Economy

The surge in commodity prices that followed Russia’s invasion of Ukraine will worsen the squeeze on UK living costs and reduce growth, economists have warned, as the Bank of England prepares its latest assessment of the economy.Oil, gas and wheat prices have risen sharply since late February, raising UK consumer prices and pointing to a higher peak in inflation this spring followed by a period of sustained high price rises. With forecasting groups, such as Goldman Sachs, now expecting inflation to peak above 9 per cent, the even higher prices will exacerbate the largest expected squeeze on household disposable incomes for 30 years, potentially slowing economic growth to a crawl. Thomas Pugh, economist at financial services company RSM UK, said that “once we factor in the impact of higher gas prices, tighter financial conditions and lower business and consumer confidence, we think that UK GDP growth [this year] could be between 0.75 and 1 percentage point lower than it otherwise would have been”. While Andrew Goodwin, chief UK economist at Oxford Economics, cut his forecast for UK GDP growth by a smaller 0.1 percentage points for 2022, he shaved more off his 2023 forecast to reflect the likely further rise in gas and electricity prices this autumn. But due to the uncertainty around the conflict in Ukraine, few economists are confident in their predictions, and most are continuously revising their outlooks. “The longer the war lasts, and the bigger the sanctions on Russia are, the greater the hit to UK activity will be,” warned Sandra Horsfield, economist at Investec.The big revisions in forecasts comes even though the UK has few direct economic links with Russia’s economy. Less than 4 per cent of the Britain’s gas supply is from Russia, a lower proportion than other major EU countries. Russia accounts for only 1.3 per cent of UK goods trade and 0.7 per cent of its foreign investment. Just $3bn, or 0.1 per cent, of the UK banking system’s foreign claims are tied up in Russian banks, limiting any likely financial fallout if Russian banks defaulted in the weeks ahead. However, the UK buys energy and commodities in international markets, where prices are soaring. “The main impact on the UK economy of Russia’s invasion of Ukraine is likely to be energy prices staying higher for longer,” said Goodwin. Yael Selfin, chief UK economist at KPMG, noted that it is not only energy prices that are rising because of the conflict. “Food prices are also likely to be affected,” she said, adding that the higher price of wheat alone could add 0.7 percentage points to inflation based on current levels. The rising cost of fertilisers is also increasing food prices. Before the war in Ukraine began, the Bank of England forecast that inflation would peak at 7 per cent in April, but since last week most economists have revised their predictions up. Financial markets now expect RPI inflation — which runs about 1 percentage point higher than CPI inflation — to average at more than 5 per cent over the next five years. Stephen Ball, economist at Goldman Sachs, predicts that the peak in headline inflation will shift from April to October, when he forecasts it will rise to 9.5 per cent, and remain above 7 per cent until next spring. Tentatively predicting another 55 per cent increase in energy bills this autumn, Ball said “the peak in headline inflation shifts from April to October”.This rise “will exacerbate the cost-of-living crisis by reducing households’ real incomes”, warned Paul Dales, chief UK economist at Capital Economics. Even before the war, the Bank of England had forecast the largest squeeze on living standards in three decades in 2022. Although households have much stronger finances on average than after the financial crisis because they could not spend as much as normal during the pandemic, Ana Boata, economist at Allianz Research, said this would not protect the wider economy from a sharp slowdown. She noted that excess savings accumulated through the pandemic “will not be enough to absorb the income squeeze from higher energy bills”.Economists had expected consumer spending to be the main driver of growth this year as the UK rebounded from the pandemic, but hopes of unusually rapid consumption growth are falling. The British Chambers of Commerce, a business organisation, revised its consumer spending growth forecast to 4.4 per cent in 2022, down from its previous December forecast of 6.9 per cent.

It also sharply downgraded business investment growth to 3.5 per cent this year and warned that the risks of recession were now rising. “Russia’s invasion of Ukraine could drive a renewed economic downturn if it stalls activity by triggering a sustained dislocation of supply chains or a more significant inflationary surge,” warned Suren Thiru, head of economics at the British Chambers of Commerce.The deterioration in the outlook might also mean that “instead of labour market tightness as is currently the case, the UK could experience job losses”, said Horsfield. More

From rationed sunflower oil in Spanish supermarkets to pricier sushi in Japan, the war in Ukraine is rippling across global dining tables. Russia and Ukraine exports account for 12 per cent of total calories traded in the world, according to the International Food Policy Research Institute. North Africa and the Middle East rely on these countries for half their cereal.The immediate consequence is higher food bills. Producers such as Nestlé, Mondelez and Danone — which just this week reset margins lower — were already dealing with inflated input costs. Unilever, prewar, reckoned these would add €3.6bn to its €23bn bill. Some are preparing the ground for a rare fourth session of negotiations with retailers: tough price-setting talks that, in normal years, are completed in a couple of rounds.That assumes they can procure goods in the first place. Anecdotally, some small flour mills and other processors, finding themselves unable to replenish depleted inventories, began triggering force majeure clauses this week. More could follow. Nor is it just exported goods. About a quarter of Europe’s supply of key nutrients such as nitrogen and phosphate used in fertilisers comes from Russia, Belarus and Ukraine. That stands to have an impact on future domestic European crops too.Longer term, disruptions to supply could trigger a rewriting of agricultural rules. As with energy, there will be renewed efforts in substitution and procurement — likely meaning more focus on self-sufficiency. The UK produces about 60 per cent of domestic food consumption by economic value, part of which is exported. As with gas, some of these efforts dovetail with existing policy campaigns, such as a move towards more organic farming. But others are contradictory. European policy moves towards greening, such as dedicating a portion of arable land to non-productive elements, may be unwound if the focus reverts to self-sufficiency.Bigger risks are in store for emerging markets, where food is a bigger component of spending and — in cases such as Egypt or Indonesia — reliance on Russia and Ukraine is greater. History shows there are few more potent sparks for social uprisings than empty tables. More

The central bank of the United States can create money to stimulate the financial sector during emergencies.
The Federal Reserve’s $9 trillion balance sheet has pushed investors into riskier holdings.
Analysts believe assets will be repriced as the Fed’s bonds are sold or mature.

Members of the Federal Reserve are debating how quickly to reduce the central bank’s portfolio of bonds, without starting a recession.Heading into the second quarter of 2022, the balance of Federal Reserve’s assets is almost $9 trillion. The majority of these assets are securitized holdings of government debt and mortgages. Most were purchased to calm investors during the subprime mortgage crisis in 2008 and 2020’s pandemic.”What’s happened is the balance sheet has become more of a tool of policy.” Roger Ferguson, former vice chairman of the Federal Reserve Board of Governors, told CNBC. “The Federal Reserve is using its balance sheet to drive better outcomes in history.”
The U.S. central bank has long used its power as a lender of last resort to add liquidity to markets during times of distress. When the central bank buys bonds, it can push investors toward riskier assets. The Fed’s policies have boosted U.S. equities despite tough economic conditions for small businesses and ordinary workers.Kathryn Judge, a professor at Columbia Law, says the Fed’s stimulus is like grease for the gears of the financial system. “If they apply too much grease too frequently, there are concerns that the overall machinery becomes risk-seeking and fragile in alternative ways,” she said to CNBC in an interview.Analysts believe that the Fed’s choice to raise interest rates in 2022 then quickly reduce the balance sheet could set off a recession as riskier assets are repriced.

Watch the video above to learn more about the recession risks of the Fed’s monetary policies.

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China will double the permitted trading range between its currency and Russia’s rouble to help bolster trade between the two countries as the Russian economy reels from western sanctions imposed after its invasion of Ukraine.The China Foreign Exchange Trade System (CFETS) announced on Thursday that “in accordance with the requirements of market development” it would widen the daily trading band for the renminbi’s exchange rate with the rouble, allowing the currency cross to trade 10 per cent in either direction of a daily midpoint set by China’s central bank, up from 5 per cent previously.CFETS said the new trading band would be implemented from Friday, “with the approval of the People’s Bank of China and the State Administration of Foreign Exchange”.China has refrained from hitting Russia with sanctions even as western countries enacted a flurry of economic punishments for Moscow’s invasion of Ukraine. Russia is a key supplier of oil and natural gas for Beijing and the two have made substantial efforts to de-dollarise bilateral trade in the years since sanctions were first imposed on Russia over its annexation of Crimea in 2014.Analysts said the trading band change was a practical response to support trade between China and Russia in light of the recent volatility of the rouble, which has sunk roughly 36 per cent this year against both the US dollar and the renminbi. By comparison, China’s currency has remained steady at around Rmb6.3 against the greenback.“This will facilitate trade and improve market liquidity” for the renminbi-rouble exchange rate, said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank. “From a market maker’s perspective, if they had kept the 5 per cent band it would be very difficult to price [the exchange rate].”The renminbi’s relative resilience throughout the Ukraine crisis has fuelled talk that the currency could become a haven, as well as speculation that Beijing could utilise its yuan-based international payments system to help cushion the blow from sanctions that have rocked Russia’s economy.Among the most severe measures levied by western countries so far is the ejection of most major Russian financial institutions from Swift, the global payments system. Payment networks Visa, Mastercard and American Express have also announced plans to suspend operations in Russia.

Following the latest sanctions being imposed, Chinese state media has highlighted the opportunity for the country to boost the use of its own cross-border payments system meant to rival Swift. Russian banks have floated the possibility of issuing co-badged cards linked to both Russia’s Mir and China’s UnionPay international payments systems.One China economist at a European bank in Hong Kong said the trading band change would make the exchange rate more flexible and allow institutions in China that paid for oil from Russia using roubles to convert the currency into renminbi at a more favourable rate.“Five per cent is actually a reasonable range, but of course if you’re talking about [emerging markets] countries that have a crisis . . . there’s a definite need to widen it,” the economist said. More

(Reuters) – Gold bounced above the $2,000 an ounce level on Thursday following a sharp correction in the last session as a lack of progress with the Russia-Ukraine talks re-ignited a shift into safe-haven assets. Spot gold rose 0.7% to $2,004.89 per ounce by 1203 GMT after tumbling as much as 3% on Wednesday. U.S. gold futures were up 1.2% to $2,011.00. “Gold bulls have shown little qualm in catapulting prices higher on signs the Ukraine crisis could drastically worsen the global economic outlook,” Han Tan, chief market analyst at Exinity said. A rush to safe-haven assets earlier this week due to the Ukraine crisis powered gold prices to near record levels hit in August 2020. “The safe-haven allure for gold is maintained despite the markets assimilation with commodity supply shocks and will be a driving force for bullion as the war in Ukraine persists,” DailyFX analyst Warren Venketas wrote in a note. A rebound in equities wilted as analysts warned of further pain for stocks with no immediate end in sight to the war in Ukraine. Investors are also keeping an eye on February U.S. consumer price index data which is due later in the day, against the backdrop of surging oil prices and ahead of the Federal Reserve’s next policy statement on March 16. Palladium, used by automakers in catalytic converters to curb emissions, was up 0.2% to $2,944.25 per ounce. The metal hit a record high of $3,440.76 on Monday, driven by fears of supply disruptions from top producer Russia. The palladium market “should continue to price-in a supply risk premium in the short-term,” ANZ analysts wrote in a note. Spot silver rose 0.7% to $25.92 per ounce, while platinum added 1.7% to $1,094.31. More

WASHINGTON (Reuters) – The gusher of money the U.S. government poured into family bank accounts during the coronavirus pandemic, credited with speeding the rebound from the health crisis, may now help limit the economic damage from Russia’s invasion of Ukraine.As analysts have begun parsing what sky-high oil prices and new uncertainty might mean, a common theme has emerged: U.S. consumers may get gouged at the gas pump but will likely be able to maintain much of their expected spending on other goods and services because of the savings accumulated during the last two years thanks to emergency federal programs totaling about $5 trillion since the spring of 2020.The war in Ukraine is a shock, they note, but one the United States may have unintentionally insured itself against.”Household savings could help consumers maintain spending volumes in the face of related price increases,” JPMorgan (NYSE:JPM) economist Daniel Silver wrote this week, noting that each 10% increase in oil prices would cost consumers an additional $23 billion each year.Households “have accumulated about $2.6 trillion of ‘excess saving’ in recent years relative to the pre-pandemic trend, which all else equal could be enough to cover even a sustained 50% surge in oil and natural gas prices for many years to come.”U.S. consumer price data due to be released later on Thursday is expected to show the pace of annual price increases jumped to 7.9% last month from 7.5% in January. Even that won’t reflect the brunt of commodity price increases in the two weeks since Russia invaded its neighbor.The full effect will depend on how long the war lasts, how deeply commodity markets are disrupted, and how forcefully the Federal Reserve responds to inflation that was accelerating for reasons beyond oil prices.The United States and its Western allies responded to the Feb. 24 invasion by imposing punishing sanctions on Russia, the world’s largest exporter of oil and oil products combined, adding to the updraft in oil prices. The price of U.S. West Texas Intermediate (WTI) crude briefly hit $130 a barrel, from around $92 before the conflict, and ended at around $110 on Wednesday.The average U.S. price for regular unleaded gasoline has hit a record $4.25 a gallon, though that is about $1 a gallon below the inflation-adjusted peak.While that indicates inflation likely has further to climb, it’s less clear what it will mean both for the Fed, as it debates how fast to raise interest rates, and for the U.S. economy as it emerges from the pandemic.Some prior oil shocks, such as the one in the 1970s, were associated with more persistent inflation that prompted the U.S. central bank to react with aggressive rate increases. Others, such as the brief spike during the Gulf War in the early 1990s, came alongside Fed rate cuts because underlying inflation was expected to ease.SIGNS OF SUBSTITUTION, NOT PULLBACKThe U.S. economy may have some room to give. Growth entering the year was strong, and even if high oil prices slow things, the outcome for the year is still likely to be solid – not the weak growth and rising prices of a true “stagflation.””The U.S. has become less sensitive to energy shocks,” with a steady decline in the share of income spent on energy, Bank of America (NYSE:BAC) economists wrote in a note. “With Omicron cases fading, the reopening of the service sector has resumed … Excess savings built up over the last two years can fund this rebound.” GRAPHIC: Energy’s share of U.S. consumer spending- https://graphics.reuters.com/UKRAINE-CRISIS/USA-CONSUMPTION/jnvwebrqwvw/chart.pngResearch on past oil shocks offers a sense of what to expect. Even as gas prices rise, fuel consumption and driving tend to remain steady, partly out of necessity – the daily commute, driving on the job, or family chores – as well as choice. Household budgets then adapt. One 2008 study of periods when gas prices were high found increased bargain shopping at grocery stores and substitution into cheaper brands.One possible bellwether of such a move: Shares of discount retail chain Dollar General Corp (NYSE:DG) have risen about 10% since the Ukraine war began, outpacing the broader market.Nik Modi, a tobacco and household products analyst at RBC Capital Markets, said there was already evidence in late February before the invasion that smokers were trading down to cheaper cigarettes, a trend he expects to continue as gas prices rise. Pump prices had risen nearly 30 cents a gallon from the start of the year to when Russia invaded. They’re up another 70 cents since.Yet high frequency restaurant and travel data so far shows little evidence of consumers pulling back.PANDEMIC BEHAVIOR CHANGESCorporate officials who might otherwise expect fallout from higher gas prices said they were hopeful consumer spending will hold up.Some studies have found rising gas prices cause families to at least delay larger purchases, but “the effect of that might be somewhat more muted in this environment than maybe it has historically,” David Denton, the chief financial officer of home improvement chain Lowe’s (NYSE:LOW) Cos Inc’s, said at the UBS Global Consumer and Retail conference on Wednesday.”In the past, when gas prices have gone up, demand in this sector has kind of gone down a little bit,” Denton said, but working from home in particular may have insulated consumers who previously commuted to work.Other pandemic dynamics may also play out. Public transit use remains depressed but could be an acceptable option for former riders as COVID-19 infections decrease. Credit card balances are lower, giving financial space to consumers intent on spending now that social life has resumed more fully.In addition, economists and officials have noted that higher oil prices now have some potential upside in the United States, with the hit to consumers offset by rising employment and investment in domestic energy production.”Oil prices would need to rise much further from here to seriously threaten the consumer recovery,” wrote Michael Pearce, a senior U.S. economist for Capital Economics. “For the broader economy, any hit to consumption should be mostly offset by greater investment in shale production.”Pearce said there may even be some unintended benefits for the Fed. If rising gas prices do curb consumer demand for some goods and services, it could ease inflation by bringing demand closer in line with available supply. Rate hikes in part work by discouraging consumption, and the oil shock may accomplish some of that job for the Fed, which is widely expected to raise borrowing costs at the end of its policy meeting next week.”To the extent this means domestic demand is weaker, we should be seeing less upward pressure on wages and services prices,” Pearce said. More

(Reuters) – Cryptocurrency evangelists are on the defensive amid warnings from U.S. and European lawmakers that digital asset companies are not up to the task of complying with Western sanctions imposed on Russia following the country’s invasion of Ukraine. The criticism has seen the crypto industry scrambling to regain control of the narrative, with many executives frustrated that the compliance regimes in place at leading exchanges, such as Coinbase (NASDAQ:COIN) and Binance, are being called into question. At the same time, the increased scrutiny could be a pivotal moment for the sector to prove that it is not the “Wild West” of finance that regulators have painted it to be. “It’s an opportunity for the industry to show that it is mature and that it knows how to properly manage risk,” said Matt Homer, an executive in residence at venture capital firm Nyca Partners.The crypto community was largely caught flat-footed as the United States and its allies moved to impose sweeping sanctions against Russia’s banks, elites and other state firms.Unlike other payment companies, crypto exchanges have rejected calls to cut off all Russian users, saying that goes against the industry’s libertarian values, sparking concerns among European officials and U.S. lawmakers that digital assets could be used to circumvent the sanctions.U.S. Senator Elizabeth Warren has alleged that many crypto exchanges and wallets have lax compliance controls and are not collecting data on customers’ identities.But executives at exchanges including Kraken, FTX, Coinbase and Gemini, as well as industry trade groups, say that’s not the case. “This rhetoric is inaccurate,” said Elena Hughes, chief compliance officer at Gemini, adding that the company screens clients like any other financial firm. “We’ve dedicated a lot of resources to ensure that we have the right controls (and) that we’ve gotten things right.”On Monday, Coinbase issued a lengthy blog detailing its controls, noting that it had blocked more than 25,000 addresses connected with Russian individuals or entities believed to be engaging in illegal activity. FTX US, a Chicago-based crypto exchange, said it operates multiple regulated licenses and continues to “rigorously implement and comply” with all sanctions.”For the most part, most of these companies have very robust systems in place already, and it’s very easy for them to comply with sanctions, just like any other financial institution,” said Kristin Smith, executive director of the Blockchain Association.’EXISTENTIAL’ RISKFrom its inception, the cryptocurrency community touted digital assets as vehicles for anonymous transactions, and a slew of federal enforcement actions for fraud, money laundering and unregistered coin offerings has only reinforced the perception that crypto companies are prone to flouting the law.But as the value of all cryptocurrencies surged past $3 trillion last year and more Americans invest in the asset class, the industry has been trying to shed its unsavory image by burnishing its overall compliance credentials.While lawmakers worry about crypto sanctions evasion, Biden administration officials have said they do not believe digital assets could be used to circumvent all the curbs.The U.S. Treasury Department has reached out to several crypto exchanges and trade groups to explain its expectations for sanctions compliance and to create a line of communication in case of questions, a person familiar with the matter said. This person, who spoke on condition of anonymity, added that officials were impressed by the majority of firms’ compliance controls.For many exchanges, the risk of not being in compliance with the rules as they stand is “existential,” said Charles Delingpole, chief executive officer at ComplyAdvantage, an anti-money laundering technology company that works with several prominent crypto firms, including Binance and Gemini.”Not only in terms of being fined (and) having dollar clearing access removed,” he said. “If you’re laundering money, which is the flip side of this, there’s been huge backlash from the public for companies seen to be facilitating illegal flows of money.” More

VERSAILLES, France (Reuters) – European Union leaders will prepare the ground on Friday for possible unexpected spending over the war in Ukraine, but will stop short of mentioning any new joint EU debt issuance, draft summit conclusions showed.Leaders of the 27-nation EU meet in Versailles, near Paris, to discuss more defence spending after Moscow’s invasion of Ukraine, Kyiv’s bid to become an EU member and ways to make Europe strategically independent of global suppliers in energy, microchips and food.Emerging from the COVID-19 pandemic, which added a lot of public debt across the EU, governments had planned to gradually withdraw the emergency fiscal support that had been necessary to keep economies going during the lockdowns.But Russia’s invasion of Ukraine forced the EU to re-think that approach because of an expected sharp raise in spending on defence and on investment in renewable sources of energy to facilitate a shift away from Russian gas, oil and coal.”Our national fiscal policies will need to take into account the overall investment needs and reflect the new geopolitical situation,” the draft summit conclusions said.”We will pursue sound fiscal policies, which ensure debt sustainability for each Member State, including by incentivising investments that are growth-enhancing and key for our 2030 objectives,” the conclusions said.JOINT DEBTSome countries such as France want new jointly-issued EU debt to help cushion the shift from Russian energy imports, the impact of sanctions imposed on Moscow over Ukraine and the push for more independence from global food and microchip suppliers.But Germany, the Netherlands and others strongly oppose such a move, saying there is plenty of still unused money in the EU’s 800 billion euro recovery fund that the bloc is already jointly borrowing to finance many of the challenges.Only 74 billion euros of the total EU fund have so far been disbursed as national governments have to prepare projects that will be financed with the grants and ultra cheap loans.”We have other instruments (than new joint debt), let’s use them first,” one euro zone official said.The draft conclusions showed that EU leaders want to find money for the challenges ahead by leveraging public funds to attract private capital and making innovative projects easier.”We will use the budget and the potential of the European Investment Bank Group to catalyse private investments, including higher risk-financing for entrepreneurship and innovation,” they said. More