Monday, February 29, 2016

Eurozone tumbles back into deflation; China factory output shrinks more than expected; Technology is eating into middle class jobs, too

1 Eurozone tumbles back into deflation (BBC) Consumer prices in the eurozone fell sharply in February to minus 0.2%, putting more pressure on the European Central Bank. The slide into deflation is a sharp reversal from the revised 0.3% increase recorded in January.

It is the first fall in inflation since September when it shrank by 0.1%, according to Eurostat. Energy drove the decline, with prices down 8% in February compared to a 5.4% slide in January.

The dismal figures have dashed hopes that ECB efforts to boost prices were working. That raises the chance of the bank announcing further stimulus measures next month. It has already announced a cut to its bank deposit rate, which remains in negative territory.

2 China factory output shrinks more than expected (Straits Times) Activity in China's manufacturing sector shrank more than expected in February, an official survey showed on March 1, adding pressure on policymakers to provide additional stimulus for the cooling economy.

The official Purchasing Managers' Index (PMI) stood at 49.0 in February, down from the previous month's reading of 49.4 and below the 50-point mark that separates growth from contraction on a monthly basis. Analysts had predicted a reading of 49.3.

Late on Monday, China's central bank reduced the amount of cash that banks must hold as reserves for the fifth time since Feb. 2015, as regulators move to get more cash into the system to cushion painful structural reforms.

3 Technology is eating middle class jobs, too (Michael White in The Guardian) “One million jobs to vanish in 10 years,” shout the Monday morning headlines just to get the week off to a good start. But it’s not another scary intervention in the referendum debate by a pro-European or a Brexiter. It’s more serious than that.

The culprit on this occasion is the British Retail Consortium (BRC), the people who speak for shops of many sizes and employ one in six of British workers, about 3 million people. They think that 900,000 of them (not quite the million of the FT’s headline) will disappear in the next decade, more in smaller businesses and poorer areas.

Why so? This is an upgrade of an old story, the impact of disruptive technologies on existing patterns of employment, bigger and smarter computers, more online sales. But since George Osborne decided to become the worker’s friend and raise the minimum wage to a “national living” variety (NLW), albeit slowly, it’s also a political story. Higher wages imposed by government will put low-paid shop workers’ jobs in danger, says the BRC.

Don’t be smug, Mr Lawyer, Ms Doctor, Sir Financial Adviser. Tech is starting to eat good middle-class jobs, much as automated production lines ate so many well-paid working-class jobs a generation ago. We know about this in journalism because our business was one of the first white-collar industries in the queue. Facebook and Google are busy eating our lunch; if we aren’t nimble enough, we’ll be pudding.

It was Keynes who first spoke of “technological unemployment”. But it’s getting faster, as it did for handloom weavers around 1800. The result for all such businesses, so the conventional scenario goes, is the pear-shaped labour market, which sees huge rewards for a tiny elite at the top and a lot (though not enough) insecure ones for millennials working in the gig economy.

So computers may beat us all at chess, but we still have the edge on human-to-human skills and much still needs to be done to tackle mental health problems in the ways we have done so many physical ailments with spectacular success. Is the future jobs path out of retail and into therapy?

Sunday, February 28, 2016

Setback for hardliners in Iran poll; Finland as the new 'sick man' of Europe; More downside pressure for oil

1 Setback for hardliners in Iran poll (Saeed Kamali Dehghan & Ian Black in The Guardian) Hardliners in Iran have been dealt a humiliating blow after reformist-backed candidates in Friday’s hard-fought elections appeared on course for a sweeping victory in Tehran, with a combination of moderates and independents sympathetic to President Hassan Rouhani leading in provinces.

A coalition of candidates supported by the reformists, dubbed “the list of hope”, is likely to take all of the capital’s 30 parliamentary seats, according to the latest tally released by the interior ministry, in surprising results seen as a strong vote of confidence in Rouhani’s moderate agenda. Mohammad Reza Aref, a committed reformist who has a degree from Stanford University in the US, is at the top of the list.

Preliminary results for the Assembly of Experts, which is responsible for appointing the next supreme leader, showed Ayatollah Akbar Hashemi Rafsanjani, a key Rouhani ally, leading the race. Elections to the assembly are usually a lacklustre event but have attracted huge attention this time because of the age of the current leader, 76-year-old Ayatollah Ali Khamenei.

Khamenei and Rafsanjani, a prominent pragmatist who was not allowed to run for president in 2013, have been at odds in recent years. Results may not be finalised until Tuesday but if they tally with the initial figures there will be a palpable change in the Iranian political landscape with moderates dominating the scene and hardliners being pushed back to the fringes.

As many as 20 women are expected to win parliamentary seats, a record for Iran. Among them is the reformist candidate Parvaneh Salahshori, who said in a recent foreign media interview that women should have a choice to wear the hijab. The issue is a taboo subject in the Islamic Republic.

The reformists’ victory is a credit to Mohammad Khatami, the former president seen as the ultimate leader of the country’s reformist movement. Khatami has faced huge restrictions on his movement and activities in recent years but is leading from behind the scenes. The Iranian media is banned from mentioning his name or publishing his photograph. Khatami released a video online early in the campaign period urging political activists to unite behind “the list of hope”.

2 Finland as the new ‘sick man’ of Europe (Andrew Walker on BBC) Is Finland now officially "the sick man of Europe"? That dismal description comes from the country's own Finance Minister, Alexander Stubb.

The broadest measure of that, GDP, is still about 7% below the high it reached at the end of 2007, just before the global financial crisis. Most, though not all, eurozone countries have got back to those earlier levels and a bit above. Even one country that was bailed out, Ireland, is among those relatively strong performers.

Finland's disappointing performance has also shown up in the unemployment figures, which rose from 6.2% of the workforce in early 2008 to 9.5% in the most recent figures. So who is to blame? The slightly flippant answer is: the late Steve Jobs, founder of Apple. But there is a serious point behind that - well two actually, although it's not the whole story of Finland's economic troubles.

In 2014 Mr Stubb, who was the prime minister at the time, told a newspaper that: "Steve Jobs took our jobs." What he meant was that Apple products had created serious challenges for two very important Finnish industries. One was forestry - in particular, paper. The other Apple-related casualty is Nokia, which incidentally began life as a paper producer in the 19th Century.

It's just one company, but a huge one that overshadowed a small economy. According to a report: "Its direct contribution accounts for 1/3 of the GDP decline and its shedding of employment for 1/5 of the reduction of total employment between 2008 and 2014."

So there you have it. Finland's economic troubles are due to Steve Jobs and the business he created. Well, no. There have been a few other things going on too. The collapse of the Soviet Union in the early 1990s hit Finnish exports. Russia's trade retaliation against the EU has also hit Finland, as it banned some EU imports.

Still, it's worth recalling that, as the OECD said in a recent assessment, "Finland enjoys a high level of income and well-being" and despite the rise in unemployment "social safety nets keep income inequality low". It's just that if Finland had adjusted better to all the shocks, incomes would probably be quite a bit higher.

3 More downside pressure for oil (Camille Accad in Khaleej Times) The price of Brent crude fell to the lowest monthly average in a decade in January, at $30.8 per barrel. Brent price averaged $52 last year and $99 in 2014. Oil supply outpaced demand in the last two years, but the market is expecting a tighter market in 2016. The consensus view is that oil prices will gradually bottom out from January's low, remaining below last year's level.

US Energy Information Administration forecasts Brent price to average $37.4 per barrel in 2016, reaching $43 by December. Market views are roughly aligned, as Brent futures contracts averaged $35 per barrel for 2016 as of last week. The market may be underestimating future supply and overestimating future demand, which would result in oil prices falling below EIA's forecast for a third consecutive year.

The IMF projects a recovery in economic growth, from 3.1 per cent year on year in 2015 to 3.4 per cent year on year this year. In our view, global demand will most likely decelerate, to around 2.8 per cent. The IMF expects US growth to rise slightly this year, but recent data suggest otherwise. Investment and consumption are sluggish, the industrial sector is contracting and the labor and property markets are showing early signs of a slowdown.

The IMF expects the euro zone and Japan to accelerate too, but these economies show no signs of strength. Moreover, China, the world's largest oil importer, will continue on its deceleration path this year due to its structural rebalancing. EIA and I expect oil demand growth to decelerate slightly from 1.5 per cent year on year in 2015 to 1.3 per cent this year. In our view, these growth estimates are too high.

The recent removal of sanctions on Iran and the return of Iraq's energy industry following years of devastating conflicts is driving a reemergence in their output. Russia, Saudi Arabia and Venezuela, who are producing near record highs, are ready to cap production at current levels, but the deal depends on the participation of Iran and Iraq, which is unlikely to happen.

Saturday, February 27, 2016

US growth revised upwards; Tesco considering 39,000 job cuts; The more connected, the more you prosper

1 US growth revised upwards (BBC) The US economy grew at a faster pace than previously thought in the fourth quarter of 2015, according to the latest official figures. The US economy grew at an annualised pace of 1% in the quarter, compared with an initial estimate of 0.7%.

Most economists had taken a more pessimistic view, expecting the figure would be revised downwards. But businesses bought more stock than previously estimated, which meant inventory levels were $13bn higher. The downside is that next month's growth figures may be lower than expected if businesses do get round to cutting back on inventory spending.

Chris Williamson, chief economist at research firm Markit, said: "Unfortunately, the cause of the upward revision bodes ill for the first quarter. The GDP number was revised higher in part due to a bigger than previously thought contribution from inventories, something which often happens due to weaker than expected demand, meaning inventories could act as a drag in the first quarter as excess stocks levels are wound down again."

Cheap oil and lower heating bills from a mild winter has helped consumer confidence. But some economists fear that the slowdown in consumer spending could get worse. The chair of the US central bank, the Federal Reserve, Janet Yellen has indicated that rates could rise gradually through the year if the economy grows strongly enough.

However, many economists believe US growth will be held back by slowing economies round the world from China to Brazil, pushing down the prices of raw materials and leading to deflation. A Reuters survey this month estimated that the top 30 global oil companies had cut their budgets by an average of 40%.

2 Tesco considering 39,000 staff cut (Graham Ruddick in The Guardian) Tesco is considering cutting store staff by 39,000 over the next three years as Britain’s biggest supermarket group attempts to reverse a slump in profits.

The potential job losses, revealed in a leaked document, are the equivalent of Tesco shedding one in six employees, either by cutting jobs or reducing hours. Tesco confirmed the validity of the document but said it had modelled various scenarios and had no plans to announce further job losses.

The group, which employs more than 300,000 people in the UK, cut thousands of jobs last year as its new boss, Dave Lewis, tried to turn around the company’s financial performance. The retailer reported a £6.4bn pre-tax loss last year, one of the biggest in British corporate history.

Tesco’s large out-of-town supermarkets have suffered as British households have changed shopping habits, moving away from buying food in one weekly shop and turning increasingly to convenience stores, online and the discounters Aldi and Lidl. Tesco is also being investigated by the Serious Fraud Office after a £326m black hole was discovered in its accounts.

Roughly 45,000 people leave Tesco every year through natural wastage, meaning the cuts could be achieved without redundancies if the company chooses to not replace departing employees. Britain’s big four supermarkets have already cut thousands of jobs in the last year as they adapt to falling sales in their supermarkets. Last year Tesco, Sainsbury’s and Morrisons closed dozens of shops.

In contrast, Aldi and Lidl, the German discounters, are hiring thousands of workers. Earlier this month Aldi announced it would create 5,000 jobs in the UK this year for the opening of 80 new shops.

3 The more connected, the more you prosper (Khaleej Times) It's a lesson everyone from a Mafia member to an Ivy-League applicant knows only too well: It pays to be connected.

And it's something that countries striving to improve the lot of their citizens should pay heed to as well. Global consultants McKinsey found that the more tied-in a country is to the rest of the world, the better its economy fares. Being connected doesn't stop at trade and finances. It's also about people - primarily the number of immigrants a nation has - and the amount of data streaming across a country's borders.

Putting it all together, the McKinsey Global Institute ranked 139 countries by how linked they are to the rest of the world. At the top is the tiny island state of Singapore, which has successfully made itself into a regional centre in Asia, and the Netherlands, one of Europe's main digital hubs.

The US comes in third, followed by Germany. China ranks seventh. At the bottom is another island nation, Seychelles, and Sierra Leone. Japan, the world's third-largest economy with a host of global brands, comes in surprisingly low, at No. 24, mainly due to its limits on immigration.

The report reckons that the world economy as a whole benefited to the tune of about $7.8 trillion in 2014 from the flow of goods, services, finance and data across borders. "Countries that are open to global flows increase their GDP," said Susan Lund, a partner at the institute who is located in Washington.

World trade growth has slowed markedly. And global capital flows have collapsed, after peaking at close to $12 trillion in 2007 before the onset of the financial crisis. Yet the baton has been taken up by an explosion in the transmission of data around the world. Half of Facebook's users had at least one international friend in 2015, up from just 16 per cent in 2012.

Wednesday, February 24, 2016

IMF warns global economy is vulnerable; Brazil stripped of investment grade status; India still blighted by caste issues

1 IMF warns global economy is vulnerable (BBC) The International Monetary Fund (IMF) has said the global economy has weakened further and warned it was "highly vulnerable to adverse shocks". It said the weakening had come "amid increasing financial turbulence and falling asset prices".

It said China's slowdown was adding to global economic growth concerns. China's economy, the second-biggest in the world, is growing at the slowest rate in 25 years. "Growth in advanced economies is modest already under the baseline, as low demand in some countries and a broad-based weakening of potential growth continue to hold back the recovery," the Washington-based IMF said.

"Adding to these headwinds are concerns about the global impact of China's transition to more balanced growth, along with signs of distress in other large emerging markets, including from falling commodity prices."

The IMF also noted any future prospects for global growth "could be derailed by market turbulence, the oil price crash and geopolitical conflicts". Earlier this year, the IMF downgraded its forecast for global economic growth. It now expects economic activity to increase 3.4% this year followed by 3.6% in 2017.

2 Brazil stripped of investment grade status (San Francisco Chronicle) Brazil's battered economy took another blow on Wednesday when Moody's became the last of the three major credit ratings agencies to strip the country of its investment grade status.

The agency lowered Brazil's ratings by two notches, from Baa3 to Baa2 with a negative outlook. Fitch Ratings lowered Brazil into junk territory in December, mirroring a similar move by Standard & Poor's in September.

In a note accompanying its decision, Moody's said the downgrade was driven by worries over an increase in government debt "in a low-growth environment" and the country's "challenging political dynamics".

The agency said it expects the government's debt to exceed 80 percent of gross domestic product within the next three years and for the economy to contract by an average of 0.5 percent a year through 2018.

Last week, Brazil's central bank published statistics showing that the economy shrank over 4 percent in 2015. On Thursday the Organization for Economic Cooperation and Development forecast the country's GDP would contract by a further 4 percent in 2016. The gloom over the country's economic prospects is compounded by the poisonous atmosphere in congress, where the government is struggling to win support for its austerity measures.

A long-running corruption scandal at the state-run oil company, Petrobras, has implicated dozens of senior politicians and many of the country's top business executives. President Dilma Rousseff also faces impeachment proceedings over claims she used public banks to plug budget gaps, as well as accusations that she used illicit funds to finance her 2014 re-election campaign.

2 India still blighted by caste issues (Priya Virmani in The Guardian) It’s now four days since Delhi was paralysed by members of the Jat caste. Unrest is so common in India that I heard one local complain, “At least the protestors could have given us the weekend off,” but the situation has been dire. Most of the city was left without water after rioters vandalised the Munak canal. Schools have been closed. At home, people have had to skip bathing and washing clothes.

All this must seem baffling to non-Indians. To the outside world, the idea of caste belongs firmly in the past. It is no secret that the dalit caste, once known as “untouchables”, were and still are the victims of shocking discrimination, but the community at the centre of the current disturbances, the Jats, are fairly prosperous landowners.

They come from the northern Indian state of Haryana, which surrounds Delhi on three sides. Though still fairly prosperous, they are feeling the pinch because of population growth, which has reduced the size of their farm holdings, and two successive years of drought and failed crops.

They are now demanding that the government give them the official status of “backward class”. Under India’s system of affirmative action, colloquially referred to as “reservations” or the “quota system”, this would allow Jats access to jobs and university places set aside for those from the lower castes.

Independent India inherited a historically rooted caste system that was notorious both for its rigidity and for its efficiency in maintaining the existing power structures. For millennia, an individual’s socio-economic position could only be inherited and never acquired. It was to address this long-standing injustice that the Indian constitution, which came into effect in 1950, incorporated a system of affirmative action.

Over decades the original “backward classes” have been joined by many better-off castes in politically motivated moves that have discredited the quota system, as well as reducing its effectiveness. With Jats comprising more than a quarter of Haryana’s voters, it is hardly surprising that the state’s politicians have spent 20 years wooing them with promises of affirmative action.

For now, the government has agreed to the Jats’ demands. This has brought a degree of calm. More than peace, what the government is attempting to buy here is Haryana’s votes. Jats played a crucial part in the BJP’s victory in the 2014 general elections. At the same time, everyone involved knows that India’s supreme court could overturn any change to the Jats’ status, as they do not fundamentally qualify as a “backward class”.

The execution of affirmative action in India has been complex, messy and overarchingly politically motivated. What is clear from this latest debacle is that its current guise is not fit for 21st-century India.

Tuesday, February 23, 2016

Asian shares fall as Saudi Arabia rules out production cuts; Bank of England may cut interest rates to zero; As mining cools, Australia turns to agriculture

1 Asian shares fall as Saudi Arabia rules out production cuts (Straits Times) Asian shares retreated on Wednesday as a nascent recovery in the oil market lost momentum after Saudi Oil Minister Ali Al-Naimi effectively ruled out production cuts by major producers anytime soon.

MSCI's broadest index of Asia-Pacific shares outside Japan extended earlier losses to fall 1.1 per cent as of 10:46 am Singapore time, slipping further from Monday's six-week high. Japan's Nikkei shed 0.7 per cent on the drop in oil prices and as the stronger yen weighed on exporters. Chinese shares opened higher but surrendered the gains, with the CSI 300 index down 0.1 per cent and the Shanghai Composite little changed.

Mr Naimi told oil executives that markets should not view the agreement by four major oil producers to freeze at the January level as a prelude to production cuts. While Mr Naimi said he was confident more nations would join the pact, Iran was seen as unlikely to agree to the output cap, which does not allow Iran to regain the market share it lost during sanctions.

The toll from low oil prices is also spreading to banks that have exposure to the energy sector, as roughly a third of US shale oil producers are at high risk of slipping into bankruptcy this year, according to a study by Deloitte. JP Morgan, the largest US bank by assets, said it will increase provisions for expected losses on energy loans by $500 million, or more than 60 per cent of its existing reserves.

2 Bank of England may cut rates to zero (Phillip Inman in The Guardian) The Bank of England could cut interest rates to zero, but will seek to avoid following Sweden, Denmark and the eurozone by setting negative rates to bolster growth and inflation.

Mark Carney, the Bank’s governor, said Threadneedle Street had “no intention and no interest” in implementing negative interest rates and would adopt the full range of the Bank’s other powers to deal with a downturn in the economy.

He said: “If we were in a position where the economy needed additional stimulus ... we could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets. Carney said the world economy had entered a period of low growth and low interest rates and was likely to be prone to financial shocks.

He added that Threadneedle Street might need to respond with additional stimulus measures, but to protect the profitability of the UK’s banks and building societies, the monetary policy committee (MPC) would avoid cutting from the current base rate of 0.5% to below zero.

The message that negative interest rates would be a last resort comes before an expected push by the European Central Bank to deploy the measure on a bigger scale at its next meeting to increase lending and growth in the eurozone. Japan and Switzerland have also adopted negative interest rates in recent months.

3 As mining cools, Australia turns to agriculture (Karishma Vaswani on BBC) Asia has become a major buyer of Australian agricultural products. Australia sold a record $600m of beef to China in 2015, and that growth shows no signs of slowing, with China's appetite for beef expected to soar to 2.2 million tonnes by 2025.

The push into agriculture couldn't come soon enough. Recent reports forecast a worrying economic future for Australia, despite it having had 25 years of consecutive growth.vThe Committee for Economic Development of Australia (CEDA) says Australia is facing hazards it hasn't seen in its economy in more than 20 years.

The end of the mining boom, and a dependence on China are both reasons why Australia is suffering, which is why the government is so keen to keep agricultural exports to Asia growing. But Australia's agricultural exports are only worth a third of what coal and iron bring to the economy.

Even if Australia tried to be the food bowl of Asia, it only produces food enough to feed its own country and another 80 million people. That's not enough to feed neighbouring Indonesia, let alone the whole of Asia. Australian producers say though that they're not trying to satisfy the entire region's needs - it's just the 1% or 2% at the top who they want to sell their premium products to.

Australia has been burned before by hitching its fortunes to Asia, and in particular to China. First Australia sold coal and iron to the Chinese, now it is trying to sell lettuce and beef. But as Asia slows down, that could hurt farms and feedlots here in the future.

Monday, February 22, 2016

BHP Billiton reports $5.67bn loss; Pound tumbles to seven-year low on Brexit fears; Slowdown shows in Singapore housing market

1 BHP Billiton reports $5.67bn loss (Chris Johnston on BBC) Mining giant BHP Billiton has posted a huge half-year net loss of $5.67bn and warned that weak commodity prices will continue. The figure for the six months to December compared with a profit of $5.35bn for the same period in 2014.

Lower commodity prices slashed revenue by 37% to $15.7bn, sending underlying profit down 92% to $412m. BHP, one of the world's biggest mining companies, took the axe to the interim dividend. It has abandoned its long-held policy of maintaining or increasing dividend payments to shareholders, reducing the payout from 62 cents a share to just 16 cents.

Chairman Jac Nasser said BHP now believed the period of weaker prices and higher volatility would be prolonged. The company pledged to pay a minimum of 50% of underlying profits in dividends in the future.

Mining companies such as BHP have been under intense pressure as a slowdown in China's economy results in lower demand for key commodities, such as iron ore and coal. BHP Billiton is one of the world's largest producers of major commodities including iron ore, metallurgical coal, copper and uranium, and has substantial interests in both conventional and shale oil and gas and energy coal.

BHP was founded in the mid-1800s in Australia, while Billiton's roots can be traced back to a tin mine in Indonesia in 1851. The Anglo-Dutch company merged with BHP in 2001 to form a global mining giant. However, that merger was partly undone last year when it spun off some smaller assets into a new company called South32.

2 Pound tumbles to seven-year low on Brexit fears (Katie Allen & David Hellier in The Guardian) The pound tumbled to a seven-year low and the UK was warned its credit rating was at risk on Monday as the effect of Boris Johnson’s backing for the Brexit campaign was felt in financial markets.

However, as traders and city economists wagered that the London mayor’s intervention had raised the probability of a leave vote in June’s EU referendum, high-profile business figures threw their support behind prime minister David Cameron’s push to stay in the EU.

The bosses of some of Britain’s top companies, including easyJet, the defence contractor BAE Systems and Shell, signed a letter backing a vote to stay in Europe. The letter was signed by the heads of about a third of the businesses on the FTSE 100 index of Britain’s largest stock-market-listed companies.

Investment banks renewed warnings of the economic risks from a Brexit, predicting exports and investment would be hit. Britain’s biggest bank, HSBC, used its annual results update to warn of a “heightened risk of uncertainty” from a vote to leave the EU. Those fears were reflected in currency markets where the pound suffered its biggest one-day drop of Cameron’s premiership.

The credit ratings agency Moody’s put the government on alert that a decision to leave the EU could lead to a downgrade of the UK’s strong credit score, potentially pushing up the cost of government borrowing.

Moody’s rates the UK Aa1, one notch below the coveted top triple-A score. The agency said if the British public voted to leave the EU, it would consider assigning a “negative outlook” to that rating, compared with a “stable” outlook currently. Such a forecast would imply a greater chance of a downgrade of the Aa1 rating in the future.

3 Slowdown shows in Singapore housing sector (Rachael Boon in Straits Times) The economic slowdown and the tough leasing market led to a jump in the number of residential properties put up for auction last year, said property research house DTZ.

Listings for mortgagee sale - which is when a bank puts a property up for auction when its owner cannot service the home loan - almost doubled to 87 units from 47 in 2014. There were only nine properties under mortgagee sales in 2012, when the property market was growing.

More owners were also forced to put their properties under the hammer. Listings for owner's sale rose to 135 properties last year from 77 in 2014. DTZ also noted that more landed properties and large apartments were listed for auction last year.

DTZ said with the recent stock market sell-off, there will likely be more choice homes put on the block. Said Dr Lee Naijia, DTZ's head of SEA Research: "Sudden shocks in the equity markets tend to be a precursor for more auction listings, as owners need to adjust their financial position. This will offer prospective home buyers a window of opportunity to acquire homes at reasonable prices."

Sunday, February 21, 2016

Japan manufacturing slows sharply; Plunging oil forms alliance of enemies; How 'black money' saved India economy

1 Japan manufacturing slows sharply (Straits Times) Growth in Japan's manufacturing activity slowed sharply in February as new export orders contracted at the fastest pace in three years, a worrying sign that overseas demand is deteriorating rapidly as China's economy slows, a preliminary survey showed on Monday.

The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.2 in February on a seasonally adjusted basis from a final 52.3 in January. But it remained above the 50 threshold that separates contraction from expansion for the 10th consecutive month.

The sub-index for new export orders fell to a preliminary 47.9 from 53.1 in January, which would indicate the biggest contraction since February 2013 if confirmed in final data. Exports in January tumbled by the most since the global financial crisis, in a clear indication that financial market turmoil and slowing emerging market economies have eroded demand abroad.

Under pressure from faltering global demand, total new orders from customers at home and overseas also changed direction and contracted, while job creation cooled to a five-month low. Companies cut selling prices for the third month in a row, and more sharply than in January, likely reflecting both falling commodity prices and sluggish demand.

Japan's economy contracted more than expected in the fourth quarter due to weak household spending and exports. While analysts expect a moderate recovery this year, stagnant wages, depressed consumer prices and faltering global growth have raised fresh doubts about Prime Minister Shinzo Abe's cocktail of stimulus policies aimed at re-energising the economy and quashing years of deflation.

2 Plunging oil forms alliance of enemies (Ian Black & Terry Macalister in The Guardian) The Iranian endorsement of a plan by its arch regional rival, Saudi Arabia, to stabilise global oil prices could be seen as a diplomatic coup for Riyadh.

However, Tehran’s support for a production freeze has not been driven by a new desire for political rapprochement as much as acceptance of a greater enemy: collapsed commodity prices. The markets are flooded in crude at a time when demand is faltering due to the slowdown in expected growth from key importers such as China. Desperate times require desperate measures.

Iran and Saudi Arabia are rival oil producers but also bitter adversaries in regional politics. Short of a shooting war, tensions could hardly get any worse at this particular moment. The Saudis severed diplomatic relations with Iran in January following a mob attack on their embassy in Tehran – a protest at the execution of a leading Shia cleric, Nimr al-Nimr, in Saudi Arabia’s eastern province.

Despite this unpromising geopolitical backdrop, last week there were positive moves towards an oil production deal. The price of Brent blend crude soared 7.5% on Wednesday after Bijan Zanganeh, Iran’s oil minister, came out of a two-hour meeting with some of his Opec counterparts to approve a deal hatched by Saudi with non-Opec member Russia the day before.

Iran, which has the fourth-biggest oil reserves in the world, had previously trumpeted its desire to vastly expand its output following the lifting in January of western sanctions imposed over its nuclear programme. It still remains unclear exactly what will happen now: the Saudis and Russians said they would hold their output at January levels, but only if other key players – including Iran – joined in.

However, the wider political and religious rivalry between Saudi Arabia and Iran is unlikely to go away any time soon. Saudi control of Mecca and the hajj pilgrimage gives it legitimacy in the Sunni Muslim world, while Iran is a beacon for Shias everywhere. Arabs and Persians have long memories of prejudice, though in modern times their animosity began with the 1979 revolution and grew after the Iraq war in 2003.

3 How ‘black money’ saved India economy (Justin Rowlatt on BBC) There is no question that India has the most positive economic story on the planet. Buoyed by increased manufacturing output, India's economy grew by 7.4% in the third quarter of 2015, the fastest growth of any major country in the world. But there is a dark side to India's success, says one of the country's most eminent economists.

Kaushik Basu, the chief economist of the World Bank, says the nation's tradition of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economies in the last few years. It is an extraordinary claim for such an influential figure to make but, as he says in his new book, An Economist in the Real World, "economics is not a moral subject".

His argument is that the pervasive use of "black money" - illegal cash, hidden from the tax authorities - created a bulwark against a crisis in the banking sector. Let me explain. Back in the last years of the noughties India's economy was looking just as frothy as the rest of the world. The difference in India is that this "irrational exuberance" did not end in disaster.

There was no subprime loans crisis to precipitate a wider crisis throughout the banking sector. So the big question is why not. There were some shrewd precautionary moves by India's central bank, concedes Mr Basu, but he says one important answer is all that dirty money.

In most of the world the price you pay for a property is pretty much the price listed in the window of the local realtor or estate agent. Not in India. Here a significant part of almost all house purchases are made in cash. And because the highest denomination note in India is 1,000 rupees, ($15; £10) it isn't unusual for a buyer to turn up with - literally - a suitcase full of used notes. The cash payment is what Indians refer to as "black money".

It means the seller can avoid a hefty capital gains tax bill. Buyers benefit too because the lower the declared value of the property, the lower the property tax they will be obliged to pay. What it also means is that Indians tend to have much smaller mortgages compared to the real value of their properties than elsewhere in the world.

That's why when the crash came, the balance sheets of global big banks collapsed along with property prices. But when prices fell in India - and they did fall in 2008 and 2009 - most bank loans were still comfortably within the value of the property. That's why India managed to avoid the subprime crisis that did so much damage elsewhere.

Thursday, February 18, 2016

Venezuela raises fuel price 6,000%; Japan exports slump the most since 2009; Bombardier to cut 7,000 jobs

1 Venezuela raises fuel price 6,000% (Sibylla Brodzinsky in The Guardian) Venezuela’s president, Nicolás Maduro, has announced the first rise in petrol prices in 20 years and a sharp devaluation of the currency which he said aimed to shore up the flailing economy, hard hit by falling oil prices which make up 95% of foreign income.

 Prices at the pump in Venezuela will jump as much as 6,086% for 95 octane gasoline, from 0.097 bolivars to 6 bolivars, or 1,300% for 91 octane as of Friday. The official exchange rate used for food and medicine imports will weaken to 10 bolivars per dollar from 6.3, while a second rate will be allowed to float.

 The socialist government’s announcement revealed some of the free market reforms that analysts have been clamouring for in the oil-dependent nation although critics say they don’t go far enough to right the country’s crisis-hit economy. “This is a necessary measure, a necessary action to balance things, I take responsibility for it,” said Maduro in a five-hour televised speech in which he announced the measures.

 Maduro said the new fuel prices would help support social programmes such as housing, health services and education, which had won his predecessor, Hugo Chávez, a broad following when he set the country on a socialist path 17 years ago.

 Maduro said he hoped the measures “will be understood by the people on the streets”, alluding to the 1989 wave of violence known as the “Caracazo” that left hundreds dead, sparked by a rise in fuel prices. Maduro also announced a 20% increase to the country’s minimum wage, effective 1 March.

 But even with the rises, Venezuela’s petrol will still be the cheapest in the world, allowing Venezuelan’s to fill their tanks with high-octane gasoline for the equivalent of the price of three beers. Wall Street analysts previously said Venezuela needed a sharp currency devaluation, spending cuts and a rise in fuel and electricity prices to avoid further economic meltdown. But local analysts said the changes announced by Maduro had not gone far enough.

2 Japan exports slump the most since 2009 (Straits Times) Japan's annual exports in January fell the most since the global financial crisis as demand weakened in China and other major markets, leaving the economy in a precarious position after a fourth-quarter contraction.

 Ministry of Finance data showed exports fell 12.9 per cent year-on-year in January versus a median market estimate for a 11.3 per cent drop, with the fourth straight month of declines led by a slump in shipments of steel and oil products. It was the biggest decline since October 2009 when the global financial crisis knocked demand across the world.

The latest data adds to growing concerns that Japanese authorities are left with few options to revive a stumbling economy even as the Bank of Japan remains proactive in policymaking, shocking markets last month by adopting negative interest rates to spark momentum.

The slowdown in China, Japan's biggest trading partner, remains a big drag on the domestic economy as well as globally, hurting exporters of commodities and a wide swathe of consumer products. In January, Japanese exports to China fell 17.5 per cent from a year earlier, down for a sixth straight month due to declines in shipments of liquid-crystal device and organic compounds.

 The world's third-largest economy contracted an annualised 1.4 per cent in October-December. While analysts expect a return to moderate growth in the current quarter, sluggish exports and weak consumer spending underscore the difficulty policy makers have in putting the economy back on track.

Japan is not alone in suffering a rough start for its exporters, with the chill in China rippling across trade-reliant regional economies such as South Korea, Taiwan and Singapore. Shipments to Asia, which account for more than half of Japan's overall exports, fell 17.8 per cent in January, marking a fifth consecutive month of annual declines.

3 Bombardier to cut 7,000 jobs (BBC) Canadian plane and train maker Bombardier will cut its workforce by about 7,000 over the next two years, it has said. Job losses will be partially offset by hiring for the production of its CSeries commercial jets, it said.

Bombardier will also cut 270 management and contractor jobs at its trains business in the UK, with 44 permanent positions to go. The UK rail business employs 3,500 people. The firm said it had made a net loss of $5.3bn (£3.7bn) in 2015, and had revenues of $18.2bn - 10% lower than the year before.

Bombardier also forecast lower revenues for 2016, saying it expects to generate between $16.5bn and $17.5bn. The 7,000 posts to be cut will include 2,000 contractors, and will fall mainly on the transportation and aerostructure parts of the business.

Tuesday, February 16, 2016

Oil falls despite Saudi-Russian deal; China plans new steps to boost economy; Apple issues bonds worth $12bn

1 Oil falls despite Saudi-Russian output deal (BBC) Oil prices fell on Tuesday despite Saudi Arabia and Russia agreeing to freeze oil output at January levels if other producers follow suit. The announcement came after ministers from the two nations met in Doha along with their counterparts from Venezuela and Qatar.

Brent crude, which had risen more than 5% earlier, finished down 3.2% at $32.33 a barrel, while US crude was down 2% at $29.14. Oil prices have sunk from their recent peak of about $116 in June 2014.

Saudi Arabian oil minister Ali al-Naimi said: "Freezing now at the January level is adequate for the market. We don't want significant gyrations in prices, we want to meet demand. We want a stable oil price."

Iraq's oil ministry said the country was also ready to commit to a production freeze if a deal was reached among other producers. Iraq announced record oil production in January, when output from all its fields averaged 4.7 million barrels per day. It is Opec's second largest oil producer, according to the International Energy Agency.

But Iran's petroleum minister, Bijan Zangeneh, said that the country would "not forego its oil market share". Iran is keen to recover lost ground after western sanctions were lifted recently, adding to fears about oversupply. It aims to raise crude production and exports to one million barrels a day.

Tensions also remain between Saudi Arabia and Russia over Syria. Russia is supporting President Assad's regime, with help from Iran while Saudi Arabia as the regional Sunni power is backing opposition forces.

2 China plans new steps to boost economy (Straits Times) China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending.

The nation's chief planning agency is making more money available to local governments to fund new infrastructure projects, according to people familiar with the matter. Meantime, China's cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending.

Officials are upping their rhetoric too. Premier Li Keqiang said policy makers "still have a lot of tools in the box" to combat the slowdown in the world's No 2 economy, days after People's Bank of China Governor Zhou Xiaochuan broke a long silence to talk up confidence in the nation's currency, the yuan.

The nation's communist leaders are seeking to maintain economic growth of at least 6.5 per cent a year through 2020 to meet their pledge of creating a "moderately prosperous society." China's annual National People's Congress meets in March, where delegates will sign off on a new five-year economic plan.

China grew by 6.8 per cent last quarter, the slowest pace since the global financial crisis. The sluggish performance came against the backdrop of a stock-market rout and a sudden devaluation in the yuan that roiled investors amid fears of further weakness.

Signs are now emerging that six interest-rate cuts by the People's Bank of China since November 2014, along with other measures to boost lending, are starting to flow through. PBOC data released Tuesday showed that aggregate financing surged to 3.42 trillion yuan in January, compared with the median forecast of 2.2 trillion yuan in a Bloomberg survey.

In a more positive sign, companies are paying down their foreign debt. Over the past six months, corporates have shaved their dollar borrowings to $820 billion from $940 billion in July. Cutting back on US dollar exposure brings down borrowing costs for companies in the real estate, energy and banking sectors especially, and removes risks should the yuan continue to weaken.

3 Apple issues bonds worth $12bn (Sam Thielman in The Guardian) Apple announced it was issuing bonds estimated in value at $12bn, despite a current cash reserve of $215bn. The bond issue, the latest in a series of huge debt issues, will be used largely to return money to shareholders without repatriating any of the estimated $177bn it holds overseas at a tax rate lower than it would be charged in the US.

Reports indicate that US-based companies are offshoring some $2.1tn in cash between them; Google, Apple and Microsoft alone account for one-fifth of that wealth. Some firms have decided to begin bringing the previously tax-free cash back into the country as lawmakers begin to develop policies that disallow untaxed foreign liquidity.

Apple’s bond issuance appears to give the company another out. The tech behemoth’s CEO, Tim Cook, has been voluble on the topic of whether the largest company in the world goes too far to avoid paying taxes on its income. “Apple pays every tax dollar we owe,” Cook said.

According to Moody’s credit agency, the company avoided paying $9bn in taxes in 2012 alone using this strategy. The latest debt issue comes amid an ongoing European Commission investigation into Apple’s use of Irish tax shelters could result in an $8bn tax bill.

Monday, February 15, 2016

EU president fears its implosion; Each generation better off than parents? Think again; The drone threat to civil aviation

1 EU president sees its implosion (San Francisco Chronicle) After decades of often unbridled expansion and increasing prosperity, the once-robust European Union is this week looking at its biggest challenge — crumbling from within, says EU President Donald Tusk.

Only days ahead of a crucial summit that opens Thursday, Tusk is crisscrossing his bloc of half a billion people and 28 nations — literally from Paris to Bucharest, on to Athens and Prague to finish in Berlin in little more than 24 hours — in yet another desperate quest to somehow reap unity where division has been sown.

"This is a critical moment. The risk of break-up is real," Tusk said, now publicly saying what had been on his mind for weeks. The stakes are immense, Tusk acknowledges, fearful that if Britain goes it will start an unraveling that no one knows when and where it might end. A so-called Brexit might turn into a full-blown EUxit.

The European Union was built on the ashes of World War II, first taking decades to bring economic wealth before taking on the task of bridging the huge ideological divide that cut the continent into a capitalist west and a communist east.

Compounding the predicament caused by a potential British exit, is the migrant crisis affecting just about every single member state, causing more bad blood than Britain's show of hard love. "The migratory crisis we are witnessing now is testing our Union to its limits," Tusk said.

And it is turning the members of the EU ever more against each other. Hundreds of thousands of migrants have come, almost unchecked, through EU member Greece and on to Germany and Sweden into the rich heartland. Almost everyone complains Greece isn't doing enough to stem the influx. Some eastern European nations complain that they lack the resources to handle large numbers of refugees and that the more prosperous nations are too soft-hearted and have allowed the borders to be overrun.

2 Each generation better than parents? Think again (Larry Elliott in The Guardian) The idea that each generation would be more fortunate than the last no longer applies and perhaps helps explain why young people feel that traditional politics has little to offer them. The political economy of the analogue age was based on the idea that people would have secure, full-time employment that would enable them to save the deposit on a home relatively quickly.

Two new reports show how that model has completely broken down. The first comes from the Resolution Foundation, which launched an in-depth study of inter-generational fairness with a look at the housing market.

The findings are shocking. So-called millennials – those born between 1982 and 2004 are on average 16 percentage points less likely to own their own homes than their parents in generation X. They, in turn are 10 percentage points less likely to own a home than their parents in the baby boomer generation.

It’s not difficult to see why it has become harder for a young person on a modest income to get a foot on the housing ladder: in the late 1990s it took them three years to save up for a deposit, while today it would take 22 years. Soaring house prices have been marvellous for baby boomers, who have often used their windfalls to create their own mini buy-to-let empires, but have been disastrous for generation rent.

Rising house prices are, however, not the only reason young people find themselves trapped in rented accommodation. The other factor is that they are struggling to make a decent wage in an increasingly insecure and casualised labour market in which low pay is endemic.

That emerges from the first in-depth study into the number of “crowd workers”, people who are paid for work through online platforms such as Uber, Upwork and Taskrabbit. Prof Ursula Huws of the University of Hertfordshire says that 5 million people are being paid through these online platforms, with more than 3 million of them regularly engaged in various forms of crowd work.

The big unanswered question is whether this sort of economic model is sustainable, because at present it is hard to see how it will be. Young workers joining the labour market often do so with tens of thousands of pounds of student debt, and will struggle to find the sort of permanent well-paid, pensionable job that their parents would have walked into three or four decades ago. They have little prospect of buying a home. This is a rotten deal for young people, who have every right to be angry. The real surprise is that they are not angrier.

3 The drone threat to civil aviation (BBC) Drones flown by the general public are "a real and growing threat" to civilian aircraft, the head of aviation trade body Iata has warned. Tony Tyler called for drone regulations to be put in place before any serious accidents occur.

He said the threat posed by unmanned aerial vehicles is still evolving. "I am as excited as you are about the prospect of having pizza delivered by a drone. But we cannot allow [drones] to be a hindrance or safety threat to commercial aviation," said Mr Tyler, director-general of the International Air Transport Association.

"The issue is real. We have plenty of pilot reports of drones where they were not expected, particularly at low altitudes around airports," he added. "There is no denying that there is a real and growing threat to the safety of civilian aircraft [coming from drones].

Drones were recently involved in four serious near-misses at UK airports, the UK Air Proximity Board said in January. The board, which investigates near-miss incidents in UK airspace, said a drone had come very close to colliding with a Boeing 737 that had taken off from Stansted airport.

In December the US government set up a registration system for Americans who own drones. 
Anyone who has a drone must register with the Federal Aviation Administration before the device takes its first flight. The move comes after several reported incidents of drones hindering emergency services' efforts in fighting fires and other dangers.