countries are now behaving badly, posing new moral and investment dilemmas for portfolio managers.Russia warns investors that there are risks in ignoring bad governance and a disregard for the rules of international conduct at the country level, as well as at the company share level in a portfolio. Maybe ESG should apply to states as well as businesses. Russia always looked cheap and was likely to make more money out of rising oil prices as the world recovery got under way, but it was easy to say no to such an investment given the obvious shortcomings of the government. That is what we did with this portfolio. Memories of South Ossetia, Syria and Crimea should have been fresh in investors’ minds before buying Russian stocks. I sold out of China in this portfolio when I saw the lurch in government towards an autocracy led by President Xi Jinping. While there may be moneymaking opportunities in the world’s second-largest economy, it is difficult to trust a state which is imposing new controls on its private property sector, rounding on successful entrepreneurs, and has clear aims to rearm and to advance its territorial reach and influence.The world is moving to shape itself into two major blocs. The Chinese bloc will include a Russia dependent on Chinese support and goodwill. It will stride on to create its own digital and internet architecture, it will spend a lot on weapons, and will reach out to as many non-aligned countries as possible along the Asia to Europe Belt and Road, and in the ring of islands between China and Australia. The US-led bloc will include Europe, the Five Eyes security grouping and parts of Central America.

Both blocs will court India, Brazil, and parts of Africa. The EU will seek to differentiate itself from some features of US policy but will remain reliant on Nato for its defence and will continue to need plenty of US technology in the digital, military and communications sectors.Inflation remains an urgent challenge in many advanced countries, with price rises hitting an alarming 9.8 per cent last month in Spain and trending considerably higher in the rest of Europe. The tough choice that still confronts central banks is how to curb inflation while not slowing economic growth too much.So far this year share and bond markets have fallen, mainly in response to the predictable surge in inflation on both sides of the Atlantic. The economic misery has been compounded by the bad news of the Russian war in Ukraine. The fund is down 4 per cent this year, thanks to the falls in holdings of world equities and in the specialist indices in both green and digital global technology.

After a good couple of years’ performance, these potential winners have also been hit by the move to higher interest rates and the uncertainties from supply disruptions. The fund’s fall has been limited by holding a quarter in inflation-linked bonds to provide some inflation protection and a quarter in cash which has the advantage of not going down in falling markets.In due course the bond market will bottom out when people think the main central banks have raised rates enough and have the mastery of inflation. That will be the time to put more of the cash to work.Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. [email protected]

The ‘Redwood fund’ — April 1 2022DescriptionWeightLyxor Core MSCI Japan (DR) UCITS ETF Dly Hedged GBP2.70%Legal & General Hydrogen Economy UCITS ETF1.80%iShares Core MSCI EM IMI UCITS ETF USD Acc1.80%Lyxor FTSE Actuaries UK Gilts Inflation Linked (DR) UCITS ETF5.30%iShares Global Clean Energy1.90%Legal & General Cyber Security UCITS ETF2.10%iShares Core MSCI World UCITS ETF GBP Hgd (Dist)21.90%Legal & General All Stocks Index-Linked Gilt Index Acc4.00%Legal & General ROBO GIobal Robotics and Automation UCITS ETF1.90%SPDR BofA ML 0-5 Yr EM $ Govt Bd UCITS ETF1.90%iShares $ TIPS 0-5 UCITS ETF GBP Hedged12.80%Vanguard FTSE 250 UCITS ETF GBP Dist4.20%X-trackers S&P 500 UCITS ETF6.00%X-trackers MSCI Korea ETF1.60%X-trackers MSCI Taiwan ETF4.20%Cash Account25.80%Source: Charles Stanley More

LONDON (Reuters) -The fallout of the Russia and Ukraine war has just helped tip two of world’s poorest countries into full-blown crises, and the list of those at risk – and the queue at the International Monetary Fund’s door – will only get longer from here. They may be far from the fighting in Ukraine, but a mass resignation of Sri Lanka’s cabinet on Monday and drastic weekend manoeuvres by Pakistan’s Prime Minister Imran Khan to avoid his removal, show how far the economic impact spreads. Both Sri Lanka and Pakistan have seen their long-festering public disquiet about economic mismanagement come to a head, but there is a double-digit list of other countries also in the danger zone.A handful were already on the brink of debt crises in the wake of the COVID pandemic, the war’s resulting surge in energy and food prices, however, have undoubtedly made things worse.Turkey, Tunisia, Egypt, Ghana, Kenya and others that also import the majority of their oil and gas as well as basic foodstuffs, such as wheat and corn, which have all soared between 25% and 40% this year, have also been facing heavy pressure.Mounting costs of imports and subsidies for those everyday essentials had already convinced Cairo to devalue its currency 15% and seek IMF help in recent weeks. Tunisia and a long-resistant Sri Lanka have asked for assistance too.Ghana, still reluctant to approach the Fund, meanwhile is seeing its currency slide, while Pakistan, a country already with 22 IMF programmes to its name, is almost certain to need more having now sunk into turmoil again.”This energy shock is certainly contributing to the political uncertainty in Sri Lanka and Pakistan,” said Renaissance Capital’s chief economist Charlie Robertson, flagging it as a key factor for both Egypt and Ghana too.”It wouldn’t surprise me if more countries were impacted,” he added, citing Jordan as well and Morocco where a relatively sizable middle class makes it sensitive to political change.HUNGER IN AFRICAIMF Managing Director Kristalina Georgieva has given a stark warning that “war in Ukraine means hunger in Africa”.The IMF’s sister organisation, the World Bank, has also said https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises a dozen of the world’s poorest countries may now default over the next year, which would be “the largest spate of debt crises in developing economies in a generation”.Overindebted “frontier’ economies”, as the least developed group of countries are referred to, now owe $3.5 trillion — some $500 billion above pre-pandemic levels, the Institute of International Finance (IIF) estimates.Pakistan and Sri Lanka already spent the equivalent of 3.4% and 2.2% of their respective GDP’s on energy before the pandemic. In Turkey the figure was an even larger 6.5%, and with oil prices having been above $100 a barrel for months now, the pressures are getting worse.Every additional $10 spent on a barrel of oil adds 0.3% to Turkey’s current account deficit, according to the IIF. For Lebanon it is 1.3%, while rating agency Fitch estimates that the cost of electricity subsidies in Tunisia could surge to over 1.8% of its GDP this year from 0.8%. UNRESTFood prices are a biting problem too. They were already rising as countries emerged from lockdowns, exacerbated in some regions by droughts.With Ukraine and Russia accounting for 29% of the world’s wheat exports and 19% of maize shipments, prices of these have gone up another 25%-30% this year.Egypt buys over 60% of its wheat overseas, four-fifths from Russia and Ukraine. After devaluing its currency and approaching the IMF, President Abdel Fattah al-Sisi’s government has also just fixed bread prices to contain runaway food costs.”For many countries these (energy and food price) rises will have repercussions for budgets, for subsidies and for political and social stability.” said Viktor Szabo, an emerging market portfolio manager at abrdn in London.”If you don’t control prices you can have unrest, just think back to the Arab Spring and the role of food prices there.”With global borrowing costs also now rising rapidly as major central banks start to raise interest rates, Max Castle, a fixed income portfolio manager at Mediolanum Irish Operations said several emerging markets commodity importers may have little choice but seek help.”It is the right situation for the IMF to intervene supporting the more vulnerable countries – particularly the ones with a current account deficit,” he said. More

The compromise, if passed, would be less than half of the $22.5 billion initially sought by U.S. President Joe Biden to combat COVID, prepare for future variants and shore up the nation’s pandemic infrastructure.White House Press Secretary Jen Psaki in a statement urged Congress to move “promptly.” Biden has said more funding is needed as the world continues to fight COVID in the pandemic’s third year. While U.S. officials have said they do not expect a surge from the latest BA.2 Omicron variant, they have pointed to the need to continue to make vaccines available at no cost and to boost surveillance and testing.U.S. regulators last week approved a second booster shot for older and immunocompromised Americans, but administration officials have said without more funding from Congress money will run out for the free shots.”The consequences of inaction are severe,” Biden warned lawmakers at a White House event last week. Lawmakers had been weighing a $15 billion measure that included $5 billion in international aid. Health experts have said without full global immunization efforts the virus can continue to mutate, increasing the risk of infection and vaccine evasion. Members of Congress negotiating the package, however, could not agree on how to pay for the global response.One of the negotiators, Republican Senator Mitt Romney, said he was open to funding global efforts in a separate, “fiscally-responsible solution” in coming weeks. A Senate vote on the $10 billion measure could come as soon as this week. Approval would send it to the House of Representatives. More

WASHINGTON (Reuters) -An agreement to provide $10 billion in U.S. funding for COVID-19 aid has been reached in the Senate, lawmakers said on Monday.Senate Majority Leader Chuck Schumer, the top Democrat in the chamber, and Republican Senator Mitt Romney hailed the deal, but Schumer said he was disappointed that an agreement on $5 billion of global health funding had not also been reached. The deal provides $10 billion in funding for COVID needs and therapeutics by repurposing unspent COVID funds. It is well below the $22.5 billion the Biden administration had sought.Senate Republicans demanded any new requests for COVID funding be paid for by repurposing existing funds from prior COVID relief funds. Romney said the deal repurposes “$10 billion to provide needed domestic COVID health response tools.”The White House said it was “grateful for the Senate’s work on a bipartisan plan to help meet some of the country’s COVID response needs” but still wants more funding.It urged Congress “to move promptly on this $10 billion package because it can begin to fund the most immediate needs, as we currently run the risk of not having some critical tools like treatments and tests starting in May and June.”Schumer said the bill provides “urgently needed funding to purchase vaccines and therapeutics, maintain access to testing and accelerate the work on next generation vaccine research.”Romney noted the agreement does not include funding for the U.S. global vaccination program, but he said he is “willing to explore a fiscally-responsible solution.”The bill cuts $2.31 billion from a COVID program to boost aviation manufacturing and repair businesses. The U.S. Transportation Department offered $673 million nationwide in three rounds of awards in the $3 billion program to support aviation jobs. Some major aerospace companies like Boeing (NYSE:BA) and General Electric (NYSE:GE) opted not to participate.It also eliminates nearly $2 billion in grant funding for shuttered venues like live performance venues, museums, and movie theaters. The program stopped taking applications in August. More

Greece has received three international bailouts from the euro zone and the IMF worth 280 billion euros ($307.19 billion) since 2010. It emerged from its latest bailout in 2018 and has relied on the debt markets to cover its borrowing needs since.”Greece concluded today the repayment of its debts to the IMF,” Finance Minister Christos Staikouras said in a statement. After previous early repayments to the IMF, Greece owed 1.9 billion euros in loans due by 2024, the last batch of a total of 28 billion euros the Fund provided between 2010 and 2014.The move allows Athens to reduce its debt servicing costs because IMF loans are more expensive than its debt to EU institutions. By paying off the IMF early, Greece is saving 230 million euros, Staikouras said.Last week, the European Stability Mechanism (ESM) said it agreed to allow Greece to pay back the IMF without a proportional early reimbursement of its loans to EU authorities. ($1 = 0.9115 euros) More

RIO DE JANEIRO (Reuters) -Energy consultant Adriano Pires has backed out of the Brazilian government’s nomination for him to take the helm at Petrobras, the country’s Mines and Energy Ministry said on Monday, in the latest blow to succession plans at the state-run oil company.”It was clear to me that I could not reconcile my consulting work with the exercise of Petrobras’ command,” Pires wrote in a letter published by the ministry on its website. Pires’ decision to turn down the chief executive job came a day after soccer magnate Rodolfo Landim declined a nomination to chair the board of Petroleo Brasileiro SA, as the company is formally known.Pires had been tapped by Brazilian President Jair Bolsonaro to take over as the top executive of Petrobras on March 28, following disagreements between the far-right leader and current CEO Joaquim Silva e Luna over the company’s fuel pricing policy.The government will now need to find suitable replacements for the two top spots at Petrobras just days before the company’s April 13 annual shareholders’ meeting.Pires’ decision to back out from the CEO job was reported earlier on Monday by Brazil’s O Globo newspaper. Preferred shares in Petrobras fell 1% after the O Globo article was published, but later recouped their losses.Pires’ nomination had been facing internal compliance-related hurdles at Petrobras, as his consultancy, Rio de Janeiro-based CBIE, advises companies that do business with Petrobras, two sources with knowledge of the matter had previously told Reuters.An internal compliance committee had also recommended against Landim’s becoming the next chairman on conflict-of-interest grounds, said the sources, who requested anonymity to discuss private internal deliberations.Reached for comment, Landim said that he decided to withdraw from the board nomination in order to dedicate all his energy to Flamengo, the Rio de Janeiro soccer club he leads.In a note to clients, analysts at Brazil’s Itau BBA maintained their “outperform” rating on Petrobras shares given what they described as strong fundamentals, but said uncertainty at the top would create negative noise.”This uncertainty regarding the nominees to the chairman and CEO positions, arising so soon before the company’s next general shareholders’ meeting, will likely trigger some volatility in the stock this week,” the analysts wrote. More

The Wall Street bank’s economists have compiled a gauge of U.S. labor that they say better tracks wage gains — which are key to inflationary pressures — than other measures. They add the total number of employees and the number of job openings to estimate labor demand. For supply, they count the labor force, or people in work and those looking for positions.The latest reading of the gap shows an excess of 5.3 million in labor demand versus supply of workers — “the most overheated level of the postwar period both in absolute terms and relative to the population,” Jan Hatzius, Goldman’s chief economist, wrote in a note Monday. Much of the continued strong employment growth that’s likely in coming months will come from people who are currently outside the labor force — something that will help ease this jobs-to-workers gap, Hatzius wrote. That will happen as Americans living off of savings work down their stockpiles, he said.“The bad news, however, is that this is probably not sufficient,” Hatzius wrote. “In order to reduce wage pressure to levels at least broadly consistent with the Fed’s inflation target, we estimate that the gap needs to shrink by at least one-half.”Fed policy makers target 2% inflation, and the most recent reading for the central bank’s preferred core gauge was 5.4%. As for wages, Friday’s March jobs report showed a 6.7% annual advance for production and non-supervisory employees, the biggest since 1982 after excluding spring 2020 distortions from the pandemic shutdown.Given the magnitude of tightness, Hatzius warned of three potential consequences:Hatzius also noted that, historically, there has never been a loosening in the job market on the order of 0.6% of the labor force — “a share that would correspond to about 1 million at present” — that wasn’t connected with a recession.Similarly worrying, the U.S. unemployment rate — at 3.6% currently, practically its pre-pandemic level — has never risen more than 0.35 percentage point over three months without a recession.Despite the alarming record, Hatzius takes heart from the fact that the sample size is small, at just 12 U.S. recessions since the end of World War II. He also said that episodes in other big economies showed moderate labor-market deterioration can occur without economic slumps.Also encouraging: there are few signs of the kind of financial imbalances among American households and companies that were seen in the run-up to the 2001 and 2007-09 slumps.Still, “the broader point is that once the labor market has overshot full employment, the path to a soft landing becomes narrow,” Hatzius concluded.Read More: Fed’s Best Hope Increasingly Looks Like a ‘Semi-Hard’ Landing©2022 Bloomberg L.P. More