Economy

The UK public sector spent less than it received in taxes and other income in January for the first time since the start of the pandemic.The surplus in January was lower than expected, however, because of surging interest payments on government debt and increased NHS costs, reducing the fiscal leeway accumulated between April and January. Public sector net borrowing was estimated to have been in surplus by £2.9bn last month, equivalent to £5.4bn less borrowing than in the same month a year ago, data from the Office for National Statistics showed on Tuesday.This is the first surplus since January 2020, before the first restrictions were imposed, but it was lower than the £3.5bn forecast by the Office for Budget Responsibility, the UK fiscal watchdog, and by economists polled by Reuters.Paul Johnson, director of the Institute for Fiscal Studies, said chancellor Rishi Sunak “probably feels he’s got the public finances just about under control, but given his own targets to get the current budget balanced over the next few years, only just under control”.Speaking on Tuesday on BBC Radio 4’s Today programme Johnson said “this doesn’t mean that he’s got lots of room for manoeuvre, given his own targets”. He noted that the big question was whether Sunak would announce any additional measures to ease the cost-of-living crisis in his spring statement in March.In the financial year to January, borrowing was £138.5bn, the second-highest total since records began in 1993 but about half that posted in the same period the previous year.It was also about £20bn less than forecast by the OBR, a larger fiscal boost than the £12bn tax national insurance rise planned for spring to fund the NHS and social care.Central government bodies spent £76.3bn in January, £500mn more than in January 2021, even though most pandemic support schemes, including furlough, had ended.Current public spending was also higher than the £69.5bn forecast by the OBR in October, reflecting interest payments that surged to £6.1bn, nearly four times higher than in the same month last year. Interest payments are rising rapidly due to surging retail price inflation to which some government bonds are linked.Samuel Tombs, economist at Pantheon Macroeconomics, calculated that interest payments in the fiscal year ending starting in April will probably total £25bn more than the OBR anticipated in the October Budget.Public spending was also boosted by the cost of the test and trace programme during the Omicron coronavirus wave.Better news came from central government receipts, which were £91.6bn in January, up £8.6bn from the same month last year, supported by strong self-assessment income tax receipts and other taxes on work.James Smith, research director at the Resolution Foundation, said “Britain’s Omicron-defying labour market recovery is benefiting both workers and the chancellor, with tax receipts this year so far over £25bn higher than forecast by the OBR last autumn”.January’s figures were boosted by many taxes due that month and the figures suggest “that Omicron hardly hit incomes and tax revenues”, said Bethany Beckett, economist at Capital Economics. Michal Stelmach, senior economist at KPMG UK, said the underlying picture for borrowing in January was better than the data suggested because about 20 per cent of taxpayers have not submitted their self-assessment tax return on time this year, taking advantage of the extended window set by HMRC. More

Shortly before the coronavirus pandemic, Tesco, the UK supermarket chain, held a conference with its suppliers. Silviu Popovici, European chief executive at PepsiCo, recalls that the then Tesco chief executive, Dave Lewis, held up a multipack of Walkers crisps. According to Popovici, Lewis gestured at the crisps and told the attendees: “We don’t sell air — we don’t transport air and we don’t sell air”. He then warned all suppliers that, if they did not address the problem of overpackaging, their products were at risk of being removed from Tesco’s range.PepsiCo, which owns Walkers, listened: it began cutting down on packaging and bringing in more eco-friendly materials, such as cardboard.Now, the $235bn drinks and snacks group is looking to exert a similar influence on its own suppliers.Like many consumer goods companies, PepsiCo recently set out ambitious climate goals, as it seeks to meet targets set out in the 2015 Paris agreement on climate change. Last year, the company said it would cut greenhouse gas emissions throughout its value chain — including its suppliers and customers — by at least 40 per cent by 2030, compared with a 2015 baseline.That presents a significant challenge because, according to Popovici, some 92 per cent of PepsiCo’s total emissions come from outside its own operations. The upshot is that it has to persuade suppliers and customers to cut emissions amounting to 22.6mn tonnes of carbon dioxide equivalent per year — equal to taking about 5mn cars off the road. Adding to the challenge, Popovici says, is the fact that only 8 per cent of its suppliers have climate targets approved by the Science-Based Targets initiative — a well-regarded standard-setter — that are in line with its own.“It’s still very, very early,” Popovici says. “We’re saying ‘You need to step up your game’.” The maker of Mountain Dew, Doritos and Quaker Oats is not alone in the scale of the challenge it faces. According to a report released this month by climate disclosure group CDP, the companies that participate in its supply chain programme — which include PepsiCo, and collectively spend $5.5tn a year on procurement — risk falling behind on their climate aims because more than half of their suppliers lack any climate targets at all, and only one in 40 have science-based targets.Crunch time: PepsiCo is piloting a scheme to help potato suppliers cut emissions © Shutterstock / Brookgardener“Ambitious environmental action is not yet cascading down the supply chain,” said CDP, while warning that addressing supply chain emissions “is the only way to leverage change at the scale required”.PepsiCo will make changes to its transport and to the coolers used for its drinks, and will also push its suppliers to switch to renewable energy. But, to achieve its emissions goals, it must also look back along its supply chain and persuade farmers who produce millions of tonnes of commodities annually to change their own practices.When it comes to Walkers crisps, this is comparatively straightforward. While PepsiCo does not own potato farms, it often buys the crop directly from potato farmers, so it is piloting a scheme in the UK to process potato peelings into low-carbon fertiliser on its supplier farms. It calculates that this has the potential to reduce fertiliser emissions by about 70 per cent.One hurdle is winning the confidence of hard-pressed farmers. “Farmers are a very conservative business community and the only way to convince them is to test and learn,” says Popovici.But still more difficult is addressing the greenhouse gas (GHG) footprint of commodities bought from traders. Every year, PepsiCo buys about 450,000 tonnes of palm oil — a commodity that has been blamed for deforestation. Now, increased efforts are being made to enable the traceability of the crop through groups such as the Roundtable on Sustainable Palm Oil.A palm oil plantation in Malaysia. PepsiCo buys 450,000 tonnes a year of the commodity © Lai Seng/ReutersPopovici says PepsiCo wants similar mechanisms to develop for other commodities, and is trying to use its scale as a supplier to push for change. At the same time, the group wants to cut 3mn tonnes of GHG emissions by introducing regenerative farming practices — such as measures to enhance soil health — across 7mn acres, an area it says is equivalent to its whole agricultural footprint. This will be partly achieved through a network of more than 350 “demonstration farms”, and the project will be monitored by an independent group.Such projects, sometimes known as “insets”, are preferred to carbon offsets — which consist of emission reduction or sequestration projects, such as tree planting, outside a company’s own value chain — because they combat emissions closer to their source. In northern Illinois, for example, PepsiCo and ingredients group Ingredion are working with the Soil and Water Outcomes Fund, which pays farmers for switching to greener farming methods such as no-till cultivation and cover crops, to target 20,000 acres of land.But that will need to scale up rapidly if PepsiCo is to reach its goals — at the same time as addressing other urgent societal issues, such as plastic pollution and obesity.“To try to move these practices on to a very fragmented supplier base is a bit harder . . . we need to signal to the farmers that there will be a market for products that are produced differently,” says Popovici. “There are only eight harvest cycles until 2030 — that’s not so many.” More

LONDON (Reuters) – Investors were bracing for a torrid day for Russian, Ukrainian and wider global markets when they reopen on Tuesday, after Vladimir Putin upped the ante in a crisis the West fears could unleash a major war.In a lengthy televised address, the Russian president recognised two breakaway regions Donetsk and Luhansk in eastern Ukraine as independent entities and described Ukraine as an integral part of Russia’s history.Tensions have already rattled global markets this year and wiped tens of billions of dollars off the value of Russian and Ukraine assets, but Monday’s escalation is expected to cause much worse.”It is probably an understatement to say that it will be an ugly day (on the markets) tomorrow,” said Viktor Szabo, an emerging market portfolio manager at abrdn in London.”I was hoping we weren’t going to get here, but this is a significant step.”Russian markets were still open when Putin announced his decision live on television following phone calls to the leaders of Germany and France.The rouble losses reached 3.3%, while Moscow’s stock markets plunged to their lowest level in over a year as the dollar-denominated RTS index finished the day 13.2% lower and the rouble-based MOEX Russian index lost 10.5%.Analysts at Commonwealth Bank of Australia (OTC:CMWAY) warned traders ahead of the start of Tuesday’s Asian open that Putin’s decision to recognise the separatist-held areas of Ukraine would clearly exacerbate already high tensions  “Financial market participants now wait for a response from the United States and Europe,” they added.That response is expected to come in the shape of tough new sanctions. Although other steps might come first, some of the most severe measures would be to cut Russia’s banks off from the SWIFT banking system and order a complete ban on EU, UK and U.S. investment funds holding Russian government bonds. At the end of last year foreigners held just over $43 billion of OFZs, as Russia’s rouble-denominated bonds are known.”We agreed (Britain) and (the EU) will coordinate to deliver swift sanctions against Putin’s regime, and stand shoulder-to-shoulder with Ukraine,” British Foreign Minister Liz Truss said on Twitter (NYSE:TWTR) following a call with European Union foreign policy chief Josep Borrell. GRAPHIC: Russia Ukraine CDS – https://fingfx.thomsonreuters.com/gfx/mkt/klvykmxlqvg/Pasted%20image%201645485094587.png FUTURES SLUMPYields on Russia’s 10-year OFZs were expected to surge further having hit a high of 10.6% on Monday. Russia has one of the biggest stockpiles of international FX reserves in the world at $630 billion, but the cost of insuring its sovereign debt against default has also soared to its highest since early 2016.Analysts were also warning of the wider impact on global market confidence, which along with the pressures of fast-rising global borrowing costs this year, has already been hit by the tensions.Futures markets were pointing to a 1.8% fall on the S&P 500 on Wall Street later, a 2.2% drop on Japan’s Nikkei, a 2.5% drop on the Nasdaq and 3.7% slump on Germany’s DAX in Europe. Demand for traditional safe assets also saw U.S. Treasuries rally.”This step clearly increases uncertainty and thus creates further downside risk for global risk assets,” said Manik Narain, head of emerging market strategy at UBS.”We are going to see a negative reaction,” added Ken Polcari, managing partner at Kace Capital Advisors in Florida. “We are going to test the Jan. 24 lows which was 4,220 on the S&P 500”. GRAPHIC: Russia’s currency reserves – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwxzkxvo/Pasted%20image%201644935695631.png More

The so-called FAANGs have seen some of their COVID-era surges cut back this year, with Facebook (NASDAQ:FB) down 38%, Apple (NASDAQ:AAPL) down 5.7%, Amazon (NASDAQ:AMZN) down 8.5% and Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL) down 35% and 10% respectively..JPMorgan’s analysts estimate that on average tech firms that are yet to even make a profit have lost 30% of their value since peaks around September last year, while ‘fintech’ firms which focus on tech-savvy banking apps and tools have dropped 40%.”As Growth stocks weakened of late, they derated, but are still not outright cheap,” JPMorgan’s analysts said in a note to clients, adding that banks and commodity-linked stocks which have rallied this year thanks to rising oil and metals prices or interest rates were still “far from expensive”.The chance is that the earnings of ‘growth’ sectors might not be exceptional anymore, although the big driver remains bond market borrowing costs, which have shot up this year as top central banks have laid the groundwork for interest rate rises.Years of record-low rates have fuelled the tech stock rally but with those rates now rising again the appeal of stratospherically-valued tech stocks gets dimmer for investors, especially if their growth trajectories splutter.”We believe that bond yields will keep moving higher through the course of the year,” JPMorgan said referring to the bond market costs”Our fixed income strategists expect U.S. 10-year (Treasury) yields to reach 2.35% by the end of this year, and German 10-year yields to reach 0.5%.” Treasury yields are now at 1.92% and Germany bunds are at 0.2%.They also said that the tensions building between Russia and Western powers over Ukraine shouldn’t drive a return to big tech names, which carved out a safe-haven reputation during the pandemic.”While geopolitics could flare up into month end… we do not expect this to last, and call for risk-on internals to resume into spring”. More

The office of Prime Minister Ariel Henry on Twitter (NYSE:TWTR) posted a sliding scale of wage hikes that vary by economic activity, with the greatest increase going to workers in areas such as the electricity and telecommunications industries. Employees in the clothing manufacturing sector, which export finished products to U.S. retailers, received a 37% increase. That takes their wages to just under $7.50 per day, compared with the $15 per day that union leaders had demanded.For decades, Haiti has promoted itself as a center for clothing manufacturing thanks to low wages and proximity to U.S. markets. Workers over the years have complained that pay is too low to cover basic goods, which are often more expensive than in other countries due to weak infrastructure and gang violence. A group of U.S. members of Congress in November said they were asking the heads of 62 American companies that import garments from Haiti for information on “protections in place for workers employed by their companies and suppliers.”Haitian officials have in the past said that increasing wages by too much would leave the garment industries at risk of losing competitiveness with respect to other countries such as the neighboring Dominican Republic. More

Countries that depend on the region’s rich supply of energy, wheat, nickel and other staples could feel the pain of price spikes.After getting battered by the pandemic, supply chain chokeholds and leaps in prices, the global economy is poised to be sent on yet another unpredictable course by an armed clash on Europe’s border.Even before the Kremlin ordered Russian troops into separatist territories of Ukraine on Monday, the tension had taken a toll. The promise of punishing sanctions in return by President Biden and the potential for Russian retaliation had already pushed down stock returns and driven up gas prices.An outright attack by Russian troops could cause dizzying spikes in energy and food prices, fuel inflation fears and spook investors, a combination that threatens investment and growth in economies around the world.However harsh the effects, the immediate impact will be nowhere near as devastating as the sudden economic shutdowns first caused by the coronavirus in 2020. Russia is a transcontinental behemoth with 146 million people and a huge nuclear arsenal, as well as a key supplier of the oil, gas and raw materials that keep the world’s factories running. But unlike China, which is a manufacturing powerhouse and intimately woven into intricate supply chains, Russia is a minor player in the global economy.Italy, with half the people and fewer natural resources, has an economy that is twice the size. Poland exports more goods to the European Union than Russia.“Russia is incredibly unimportant in the global economy except for oil and gas,” said Jason Furman, a Harvard economist who was an adviser to President Barack Obama. “It’s basically a big gas station.”An underground gas storage facility in Kasimov, east of Moscow. Russia supplies nearly 40 percent of Europe’s natural gas.Andrey Rudakov/BloombergOf course, a closed gas station can be crippling for those who depend on it. The result is that any economic damage will be unevenly spread, intense in some countries and industries and unnoticed in others.Europe gets nearly 40 percent of its natural gas and 25 percent of its oil from Russia, and is likely to be walloped with spikes in heating and gas bills, which are already soaring. Natural gas reserves are at less than a third of capacity, with weeks of cold weather ahead, and European leaders have already accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.And then there are food prices, which have climbed to their highest level in more than a decade largely because of the pandemic’s supply chain mess, according to a recent United Nations report. Russia is the world’s largest supplier of wheat, and together with Ukraine, accounts for nearly a quarter of total global exports. For some countries, the dependence is much greater. That flow of grain makes up more than 70 percent of Egypt and Turkey’s total wheat imports.This will put further strain on Turkey, which is already in the middle of an economic crisis and struggling with inflation that is running close to 50 percent, with skyrocketing food, fuel and electricity prices.And as usual, the burden falls heaviest on the most vulnerable. “Poorer people spend a higher share of incomes on food and heating,” said Ian Goldin, a professor of globalization and development at Oxford University.Ukraine, long known as the “breadbasket of Europe,” actually sends more than 40 percent of its wheat and corn exports to the Middle East or Africa, where there are worries that further food shortages and price increases could stoke social unrest.Lebanon, for example, which is experiencing one of the most devastating economic crises in more than a century, gets more than half of its wheat from Ukraine, which is also the world’s largest exporter of seed oils like sunflower and rapeseed.On Monday, the White House responded to Mr. Putin’s decision to recognize the independence of two Russian-backed territories in the country’s east by saying it would begin imposing limited sanctions on the so-called Donetsk and Luhansk People’s Republics. Jen Psaki, the White House press secretary, said Mr. Biden would soon issue an executive order prohibiting investment, trade and financing with people in those regions.Analysts watching the unfolding conflict have mapped out a range of scenarios from mild to severe. The fallout on working-class families and Wall Street traders depends on how an invasion plays out: whether Russian troops stay near the border or attack the Ukrainian capital, Kyiv; whether the fighting lasts for days or months; what kind of Western sanctions are imposed; and whether Mr. Putin responds by withholding critical gas supplies from Europe or launching insidious cyberattacks.“Think about it rolling out in stages,” said Julia Friedlander, director of the economic statecraft initiative at the Atlantic Council. “This is likely to play out as a slow motion drama.”As became clear from the pandemic, minor interruptions in one region can generate major disruptions far away. Isolated shortages and price surges— whether of gas, wheat, aluminum or nickel — can snowball in a world still struggling to recover from the pandemic.“You have to look at the backdrop against which this is coming,” said Gregory Daco, chief economist for EY-Parthenon. “There is high inflation, strained supply chains and uncertainty about what central banks are going to do and how insistent price rises are.”Ukraine’s port of Mykolaiv. The Middle East and Africa are especially reliant on Ukraine’s exports of wheat and corn.  Brendan Hoffman for The New York TimesThe additional stresses may be relatively small in isolation, but they are piling on economies that are still recovering from the economic body blows inflicted by the pandemic.What’s also clear, Mr. Daco added, is that “political uncertainty and volatility weigh on economic activity.”That means an invasion could have a dual effect — slowing economic activity and raising prices.In the United States, the Federal Reserve is already confronting the highest inflation in 40 years, at 7.5 percent in January, and is expected to start raising interest rates next month. Higher energy prices set off by a conflict in Europe may be transitory but they could feed worries about a wage-price spiral.“We could see a new burst of inflation,” said Christopher Miller, a visiting fellow at the American Enterprise Institute and an assistant professor at Tufts University.Also fueling inflation fears are possible shortages of essential metals like palladium, aluminum and nickel, creating another disruption to global supply chains already suffering from the pandemic, trucker blockades in Canada and shortages of semiconductors.The price of palladium, for example, used in automotive exhaust systems, mobile phones and even dental fillings, has soared in recent weeks because of fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, used to make steel and electric car batteries, has also been jumping.It’s too early to gauge the precise impact of an armed conflict, said Lars Stenqvist, the chief technology officer of Volvo, the Swedish truck maker. But he added, “It is a very, very serious thing.”“We have a number of scenarios on the table and we are following the developments of the situation day by day,” Mr. Stenqvist said Monday.The West has taken steps to blunt the impact on Europe if Mr. Putin decides to retaliate. The United States has ramped up delivery of liquefied natural gas and asked other suppliers like Qatar to do the same.A front line position in Luhansk Oblast, in eastern Ukraine, a scene of mortar attacks. “This is likely to play out as a slow motion drama,” said one analyst.Tyler Hicks/The New York TimesThe demand for oil might add momentum to negotiations to revive a deal to curb Iran’s nuclear program. Iran, which is estimated to have as many as 80 million barrels of oil in storage, has been locked out of much of the world’s markets since 2018, when President Donald J. Trump withdrew from the nuclear accord and reimposed sanctions.Some of the sanctions against Russia that the Biden administration is considering, such as cutting off access to the system of international payments known as SWIFT or blocking companies from selling anything to Russia that contains American-made components, would hurt anyone who does business with Russia. But across the board, the United States is much less vulnerable than the European Union, which is Russia’s largest trading partner.Americans, as Mr. Biden has already warned, are likely to see higher gasoline prices. But because the United States is itself a large producer of natural gas, those price increases are not nearly as steep and as broad as elsewhere. And Europe has many more links to Russia and engages in more financial transactions — including paying for the Russian gas.Oil companies like Shell and Total have joint ventures in Russia, while BP boasts that it “is one of the biggest foreign investors in Europe,” with ties to the Russian oil company Rosneft. Airbus, the European aviation giant, gets titanium from Russia. And European banks, particularly those in Germany, France and Italy, have lent billions of dollars to Russian borrowers.“Severe sanctions that hurt Russia painfully and comprehensively have potential to do huge damage to European customers,” said Adam Tooze, director of the European Institute at Columbia University.Depending on what happens, the most significant effects on the global economy may manifest themselves only over the long run.One result would be to push Russia to have closer economic ties to China. The two nations recently negotiated a 30-year contract for Russia to supply gas to China through a new pipeline.“Russia is likely to pivot all energy and commodity exports to China,” said Carl Weinberg, chief economist at High Frequency Economics.The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency. The pandemic has already highlighted the downsides of far-flung supply chains that rely on lean production.Now Europe’s dependence on Russian gas is spurring discussions about expanding energy sources, which could further sideline Russia’s presence in the global economy.“In the longer term, it’s going to push Europe to diversify,” said Jeffrey Schott, a senior fellow working on international trade policy at the Peterson Institute for International Economics. As for Russia, the real cost “would be corrosive over time and really making it much more difficult to do business with Russian entities and deterring investment.” More

BRASILIA (Reuters) – Brazil’s central bank chief Roberto Campos Neto said on Monday consumer prices continue to trend higher as core inflation speeds up despite aggressive monetary tightening by policymakers.”We actually see an inflation trend that is still growing,” he said in an online event hosted by television channel AgroMais.He noted that only Brazil and Russia’s current interest rates are above the neutral level, which supports the economy at full employment without pressuring or decelerating inflation. A higher than neutral level is necessary to cool inflationary pressures and bring prices closer to central bank targets, Campos Neto said.The Brazilian central bank has already raised rates to 10.75% from an all-time low of 2% in March last year, and indicated further adjustments to tame inflation that hit 10.4% in the 12 months through January.Despite rising borrowing costs, Campos Neto said he believed analysts who are forecasting meager growth for Brazil this year will adjust their numbers upwards due to recent domestic data.According to him, the most crucial point for the central bank today is to understand how the normalization of monetary policy will take place in an environment of higher global inflation, in which energy inflation “seems more persistent.”He stressed that the central bank was looking to analyze what effect this, along with China’s slowdown, would have on emerging markets. More

VILNIUS (Reuters) – The European Union must impose sanctions on Russia immediately after it recognised two Ukrainian breakaway regions as independent, the governments of the Baltic states of Estonia, Latvia and Lithuania said after Russia’s announcement.Russian President Vladimir Putin recognised the Donetsk and Luhansk regions in eastern Ukraine as independent entities on Monday, upping the ante in a crisis the West fears could unleash a major war.The three Baltic states, unlike Ukraine, are all members of NATO and the European Union.”The EU must impose sanctions immediately,” Latvian Foreign minister Edgars Rinkevics wrote on Twitter (NYSE:TWTR).”I remain convinced such a course of escalation should be met with sanctions,” his Lithuanian counterpart Gabrielius Landsbergis wrote in a tweet.In a joint statement, Rinkevics and Latvia’s president and prime minister called on the international community “to take the strongest possible measures to stop Russia’s aggression and offer assistance to Ukraine”.Separately, Estonia’s president called on the European Union to impose sanctions for what he called the “gross and unjustifiable trampling on international law”.Lithuania’s speaker of parliament will table a parliamentary motion to “never recognize” any change of status of the breakaway region, she said on Monday.”Recognition of Donetsk & Luhansk separatist ‘republics’ by Russia is an intolerable violation of international law. It also means unilateral withdrawal from Minsk agreements”, said Lithuanian President Gitanas Nauseda, referring to the Donbass ceasefire documents.The Baltic States said on Jan. 21 they will provide Ukraine with U.S.-made anti-armour and anti-aircraft missiles, days after receiving clearance from the U.S. State Department to send U.S.-made missiles and other weapons there.The foreign ministers of the three Baltic countries plan to visit Ukraine together later this week in a show of solidarity. More