Countercurrents | September 30, 2022
The world is sliding into a recession due to multiple overlapping crises, the head of the WTO said on Tuesday.
Speaking at the opening of the WTO’s annual public forum in Geneva, Ngozi Okonjo-Iweala noted that the World Bank and the International Monetary Fund (IMF) have both downgraded their global growth forecasts, and that trade indicators are “not looking too good.”
Colliding crises such as surging food prices, the soaring cost of living, and the energy crunch, first triggered by the Covid-19 pandemic and then aggravated by the Russia-Ukraine conflict, have created the conditions for a global recession.
“I think a global recession. That is what I think we are edging into. But at the same time, we have to start thinking of the recovery. We have to restore growth,” Okonjo-Iweala said.
The former Nigerian finance and foreign minister stressed that as these shocks are “hitting countries at the same time,” radical policies will be needed to revive growth.
“Central banks do not really have too much of a choice but to tighten and increase interest rates,” she said, admitting that the repercussions on emerging markets and developing countries would be “quite severe.”
The head of the WTO also called on central banks to determine the reasons behind the inflationary crisis, adding that her main concerns were ensuring food security and access to energy.
European stock markets continued their decline on Thursday as the World Bank warned of a recession in Europe. Similar warnings have also been issued by others including the World Trade Organization (WTO).
World Bank President Warns of Recession In Europe
Other media reports said:
In London, the FTSE 100 fell 1.9% after opening, with losses across the board, while the CAC tumbled 1.1% in Paris and the Frankfurt DAX was 1% lower.
It came as David Malpass, president of the World Bank, warned the West that it could take years for global energy production to recover from the supply crisis triggered by Russia’s invasion of Ukraine.
He added that the energy crisis would prolong the risk of a period of low growth and high inflation, or stagflation.
The pound tumbled 0.9% as former Bank of England (BoE) governor Mark Carney accused new prime minister Liz Truss of “undercutting” the UK’s financial institutions.
He pointed to a lack of an Office for Budget Responsibility (OBR) forecast, and a lack of detail about costing and working at “cross-purposes” with the central bank.
“I do not understand why it seems unusual that you actually want to know the numbers in a Budget, after all that is what a Budget is, and understand the forecasts underpinning those numbers, he said.
“Then make your own judgments about whether those are plausible. It is important to have it open to independent and dare I say expert scrutiny. That is the system that has been put in place.”
Yields (or interest rates) on UK government bonds are rising again, a day after the Bank of England’s emergency intervention led to a sharp drop.
The 30-year yield, which plunged by more than one percentage point on Wednesday, rose to 4.06% while the 10-year yield has climbed to 4.17%. Any rise in yields pushes up government borrowing costs.
Across the pond, S&P 500 futures were down 1.2%, Dow futures shed 1.1%, and Nasdaq futures were 1.5% lower as trade began in Europe.
Elsewhere, Asian markets rose on Thursday after the BoE launched the emergency bond buying programme to help shore up a falling pound.
The move offered some comfort to a fractious mood in markets, with the Nikkei climbing almost 1% on the day in Tokyo, while the Hang Seng fell 0.8% in Hong Kong, and the Shanghai Composite dipped 0.1%.
U.S. Key Economic Data Sparks Recession Fears
Another media report said:
The U.S. economy contracted for the second consecutive quarter in the three months ended June, the Bureau of Economic Analysis (BEA) said on Thursday in its final estimate. The latest figures meet BEA’s criteria for a so-called technical recession as soaring inflation and higher interest rates weigh on spending.
Data showed that gross domestic product (GDP) shrank by 0.6% on an annualized basis in the second quarter, which is below the initially reported 0.9% decline. The country’s economic output has already dropped over the first three months of the year, with GDP nosediving 1.6%, the worst performance since the spring of 2020.
However, an alternative measure of economic growth, known as gross domestic income, has increased by 0.1% in the second quarter.
Economists have been debating over whether the U.S. had slipped into recession, commonly defined as two consecutive quarters of negative growth. Some economists and policymakers have rebuffed the claims of an early 2022 recession, citing robust job growth, consumer spending and manufacturing.
“The annual revisions to GDP and gross domestic income indicate a weaker U.S. economy in the first half of 2022 than initially reported,” Gus Faucher, chief economist for The PNC Financial Services Group, wrote on Thursday, in a note seen by CNN.
The U.S. economy is in transition during 2022, and the data is contradictory, he claimed, citing strength in areas such as the labor market, production and spending.
According to Abbey Omodunbi, PNC’s assistant vice president and senior economist, recession risks remain elevated amid the Federal Reserve’s aggressive interest rate hikes to combat historically high inflation.
“And with that, we are going to see significant slowing of the U.S. economy, particularly in interest-rate-sensitive sectors,” such as housing and business investments, he told the media outlet.
Worst Bond Market Crash In Over 70 Years Coming, Warns Bloomberg
Global government bonds are on course for their worst performance since 1949 as losses mount in the face of aggressive central banks, Bloomberg reported over the weekend citing Bank of America projections.
According to the report, the escalating losses reflect how far the U.S. Federal Reserve and other central banks have shifted away from the monetary policies of the Covid pandemic, when they held rates near zero to keep their economies going. The reversal has hit everything from stock prices to oil as investors brace for an economic slowdown.
On Friday, the UK’s five-year bonds plummeted by the most since 1992 after the government rolled out a massive tax-cut plan. Two-year U.S. Treasuries are in the middle of the longest losing streak since at least 1976, falling for 12 straight days.
“Bottom lines, all those years of central bank interest-rate suppression-proof gone,” Peter Boockvar, chief investment officer at Bleakley Advisory Group told the media outlet. “These bonds are trading like emerging market bonds, and the biggest financial bubble in the history of bubbles, that of sovereign bonds, continue to deflate,” he explained.
The Fed raised its policy-rate range to 3.25% on Wednesday, which is its third straight 75-basis-point hike, hinting further increases beyond 4.5%.
“With more Fed rate hiking coming and quantitative tightening, as well as possibly more government debt issuance down the road amid less Treasury buyers out there now, it all just means higher rates,” managing director at Mischler Financial Glen Capelo said, adding: “The 10-year yield is definitely going to get closer to 4%.”
According to Bloomberg, in the coming week the market may face fresh volatility from the release of inflation data and public speaking engagements by Fed officials. Also, the sale of new two-, five- and seven-year Treasuries will likely spur trading volatility in those benchmarks, it reports.
European Stocks Sharply Lower; German State Inflation Weighs
An Investing.com report said:
European stock markets weakened Thursday as surging German inflation increased concerns of more aggressive monetary policy tightening, while the boost from the Bank of England’s invention faded.
Investors have been rattled in recent weeks by soaring bond yields, as central bankers raised interest rates substantially to contain red-hot inflation, potentially tipping the global economy into recession.
The European Central Bank has increased its benchmark interest rate by a combined 125 basis points over its last two meetings, and more hikes look likely after inflation in Germany’s most populous state, North Rhine Westphalia, registered its biggest jump since the early 1950s, climbing 10.1% year-on-year in September.
The Bank of England had stepped in on Wednesday, after a run on the pound, announcing that it would start buying long-dated bonds, on a temporary basis, in order to calm the market chaos.
However, the relief attached to that move has not lasted long as the European economic outlook remains extremely uncertain, especially given the region’s ongoing energy crisis as winter approaches.
Meanwhile, Next stock slumped over 9% after the U.K. clothes retailer issued its second profit warning this year as soaring inflation holds back discretionary spending.
H&M stock fell 4.7% after the retail giant announced an 86% drop in operating profit in the three months through August, hit by its exit from Russia and higher costs.
Porsche shares debuted on the Frankfurt Stock Exchange on Thursday, with owner Volkswagen hoping to raise about 9.4 billion euros ($9.1 billion) in one of the largest European initial public offerings.
Gold futures fell 1.2% to $1,649.75/oz, while EUR/USD traded 1% lower at 0.9639.
Germany Deploys 200-bn-euro Shield In ‘Energy War’
A report from Germany said:
Germany on Thursday extended a 200-billion-euro ($194-billion) shield to protect households and businesses from skyrocketing power costs, as Europe’s biggest economy found itself in an “energy war over prosperity and freedom” against Russia.
“The German government will do everything so that prices sink,” Chancellor Olaf Scholz vowed, announcing a price cap for electricity and gas, as well as a plan to cream off windfall profits made by energy companies little hit by soaring gas prices.
The multi-billion-euro fund was designed to ensure that Germany could contend with the fallout from rising prices “this year and next year and the one after that”, Scholz said.
Inflation – 70Year High
Thursday’s announcement came as inflation soared to a 70-year high of 10 percent in September, according to official data, driven higher by spiking energy prices.
The country was also predicted to sink into a recession in 2023, with consumer prices seen reaching 8.8 percent annually, leading economic institutes said Thursday.
Germany, which has been highly dependent on imports of fossil fuels from Russia to meet its energy needs, has come under acute pressure as dwindling supplies from Moscow have stoked prices for the fuel.
“We find ourselves in an energy war over prosperity and freedom,” Finance Minister Christian Lindner said.
Protecting consumers against the rising bills was a “crystal clear answer” to Russian President Vladimir Putin that Germany was “strong economically”, he added.
Bakers And Craftsmen
Protection from rising prices was needed for “pensioners, workers, families… but also bakers and craftsmen or big industrial plants that are dependent on electricity and the gas supply”, Scholz said.
Confidence amongst businesses and consumers has dropped precipitously in recent months as Germany slips towards a winter recession.
As well as rising household bills, some businesses have been forced to rein in production or operate a loss as their energy costs soar.
The gas price cap should cover “at least a part” of the gas used by households and businesses, while “maintaining an incentive to reduce gas use” over the winter as supplies are limited, the government said in a statement.
In the same way, the government would work to limit the price of electricity for consumers by skimming off profits made by energy firms that have profited by the higher asking prices for gas but which do not use the energy source to generate power.
Ahead of the announcement, analysts warned that a full energy price cap would rob consumers of a reason to limit their usage, just as the government is imploring households to make every saving possible over the winter.
One in two flats in Germany is heated with gas, with figures from Thursday showing national usage was above average for the time of year.
“Without significant reductions, including in private households, it will be difficult to avoid a gas shortage,” the head of the Federal Network Agency Klaus Mueller warned.
Scholz also announced that the government would be scrapping a controversial gas levy that would have allowed energy companies to pass on rising costs and stabilize their business.
Germany has moved to prop up the energy market, announcing the nationalization of struggling provider Uniper, which had been one of the biggest importers of Russian gas.
An agreement on the financing for the new package only emerged after weeks of haggling within the three-way coalition between Scholz’s Social Democrats, the Greens and the liberal FDP.
The 200 billion euros would be pumped into an economic stability fund outside the government’s main budget, allowing the government to stick to constitutional debt rules that limit public deficits – a red line for FDP leader Lindner.
“Through these measures, we want to send a clear signal to the capital markets that even while we use such a shield, Germany will keep to its stability-oriented fiscal policy. German bonds remain the gold standard in the world,” he said.
Over the last months, Germany has also rushed to tap new sources of energy to reduce the demands put on gas.
Earlier this month, the government said it would keep two nuclear power plants running beyond the end of the year to prop up the electricity grid.
The decision marked a major U-turn, with the traditionally anti-nuclear Greens consenting to delay Merkel era plans to exit atomic energy.
France Forecasts Weak Growth Next Year Amid Energy Crisis
An AP report said:
France forecasts growth to slow down substantially next year in the EU’s second-biggest economy, amid fears of a recession in neighboring Germany as the economic situation in Europe is slammed by the impact of Russia’s war in Ukraine.
France’s budget, presented Monday in a Cabinet meeting, is based on predicted growth of 1% next year — down from an estimated 2.7% this year.
As the country faces soaring energy and food prices, Finance Minister Bruno Le Maire said inflation in France is expected to reach 6% in the coming months and 4% later next year.
Also on Monday, the Paris-based Organization for Economic Cooperation and Development (OECD) said it anticipates almost flat growth next year in the 19-nation euro zone largely due to a recession in Germany, where the gross domestic product is expected to contract by 0.7%.
The OECD’s predictions put France’s growth at 0.6% next year.
The French government issued this month a 16 billion-euro ($16 billion) plan to cap gas and electricity price rises in France at 15% next year.
“I think that what makes France different from a lot of European countries is that the purchasing power in 2023 will continue to increase, especially thanks to the cap on energy prices,” Le Maire told a news conference.
The cost of the measure is partially paid for by compulsory financial contributions from energy producers, he said. Those that benefit from soaring profits will help support French households and companies impacted by the crisis, he said.
Earlier this month, the European Union’s executive body unveiled a plan to cap the revenue of electricity producers that are making extraordinary profits because of the effects of Russia’s war in Ukraine, saying the proposal could raise $140 billion to help people hit by spiraling energy prices.
France has not introduced a windfall tax on energy firms. The leftist opposition to the French government is pushing for a referendum and proposed a bill last week to create such a tax.
Last week, French lawmakers questioned companies benefiting from energy price hikes such as French giants TotalEnergies and Engie.
TotalEnergies CEO Patrick Pouyanné said the company will pay $30 billion in taxes worldwide this year.
Yet in France, the group’s main activities, related to refinery and selling fuel, were losing money in previous years, he said. He added that the price cap of gas and electricity in France prevents the company from making windfall profits in France this year.
Europe Braces For Mobile Network Blackouts
A Reuters report said:
Once unthinkable, mobile phones could go dark around Europe this winter if power cuts or energy rationing knocks out parts of the mobile networks across the region.
Russia’s decision to halt gas supplies via Europe’s key supply route in the wake of the Ukraine conflict has increased the chances of power shortages. In France, the situation is made worse by several nuclear power plants shutting down for maintenance.
Telecoms industry officials say they fear a severe winter will put Europe’s telecoms infrastructure to the test, forcing companies and governments to try to mitigate the impact.
Currently there are not enough back-up systems in many European countries to handle widespread power cuts, four telecoms executives said, raising the prospect of mobile phone outages.
European Union countries, including France, Sweden and Germany, are trying to ensure communications can continue even if power cuts end up exhausting back-up batteries installed on the thousands of cellular antennas spread across their territory.
Europe has nearly half a million telecom towers and most of them have battery backups that last around 30 minutes to run the mobile antennas.
In France, a plan put forward by electricity distributor Enedis, includes potential power cuts of up to two hours in a worst case scenario, two sources familiar with the matter said.
The general black-outs would affect only parts of the country on a rotating basis. Essential services such as hospitals, police and government will not be impacted, the sources said.
The French government, telecoms operators and Enedis, a unit of state-controlled utility EDF, have held talks on the issue over the summer, the French government and the sources said.
The French Federation of Telecoms (FFT), a lobby group representing Orange, Bouygues Telecom and Altice’s SFR, put the spotlight on Enedis for being unable to exempt antennas from the power cuts.
Enedis declined to comment on the content of the talks held with the government on the matter.
Enedis said in a statement to Reuters all regular customers were treated on an equal footing in the event of exceptional outages.
It said it was able to isolate sections of the network to supply priority customers, such as hospitals, key industrial installations and the military and that it was up to local authorities to add telecoms operators infrastructure to the list of priority customers.
“Maybe we’ll improve our knowledge on the matter by this winter, but it’s not easy to isolate a mobile antenna (from the rest of the network),” said a French finance ministry official with knowledge of the talks.
A French finance ministry spokesperson declined to comment on the talks with Enedis, the telecoms groups and the government.
Sweden, Germany & Italy
Telcos in Sweden and Germany have also raised concerns over potential electricity shortages with their governments, several sources familiar with the matter said.
Swedish telecom regulator PTS is working with telecom operators and other government agencies to find solutions, it said. That includes talks about what will happen if electricity is rationed.
PTS is financing the purchase of transportable fuel stations and mobile base stations that connect to mobile phones to handle longer power outages, a PTS spokesperson said.
The Italian telecoms lobby told Reuters it wants the mobile network to be excluded from any power cut or energy saving stoppage and will raise this with Italy’s new government.
The power outages increase the probability of electronic components failing if subjected to abrupt interruptions, telecoms lobby chief Massimo Sarmi said in an interview.
The Reuters report said:
Telecom gear makers Nokia and Ericsson are working with mobile operators to mitigate the impact of a power shortage, three sources familiar with the matter said.
Both companies declined to comment.
The European telecom operators must review their networks to reduce extra power usage and modernize their equipment by using more power efficient radio designs, the four telecom executives said.
To save power, telecom companies are using software to optimize traffic flow, make towers “sleep” when not in use and switch off different spectrum bands, the sources familiar with the matter said.
The telecom operators are also working with national governments to check if plans are in place to maintain critical services.
In Germany, Deutsche Telekom has 33,000 mobile radio sites (towers) and its mobile emergency power systems can only support a small number of them at the same time, a company spokesperson said.
Deutsche Telekom will use mobile emergency power systems which mainly rely on diesel in the event of prolonged power failures, it said.
France has about 62,000 mobile towers, and the industry will not be able to equip all antennas with new batteries, the FFT’s president Liza Bellulo said.
Accustomed to uninterrupted power supply for decades, European countries usually do not have generators backing up power for longer durations.
“We are a bit spoiled maybe in large parts of Europe where electricity is pretty stable and good,” a telecom industry executive said. “The investments in the energy storage area have maybe been less than in some other countries.”