No signs of wage inflation in Europe (yet)...

Europe’s largest private employer VW faces no pressure to raise wages 

German automaker’s view reinforces ECB policymakers’ forecasts that sustained inflation is unlikely

VW’s chief executive told the FT that despite sharp rises in input costs, the company is not under pressure to raise wages - Joe Miller and Martin Arnold in Frankfurt 

4 HOURS AGO 

 Europe’s biggest private-sector employer Volkswagen has said it is not under pressure to raise salaries, reinforcing central bankers’ forecasts that the region’s economic rebound from the coronavirus pandemic is unlikely to fuel sustained inflation. 

 “We don’t see signs of wage inflation pressure in our major markets,” Arno Antlitz, VW’s chief financial officer, told the Financial Times. “It is difficult to say from today’s perspective if this will change, but we don’t expect that.” 

 His comments echo those made earlier this week by the ECB’s chief economist Philip Lane on whether companies will pass higher costs on to consumers. He said: “The fact that pricing power may have been rediscovered by some global firms is not on its own enough to generate persistent inflation — you need a strong labour market.” 

 Investors are anxious that the massive fiscal and monetary stimulus rolled out on both sides of the Atlantic since the pandemic hit early last year could cause inflation to soar as lockdowns are lifted and the US and European economies rebound. A rise in inflation would erode real-terms bond market returns. Eurozone inflation turned negative in the final months of last year but rebounded to 1.6 per cent in April. The ECB expects it to top its target of below, but close to, 2 per cent late this year, driven by soaring supply-side price pressures and resurgent consumer demand. 

The US Federal Reserve also expects US price growth to top its 2 per cent target this year. However, most economists think these inflationary pressures will fade in 2022 because labour markets will take time to recover from the shock of the pandemic, delaying any significant rise in wages. 

The ECB forecasts that eurozone inflation will fall back to 1.4 per cent by 2023. Unemployment in the eurozone has risen from just above 7 per cent before the pandemic to 8.1 per cent in March, but millions of people have dropped out of the workforce and millions more are still on state-subsidised furlough schemes. Eurozone labour slack, a broader measure of labour market softness which includes involuntary part-timers and discouraged workers, rose to about 16 per cent of the extended labour force in the final quarter of last year, up 2 percentage points from pre-pandemic levels. 

 Only one in 10 eurozone businesses in both the manufacturing and services sectors reported labour was a factor limiting production according to the latest quarterly survey by the European Commission in April. In contrast, insufficient demand was a concern for more than one in three services providers and 27 per cent of eurozone factories. “We do think the labour market is going to lag behind the overall recovery and we notice the sectors that have been most hit by the pandemic are quite labour intensive,” said Lane. 

VW, which employs more than 660,000 staff worldwide including almost 500,000 in Europe, resisted recent calls from Germany’s most powerful union, IG Metall, for a 4 per cent pay rise. Instead it agreed to a one-off annual 2.3 per cent increase from 2019’s remuneration levels, to take effect next year. At the time the deal was announced, local union leader Thorsten Gröger said the deal meant that “the VW workforce will find a noticeable plus in their wallets”. 

 While VW’s labour costs are little changed, it has been hit by sharp increases in the cost of raw materials. “We feel a lot of pressure on the materials side, steel is one thing, but even more concerning are precious metals . . . aluminium is on the increase,” said chief executive Herbert Diess. “Wherever possible we will pass it on to our customers and we will make sure that the increases will be as low as possible with our purchasing power.” 

 Additional reporting by Claire Jones and Valentina Romei 

Ahead of our budget:

 Note even Labour are saying do not raise taxes yet:

MICHAEL SPENCER

This is how you kill off a recovery

Michael Spencer

Sunday February 21 2021, 12.01am, The Sunday Times

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Rishi Sunak has guided the economy through these dark times with calmness and dexterity. The furlough scheme has supported millions of jobs and Eat Out to Help Out brought light and life back to our high streets last summer.

Now, though, I hear worrying murmurs from the Treasury that Sunak would be well advised to ignore. There is talk that his aides are pressing him to start paying for the enormous costs of the Covid-19 pandemic by increasing taxes, specifically taxes on business and capital, such as corporation and capital gains tax. They want him to announce these in the budget on March 3.

These taxes “poll well”, of course — robbing Peter to pay Paul nearly always gets the ardent support of Paul. They are viewed by many people as taxes on wealthy individuals or anonymous corporations, and (the argument runs) this money is needed to restore the nation’s balance sheet.

This is a dangerous and misleading picture. In reality, these are taxes on investment and entrepreneurialism, and ultimately on the nation’s prosperity.

This would be a terrible route to choose, one that would risk suffocating any economic recovery before it has even started and would deal a body blow to Britain’s reputation as a business-friendly environment.

The UK faces the huge dual challenges of recovering from Covid and forging a new identity after Brexit. More than ever we need the investors, entrepreneurs, innovators, venture capitalists and businessmen, British and foreign, large and small, who will invest in start-ups and existing businesses.

Any increase in corporation or capital gains tax would be a direct attack on them and on the proposition that post-Brexit Britain will be a new and exciting place to invest. This would have a major impact on our longer-term economic outlook. If we want the UK to be a crucible for entrepreneurs, new business, stock market listings and innovation, then we shouldn’t even consider such a step, especially not now. The economy shrank by almost 10 per cent last year — and any increase in taxes would hit a smaller economy even harder. Many entrepreneurs have seen their profits evaporate and their balance sheets shrink alarmingly. They need encouragement, not a further burden.

I know all this to be true because I was one of those entrepreneurs. I started a small company with four staff in the Margaret Thatcher era and built it into a FTSE 100 broker-dealer called Icap (later NEX). I now invest in a broad portfolio of businesses. I and my business have always been UK taxpayers.

Throughout my career, my business, like every other, was exposed to global competition. If the tax burden on British businesses and investors becomes too high relative to those borne by their international competitors, they will suffer. Some will choose to move away; others will simply not start up here.

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Talent and capital are more mobile than ever. You can transfer money anywhere in seconds. Leaders and investors move where the opportunity is greatest and the tax rate is the most attractive. Look at the success of Ireland after it lowered its corporation tax rate to 12.5 per cent. Recall the increase in tax revenues when George Osborne progressively lowered UK corporation taxes. The Laffer curve works. I would go so far as to say that a truly bold leader would set out a narrative of lowering taxes over time.

Labour always wants to increase tax on capital and the so-called wealthy because they really do not understand wealth creation. They believe, simplistically, that there is a finite pot of money that needs to be shared out fairly. They are resentful of individual success and exceptionalism. Conservatives know this to be rubbish.

There is also a harsh irony that the EU was, and still is, terrified that Brexit Britain will lower taxes, thereby attracting huge capital inflows and talent migration. Have we totally lost sight of this great opportunity?

Furthermore, I do not necessarily believe that the nation’s finances, badly damaged though they have been by Covid, need such immediate and drastic action. While the gross national debt-to-GDP ratio is back near wartime levels, the costs of servicing that debt remain very low. The government continues to be able to borrow at rates of far less than 1 per cent. The interest cost of the extra Covid debt may amount to some £3 billion a year — a big sum in absolute terms but trivial compared with some projects, such as the £100 billion cost of High Speed 2 rail.

I have faith that our prime minister and chancellor will ignore the siren calls for tax increases and that courage, wisdom and experience will prevail.

Lord (Michael) Spencer is the founder of NEX Group, the markets and trading business sold to the owner of the Chicago Mercantile Exchange in 2018

Oh gosh - Paradox of Thrift:

 

Britain’s recovery is threatened by the growing savings glut

Saving for a rainy day may seem prudent but can do an awful lot of damage when embraced by all at once

JEREMY WARNER24 February 2021 • 11:00am

Coiled spring or permanently rusted up old engine? Britain’s – and Europe’s – hopes for economic recovery are threatened by a toxic mix of poor productivity and high rates of saving. Inability to spend as freely as we would have liked for the past year, together with high levels of uncertainty about the future trajectory of the economy, has left both household and corporate balance sheets overflowing with excess deposits.

Persuading companies and consumers to disgorge at least some of these monies is key to the rapid bounce back in the economy anticipated by the likes of Andy Haldane, the Bank of England’s chief economist. His depiction of the UK economy as a “coiled spring”, just waiting to be released, doesn’t work if this excess has become permanently and uselessly frozen in bank and savings accounts. Haldane’s hopes rely crucially on a wall of pent-up demand progressively breaking free as Covid restrictions are lifted.Advertisement : 8 sec

The Bank of England estimates that with the savings rate as high as 26.5pc of disposable income at one stage last year, households accumulated an excess stock of savings of around £125bn between March and November, a number which is bound to have risen further still since then with the imposition of a third national lockdown.

The same level of accumulation has been broadly mirrored in the corporate sector, the Bank estimates. That’s a lot of money that could potentially flow back into demand once everyone is confident enough in the success of the vaccine programme to start acting normally again. 

Only one problem; these savings are not evenly distributed. Among households they are disproportionately skewed to higher income earners and retirees.

Much the same can be said of the corporate sector; companies that have survived the pandemic well will be flush with cash, but others, particularly in hospitality and other sectors forcibly closed by lockdown, will have barely two pennies to rub together.

The upshot is that those most likely to have saved the most are also those least likely to spend or invest it productively. Survey evidence seems to support this observation. Most respondents say they plan to keep at least some part of their excess. A permanently higher savings rate may have established itself.

If that turns out to be true, it feeds into the wider debate about growing wealth inequality and secular stagnation.

The economy at large is going to be in some trouble if the better off cannot be persuaded to spend their money, or otherwise invest it in productive activity, but instead simply leave it fallow in seemingly ever-rising asset prices. Poor levels of business investment, innovation and productivity growth would become embedded. And the bubble in asset prices would expand even further.

Instinctively, most of us are against negative interest rates, but you can see the logic. It is very difficult in practice to charge a negative rate on retail deposits; physical cash provides some kind of alternative. But for big, corporate depositors, that’s not an option.

Experience in Denmark, whose central bank was the first to impose a negative bank rate, suggests the threat of confiscation can be persuasive in forcing companies to invest their cash rather than hoard it. That debate has yet to play out within the Bank of England’s Monetary Policy Committee, but at least three of its members seem partially to have bought the arguments in favour of negative rates.

As David Owen of the investment bank Jefferies has argued it may be more important to get the corporate sector spending its surplus than householders. The estimated excess of £125bn is only 10pc of annual household spending, but around 50pc of business investment. Ergo, you get a much bigger relative effect if corporates disgorge the money than households.

That said, fiscal levers are always going to be preferable to monetary manipulation in spurring the hoped-for handover from public to private sources of demand. Negative rates are not going to persuade people and companies to spend and invest what they don’t already have but targeted tax cuts or even Biden-style handouts just might.

It is also possible to envisage any number of “use it or lose it” measures that could be applied to corporate cash hoarders. That’s why it is so important that Chancellor Rishi Sunak does not make the mistake of reining in the public finances too soon in next week’s Budget with much-rumoured “down payments” on fiscal consolidation, such as a hike in corporation tax. Not until households and firms are spending freely again can he afford to apply the brakes.

Keynes called it the “paradox of thrift”. What may seem a worthy, even admirable, characteristic on an individual level – that of saving for a rainy day – can do an awful lot of damage when households, companies and the state all decide to do it en masse.

A look at economic data across economies, and...

 A long, hard look at the China data. This is a challenging read, but it does explain some of the reasons you cannot compare headline Chinese data with the rest of the world:

There Is No Chinese Economic Miracle

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• LEE ESTO EN ESPAÑOL

12/04/2020Daniel Lacalle

Listen to the Audio Mises Wire version of this article.

The year 2020 will be an extremely tough year for the European economy. Added to an unprecedented drop is a strong impact in the fourth quarter due to the new lockdowns. Morgan Stanley estimates that the eurozone’s GDP will fall by 2.2 percent in the fourth quarter, a 7 percent drop in the full year 2020. In addition, the investment bank has lowered the outlook for 2021, with a rebound of only 5 percent in the average of the euro area, delaying the recovery of 2019 GDP to 2023.

The “jobless recovery” is even more worrying. The apparently spectacular rebound data for the third quarter resulted in zero job creation. Unemployment in the eurozone in September stood at 8.3 percent and in Spain at 16.5 percent, not counting the millions of furloughed jobs in Europe.

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In this environment, the United States’s recovery seems much stronger. GDP recovered in the third quarter to just 3.5 percent below 2019 levels. Unemployment has fallen to 6.9 percent in October but remains well above the record employment levels of 2019.

However, the data from China is apparently spectacular. The manufacturing and services index already shows an enviable expansion. GDP for the first three quarters is already growing at 0.7 percent after an expansion of 4.9 percent in the third quarter. Urban unemployment in China is 5.4 percent after shooting to a paltry 6 percent. What is behind the Chinese miracle compared to the poor eurozone?

A planned GDP. The GDP of China is dictated by production, not demand. It is not an observed GDP, but rather planned by the federal government together with the provinces. For this reason, many analysts scrutinize the data and deduct various factors, including the increase and valuation of inventories. It is not by chance that inventories of iron ore, automobiles, and finished goods have risen to the highest level in seven months as the economy recovers. If the economic situation were in the announced expansion, inventories would be falling rapidly when sold. Much is produced that is then not sold and remains in warehouses. Thus, it is not surprising that industrial prices fell 2.1 percent in September, export prices 0.9 percent, and the country’s debt soared 13.5 percent amid an apparently miraculous recovery. Industrial business profits have fallen 2.4 percent between January and September and, furthermore, factory door prices fell faster than expected in September and were at risk of deflation. These are signs of a slowly recovering economy, like all others, but not of a growth miracle.

In most economies, inventories are valued at market prices, while in China they are valued by the authorities and adjusted later. Constant methodological and base changes also lead to doubts regarding annual growth, despite the evident increase in transparency in recent years. Another difficult factor to analyze is the growth of construction activity in a country where overcapacity is evident and ghost cities and white elephant uneconomical projects are multiplying.

The reduction in urban unemployment also hides a more complex reality. Unemployment in China is close to 11 percent on average, according to the "Long Run Trends in Unemployment and Labor Force Participation in China" study (NBER Working Paper No. 21460) and probably well above 13 percent in the midst of the covid-19 crisis. 

According to Capital Economics, Nomura, or HSBC University of Beijing, another important challenge is calculating GDP with a realistic deflator. By using a deflator—the impact of prices on GDP—that is much lower than the observed one, GDP appears artificially higher than it really is. In an economy where inflation is underestimated, nominal wages, which grow at an official 3.6 percent, lose purchasing power almost every year due to the real cost of living, especially in food and daily expenditures, which are much higher than the official ones.

In a recent study ("A Forensic Examination of China’s National Accounts" [2019]) the authors concluded that China’s GDP may have been exaggerated by around 2 percent per year between 2008 and 2016, showing that China’s real GDP is probably 18 percent lower than the official figure. China’s GDP is never revised, and the December figure simply stands and is consolidated without question. This is an important factor that the Chinese authorities have tried to correct with greater transparency and adjustments by the NBS (National Bureau of Statistics). The problem is that provinces have accelerated their race in the effort to provide spectacular figures and the magnitude of the corrections of the national office does not compensate for these “exaggerations.”

Another problem is that annual revisions compute for growth but are not revised in the GDP figure for the year. The calculation base is reduced. For example, according to independent consultancy China Beige Book, gross capital formation for the third quarter of 2019 has been revised down by ¥2.3 trillion. As the 2019 figure falls, the growth on the same data for 2020 seems spectacular. That same review was made with the retail sales figure: those for August 2019 were revised down by ¥50 billion and the growth figure for 2020 seems miraculous. However, a revision of such depth in the base calculation of figures for 2019 did not generate a downward revision of the GDP for that year.

These methodological problems are added to the survey used for the calculation. The government uses a list of companies that generate a minimum amount of revenue. That list grows and shrinks, creating homogeneity problems that the NBS tries to adjust for.

In the United States, each daily, weekly, and monthly data is analyzed by different independent entities and each data point is impossible to manipulate by a government authority. That is why the GDP is constantly revised. China’s GDP is the only one that is not revised. It is published and consolidated.

It is a shame because the reality observed by companies and citizens in China is that the economy is recovering slowly and unevenly, but it is recovering, probably with a year-on-year drop of 2.5 percent, which would be, in any case, a very positive figure. Falling into planned overcapacity and excessive triumphalism on the part of some provinces competing to provide better data than others ends in questioning the reality of the improvement in the economy.

Beijing has pledged to bring the data up to IMF standards, but lack of independent scrutiny and the competition between provinces when it comes to providing positive and spectacular figures continue to generate inconsistencies between sales, inventories, consumption, and profits. The recovery of the real economy in China is happening, but it is not dissimilar to that of many of the leading Asian countries.

Author:

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

Is the Green Agenda worth it?

 Analysis, not propaganda:

If Boris’s green agenda is to fly, it must deliver UK jobs and growth

A UK green revolution is ambitious, but suddenly the geopolitical backdrop makes the venture less risk, more reward

JEREMY WARNER6 December 2020 • 6:00am

First to approve a vaccine to counter the pandemic, and now ahead of the pack too in the scale of its ambitions to tackle climate change.

Is the apparent largesse of Britain’s so-called “Nationally Determined Contribution” - the emissions reduction commitment announced last week for the COP26 UN Climate Change summit in Glasgow next year - just more vacuous, nationalistic boosterism, primarily designed to stir the patriotic juices by seemingly making Britain more environmentally saintly than anyone else, or is this a genuine show of world leadership in tackling the other supposed great global crisis of the age?

A bit of both seems to be the answer.

An unkind joke about Theresa May’s premiership is that her legacy is precisely zero - the legally binding target to net zero carbon emissions by 2050, that is.

Yet it is a goal that Boris Johnson seems equally keen to embrace. The manifesto promise to increase offshore wind to 40 gigawatts by 2030, the ban on sales of new petrol and diesel powered cars and vans from 2030, and now the pledge to lead the way globally by slashing emissions by 68pc by the end of the decade - thick and fast the environmental commitments keep coming.

On this front at least, there would be no need for the level playing field provisions demanded by the EU in free trade agreement negotiations; the UK is already some distance ahead of Europe.

To some it looks insane. At a time when the UK economy needs to become more economically competitive to meet the challenges of Brexit, the Prime Minister seems intent only on ramping up the scale of the UK’s climate change obligations.

It’s all very well to adopt a world leadership role in saving the planet, yet if it destroys the economy in the meantime, he’s unlikely to get much thanks for it at the ballot box.

But here’s the point; it’s not going to destroy the economy. Much more likely is that it is end up part of the economy’s salvation.

A little context. The more ambitious “Nationally Determined Contribution” is in fact only what is needed to keep the UK on track to meet the wider net zero by 2050 target.

The pre-existing NDC had been set at a time when the overall 2050 target was less ambitious - an 80pc reduction in emissions by 2050, not today’s 100pc. So in order to meet the new target, the NDC has to be more ambitious too.

All Boris Johnson is doing is rubber stamping what was in any case going to be the Climate Change Committee’s recommendation on how to update the NDC. As a serious advocate of the need for radical action on climate change, he would have been in some trouble had he rejected it.

All the same, the new commitment, which is to ramp up emissions reduction from 57pc of 1990 levels to 68pc within a decade, is a huge ask. As yet, there is still little in the way of clarity on how to get there. Nonetheless, it is good to see the UK take the lead on a matter of such global significance.

I have to admit to feeling a little ashamed of the national triumphalism on display last week at being the first to approve a Covid vaccine, a “Britain is best claim” made all the more ridiculous by the fact that the vaccine in question was developed by Turkish immigrants in Germany and is manufactured in Belgium.

Full marks to June Raine, head of the Medicines and Healthcare products Regulatory Agency (MHRA), the body that authorised the vaccine, for moving so swiftly. In doing so she helps sustain Britain’s reputation as a home for trustworthy pharmaceuticals regulation and expertise now that the European Medicines Agency has been lost to Amsterdam.

But as with climate change, this should never be seen in terms of a global race. Commendably, the Prime Minister stayed out of the childish gloating among some of his ministers.

“These are global efforts, you’ve got scientists around the world coming together to make this possible. It’s a truly international thing and very, very moving to see,” he said. Quite so.

I doubt whether fast tracking the vaccine is going to give the UK much of a heads start in terms of economic recovery. Any “heads start” looks in any case as if it will be foiled by teething problems in supply.

The US and Europe are at most only weeks behind. For the UK economy to prosper, the global, and yes the EU, economies need to prosper too.

Growth booster

Line chart with 3 lines.

Vaccines should help global growth recover, according to UBS

The chart has 1 X axis displaying values. Range: 2014.93 to 2022.07.

The chart has 1 Y axis displaying % change year on year. Range: -6 to 8.

Growth boosterGDP growthUBS forecast base caseUBS forecast with vaccines20152016201720182019202020212022-6-4-202468Source: World Bank, UBS

Vaccines should help global growth recover, according to UBS

% change year on year

End of interactive chart.

In pushing the boundaries on climate change commitments, the UK perfectly captures the global dimensions of today’s economic challenges.

It was always possible to argue that there was little point in the UK making the effort as long as China and the US, the world’s two biggest emitters, refused to take the issue seriously; whatever Britain did would be like spitting against the wind.

But now China has committed to net zero by 2060, and Biden’s America to 2050. South Korea and Japan similarly so. Indeed, Biden has gone a step further than the UK in also committing to making the power network carbon neutral by 2035.

There is generally reckoned that to be carbon neutral by 2050, the power system has to get there at least 10 years beforehand.

We can therefore expect the UK to follow Biden’s lead shortly. In the spirit of international co-operation on these issues, the UK will also shortly be announcing plans to mirror the European Emissions Trading Scheme with its own independent, but linked, trading scheme for post-Brexit Britain. For the time being, this will be sold as an alternative to more overt carbon taxes.

As for the US, don’t assume that its renewed commitment to climate change goals is greenwashing flam. Biden’s nominated Treasury Secretary, Janet Yellen, supports the idea of both revenue neutral carbon taxes and carbon border adjustment taxes on imports from countries that refuse to make the switch. She’ll be pursuing these goals with vigour.

Ambitious targets are one thing; for the UK economy, the important thing is to tap into their economic potential. The explosive growth of offshore wind is already an outstanding British success story, neatly substituting for the expertise and jobs in offshore engineering that used to be occupied by now semi obsolete North Sea oil. Yet many of the components are still foreign made. A strategy for promoting local content is urgently required.

“The more specific you are about your targets”, says Adair Turner, co-chair of the international Energy Transitions Commission, “the more certain industry can be about the future, and the higher its investment in local innovation, manufacturing and supply”.

Efforts to stem climate change have developed seemingly unstoppable global momentum. Whatever the merits of their case, climate change sceptics have lost the argument.

They have become no more than faintly eccentric, lone voices crying in the wilderness, as irrelevant to the future as Extinction Rebellion, with its focus on impoverishing life-style changes, is to pragmatic pursuit of a carbon free world. That goal will only command majority support if it also offers a plausible path to economic prosperity.